# Qanoon Digest: every question page in full > Plain-language explanations of Pakistan's tax and customs law, built from official FBR documents. Every section cited, every source linked. 539 plain-language answers to questions about Pakistan's tax law, each citing the section of law it relies on. Laws, SROs and budget documents are listed in https://qanoondigest.com/llms.txt and can be searched through the MCP server at https://connect.qanoondigest.com/mcp (setup: https://qanoondigest.com/mcp). > This is not legal or tax advice. Qanoon Digest is an independent publication and is not affiliated with, endorsed by, or connected to the Federal Board of Revenue or the Government of Pakistan. Content is a plain-language summary of publicly available FBR documents and may be out of date or incomplete. Always verify against the official document before acting, and consult a qualified professional for your situation. # Salaried employees Tax on salary, deductions by your employer, allowances, perks and refunds. ## Can tax paid on my mobile bill or electricity bill be adjusted against my salary tax, and can my employer take it into account? Source: https://qanoondigest.com/faq/salaried-employees/adjust-phone-electricity-tax-against-salary-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer Mostly yes. Section 149 lets your employer adjust tax already withheld from you under other heads once you give documentary evidence, and section 168 treats advance tax on phone and internet bills as tax paid. Electricity bill tax under section 235 is different: for individuals only the tax on monthly bills above Rs. 30,000 is adjustable. **Applies to:** Salaried individuals who pay advance income tax through mobile, internet, landline or electricity bills during the tax year. ### What does the law say? Three parts of the Income Tax Ordinance, 2001 work together here. **Section 149(1)** sets how your employer deducts tax from salary. The employer deducts at your average rate, worked out on your estimated salary income for the year using the salaried rates in Division I of Part I of the First Schedule, "after making adjustment of tax withheld from employee under other heads" and certain tax credits, "after obtaining documentary evidence". The adjustment covers tax withheld from you under the Ordinance during the tax year, any excess or short deduction earlier in the year, and any failure to deduct. **Section 168** is the general rule on credit. Tax collected under Chapter XII (the chapter that contains sections 235 and 236) is treated as tax paid by the person it was collected from, and that person gets a tax credit for it in the tax year it was collected. The exception is tax that the Ordinance makes a final tax; section 168(3) lists those, and sections 235 and 236 are not in the list printed in the text amended to 30 June 2026. Section 168(5) adds that any credit that cannot be used in the year is refunded to the taxpayer. **Sections 235 and 236** are where the bill taxes come from: | Bill | Section | What the text says about adjustment | |---|---|---| | Electricity (commercial, industrial or domestic) | 235 | For a taxpayer other than a company, tax collected up to a bill amount of Rs. 360,000 a year is minimum tax with no refund, and tax collected "on monthly bill over and above thirty thousand rupees per month shall be adjustable" (section 235(4)). | | Mobile, landline, internet, prepaid cards and units | 236 | Section 236 itself says nothing about adjustment. The credit comes from section 168, because section 236 is not listed as a final tax in section 168(3). | ### How does it work in practice? **Mobile and internet.** Division V of Part IV of the First Schedule sets the collection rate at 15% of the amount of bill or the sale price of prepaid cards or units for mobile and internet subscribers. For a landline subscriber whose monthly bill exceeds Rs. 1,000, the rate is 10% of the amount of the bill. A proviso raises the mobile and internet rate to 75% for persons named in an income tax general order issued under the Ordinance's powers to enforce filing of returns. Because this tax is creditable under section 168, it can be set off against your salary tax, either by your employer under section 149 or in your return. **Electricity.** Section 235(1) has a proviso that matters to most salaried filers: the advance tax does not apply to a domestic consumer whose name is on the Active Taxpayers' List. If you are on that list, there should be no income tax on your home electricity bill to adjust. If you are not, section 235(4) splits the tax: the part tied to bills up to Rs. 360,000 a year is minimum tax, and only the tax on monthly bills above Rs. 30,000 is adjustable. The text does not spell out whether "over and above thirty thousand rupees" means the whole tax on any bill above that figure or only the tax on the excess, so this page does not settle that point. **Evidence.** Section 149 speaks of "documentary evidence". The law does not list which documents qualify, so what an employer accepts is not settled by the text. ### Worked example (illustrative figures) Ayesha works for a software firm in Lahore. Her salary is Rs. 200,000 a month, Rs. 2,400,000 for tax year 2027, and she has no other income. Her postpaid mobile bill is Rs. 3,000 a month before tax. 1. **Salary tax for the year.** Under the Division I, clause (2) table for tax year 2027, income between Rs. 2,200,000 and Rs. 3,200,000 is taxed at Rs. 116,000 plus 20% of the amount above Rs. 2,200,000. Rs. 116,000 + 20% of Rs. 200,000 = Rs. 116,000 + Rs. 40,000 = **Rs. 156,000**, or Rs. 13,000 a month if spread evenly. 2. **Mobile bill tax.** 15% of Rs. 3,000 = Rs. 450 a month, Rs. 5,400 for the year. 3. **Adjustment in January.** After six months her employer has deducted 6 x Rs. 13,000 = Rs. 78,000. Ayesha gives the employer her July to December bills showing Rs. 2,700 of tax. The tax still to be deducted becomes Rs. 156,000 - Rs. 78,000 - Rs. 2,700 = Rs. 75,300, which is Rs. 12,550 a month for the last six months. 4. **Year end.** Salary deductions total Rs. 78,000 + Rs. 75,300 = Rs. 153,300. Add Rs. 5,400 collected on the phone bill and the total is Rs. 158,700, which is Rs. 2,700 more than her Rs. 156,000 liability. That Rs. 2,700 (January to June bill tax she never showed her employer) is a credit under section 168 that she can claim in her return, and any credit left unused is refunded as section 168(5) provides. The law does not fix how an employer spreads the adjustment over the remaining months; step 3 shows one straightforward way. ### What if my name is not on the Active Taxpayers' List? Then section 235 tax can appear on your home electricity bill, and for mobile and internet you may face the 75% rate if you are named in one of those general orders. The electricity tax up to Rs. 360,000 of bills a year stays a minimum tax and is not refunded, even if your salary tax is already fully paid. ### What if I have an exemption certificate? Section 236(4) says the advance tax is not collected from a person who produces a certificate from the Commissioner that his income for the tax year is exempt. Section 235(3) has a similar certificate rule for electricity. ### Common mistakes - **Assuming every rupee on the electricity bill is adjustable.** Section 235(4)(a) makes the tax on the first Rs. 360,000 of annual bills a minimum tax for individuals. - **Expecting the employer to adjust without proof.** Section 149(1) ties the adjustment to documentary evidence. - **Thinking unadjusted bill tax is lost.** Section 168 gives the credit for the tax year of collection, whether or not the employer used it. - **Claiming a family member's bill.** Section 168(1)(b) treats the tax as paid by "the person from whom the tax was collected". The Ordinance text does not address bills in another person's name. ### What to check in the official text Read section 149(1) for the adjustment wording, section 168(1) to (5) for the credit and refund rule, section 235(1) and (4) for the electricity split, and section 236 with Division V of Part IV of the First Schedule for the phone and internet rates. The current Division IV electricity rate table is not clearly reproduced in our copy of the consolidated text, so check it in the official PDF before relying on a specific electricity rate. ### Frequently asked #### Does my employer have to reduce my salary tax for mobile bill tax? Section 149(1) tells the employer to compute the deduction after making adjustment of tax withheld from the employee under other heads, after obtaining documentary evidence. The adjustment therefore depends on the employer receiving proof of the tax collected; the Ordinance does not list which documents count. #### Is all the tax on my electricity bill adjustable? No. For a taxpayer other than a company, section 235(4) treats tax collected on bills up to Rs. 360,000 a year as minimum tax with no refund, and makes only the tax collected on monthly bills above Rs. 30,000 adjustable. A domestic consumer on the Active Taxpayers' List is not charged this tax at all. #### What if my employer did not adjust the bill tax during the year? Section 168 allows a tax credit for tax collected under Chapter XII in the tax year it was collected, and any credit that cannot be used is refunded, as section 168(5) provides. In practice that means the credit is claimed in the return for the year. ### Citations - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "adjustment of tax withheld from employee under other heads and tax credit admissible under section 61" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 235 (Electricity consumption)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#235-electricity-consumption), as amended to 2026-06-30: "the provisions of sub-section (1) shall not apply to a domestic consumer of electricity if his name appears on the Active Taxpayers’ List." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236 (Telephone and internet users)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236-telephone-and-internet-users), as amended to 2026-06-30: "Advance tax under this section shall not be collected from Government, a foreign diplomat, a diplomatic mission in Pakistan, or a person who produces a certificate from the Commissioner that his income during the tax year is exempt from tax." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division V (Telephone users)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## I changed jobs mid-year; will my new employer account for tax my old employer deducted? Source: https://qanoondigest.com/faq/salaried-employees/changing-jobs-mid-year-salary-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer It can. Section 149(1) of the Income Tax Ordinance lets an employer adjust its deduction for tax already withheld from you during the tax year and for any excess or deficiency, after obtaining documentary evidence. The certificate your old employer must issue under section 164 is that evidence. Whatever is still unsettled is resolved through your return. **Applies to:** Employees who leave one employer and join another within the same tax year (1 July to 30 June). Your new employer is allowed to take your old employer's deductions into account, but it needs proof. Section 149 of the Income Tax Ordinance lets an employer adjust for tax already withheld from you in the tax year, and for any excess or shortfall from earlier deductions, "after obtaining documentary evidence". The old employer's tax deduction certificate under section 164 is the natural evidence. ### What does the law say? **All the year's salary is taxed together.** Section 12(1) charges any salary received by an employee in a tax year. Section 12(5)(b) says an amount is treated as received from employment whether it is paid by the employer or "by a past employer or a prospective employer". Salary from July to December with one company and January to June with another is one figure for the tax year. **The new employer deducts on your estimated salary for the year.** Section 149(1) requires the person paying salary to deduct at your average rate "on the estimated income of the employee chargeable under the head Salary for the tax year in which the payment is made". It then allows adjustment, "after obtaining documentary evidence", for: 1. tax withheld from the employee under the Ordinance during the tax year; 2. any excess deduction or deficiency arising out of any previous deduction; or 3. failure to make deduction during the year. **The old employer must give you a certificate.** Section 164(1) requires every person deducting tax to furnish, at the time of deduction, copies of the Computerized Payment Receipt (CPR) or an equivalent document along with a certificate setting out the amount of tax deducted. Section 164(2) requires you to attach the CPR copies to your return. **You get credit for all of it.** Section 168(2) allows a tax credit for tax deducted from payments to you against the tax due for that tax year. ### How does it work in practice? The law gives the new employer the power to adjust, on evidence. It does not say the new employer must ask for your old salary details, and it does not set a form for you to hand them over. Without the evidence, the new employer can only estimate from the salary it pays, and the gap stays open until your return. ### Worked example (illustrative figures) Ayesha works in Lahore. From July to December 2026 she earns Rs. 150,000 a month with her first employer. From January to June 2027 she earns Rs. 250,000 a month with a new employer. The salaries are invented; the rates are tax year 2027 rates from clause (2) of Division I, Part I, First Schedule. **Tax on her total salary for tax year 2027:** 1. Old job: 6 x 150,000 = 900,000 2. New job: 6 x 250,000 = 1,500,000 3. Total: 2,400,000 4. Band above Rs. 2,200,000 up to Rs. 3,200,000: 116,000 + 20% of 200,000 = 116,000 + 40,000 = **Rs. 156,000** **What the old employer deducted.** Assume it estimated her salary at a full year of Rs. 1,800,000. Tax on that is 6,000 + 11% of 600,000 = 72,000, an average rate of 72,000 / 1,800,000 = 4%. Over six months: 4% of 900,000 = **Rs. 36,000**. **Case 1: the new employer has no evidence.** It estimates only its own Rs. 1,500,000. Tax: 6,000 + 11% of 300,000 = 6,000 + 33,000 = 39,000. Total deducted by both employers: 36,000 + 39,000 = 75,000. Shortfall at the return: 156,000 - 75,000 = **Rs. 81,000**. **Case 2: Ayesha gives the new employer her section 164 certificate.** It estimates her salary for the year at Rs. 2,400,000, giving tax of Rs. 156,000. It subtracts the Rs. 36,000 already withheld, leaving 120,000 to deduct over six months: 120,000 / 6 = **Rs. 20,000 a month**. Total deducted: 36,000 + 120,000 = 156,000, matching her liability. In both cases her final tax is the same Rs. 156,000. The difference is whether it is collected monthly or left as a lump sum to pay with the return. ### What if ...? **My old employer deducted too much?** Section 149(1)(ii) lets the new employer adjust for "any excess deduction" arising from previous deductions, again on documentary evidence. Anything still over-deducted at year end is credited under section 168 and is refundable. **My old employer did not deduct at all?** Section 149(1)(iii) covers "failure to make deduction during the year". The new employer may take that shortfall into account once it has the evidence. **I had a gap between jobs?** Months without salary add nothing. Only salary actually received in the tax year is charged under section 12(1). **My final settlement from the old job came after I joined the new one?** It is still salary from a past employer under section 12(5)(b) and belongs in the same tax year's total. ### Common mistakes - **Assuming the new employer already knows.** Section 149 permits adjustment "after obtaining documentary evidence"; without it the new employer works only from its own payroll. - **Not asking for the certificate.** Section 164(1) obliges the deductor to issue it, and section 164(2) requires the CPR copies with your return. - **Treating each employer's deduction as final.** Section 168 treats all of it as a credit against one liability for the year. ### What to check in the official text Read section 149(1) and (2), section 164(1) and (2), section 12(1) and 12(5), and section 168(2). The certificate's contents are "such other particulars as may be prescribed", so check the Income Tax Rules, 2002 for the prescribed form. Take the rates from clause (2) of Division I, Part I of the First Schedule. ### Frequently asked #### What document proves the tax my old employer deducted? Section 164(1) requires the person deducting tax to give you a certificate of the amount deducted, along with copies of the Computerized Payment Receipt or an equivalent document. Section 149(1) lets your new employer adjust for earlier deductions after obtaining documentary evidence. #### Is salary from my old employer added to salary from the new one? Yes. Section 12(1) charges all salary received in the tax year, and section 12(5)(b) confirms amounts from a past employer count as received from employment. Both salaries are taxed together on the slab table. #### What happens if the new employer does not adjust? The combined deductions will often be too low, because each employer applied the slab table to only part of your salary. Section 168 credits what was deducted, and the balance is payable with your return. If too much was deducted, the excess is refundable. ### Citations - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "(ii) any excess deduction or deficiency arising out of any previous deduction; or" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 164 (Certificate of collection or deduction of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#164-certificate-of-collection-or-deduction-of-tax), as amended to 2026-06-30: "furnish to the person from whom the tax has been collected or to whom the payment from which tax has been deducted has been made," Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "(b) by a past employer or a prospective employer; or" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## If my company gives me a car, how much is added to my taxable salary? Source: https://qanoondigest.com/faq/salaried-employees/company-car-perquisite-taxable-value Law current to: 30 June 2026 (Income Tax Rules, 2002 as amended to 24 November 2023). Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer Section 13(3) of the Income Tax Ordinance adds the value of a company car used privately to your salary, computed as prescribed. Rule 5 of the Income Tax Rules, 2002 sets it at 5% of the car's cost (or market value at the start of a lease) for mixed personal and official use, and 10% for personal use only. **Applies to:** Employees and company directors in Pakistan who are given a car by their employer that they use wholly or partly for private purposes. ### What does the law say? Section 12(2)(b) of the Income Tax Ordinance, 2001 counts "any perquisite, whether convertible to money or not" as salary. A car your employer lets you use privately is such a perquisite. Section 13 then says how to value perquisites, and section 13(3) deals with cars: where a motor vehicle is provided "wholly or partly for the private use of the employee", your salary for the year includes "an amount computed as may be prescribed". The prescribed amount is in the Income Tax Rules, 2002. Rule 3 says perquisites are included in salary in accordance with rules 4 to 7. Rule 5, headed "Valuation of conveyance", sets the figure: | How the car is used | Amount added to salary | Base | |---|---|---| | Partly personal and partly official | 5% | Cost to the employer of acquiring the car, or its fair market value at the start of the lease if leased | | Personal use only | 10% | Same base | Rule 6 adds that "employee" includes a director of a company for this Part, and rule 7 says these rules apply to salary income received after 30 June 2006. ### How does it work in practice? The amount is added to your taxable salary for the year, not to your cash pay. Your employer includes it in your estimated salary when it calculates the monthly deduction, so your take-home pay falls by the extra tax even though no extra money reaches you. Three points follow from the text: - **The base is the car's cost, not its current value.** Rule 5 uses the cost to the employer of acquiring the vehicle. It does not reduce the base for age or depreciation. - **Leased cars use the market value at the start of the lease.** If the company leases the car, the base is the fair market value when the lease began. - **Only private use triggers section 13(3).** A pool vehicle used strictly for official work is not provided "for the private use of the employee". ### Worked example (illustrative figures) Imran is a manager at a pharmaceutical company in Islamabad. Salary is his only income. For tax year 2027 (1 July 2026 to 30 June 2027) his cash salary is Rs. 3,000,000. His company bought a car for Rs. 6,000,000 and gives it to him for office and family use for the whole year. **Step 1: value the car.** Mixed use, so 5% of cost: Rs. 6,000,000 x 5% = Rs. 300,000. **Step 2: taxable salary.** Rs. 3,000,000 + Rs. 300,000 = Rs. 3,300,000. **Step 3: tax.** Salary is more than 75% of taxable income, so clause (2) of Division I of Part I of the First Schedule applies. Between Rs. 3,200,000 and Rs. 4,100,000 the tax is Rs. 316,000 + 25% of the amount above Rs. 3,200,000: Rs. 316,000 + 25% x Rs. 100,000 = Rs. 316,000 + Rs. 25,000 = **Rs. 341,000**. **Without the car**, on Rs. 3,000,000 the tax is Rs. 116,000 + 20% x Rs. 800,000 = **Rs. 276,000**. The car costs Imran Rs. 65,000 in extra tax for the year. **If the car were for personal use only**, the value would be 10% x Rs. 6,000,000 = Rs. 600,000, taxable salary Rs. 3,600,000, and tax Rs. 316,000 + 25% x Rs. 400,000 = **Rs. 416,000**. ### What if I pay part of the running costs, or have the car for only part of the year? Rule 5 as printed in the Rules we hold gives only the two percentages and the cost base. It does not mention a reduction for money the employee pays towards the car, and it does not say how to handle a car provided for part of the year. The earlier formula in section 13(3), replaced by the Finance Ordinance, 2002, did subtract employee payments, but that formula is no longer the law. Where your situation depends on either point, the text we hold is silent. ### What if the company also gives me a driver or pays for fuel? Section 13(5) separately adds the salary of a driver or other domestic assistant the employer provides, reduced by anything you pay the employer for those services. Rule 5 does not say whether fuel and maintenance are covered by the 5% or 10% figure. If you receive a separate fuel allowance instead, that is an allowance under section 12(2)(c), not part of the car valuation. ### Common mistakes - **Using today's resale value.** Rule 5 uses the employer's acquisition cost, or market value at the start of a lease. - **Assuming a car is tax free because it is registered to the company.** Section 13(3) turns on private use, not ownership. - **Applying 10% to a car used for work as well.** The 10% rate is for personal use only. Mixed use is 5%. - **Relying on old rates.** The 15% and 7.5% figures in the pre-2002 section 13(3) formula were replaced. ### What to check in the official text - Section 13(3) and (5) of the Ordinance, as amended to 30 June 2026. - Rules 3, 5, 6 and 7 of the Income Tax Rules, 2002. The consolidated Rules we hold run only to 24 November 2023, and rule 5 ends with the word "and" with nothing following. Check the official PDF and any later notification in case text is missing or has been amended. - Your employer's car policy, which decides whether the car is for mixed use or personal use only. ### Frequently asked #### What percentage of a company car's value is taxable? Rule 5 of the Income Tax Rules, 2002 values the car at 5% of its cost to the employer where it is used partly for personal and partly for official use, and 10% where it is for personal use only. For a leased car, the base is its fair market value at the start of the lease. #### Does a car used only for office work get added to salary? Section 13(3) applies where the car is provided wholly or partly for the employee's private use. A car used only for official purposes does not fall within those words, and rule 5 only sets values for mixed use and personal use. #### Does the rule apply to company directors? Yes. The Income Tax Rules say that for this Part, employee includes a director of a company, so a director given a company car is valued the same way. ### Citations - [Income Tax Ordinance, 2001, section 13 (Value of perquisites)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#13-value-of-perquisites), as amended to 2026-06-30: "Where, in a tax year, a motor vehicle is provided by an employer to an employee wholly or partly for the private use of the employee, the amount chargeable to tax to the employee under the head “Salary” for that year shall include an amount computed as may be prescribed." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 5 (Valuation of conveyance)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#5-valuation-of-conveyance), as amended to 2023-11-24: "The value of conveyance provided by the employer to the employee shall be taken equal to an amount as below:-" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Rules, 2002, section 3 (Valuation of perquisites, allowances and benefits)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#3-valuation-of-perquisites-allowances-and-benefits), as amended to 2023-11-24: "the value of all perquisites, allowances and benefits provided by the employer to the employee shall be included in the said income in accordance with the rules 4 to 7." Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Rules, 2002, Part I, rules 6 and 7](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24), as amended to 2023-11-24 Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "any perquisite, whether convertible to money or not;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## My employer deducted tax from my salary but did not deposit it; am I liable? Source: https://qanoondigest.com/faq/salaried-employees/employer-deducted-tax-not-deposited Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer Section 168(1)(b) of the Income Tax Ordinance treats tax deducted from your salary as tax paid by you. Section 160 requires the employer to pay it to the Commissioner, and section 161(1)(b) makes an employer who deducts but does not pay personally liable for that amount. The law places the recovery on the employer, not on you. **Applies to:** Employees whose pay slips show income tax deducted that does not appear in FBR records against their CNIC or NTN. ### What does the law say? Four sections of the Income Tax Ordinance, 2001 answer this together. **Section 160, the duty to deposit.** Any tax "deducted or purported to be deducted" under Division III of Part V of Chapter X, the division that covers salary, "shall be paid to the Commissioner by the person making the collection or deduction". The words "purported to be deducted" mean the duty to pay covers tax the employer claims to have deducted, not only tax deducted correctly. **Section 161(1)(b), the employer's personal liability.** Where a person "having ... deducted tax under Division III ... fails to pay the tax to the Commissioner as required under section 160", that person "shall be personally liable to pay the amount of tax to the Commissioner". The Commissioner may pass an order and recover it. **Section 168(1)(b), the employee's position.** The amount of any tax deducted under Division III "shall be treated as tax paid by the person from whom the tax was collected or deducted". Section 168(2) allows that person a tax credit for it in the tax year of deduction. **Section 162, the contrast.** Where the employer fails to deduct at all, the Commissioner may recover the amount "from the person from whom the tax should have been collected or to whom the payment was made". That route is written for non-deduction. The deducted-but-not-deposited case is dealt with by section 161(1)(b). ### How does it work in practice? The employer reports your deductions in quarterly statements under section 165, listing your name, CNIC, NTN, "the total amount of payments made to a person from which tax has been deducted", and the tax deducted. Those statements are how deducted tax is linked to you. If the employer neither deposits nor reports, the tax will not appear against your CNIC, even though your pay slips show it. Section 164(1) requires the employer to give you a certificate and copies of the Computerized Payment Receipts (CPRs) at the time of deduction. Section 164(2) asks a person filing a return to attach the CPR copies. An employer who never deposited the money has no genuine CPR to hand over. This creates a practical gap. Section 168(1)(b) treats the deducted tax as paid by you, without any condition that the employer deposited it. But the supporting document section 164(2) asks for does not exist. The Ordinance does not say how the credit is to be verified when the employer has not deposited the tax. ### Worked example (illustrative figures) The names and amounts are made up. **Usman, a sales officer at a Gujranwala distribution firm, tax year 2027** - Monthly tax shown on pay slips: Rs. 3,000, so Rs. 36,000 for 12 months - Tax actually deposited by the firm, with CPRs: July to December, 6 x Rs. 3,000 = Rs. 18,000 - Tax deducted but not deposited: January to June, 6 x Rs. 3,000 = Rs. 18,000 How the sections apply: | Question | Section | Result | |---|---|---| | How much tax is treated as paid by Usman? | 168(1)(b) | Rs. 36,000, the full amount deducted | | Who must pay the missing Rs. 18,000 to the Commissioner? | 160 and 161(1)(b) | The firm, personally liable | | Must the firm be heard before recovery? | 161(1A) | Yes | | Can Usman attach CPRs for the whole Rs. 36,000? | 164(2) | Only for the Rs. 18,000 actually deposited | Usman's pay slips, the section 164 certificate if he received one, and bank statements showing reduced net salary are his records that Rs. 36,000 was deducted. ### What if the employer did not deduct at all? Then this is not a section 161(1)(b) case. Section 161(1)(a) makes the employer personally liable for failing to deduct, and section 162 separately lets the Commissioner recover the tax from the employee. Section 161(2) lets an employer who pays the tax recover it from the employee. ### What if the employer later deposits the tax? Section 160 says tax is to be paid "within the time and in the manner as may be prescribed". Section 168(1)(b) ties the treatment as tax paid to the deduction and says nothing about when the employer deposits it. Section 161(1B) deals with a different case, where the payee has already paid the tax that was not deducted, and charges the defaulting person default surcharge at twelve per cent per annum. ### Common mistakes - **"If FBR does not show it, I have not paid it."** Section 168(1)(b) ties the treatment to deduction, not to what the employer reported. - **"The employee is jointly liable with the employer."** Section 161(1)(b) makes the deducting person personally liable. Recovery from the employee under section 162 is written for failure to deduct. - **"A pay slip is the same as a CPR."** It is evidence of deduction, not of deposit. Section 164(2) asks for CPR copies. ### What to check in the official text Read sections 160, 161 and 162 together, then section 168(1) and (2). Read section 164 for the certificate and CPR requirement and section 165 for the employer's statements. Any offence or prosecution provision that may apply to an employer who keeps deducted tax is outside this page. ### Frequently asked #### Can FBR recover the missing tax from me instead of my employer? Section 162 lets the Commissioner recover from the employee where the employer failed to deduct tax. Where tax was deducted but not deposited, section 161(1)(b) makes the employer personally liable, and section 168(1)(b) treats the deducted amount as tax you have paid. #### What evidence shows the tax was deducted from me? The certificate and CPR copies the employer must give under section 164(1), your pay slips and bank credits showing net pay are all records of deduction. Section 164(2) asks a filer to attach CPR copies, which a non-depositing employer may not be able to produce. #### Does my employer get a hearing before recovery? Yes. Section 161(1A) says no recovery under sub-section (1) shall be made unless the person has been provided with an opportunity of being heard. ### Citations - [Income Tax Ordinance, 2001, section 160 (Payment of tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#160-payment-of-tax-collected-or-deducted), as amended to 2026-06-30: "shall be paid to the Commissioner by the person making the collection or deduction within the time and in the manner as may be prescribed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 161 (Failure to pay tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#161-failure-to-pay-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be personally liable to pay the amount of tax to the Commissioner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "shall be treated as tax paid by the person from whom the tax was collected or deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 162 (Recovery of tax from the person from whom tax was not collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#162-recovery-of-tax-from-the-person-from-whom-tax-was-not-collected-or-deducted), as amended to 2026-06-30: "recover the amount not collected or deducted from the person from whom the tax should have been collected or to whom the payment was made" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 165 (Statements)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#165-statements), as amended to 2026-06-30: "the total amount of payments made to a person from which tax has been deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 164 (Certificate of collection or deduction of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#164-certificate-of-collection-or-deduction-of-tax), as amended to 2026-06-30: "A person required to furnish a return of taxable income for a tax year shall attach to the return" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How is a golden handshake or redundancy payment taxed when I am laid off? Source: https://qanoondigest.com/faq/salaried-employees/golden-handshake-severance-pay-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer Section 12(2)(e)(iii) of the Income Tax Ordinance treats termination pay, redundancy compensation and golden handshakes as salary. Section 12(6) lets you elect, by written notice to the Commissioner, to have that amount taxed at your average rate over the three preceding tax years instead of the slab rate. Section 12(8) sets the deadline. **Applies to:** Employees who receive a golden handshake, voluntary separation scheme payment, redundancy compensation or other payment on leaving a job. A golden handshake is taxed as salary, but you do not have to accept the slab rate on it. The Income Tax Ordinance lets a departing employee choose a lower, averaged rate based on the tax they paid over the previous three years. Because a lump sum on top of a normal year's pay usually lands in a high slab, the choice can make a large difference. ### What does the law say? Section 12(2)(e)(iii) includes in salary any amount received "on termination of employment, whether paid voluntarily or under an agreement, including any compensation for redundancy or loss of employment and golden handshake payments". A voluntary separation scheme payment, a redundancy package or a negotiated exit payment all fall here. Section 12(1) taxes it in the tax year you receive it. Section 12(6) gives the relief. An employee who received such an amount in a tax year "may, by notice in writing to the Commissioner, elect for the amount to be taxed" at the rate given by this formula: **A/B%** - **A** is the total tax paid or payable by the employee on total taxable income for the three preceding tax years. - **B** is the employee's total taxable income for those three years. Section 12(8) sets the deadline: the due date for the employee's return of income for the tax year in which the amount was received, or a later date the Commissioner allows. Section 118(3) makes that 30 September after the tax year ends. A payment received between 1 July 2026 and 30 June 2027 falls in tax year 2027, so the deadline is 30 September 2027 unless extended. ### How does it work in practice? When your employer pays the handshake, section 149 requires it to deduct tax at your average rate on your estimated salary for the year. The handshake is salary received in that year, and section 149 computes the deduction at the rates in Division I of Part I of the First Schedule. The section 12(6) election is made by you to the Commissioner. It is not an instruction to the employer, and the Ordinance does not say the employer can apply the A/B rate itself. Any tax deducted beyond the final liability is a credit under section 168 and refundable under section 168(5). Section 12(6) says "the amount", meaning the termination payment, is taxed at the A/B rate. The Ordinance does not separately spell out how the rest of that year's salary is computed. The natural reading, used below, is that your ordinary salary for the year is still taxed on the slab table. ### Worked example (illustrative figures) Imran worked for a bank in Karachi and left under a voluntary separation scheme in tax year 2027. All income figures below are invented. The rates are the real tax year 2027 rates from clause (2) of Division I, Part I, First Schedule. - Ordinary salary received in tax year 2027: Rs. 2,400,000 - Golden handshake received in tax year 2027: Rs. 3,000,000 - Taxable income, all salary, for tax years 2024, 2025 and 2026: Rs. 2,000,000, Rs. 2,200,000 and Rs. 2,300,000, total Rs. 6,500,000 The tax on those earlier years uses the salaried tables in force for each year, which the source PDF prints in the footnotes to clause (2): | Tax year | Taxable income (Rs.) | Band in that year's table | Tax (Rs.) | |---|---|---|---| | 2024 | 2,000,000 | 15,000 + 12.5% of amount over 1,200,000 | 115,000 | | 2025 | 2,200,000 | 30,000 + 15% of amount over 1,200,000 | 180,000 | | 2026 | 2,300,000 | 116,000 + 23% of amount over 2,200,000 | 139,000 | | **Total** | **6,500,000** | | **434,000** | **Without the election:** 1. Total salary: 2,400,000 + 3,000,000 = 5,400,000 2. Band above Rs. 4,100,000 and up to Rs. 5,600,000: 541,000 + 29% of the amount above 4,100,000 3. 29% of 1,300,000 = 377,000 4. Tax: 541,000 + 377,000 = **Rs. 918,000** **With the section 12(6) election:** 1. A/B = 434,000 / 6,500,000 = 6.68% (rounded) 2. Tax on the handshake: 3,000,000 x 434,000 / 6,500,000 = 200,308 (rounded to the rupee) 3. Tax on ordinary salary of Rs. 2,400,000: 116,000 + 20% of 200,000 = 156,000 4. Total: 200,308 + 156,000 = **Rs. 356,308** On these figures the election reduces Imran's tax year 2027 liability by Rs. 561,692 (918,000 minus 356,308). Without it, the handshake alone adds Rs. 762,000 (918,000 minus 156,000), an effective rate above 25% on the lump sum. ### What if ...? **I have not worked three full years?** The formula uses "the three preceding tax years". The Ordinance does not say how it applies if you had no taxable income in one or more of those years, and this page does not assume a result. **My average rate is higher than the slab rate would be?** The election is optional. If A/B% gives more tax than the slab rate, there is no reason under the Ordinance to make the election. **The payment is spread over two tax years?** Section 12(6) applies to an amount received "in a tax year". Each year's receipt would be considered for that year, and each has its own section 12(8) deadline. **Part of the payment is from my provident fund?** Provident fund receipts are covered separately by section 12(2)(e)(iv) and by the exemptions in the Ordinance. They are not the same as termination compensation. ### Common mistakes - **Thinking the handshake is tax free as compensation.** Section 12(2)(e)(iii) expressly makes it salary. - **Waiting for the employer to apply the average rate.** Section 12(6) requires the employee's written notice to the Commissioner. - **Missing the deadline.** After the section 12(8) date, only the Commissioner can allow a later election. - **Using only one year's rate.** A and B are totals over three preceding tax years, not the most recent year alone. ### What to check in the official text Read section 12(2)(e)(iii), 12(6) and 12(8) together, and section 118(3) for the return due date. A and B come from your own returns for the three preceding tax years, and the earlier years' rate tables are in the footnotes to clause (2). Use the clause (2) table in Division I, Part I of the First Schedule for the tax on your ordinary salary for the year of receipt. ### Frequently asked #### Is a golden handshake taxable in Pakistan? Yes. Section 12(2)(e)(iii) includes in salary any amount received on termination of employment, including redundancy compensation and golden handshake payments. It is taxed under the head Salary, at the slab rates unless you elect the average rate under section 12(6). #### What is the A/B formula for a golden handshake? Section 12(6) sets the rate as A/B%, where A is the total tax paid or payable on your total taxable income for the three preceding tax years and B is that total taxable income. The result is your average tax rate over those three years. #### When must I elect the section 12(6) rate? Section 12(8) requires the election by the due date for your return of income for the tax year in which you received the payment, or a later date the Commissioner allows. For individuals, section 118(3) sets the return due date at 30 September after the tax year ends. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "on termination of employment, whether paid voluntarily or under an agreement, including any compensation for redundancy or loss of employment and golden handshake payments;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule on the estimated income of the employee chargeable under the head “Salary” for the tax year in which the payment is made" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 118 (Method of furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#118-method-of-furnishing-returns-and-other-documents), as amended to 2026-06-30: "(b) in the case of a return of income for any person (other than a company), as described under clause (a), on or before the 30th day of September next following the end of the tax year to which the return relates." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), footnotes: Tables substituted by the Finance Acts, 2024, 2025 and 2026 (tax year 2024, 2025 and 2026 tables)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How does my employer calculate the tax deducted from my salary each month? Source: https://qanoondigest.com/faq/salaried-employees/how-employer-calculates-monthly-salary-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer Section 149 of the Income Tax Ordinance requires your employer to estimate your salary for the whole tax year, work out the annual tax on it using the First Schedule rates, and turn that into an average rate. Each salary payment is taxed at that rate, with later months adjusted for any excess or shortfall. **Applies to:** Employees in Pakistan whose employer deducts income tax from salary, for tax year 2027. ### What does the law say? Section 149(1) of the Income Tax Ordinance, 2001 makes every person responsible for paying salary deduct tax at the time of payment. The deduction is not a flat percentage. It is made at "the employee's average rate of tax", computed on the employee's estimated income under the head "Salary" for the whole tax year, using the rates in Division I of Part I of the First Schedule. Section 149(2) gives the formula for that average rate: - **A** is the tax that would be payable if your estimated annual salary (B) were your taxable income for the year, plus any tax under section 4AB - **B** is your estimated income under the head "Salary" for the year - **Average rate = A / B** For a salaried individual, the rates used to work out A are the clause (2) table in Division I of the First Schedule. For tax year 2027 that table starts at 0% up to Rs. 600,000 and rises to 35% above Rs. 7,000,000. The section 4AB surcharge (printed inside section 4 in the consolidated text) is part of the formula in general, but its proviso says no surcharge is payable on salary income, so for most employees A is simply the table tax. ### What can the employer adjust? Section 149(1) lets the employer make adjustments "as may be necessary" for three things: 1. tax already withheld from you under the Ordinance during the tax year 2. any excess deduction or deficiency arising out of a previous deduction 3. failure to make a deduction during the year It also allows adjustment of tax withheld from you under other heads, and of tax credits under sections 61 and 63, but only "after obtaining documentary evidence". Those credits are covered on separate pages. ### How does it work in practice? Your employer does not know your final annual salary on 1 July. It has to estimate it. Section 149 does not say how the estimate is built; the simplest approach is salary already paid plus current monthly pay for the months left. Section 12 counts allowances, bonuses and perquisites as salary, so they belong in the estimated salary, not only basic pay. Whenever the estimate changes (a raise, a bonus, a new allowance), the annual tax and the average rate change too, and section 149 lets the employer correct earlier over or under deductions in later months. The Ordinance does not prescribe one spreading method, so two employers can reach the same annual total by slightly different monthly paths. ### Worked example (illustrative figures) Hamza works for a pharmaceutical distributor in Faisalabad. His salary is made up; the rates are the tax year 2027 rates. **July to December: Rs. 250,000 a month** - Estimated annual salary (B): Rs. 250,000 x 12 = Rs. 3,000,000 - Slab: Rs. 2,200,001 to Rs. 3,200,000, so Rs. 116,000 + 20% of the amount over Rs. 2,200,000 - Tax (A): Rs. 116,000 + (20% x Rs. 800,000 = Rs. 160,000) = Rs. 276,000 - Average rate: Rs. 276,000 / Rs. 3,000,000 = 9.2% - Monthly deduction: 9.2% x Rs. 250,000 = **Rs. 23,000** After six months, Rs. 138,000 has been deducted. **From January: raise to Rs. 300,000 a month** - New estimated annual salary: (6 x Rs. 250,000) + (6 x Rs. 300,000) = Rs. 1,500,000 + Rs. 1,800,000 = Rs. 3,300,000 - Slab: Rs. 3,200,001 to Rs. 4,100,000, so Rs. 316,000 + 25% of the amount over Rs. 3,200,000 - New annual tax: Rs. 316,000 + (25% x Rs. 100,000 = Rs. 25,000) = Rs. 341,000 - Already deducted: Rs. 138,000 - Balance for January to June: Rs. 341,000 - Rs. 138,000 = Rs. 203,000 - Spread over six payments: Rs. 203,000 / 6 = about **Rs. 33,833 a month** | Months | Salary per month | Tax per month | Tax for the period | |---|---|---|---| | July to December | Rs. 250,000 | Rs. 23,000 | Rs. 138,000 | | January to June | Rs. 300,000 | about Rs. 33,833 | Rs. 203,000 | | **Year** | | | **Rs. 341,000** | The raise adds Rs. 300,000 to Hamza's salary for the year and Rs. 65,000 to his tax. That is Rs. 200,000 taxed at 20% (up to Rs. 3,200,000) plus Rs. 100,000 taxed at 25% (Rs. 40,000 + Rs. 25,000). The annual total is exactly what the table charges on Rs. 3,300,000. ### What if my salary drops or I leave mid-year? If your estimated annual salary falls, the annual tax falls and the employer can reduce later deductions under section 149(1)(ii). If you leave before the employer can correct an over-deduction, the correction does not happen through payroll; any excess is a matter for your return and refund claim, which are separate topics. ### What if I have two employers? Each employer deducts under section 149 on the salary it pays. Neither is told about the other unless you provide evidence, so the combined deductions can fall short of the tax on your total salary. That situation is covered on the page about two jobs. ### Common mistakes - **"Tax is a fixed percentage of my monthly pay."** The rate is the average rate on estimated annual salary, which changes when your pay changes. - **"Only basic salary is taxed."** Section 12 includes allowances such as rent, utilities, education and travel allowances in salary. - **"The employer cannot change the deduction mid-year."** Section 149(1) expressly allows adjustments for earlier excess or short deductions. ### What to check in the official text Read section 149(1) and (2) in full, and the clause (2) table of Division I, Part I of the First Schedule in the source PDF for the rates. Check your employer's annual deduction certificate against your own calculation of the year's tax on your total salary. ### Frequently asked #### Why does my employer use my annual salary when I am paid monthly? Section 149 ties the deduction to your estimated income under the head Salary for the whole tax year. The rates in the First Schedule are annual rates, so the employer works out the year's tax first and then applies the resulting average rate to each payment. #### Can my employer take less tax if I have paid tax elsewhere? Section 149(1) allows the employer to adjust tax withheld from you under other heads during the tax year, and tax credits under sections 61 and 63, after obtaining documentary evidence. Without that evidence the employer has no basis in the section to make the adjustment. #### What happens if too much tax was deducted in earlier months? Section 149(1)(ii) lets the employer adjust any excess deduction or deficiency arising out of a previous deduction. In practice that means later deductions in the same tax year can be reduced or increased to bring the total in line with the annual tax. ### Citations - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule on the estimated income of the employee chargeable under the head “Salary” for the tax year in which the payment is made" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), Table (substituted by the Finance Act, 2026)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "the amount of any allowance provided by an employer to an employee including a cost of living, subsistence, rent, utilities, education, entertainment or travel allowance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 4 (Tax on taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4-tax-on-taxable-income), as amended to 2026-06-30: "Provided that in case of an individual deriving income chargeable under the head “Salary”," Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 61 (Charitable donations)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#61-charitable-donations), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 63 (Contribution to an Approved Pension Fund)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#63-contribution-to-an-approved-pension-fund), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is my Eid or performance bonus taxable, and why was more tax deducted in my bonus month? Source: https://qanoondigest.com/faq/salaried-employees/is-bonus-taxable-salary-pakistan Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer Yes. Section 12(2)(a) of the Income Tax Ordinance lists bonus as part of salary, so an Eid, annual or performance bonus is taxed at the same salary rates. The deduction jumps in the bonus month because section 149 makes your employer re-estimate your annual salary and recover the extra tax. **Applies to:** Employees in Pakistan who receive a bonus, incentive or similar one-off payment from their employer, for tax year 2027. ### What does the law say? Section 12(2)(a) of the Income Tax Ordinance, 2001 defines salary to include "any pay, wages or other remuneration provided to an employee, including leave pay, payment in lieu of leave, overtime payment, bonus", followed by commission, fees, gratuity and similar payments. A bonus is therefore salary, whatever it is called: Eid bonus, annual bonus, performance bonus, festival bonus or incentive. There is no separate bonus rate. The consolidated text shows that an old proviso taxing certain corporate bonuses at a separate rate was omitted by the Finance Act, 2015. Today a bonus is added to your other salary for the tax year and the total is taxed under the clause (2) table of Division I, Part I of the First Schedule. For tax year 2027 that table runs from 0% up to Rs. 600,000 to 35% above Rs. 7,000,000. ### Why was so much tax deducted in my bonus month? Section 149 requires your employer to deduct tax at your average rate on your *estimated* salary for the whole year. When a bonus is paid, your estimated annual salary jumps, so the annual tax jumps too. Tax already deducted in earlier months was based on the lower estimate, so there is a shortfall. Section 149(1) allows the employer to adjust for "any excess deduction or deficiency arising out of any previous deduction". Recovering that shortfall at the moment the bonus is paid is one way to do it, and it produces a visible spike on the payslip. The spike is a catch-up of the annual tax, not a separate tax on the bonus. ### Worked example (illustrative figures) Nadia is a sales officer at a textile trading house in Karachi. Her figures are made up; the rates are the tax year 2027 rates. **Before the bonus** - Salary: Rs. 200,000 a month, so estimated annual salary Rs. 2,400,000 - Tax: Rs. 116,000 + 20% of (Rs. 2,400,000 - Rs. 2,200,000) = Rs. 116,000 + Rs. 40,000 = Rs. 156,000 - Monthly deduction: Rs. 156,000 / 12 = Rs. 13,000 - July to November (five months): 5 x Rs. 13,000 = Rs. 65,000 deducted **December: bonus of Rs. 400,000 paid** - New estimated annual salary: Rs. 2,400,000 + Rs. 400,000 = Rs. 2,800,000 - New annual tax: Rs. 116,000 + 20% of (Rs. 2,800,000 - Rs. 2,200,000) = Rs. 116,000 + Rs. 120,000 = Rs. 236,000 - Extra tax caused by the bonus: Rs. 236,000 - Rs. 156,000 = Rs. 80,000, which is 20% of the bonus because the whole bonus falls inside the 20% slab Section 149 does not fix how the employer spreads this. Two ways of getting to the same annual total: | | Method 1: recover in bonus month | Method 2: spread over remaining months | |---|---|---| | July to November | Rs. 65,000 | Rs. 65,000 | | December | Rs. 13,000 + Rs. 80,000 = Rs. 93,000 | about Rs. 24,429 | | January to June | 6 x Rs. 13,000 = Rs. 78,000 | 6 x about Rs. 24,429 = about Rs. 146,571 | | **Year** | **Rs. 236,000** | **Rs. 236,000** | Under Method 2, the balance after November is Rs. 236,000 - Rs. 65,000 = Rs. 171,000, divided over seven payments (December to June), about Rs. 24,429 each. Either way, Nadia's tax for the year is Rs. 236,000. The December spike under Method 1 is not an extra tax. It is the same annual tax collected earlier. ### What if the bonus pushes me into a higher slab? Only the part of the bonus above the slab boundary is taxed at the higher rate. If Nadia's bonus had been Rs. 1,000,000, her annual salary would be Rs. 3,400,000. Rs. 800,000 of the bonus would fall in the 20% slab (up to Rs. 3,200,000) and Rs. 200,000 in the 25% slab. Tax on the bonus: Rs. 160,000 + Rs. 50,000 = Rs. 210,000. Her salary below the boundary is not retaxed at 25%. ### What if the bonus relates to an earlier year? A bonus for work done in an earlier year but paid late may count as salary paid in arrears. Section 12(7) lets an employee elect, by written notice to the Commissioner, to have arrears taxed at the rates that would have applied in the year the services were rendered, if that gives a lower charge. That election is explained on the page about salary arrears. ### Common mistakes - **"Eid bonus is exempt."** No provision in section 12 exempts it. It is named as salary. - **"The bonus was taxed at 35%."** Unless your salary is above Rs. 7,000,000 for the year, no part of it is taxed at 35%. A large December deduction is usually a catch-up of the annual tax, as in the example. - **"The employer made a mistake, so I lose the money."** If the total deducted for the year is more than the tax on your total salary, the excess can be corrected by the employer in later months or claimed through your return. ### What to check in the official text Read section 12(2)(a) and the footnote under it recording the omitted bonus proviso, then section 149(1) and (2). Take your annual salary including the bonus, apply the clause (2) table in the source PDF, and compare the result with the total tax shown on your employer's deduction certificate. ### Frequently asked #### Is an Eid bonus tax free in Pakistan? Nothing in section 12 separates an Eid bonus from any other bonus. Section 12(2)(a) names bonus as part of salary, so it is taxed at the salary rates in clause (2) of Division I of the First Schedule unless a specific exemption covers it. #### Is my bonus taxed at a special flat rate? No. The Ordinance once had a proviso taxing certain corporate bonuses separately, but the Finance Act, 2015 omitted it. A bonus is now simply added to your salary for the year and taxed at the ordinary slab rates. #### Will I get the extra tax back later? Only if too much was deducted overall. If the employer's deductions for the year add up to the tax on your total salary including the bonus, nothing is owed back. Section 149 lets the employer correct an excess in later months. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "any pay, wages or other remuneration provided to an employee, including leave pay, payment in lieu of leave, overtime payment, bonus" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "any excess deduction or deficiency arising out of any previous deduction" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), Table (substituted by the Finance Act, 2026)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is an interest-free or low-interest loan from my employer taxed as salary? Source: https://qanoondigest.com/faq/salaried-employees/interest-free-loan-from-employer-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer It can be. Section 13(7) of the Income Tax Ordinance adds to your salary the profit you would have paid at the benchmark rate, less any profit you actually pay, on an employer loan made interest free or below that rate. Loans not exceeding Rs. 1 million are excluded. A loan the employer later waives is taxed under section 13(9). **Applies to:** Employees in Pakistan who have taken a loan or advance from their employer, or whose debts the employer has paid or forgiven. ### What does the law say? Section 12(2)(b) of the Income Tax Ordinance, 2001 counts any perquisite as salary, and section 13 values particular perquisites. Three of its sub-sections deal with money between you and your employer. **Section 13(7): cheap loans.** Where your employer lends you money on or after 1 July 2002, and you pay no profit or pay less than the benchmark rate, your salary for the year includes: - (a) the profit on the loan computed at the benchmark rate, if you pay no profit; or - (b) the difference between the profit you paid that year and the profit at the benchmark rate. (The consolidated text prints this limb as "(d)".) Two provisos limit this. The first says it does not apply to a benefit arising "due to waiver of interest by such employee on his account with the employer". The second says it does not apply to "loans not exceeding one million rupees". **Section 13(14): the benchmark rate.** For the tax year starting 1 July 2002 (tax year 2003) it was five per cent, and for each later year one per cent higher than the year before, "but not exceeding ten per cent per annum". Counting forward (2004: 6%, 2005: 7%, 2006: 8%, 2007: 9%, 2008: 10%), the formula hits the cap in tax year 2008 and stays at ten per cent after that, including tax year 2027. **Section 13(9): waived loans.** If your employer waives an amount you owe it, the amount waived is added to your salary for that year. **Section 13(10): debts paid for you.** If your employer pays an amount you owe to someone else, the amount paid is added to your salary for that year. ### How does it work in practice? Your employer adds the benchmark profit to your estimated salary and deducts tax on it through payroll under section 149, even though no cash reaches you. A waived loan or a debt paid on your behalf is added in the year the waiver or payment happens. | Situation | Added to salary | |---|---| | Loan of Rs. 1,000,000 or less, interest free | Nothing under section 13(7) | | Loan above Rs. 1,000,000, interest free | Profit at 10% on the loan | | Loan above Rs. 1,000,000 at a rate below 10% | 10% profit minus the profit you paid | | Loan at 10% or more | Nothing under section 13(7) | | Employer writes off what you owe it | The amount written off (section 13(9)) | | Employer pays your bank, landlord or other creditor | The amount paid (section 13(10)) | ### Worked example (illustrative figures) Sana works for a bank in Faisalabad. Salary is her only income. For tax year 2027 (1 July 2026 to 30 June 2027) her salary is Rs. 2,400,000. On 1 July 2026 her employer gives her a Rs. 3,000,000 house-building loan at 4% a year, and the full amount is outstanding all year. **Step 1: profit at the benchmark rate.** Rs. 3,000,000 x 10% = Rs. 300,000. **Step 2: profit she actually pays.** Rs. 3,000,000 x 4% = Rs. 120,000. **Step 3: amount added to salary.** Rs. 300,000 minus Rs. 120,000 = Rs. 180,000. **Step 4: taxable salary.** Rs. 2,400,000 + Rs. 180,000 = Rs. 2,580,000. **Step 5: tax.** Salary is more than 75% of taxable income, so clause (2) of Division I of Part I of the First Schedule applies. Between Rs. 2,200,000 and Rs. 3,200,000 the tax is Rs. 116,000 + 20% of the amount above Rs. 2,200,000: Rs. 116,000 + 20% x Rs. 380,000 = Rs. 116,000 + Rs. 76,000 = **Rs. 192,000**. Without the loan benefit, tax on Rs. 2,400,000 would be Rs. 116,000 + 20% x Rs. 200,000 = **Rs. 156,000**. The cheap loan adds Rs. 36,000 of tax for the year. ### What if my loan is just over Rs. 1 million? The proviso excludes loans "not exceeding one million rupees". It does not say that only the part above Rs. 1 million is counted once a loan crosses the limit. On the words of section 13(7), the benchmark profit is computed on "the loan", but the text does not spell out how a partly repaid loan or a loan that falls below Rs. 1 million during the year is measured. Where that matters, the Ordinance text we hold leaves the point open. ### What if I used the loan to buy property that earns income? Section 13(8) says that, for purposes of the Ordinance other than section 13(7), where you use such a loan to acquire an asset or property that produces taxable income, you are treated as having paid profit at the benchmark rate on the loan, or on the part used for that asset. Whether that treated profit is deductible depends on the rules for that other head of income, which this page does not cover. ### Common mistakes - **Assuming every staff loan is taxable.** Loans not exceeding Rs. 1 million are outside section 13(7). - **Using the State Bank policy rate.** The benchmark in section 13(14) is its own formula, capped at ten per cent. The State Bank discount rate was the pre-2002 definition, since replaced. - **Forgetting the write-off.** When an employer forgives a salary advance, section 13(9) taxes the waived amount as salary. - **Treating employer-paid personal bills as gifts.** Section 13(10) adds any debt of yours that the employer pays. ### What to check in the official text - Section 13(7), (8), (9), (10) and (14) in the official PDF, including the lettering of the limbs of section 13(7). - The loan agreement: the amount, the profit rate and dates of disbursement and repayment, because section 13(7) is computed for each tax year. ### Frequently asked #### Is a staff loan of Rs. 1 million or less taxable? No. The second proviso to section 13(7) says the sub-section does not apply to loans not exceeding one million rupees. No benchmark profit is added to salary for such a loan. #### What is the benchmark rate for employee loans? Section 13(14) sets it at five per cent for the tax year starting 1 July 2002, rising by one per cent each year but not exceeding ten per cent per annum. By that formula the rate reached the ten per cent cap in tax year 2008, so ten per cent applies for tax year 2027. #### If my employer forgives my loan, is it taxed? Yes. Section 13(9) adds the amount waived to your salary for the tax year in which the employer waives it. ### Citations - [Income Tax Ordinance, 2001, section 13 (Value of perquisites)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#13-value-of-perquisites), as amended to 2026-06-30: "Where a loan is made, on or after the 1st day of July, 2002, by an employer to an employee and either no profit on loan is payable by the employee or the rate of profit on loan is less than the benchmark rate, the amount chargeable to tax to the employee under the head “Salary” for a tax year shall include an amount equal to-" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 13 (Value of perquisites)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#13-value-of-perquisites), as amended to 2026-06-30: "Where, in a tax year, an obligation of an employee to pay or repay an amount owing by the employee to the employer is waived by the employer, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the amount so waived." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "any perquisite, whether convertible to money or not;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule on the estimated income of the employee chargeable under the head “Salary”" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is my conveyance, fuel or travel allowance taxable? Source: https://qanoondigest.com/faq/salaried-employees/conveyance-fuel-allowance-taxable Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer Yes, in most cases. Section 12(2)(c) of the Income Tax Ordinance counts travel and similar allowances as salary unless solely spent on your job duties, and its Explanation says a fixed monthly or percentage-of-salary allowance never qualifies. Reimbursement of actual fuel or travel spent on the employer's behalf is excluded under section 12(2)(d). **Applies to:** Employees in Pakistan who receive a conveyance, petrol, fuel or travel allowance, or claim back travel costs from their employer. ### What does the law say? Section 12(2) of the Income Tax Ordinance, 2001 defines salary widely. Clause (c) includes "the amount of any allowance provided by an employer to an employee", naming cost of living, subsistence, rent, utilities, education, entertainment and travel allowances. A conveyance or fuel allowance is an allowance of the same kind. Clause (c) has one exclusion: an allowance "solely expended in the performance of the employee's duties of employment" is not salary. The Finance Act, 2021 added an Explanation that narrows this exclusion. It says an allowance solely expended on duties does **not** include: 1. an allowance paid in monthly salary on a fixed basis or as a percentage of salary; or 2. an allowance that is not wholly, exclusively, necessarily or actually spent on behalf of the employer. Clause (d) deals with a different arrangement: reimbursement. It counts as salary any expenditure you incur that your employer pays or reimburses, "other than expenditure incurred on behalf of the employer in the performance of the employee's duties of employment". Section 13, which values perquisites such as a company car, says in sub-section (2) that it does not apply to amounts under clauses (c) or (d) of section 12(2). Allowances and reimbursements are taken at their rupee amount. ### How does it work in practice? The difference is between a fixed payment and a payment for actual work travel. | How the travel money is paid | Tax position | |---|---| | Fixed conveyance allowance, same amount each month | Salary under section 12(2)(c), Explanation (i) | | Fuel allowance set as a percentage of basic pay | Salary under section 12(2)(c), Explanation (i) | | Allowance you can spend as you like, no accounting to employer | Salary, because it is not actually spent on behalf of the employer (Explanation (ii)) | | Reimbursement of actual fuel, fares or tolls for official trips | Not salary, as expenditure on behalf of the employer under section 12(2)(d) | | Reimbursement of your daily commute to office | The Ordinance does not say whether commuting is a duty of employment; section 12(2)(d) only excludes spending on the employer's behalf in performing duties | Your employer includes the taxable part in your estimated salary for the year and, under section 149, deducts tax each month at your average rate. You cannot claim a deduction for your own travel costs: section 12(4) says no deduction is allowed for expenditure incurred by an employee in deriving salary. ### Worked example (illustrative figures) Bilal is a sales officer in Karachi. Salary is his only income. For tax year 2027 (1 July 2026 to 30 June 2027) he earns Rs. 1,500,000 in pay and other allowances. **Arrangement A: fixed fuel allowance.** His employer pays a fixed Rs. 15,000 a month for fuel, Rs. 180,000 for the year. Under Explanation (i) this is salary. - Taxable salary: Rs. 1,500,000 + Rs. 180,000 = Rs. 1,680,000 - Salary is more than 75% of his taxable income, so clause (2) of Division I of Part I of the First Schedule applies. Between Rs. 1,200,000 and Rs. 2,200,000 the tax is Rs. 6,000 + 11% of the amount above Rs. 1,200,000. - Tax: Rs. 6,000 + 11% x Rs. 480,000 = Rs. 6,000 + Rs. 52,800 = **Rs. 58,800** **Arrangement B: reimbursement of actual trips.** Instead, Bilal logs his client visits and claims back Rs. 180,000 of fuel over the year with receipts, all for the employer's sales work. Under section 12(2)(d) this is expenditure on behalf of the employer and is not salary. - Taxable salary: Rs. 1,500,000 - Tax: Rs. 6,000 + 11% x Rs. 300,000 = Rs. 6,000 + Rs. 33,000 = **Rs. 39,000** The same Rs. 180,000 costs Bilal Rs. 19,800 more tax (11% x Rs. 180,000) when it comes as a fixed allowance. ### What if my employer gives me a car instead? A car provided for private use is a perquisite, not an allowance. Section 13(3) adds an amount "computed as may be prescribed", and the Income Tax Rules set that amount as a percentage of the car's cost. That is covered on a separate page about company cars. ### What if I spend my whole allowance on official travel? If the allowance is a fixed monthly sum or a percentage of salary, Explanation (i) treats it as salary regardless of how you spend it. The exclusion only helps where the allowance is actually, wholly and exclusively spent on behalf of the employer and is not a fixed or percentage payment. The Ordinance does not describe what records prove this. ### Common mistakes - **Believing conveyance allowance is automatically exempt.** Section 12 has no general exemption for conveyance allowance, and the Explanation makes a fixed allowance taxable. The conveyance exemptions in Part I of the Second Schedule are limited to specific named office-holders, not ordinary employees. - **Deducting fuel bills from salary in the return.** Section 12(4) bars any deduction against salary. - **Mixing up allowance and reimbursement.** A monthly fixed amount is an allowance under clause (c). Money paid back against actual official expenses is a reimbursement under clause (d). The tax result is different. - **Assuming section 13 values the allowance.** Section 13(2) excludes allowances and reimbursements from the perquisite rules. ### What to check in the official text - Section 12(2)(c), including the Explanation added by the Finance Act, 2021, and section 12(2)(d). - Section 12(4) on the bar on deductions. - Your employer's travel policy: whether the payment is a fixed allowance or a claim against actual official expenses decides which clause applies. - Part I of the Second Schedule, if your employer says a specific exemption applies to your allowance. The old general clause (39) for special allowances spent wholly on duties was omitted by the Finance Act, 2021. ### Frequently asked #### Is a fixed petrol allowance of a set amount every month taxable? Yes. The Explanation to section 12(2)(c), added by the Finance Act, 2021, says an allowance paid in monthly salary on a fixed basis or as a percentage of salary is not an allowance solely expended in performing your duties. It is therefore part of taxable salary. #### Is reimbursement of fuel for official trips taxable? Section 12(2)(d) counts expenses reimbursed by the employer as salary, other than expenditure incurred on behalf of the employer in performing your duties. Actual fuel or fares spent on the employer's work and reimbursed on that basis fall outside salary. #### Can I deduct my own fuel costs from a taxable conveyance allowance? No. Section 12(4) says no deduction is allowed for any expenditure incurred by an employee in deriving salary. The allowance is taxed in full even if you spend it on travel. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "the amount of any allowance provided by an employer to an employee including a cost of living, subsistence, rent, utilities, education, entertainment or travel allowance, but shall not include any allowance solely expended in the performance of the employee’s duties of employment." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "allowance which is paid in monthly salary on fixed basis or percentage of salary" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 13 (Value of perquisites)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#13-value-of-perquisites), as amended to 2026-06-30: "This section shall not apply to any amount referred to in clause (c) or" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule on the estimated income of the employee chargeable under the head “Salary”" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clauses (39), (52) and (56)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is house rent allowance, a company-provided house, or employer-paid utilities taxable? Source: https://qanoondigest.com/faq/salaried-employees/house-rent-allowance-company-accommodation-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer Yes, all three are taxable. Section 12(2)(c) counts a rent allowance as salary in full. A house provided by the employer is valued under section 13(12) and rule 4 of the Income Tax Rules at no less than 45% of basic salary (30% where a 30% allowance applies), and utilities are added at fair market value under section 13(6). **Applies to:** Employees in Pakistan who receive house rent allowance, employer accommodation, paid utilities or domestic staff, for tax year 2027. ### What does the law say? Housing can reach an employee in three ways, and the Income Tax Ordinance, 2001 treats each one differently. **1. House rent allowance paid in cash.** Section 12(2)(c) includes in salary "the amount of any allowance provided by an employer to an employee including a cost of living, subsistence, rent, utilities..." allowance. The only allowances left out are those "solely expended in the performance of the employee's duties", and the Explanation to clause (c) says that does not include an allowance paid in monthly salary on a fixed basis or as a percentage of salary. A monthly house rent allowance is exactly that kind of payment, so the whole amount is salary. Section 13(2) says the perquisite valuation rules in section 13 do not apply to amounts under clause (c), so the allowance counts at the amount paid. **2. A house or flat provided by the employer.** Section 13(12) says that where accommodation or housing is provided by an employer, the employee's salary includes "an amount computed as may be prescribed". The prescription is rule 4 of the Income Tax Rules, 2002: - The value is "the amount that would have been paid by the employer in case such accommodation was not provided". - It can never be less than **45%** of the minimum of the time scale of basic salary, or of basic salary where there is no time scale. - Where house rent allowance is admissible at 30%, the floor is **30%** of that minimum or basic salary instead. Rule 3 confirms that all perquisites, allowances and benefits are to be included in salary in accordance with rules 4 to 7. **3. Utilities and domestic staff.** Section 13(6) adds the fair market value of utilities the employer provides, reduced by anything you pay for them. Section 13(14) defines utilities to include electricity, gas, water and telephone. Section 13(5) adds the total salary paid to a housekeeper, driver, gardener or other domestic assistant provided to you, reduced by any payment you make to the employer for those services. ### Where does the "45% of HRA is exempt" idea come from? We found no provision in the Ordinance amended to 30 June 2026 or the Income Tax Rules amended to 24 November 2023 that exempts a percentage of house rent allowance for employees generally. The 45% figure in rule 4 is a floor on the *taxable value* of a house the employer provides. It is not an exemption. The only Second Schedule clause we found that exempts house rent allowance by name is clause (55) of Part I, which is limited to judges of the Supreme Court and High Courts. ### Worked example (illustrative figures) Imran is a plant engineer at a cement company near Chakwal. His figures are made up; the rates are the tax year 2027 rates. His basic salary is Rs. 120,000 a month and there is no time scale. **Case A: he receives house rent allowance of 45% of basic in cash** - Basic: Rs. 120,000 x 12 = Rs. 1,440,000 - House rent allowance: Rs. 54,000 x 12 = Rs. 648,000, all taxable under section 12(2)(c) - Taxable salary: Rs. 2,088,000 **Case B: the company gives him a house instead, and pays his bills and a driver** - Basic: Rs. 1,440,000 - Accommodation under rule 4: the floor is 45% x Rs. 120,000 = Rs. 54,000 a month, so at least Rs. 648,000 a year. If his employer's policy would have paid him more than that as allowance, the higher figure applies. - Utilities paid by the company: say Rs. 15,000 a month at fair market value = Rs. 180,000, under section 13(6) - Driver's salary paid by the company: say Rs. 40,000 a month = Rs. 480,000, under section 13(5) - Taxable salary: Rs. 1,440,000 + Rs. 648,000 + Rs. 180,000 + Rs. 480,000 = Rs. 2,748,000 **Tax on each case (clause (2) table)** | | Taxable salary | Tax for the year | |---|---|---| | Case A | Rs. 2,088,000 | Rs. 6,000 + 11% x Rs. 888,000 = Rs. 103,680 | | Case B | Rs. 2,748,000 | Rs. 116,000 + 20% x Rs. 548,000 = Rs. 225,600 | The house itself is valued the same way as the allowance in this example. The difference comes from the utilities and the driver, which are also perquisites. ### What if I pay part of the rent or bills myself? Section 13(6) reduces the utilities figure by any payment you make for them, and section 13(5) reduces the domestic staff figure by any payment you make to the employer. Rule 4 does not mention a deduction for rent the employee contributes; its wording fixes the value by reference to what the employer would have paid. How an employee contribution is treated under rule 4 is not spelled out in the rule. ### What if my employer pays my landlord directly? Section 13(10) adds to salary any amount the employer pays to settle an obligation you owe to another person. Rent you owe your landlord, paid by your employer, would fall within those words. Whether it is instead treated as accommodation "provided" under section 13(12) depends on the arrangement, and the Ordinance does not draw that line for you. ### Common mistakes - **"House rent allowance is partly exempt."** Not under any general provision in the texts we hold. It is salary in full. - **"A company house is tax free because I receive no cash."** Section 13(12) and rule 4 add a value to your salary. - **"Bills paid by the company are not my income."** Section 13(6) says they are, at fair market value. ### What to check in the official text Read section 12(2)(c) with its Explanation, section 13(2), (5), (6), (10), (12) and (14), and rules 3 and 4 of the Income Tax Rules, 2002. The Rules we hold are amended to 24 November 2023; later notifications changing rule 4, if any, are not in this corpus. ### Frequently asked #### Is 45% of house rent allowance exempt from tax? No such exemption appears in the Ordinance or the Income Tax Rules. The 45% figure comes from rule 4, where it sets the minimum value of a house provided by the employer. A cash house rent allowance is salary in full under section 12(2)(c). #### My employer pays my electricity and gas bills. Is that taxable? Yes. Section 13(6) adds the fair market value of utilities provided by the employer to your salary, reduced by anything you pay for them. Section 13(14) defines utilities to include electricity, gas, water and telephone. #### Is a driver or cook provided by my company taxable? Yes. Section 13(5) adds the total salary paid to a housekeeper, driver, gardener or other domestic assistant who serves you, reduced by any payment you make to the employer for those services. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "the amount of any allowance provided by an employer to an employee including a cost of living, subsistence, rent, utilities, education, entertainment or travel allowance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 13 (Value of perquisites)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#13-value-of-perquisites), as amended to 2026-06-30: "Where, in a tax year, utilities are provided by an employer to an employee, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the fair market value of the utilities provided" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 4 (Valuation of accommodation)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#4-valuation-of-accommodation), as amended to 2023-11-24: "The value of accommodation provided by an employer to the employee shall be taken equal to the amount that would have been paid by the employer in case such accommodation was not provided." Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Rules, 2002, section 3 (Valuation of perquisites, allowances and benefits)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#3-valuation-of-perquisites-allowances-and-benefits), as amended to 2023-11-24: "the value of all perquisites, allowances and benefits provided by the employer to the employee shall be included in the said income in accordance with the rules 4 to 7." Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (55)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is leave encashment taxable when I cash in my unused leave? Source: https://qanoondigest.com/faq/salaried-employees/is-leave-encashment-taxable Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer Usually yes. Section 12(2)(a) of the Income Tax Ordinance includes payment in lieu of leave in salary, so encashed leave is taxed at the normal salary rates. The only exemption, Second Schedule Part I clause (19), covers leave encashed preparatory to retirement by armed forces members and federal or provincial government employees. **Applies to:** Private sector and government employees in Pakistan who are paid for unused leave, for tax year 2027. ### What does the law say? Section 12(2)(a) of the Income Tax Ordinance, 2001 defines salary to include "any pay, wages or other remuneration provided to an employee, including leave pay, payment in lieu of leave". Money paid to you for leave you did not take is a payment in lieu of leave. It is therefore salary and taxable under the head "Salary", unless an exemption applies. The Second Schedule, Part I, clause (19) provides one exemption: > Any sum representing encashment of leave preparatory to retirement of a member of the Armed Forces of Pakistan or an employee of the Federal Government or a Provincial Government. Two conditions must both be met for clause (19): 1. **Who:** a member of the Armed Forces of Pakistan, or an employee of the Federal Government or a Provincial Government. 2. **When:** the encashment is of leave preparatory to retirement. Nothing else in the clause widens it to private employers, companies, banks or other bodies. ### How does it work in practice? For a private sector employee, encashed leave is added to the rest of your salary for the tax year. Your employer deducts tax on it under section 149, re-estimating your annual salary in the month of payment and correcting "any excess deduction or deficiency arising out of any previous deduction". The rates are the clause (2) table of Division I, Part I of the First Schedule, which for tax year 2027 runs from 0% up to Rs. 600,000 to 35% above Rs. 7,000,000. For a federal or provincial government employee or a member of the armed forces, a sum representing encashment of leave preparatory to retirement is exempt under clause (19), so it is not part of taxable salary. ### Worked example (illustrative figures) Usman is an IT officer at a private bank in Islamabad. His figures are made up; the rates are the tax year 2027 rates. - Monthly salary: Rs. 180,000, so annual salary before encashment Rs. 2,160,000 - In March he encashes 20 days of unused leave for Rs. 120,000 **Tax without the encashment** - Slab: Rs. 1,200,001 to Rs. 2,200,000, so Rs. 6,000 + 11% of the amount over Rs. 1,200,000 - Rs. 6,000 + (11% x Rs. 960,000 = Rs. 105,600) = Rs. 111,600 **Tax with the encashment** - Annual salary: Rs. 2,160,000 + Rs. 120,000 = Rs. 2,280,000 - Slab: Rs. 2,200,001 to Rs. 3,200,000, so Rs. 116,000 + 20% of the amount over Rs. 2,200,000 - Rs. 116,000 + (20% x Rs. 80,000 = Rs. 16,000) = Rs. 132,000 **Extra tax caused by the encashment:** Rs. 132,000 - Rs. 111,600 = **Rs. 20,400** Check by slab: the first Rs. 40,000 of the encashment (taking salary from Rs. 2,160,000 to Rs. 2,200,000) is taxed at 11% = Rs. 4,400, and the remaining Rs. 80,000 at 20% = Rs. 16,000. Total Rs. 20,400. **Comparison: a provincial government employee** Farah, a Grade 17 officer of a provincial education department, retires and receives Rs. 900,000 as encashment of leave preparatory to retirement. Under clause (19) that sum is exempt. It is not added to her taxable salary, and no tax arises on it. ### What if I am a government employee but not retiring? Clause (19) speaks only of encashment "preparatory to retirement". Leave encashed during service, or in circumstances that are not preparatory to retirement, is not described by that clause, so it falls back to section 12(2)(a) as payment in lieu of leave. The clause does not define "preparatory to retirement"; if your case is borderline, the wording of the clause and any government leave rules that apply to you are what matter, and those rules are not in this corpus. ### What if I work for a state-owned company or autonomous body? The clause names "an employee of the Federal Government or a Provincial Government". It does not mention corporations, authorities or companies owned by government. Whether an employee of such a body counts as an employee of the Federal or a Provincial Government is not answered by the clause itself. This page does not resolve that question. ### What if the encashment is paid on termination? Section 12(2)(e)(iii) separately covers amounts received on termination of employment, such as redundancy compensation and golden handshakes, and section 12(6) lets an employee elect a special averaged rate for those. The Ordinance does not say whether a leave encashment paid at the same time falls under that termination provision or remains a payment in lieu of leave under section 12(2)(a). This page does not resolve that point; see the page on golden handshake and severance pay. ### Common mistakes - **"All leave encashment at retirement is tax free."** Clause (19) applies only to armed forces members and federal or provincial government employees. A private employee retiring from a company gets no exemption under it. - **"Encashment is taxed at a flat rate."** It is added to salary and taxed at the ordinary slab rates, so the extra tax depends on which slab your total salary reaches. - **"Leave pay is different from leave encashment."** Section 12(2)(a) lists both "leave pay" and "payment in lieu of leave" as salary. ### What to check in the official text Read section 12(2)(a) and clause (19) of Part I of the Second Schedule in the Income Tax Ordinance amended to 30 June 2026. Check how your payslip or final settlement describes the payment, and whether your employer is a federal or provincial government department. ### Frequently asked #### Is leave encashment on resignation from a private company taxable? Yes. Section 12(2)(a) treats payment in lieu of leave as salary, and the clause (19) exemption in the Second Schedule is limited to armed forces members and federal or provincial government employees encashing leave preparatory to retirement. #### Is LPR leave encashment of a government employee taxable? Clause (19) of Part I of the Second Schedule exempts any sum representing encashment of leave preparatory to retirement of a federal or provincial government employee or a member of the armed forces. Leave encashed by such an employee in other circumstances is not covered by that clause's words. #### Is leave encashment taxed at a separate rate? No separate rate is provided. The payment is added to your salary for the tax year and taxed under the clause (2) table of Division I of the First Schedule, with your employer deducting tax under section 149. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "any pay, wages or other remuneration provided to an employee, including leave pay, payment in lieu of leave" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (19)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "Any sum representing encashment of leave preparatory to retirement of a member of the Armed Forces of Pakistan or an employee of the Federal Government or a Provincial Government." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "any excess deduction or deficiency arising out of any previous deduction" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), Table (substituted by the Finance Act, 2026)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is medical allowance tax free, and what about medical bills my company reimburses? Source: https://qanoondigest.com/faq/salaried-employees/medical-allowance-reimbursement-tax-exemption Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer Clause (139) of the Second Schedule exempts free medical treatment or reimbursed medical bills given under your terms of employment, if the hospital's NTN is given and your employer attests the bills. A cash medical allowance is exempt only up to 10% of basic salary, and only where no free treatment or reimbursement is provided. **Applies to:** Employees in Pakistan who receive a medical allowance, free medical treatment, or reimbursement of medical or hospital bills from their employer. ### What does the law say? Section 12 of the Income Tax Ordinance, 2001 treats almost everything an employer gives you as salary, including allowances (section 12(2)(c)) and any of your own expenses that the employer pays or reimburses (section 12(2)(d)). Medical benefits are pulled back out of that net by clause (139) of Part I of the Second Schedule, which lists them as exempt. Clause (139) has two parts, and they work very differently. **Part one: free treatment or reimbursed bills.** The benefit of free medical treatment or hospitalisation provided by the employer, or the reimbursement you receive for medical or hospital charges you paid, is exempt where it is "in accordance with the terms of employment". There is no rupee limit in the clause. There are two conditions in the proviso: the National Tax Number of the hospital or clinic must be given, and the employer must certify and attest the medical or hospital bills. **Part two: a cash medical allowance.** A medical allowance is exempt up to ten per cent of your basic salary, but only "if free medical treatment or hospitalization or reimbursement of medical or hospitalization charges is not provided for in the terms of employment". In the consolidated text we hold, both parts are printed with the letter (a). The official PDF is the place to confirm the lettering. ### How does it work in practice? Your employer applies this when it works out your monthly tax. Section 149 requires the person paying your salary to deduct tax at your average rate on your estimated income "chargeable under the head Salary" for the year. Exempt medical amounts are not part of that income, so they do not push up the monthly deduction. Amounts that fail the conditions are added to taxable salary. What matters most is what your appointment letter or company policy says: | Your terms of employment provide | Tax position under clause (139) | |---|---| | Free treatment at a panel hospital | Exempt, if hospital NTN given and bills attested by employer | | Reimbursement of your medical bills | Exempt, same conditions, no rupee cap in the clause | | Only a fixed medical allowance, no treatment or reimbursement | Allowance exempt up to 10% of basic salary | | Reimbursement and also a fixed medical allowance | Reimbursement can be exempt; the allowance does not meet the condition for exemption | ### Worked example (illustrative figures) Ayesha works for a trading company in Lahore. Salary is her only income. For tax year 2027 (1 July 2026 to 30 June 2027) her package is: - Basic salary: Rs. 1,200,000 a year - Other allowances: Rs. 600,000 - Medical allowance: Rs. 120,000 (Rs. 10,000 a month) Her contract gives her no free treatment and no bill reimbursement, only the allowance. **Step 1: test the limit.** 10% of basic salary is Rs. 1,200,000 x 10% = Rs. 120,000. Her allowance of Rs. 120,000 does not exceed this, so it is exempt. **Step 2: taxable salary.** Rs. 1,200,000 + Rs. 600,000 = Rs. 1,800,000. **Step 3: tax.** Because salary is more than 75% of her taxable income, clause (2) of Division I of Part I of the First Schedule applies. For income over Rs. 1,200,000 and up to Rs. 2,200,000 the tax is Rs. 6,000 + 11% of the amount above Rs. 1,200,000: Rs. 6,000 + 11% x Rs. 600,000 = Rs. 6,000 + Rs. 66,000 = **Rs. 72,000** for the year. **If the allowance were not exempt** (say her contract also promised bill reimbursement), taxable salary would be Rs. 1,920,000 and tax Rs. 6,000 + 11% x Rs. 720,000 = **Rs. 85,200**. The Rs. 13,200 difference is 11% of the Rs. 120,000 allowance. ### What if my allowance is more than 10% of basic salary? Clause (139) exempts an allowance "not exceeding" ten per cent of basic salary. It does not say in so many words whether an allowance above the limit stays exempt up to 10% with only the excess taxed, or loses the exemption altogether. The Ordinance text we hold does not settle this, so it is a point to confirm with your employer's payroll or the Commissioner rather than assume. ### What if the hospital has no NTN or my employer does not attest the bills? The proviso makes the NTN of the hospital or clinic and the employer's certification of the bills conditions of the reimbursement exemption. Clause (139) does not say what happens when they are missing. Without the exemption, a reimbursed personal expense falls under section 12(2)(d), which counts reimbursed expenditure as salary unless it was spent on the employer's behalf in performing your duties. Medicine for yourself is not an expense of that kind. ### Common mistakes - **Treating every medical payment as tax free.** Only benefits that fit clause (139) are exempt. Everything else an employer pays you is salary under section 12. - **Claiming the 10% allowance exemption alongside a reimbursement scheme.** The allowance exemption only applies where no free treatment or reimbursement is provided for. - **Assuming the 10% is of gross salary.** The clause says "basic salary". House rent, utilities and other allowances are not part of the base. - **Forgetting the paperwork.** A reimbursement without the hospital NTN and employer attestation does not meet the proviso. - **Thinking you can deduct your own doctor's bills from salary.** Section 12(4) allows no deduction for expenditure incurred by an employee in deriving salary, and clause (139) covers only what the employer provides or reimburses. ### What to check in the official text - Clause (139) of Part I of the Second Schedule, in the official PDF, for the exact lettering of its two parts and the full proviso. - Section 12(2)(c) and (d), to see how allowances and reimbursements that are not exempt are treated. - Your own appointment letter or HR policy: clause (139) turns on what the "terms of employment" provide, so the wording there decides which part of the clause applies to you. - The salary rate table in clause (2) of Division I of Part I of the First Schedule, if you want to work out the tax on any taxable part. ### Frequently asked #### Is my monthly medical allowance taxable? Clause (139) of Part I of the Second Schedule exempts a medical allowance up to ten per cent of basic salary, but only where your terms of employment do not provide free medical treatment or reimbursement of medical or hospital charges. If they do, the allowance falls back into salary under section 12. #### What paperwork is needed for tax free medical reimbursement? The proviso to the first part of clause (139) requires the National Tax Number of the hospital or clinic to be given and the employer to certify and attest the medical or hospital bills. The reimbursement must also be in accordance with the terms of employment. #### Can I get both a medical allowance and bill reimbursement tax free? On the wording of clause (139), no. The allowance exemption only applies if free treatment or reimbursement is not provided for in your terms of employment, so an employee who has a reimbursement entitlement cannot also claim the 10% allowance exemption. ### Citations - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (139)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "any medical allowance received by an employee not exceeding ten per cent of the basic salary of the employee if free medical treatment or hospitalization or reimbursement of medical or hospitalization charges is not provided for in the terms of employment" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "the amount of any expenditure incurred by an employee that is paid or reimbursed by the employer, other than expenditure incurred on behalf of the employer in the performance of the employee’s duties of employment" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule on the estimated income of the employee chargeable under the head “Salary”" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do I still need to file a tax return if my employer already deducts tax from my salary? Source: https://qanoondigest.com/faq/salaried-employees/salaried-person-must-file-tax-return Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer Usually yes. Section 114 of the Income Tax Ordinance requires a return from every individual whose taxable income exceeds the amount not chargeable to tax, which is Rs. 600,000 of salary in tax year 2027. Tax deducted by the employer does not replace the return. Owning a car above 1000cc, certain property or an NTN also triggers filing. **Applies to:** Salaried individuals in Pakistan, including those whose only income is salary taxed at source by the employer. ### What does the law say? Section 114(1) of the Income Tax Ordinance, 2001 lists the persons who must "furnish a return of income for a tax year". Clause (ab) covers "every person (other than a company) whose taxable income for the year exceeds the maximum amount that is not chargeable to tax". Nothing in section 114 exempts a person because their tax was already deducted at source. For a salaried individual, the amount not chargeable to tax comes from the salary table in clause (2) of Division I, Part I of the First Schedule. For tax year 2027 (1 July 2026 to 30 June 2027) that table charges 0% on taxable income up to Rs. 600,000. Above that figure, clause (ab) applies and a return is required. Section 114(1)(b) adds a second list. A person not caught by the income test must still file if the person, among other things: - has been charged to tax in either of the two preceding tax years (sub-clause (i)); - owns immovable property with a land area of 500 square yards or more, or a flat, in the areas those sub-clauses list: sub-clause (iii) covers any flat within the former municipal limits, a Cantonment or the Islamabad Capital Territory, and sub-clause (v) a flat of 2,000 square feet or more in a rating area (sub-clauses (iii) to (v)); - owns a motor vehicle with engine capacity above 1000 CC (sub-clause (vi)); - has obtained a National Tax Number (sub-clause (vii)). ### Does payroll deduction replace the return? No. Until 2013, section 115(1) said that where all of a person's income was salary, the employer's annual statement of deduction "shall ... be treated as a return of income". The Finance Act, 2013 omitted that sub-section. The consolidated text now prints it only as a footnote. The employer still deducts tax from each salary payment, but the employee's own return under section 114 is a separate obligation. ### How is the return filed? Section 114(2) says a return must be in the prescribed form, signed, and "accompanied with a wealth statement" (clause (e)). Section 114(2A), as substituted by the Finance Act, 2026, says a return "shall be filed electronically on IRIS". Section 118(2A) separately requires a salaried person with salary of Rs. 500,000 or more to file electronically with proof of deduction and a wealth statement. A footnote in the consolidated text records S.R.O. 791(I)/2015, which directed that all individuals earning taxable salary file electronically regardless of that threshold. For a person other than a company, section 118(3) sets the due date as 30 September following the end of the tax year. For tax year 2027 that is 30 September 2027. ### Who is exempt? Section 115(3) protects four groups from filing "solely by reason of" sub-clauses (iii), (iv), (v) and (vi) of section 114(1)(b), that is, property ownership and vehicles above 1000cc: | Person | Relief under section 115(3) | |---|---| | A widow | Not required to file only because of property or a vehicle | | An orphan below 25 years | Same | | A disabled person | Same | | A non-resident person | Only for ownership of immovable property | The relief is limited. If a widow's taxable salary exceeds Rs. 600,000, clause (ab) of section 114(1) still requires her to file, because that clause is not one of the sub-clauses section 115(3) mentions. The same applies if she holds an NTN under sub-clause (vii). ### Worked example (illustrative figures) The people and salaries are made up. The rates are the tax year 2027 salary rates. **Kamran, a clerk in Faisalabad, Rs. 45,000 a month, owns a 1300cc car** - Annual salary: Rs. 45,000 x 12 = Rs. 540,000 - This is below Rs. 600,000, so section 114(1)(ab) does not apply - The car's engine is above 1000 CC, so section 114(1)(b)(vi) applies - Result: Kamran must file a return for tax year 2027 even though his tax is nil **Nadia, a software tester in Islamabad, Rs. 120,000 a month, no other income** - Annual salary: Rs. 120,000 x 12 = Rs. 1,440,000 - Slab: Rs. 1,200,001 to Rs. 2,200,000 - Tax: Rs. 6,000 + 11% x (Rs. 1,440,000 - Rs. 1,200,000) = Rs. 6,000 + Rs. 26,400 = Rs. 32,400 - Her employer deducts this from her monthly salary across the year - Her taxable income exceeds Rs. 600,000, so section 114(1)(ab) applies - Result: Nadia must file a return by 30 September 2027, attaching a wealth statement ### What is the Active Taxpayers List and why does it matter? Section 181A says "The Board shall have the power to institute active taxpayers' list" and that the list "shall be regulated as may be prescribed". The Ordinance itself does not set out who is placed on the list; that is left to rules. The practical effect appears in the Tenth Schedule. Rule 1 says that where tax is to be deducted or collected "from persons not appearing in the active taxpayers' list, the rate of tax required to be deducted or collected ... shall be increased by hundred percent of the rate specified". The Tenth Schedule also sets its own higher rates for some transactions, such as the tax collected on buying immovable property. Because the Ordinance leaves the criteria for the list to rules, which are not reproduced here, this page does not state exactly what places a person on it. ### Common mistakes - **"My employer cut my tax, so I have met my filing duty."** Payroll deduction is a payment of tax. Filing is a separate act under section 114. - **"Below Rs. 600,000 means I never file."** The income test is only one trigger. An NTN, a car above 1000cc or qualifying property each require a return under section 114(1)(b). - **"Widows never file."** Section 115(3) removes only the property and vehicle triggers. The income test and the NTN trigger still apply. ### What to check in the official text Read all of section 114(1), including the footnotes, because several sub-clauses were substituted over the years and the consolidated text is dense. Check section 115(3) for the exact wording of the exemption. The rules that decide who appears on the Active Taxpayers List, and the wealth statement form, are prescribed outside the Ordinance and are not reproduced here. ### Frequently asked #### My salary is Rs. 40,000 a month and I own nothing. Do I have to file? Rs. 40,000 a month is Rs. 480,000 a year, below the Rs. 600,000 0% slab for tax year 2027, so section 114(1)(ab) does not apply. You would still have to file if any clause of section 114(1)(b) applies, for example if you hold an NTN, were charged to tax in either of the two preceding tax years, or own a vehicle above 1000cc. #### Is my employer's annual salary statement treated as my return? Not any more. Section 115(1) once treated the employer's annual statement as the employee's return, but the Finance Act, 2013 omitted it. The employer's statements and your own return under section 114 are now separate documents. #### Does a widow who owns a house have to file? Section 115(3) says a widow, an orphan below 25, a disabled person and, for property, a non-resident are not required to file solely because they own property or a vehicle under section 114(1)(b)(iii) to (vi). If her taxable income exceeds the taxable limit, the income test in section 114(1)(ab) still applies. ### Citations - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "every person (other than a company) whose taxable income for the year exceeds the maximum amount that is not chargeable to tax under this Ordinance for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 115 (Persons not required to furnish a return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#115-persons-not-required-to-furnish-a-return-of-income), as amended to 2026-06-30: "The following persons shall not be required to furnish a return of income for a tax year solely by reason of" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 118 (Method of furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#118-method-of-furnishing-returns-and-other-documents), as amended to 2026-06-30: "on or before the 30th day of September next following the end of the tax year to which the return relates" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 181A (Active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181a-active-taxpayers-list), as amended to 2026-06-30: "The Board shall have the power to institute active taxpayers’ list." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), Table (substituted by the Finance Act, 2026)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (rate of deduction or collection of tax for persons not appearing in the active taxpayers' list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## If my employer pays my income tax for me (net salary package), is that also taxable? Source: https://qanoondigest.com/faq/salaried-employees/employer-pays-my-income-tax-grossing-up Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer Yes. Section 12(3) of the Income Tax Ordinance says that where your employer agrees to pay the tax chargeable on your salary, your income under the head Salary is grossed up by the tax the employer pays. The tax borne for you is added to the net pay you receive, and tax is worked out on that higher figure. **Applies to:** Employees in Pakistan on a net-of-tax or tax-free salary package, where the employer bears the income tax on the employee's salary. ### What does the law say? Section 12(3) of the Income Tax Ordinance, 2001 deals with net packages directly: where an employer agrees to pay the tax chargeable on an employee's salary, the employee's income chargeable under the head "Salary" is "grossed up by the amount of tax payable by the employer". In plain terms, the tax your employer pays for you is a benefit, and it is added to your salary. Your taxable salary is the net amount you receive plus the tax your employer bears. ### How does it work in practice? Section 149 requires the person paying salary to deduct tax at the employee's average rate, worked out on estimated salary income for the year using the rates in Division I of Part I of the First Schedule. On a net package, the employer does not cut your pay. It bears the deduction itself, but the estimate it uses must be the grossed-up salary, not the net amount. This creates a loop: the tax depends on the grossed-up salary, and the grossed-up salary depends on the tax. The figures only settle when the grossed-up salary minus the tax on it equals the net amount agreed. Section 12(3) does not prescribe a method for finding that point; the example below simply finds the figure where the two balance. ### Worked example (illustrative figures) Farah joins a multinational company in Karachi on a net package: she is promised Rs. 2,400,000 in hand for tax year 2027 (1 July 2026 to 30 June 2027), and the company will bear all tax. Salary is her only income, so the salaried rates in clause (2) of Division I of Part I of the First Schedule apply. The relevant rows of that table: | Taxable income | Tax | |---|---| | Over Rs. 1,200,000 up to Rs. 2,200,000 | Rs. 6,000 + 11% of the amount above Rs. 1,200,000 | | Over Rs. 2,200,000 up to Rs. 3,200,000 | Rs. 116,000 + 20% of the amount above Rs. 2,200,000 | **Step 1: a first guess shows the loop.** Tax on Rs. 2,400,000 alone is Rs. 116,000 + 20% x Rs. 200,000 = Rs. 156,000. But adding Rs. 156,000 takes the salary to Rs. 2,556,000, and tax on that is higher again. So Rs. 156,000 is not the final figure. **Step 2: find the balancing gross salary.** Call the gross salary G. In the Rs. 2,200,000 to Rs. 3,200,000 band, tax is Rs. 116,000 + 20% x (G minus Rs. 2,200,000), which simplifies to 20% of G minus Rs. 324,000. The net must equal Rs. 2,400,000: G minus (20% of G minus Rs. 324,000) = Rs. 2,400,000 80% of G + Rs. 324,000 = Rs. 2,400,000 80% of G = Rs. 2,076,000 G = Rs. 2,595,000 **Step 3: check.** Tax on Rs. 2,595,000 = Rs. 116,000 + 20% x Rs. 395,000 = Rs. 116,000 + Rs. 79,000 = Rs. 195,000. Net: Rs. 2,595,000 minus Rs. 195,000 = Rs. 2,400,000. It balances, and G is inside the band used. **Result.** Farah's taxable salary is **Rs. 2,595,000**, her tax for the year is **Rs. 195,000** (borne by the employer), and she receives Rs. 2,400,000. Spread over 12 months, that is Rs. 16,250 a month. ### What if the employer pays only part of my tax? Section 12(3) applies to the tax the employer "agrees to pay". If it bears only a fixed amount or part of the tax, that is the amount payable by the employer that is added. The same loop applies, since the addition itself raises the tax. ### What if I also have rent or business income? If your salary is no more than 75% of your taxable income, clause (2) of Division I no longer applies and the general individual rates in clause (1) are used instead. Grossing up still applies to the salary part under section 12(3), but whether your employer's agreement covers tax on your other income depends on your contract, which the Ordinance does not decide. ### Common mistakes - **Declaring only the net amount in the return.** Section 12(3) makes the grossed-up figure your income under the head "Salary". - **Grossing up once and stopping.** Adding the tax on the net figure understates salary because the extra amount is taxed too. - **Assuming the net figure decides your tax band.** The band is set by the grossed-up salary. In the example, a net Rs. 2,400,000 is taxed as Rs. 2,595,000. - **Treating tax borne by the employer as a gift.** Section 12(3) adds the tax the employer agrees to pay to the employee's income under the head "Salary". ### What to check in the official text - Section 12(3) of the Ordinance, as amended to 30 June 2026. - Section 149, for how the employer computes the monthly deduction at the average rate. - Clause (2) of Division I of Part I of the First Schedule for the tax year 2027 salaried rates, and clause (1) if salary is 75% or less of your taxable income. - Your appointment letter: the exact wording on who bears tax, and on what income, decides how much is grossed up. ### Frequently asked #### Is a tax-free salary really tax free in Pakistan? No. A tax-free package only means the employer bears the tax. Section 12(3) grosses up your salary by that tax, so your taxable salary is higher than the net amount you receive. #### Who deposits the tax on a net salary package? Section 149 still requires the person paying salary to deduct tax at the employee's average rate on estimated salary income. On a net package the employer bears that tax instead of reducing your pay, and the tax is worked out on the grossed-up salary. #### Does the Ordinance give a formula for grossing up? Section 12(3) says salary is grossed up by the amount of tax payable by the employer, but it does not set out a calculation method. Because the tax depends on the grossed-up figure, the amounts have to balance, which the worked example on this page shows. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "Where an employer agrees to pay the tax chargeable on an employee’s salary, the amount of the employee’s income chargeable under the head “Salary” shall be grossed up by the amount of tax payable by the employer." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule on the estimated income of the employee chargeable under the head “Salary”" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can contributions to a voluntary pension fund or charity reduce the tax deducted from my salary? Source: https://qanoondigest.com/faq/salaried-employees/pension-fund-donation-tax-credit-salary Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer Yes. Section 63 gives a tax credit for contributions to an approved pension fund under the Voluntary Pension System Rules, 2005, capped at 20% of taxable income, and section 61 gives a credit for qualifying donations, capped at 30% for individuals. Section 149 lets your employer apply both credits to monthly deductions once you give documentary evidence. **Applies to:** Salaried individuals who contribute to a voluntary pension fund or make donations to approved institutions, non-profit organizations or Thirteenth Schedule funds. ### What does the law say? Both reliefs are **tax credits** under Part X of Chapter III of the Income Tax Ordinance, 2001. A tax credit is subtracted from the tax worked out on your taxable income; section 4(2) says tax payable is computed by applying the rates to taxable income "and from the resulting amount shall be subtracted any tax credits allowed". It does not reduce your taxable income. **Section 63, approved pension fund.** An "eligible person" (defined in section 2(19A) as an individual Pakistani holding a valid National Tax Number, CNIC or NICOP) who earns income under the head "Salary" or "Income from Business" gets a tax credit for contributions paid in the year to an approved pension fund under the Voluntary Pension System Rules, 2005. **Section 61, donations.** A person gets a tax credit for sums paid or property given as a donation, voluntary contribution or subscription to: - a board of education or university established by or under a Federal or Provincial law; - an educational institution, hospital or relief fund established or run by the Federal Government, a Provincial Government or a Local Government; - a non-profit organization, or a person eligible for the separate tax credit the Ordinance gives to charitable organizations; or - entities, organizations and funds listed in the Thirteenth Schedule. ### How is the credit worked out? Both sections use the same formula: **(A / B) x C**. - **A** is the tax assessed for the year before any tax credit under Part X. - **B** is your taxable income for the year. - **C** is the lesser of the amount you paid and a cap. | | Section 63 (pension fund) | Section 61 (donations, individual) | |---|---|---| | Amount counted | Contribution paid in the year | Donations in the year, including fair market value of property given | | Cap | 20% of taxable income | 30% of taxable income | | Lower cap | None | 15% where the donation goes to an associate | | Condition on cash | None stated | Cash counts only if paid by crossed cheque drawn on a bank (section 61(4)) | A/B is simply your average tax rate. So the credit equals your average rate multiplied by the amount you contributed or donated, up to the cap. ### How does it work through payroll? Section 149(1) says the employer deducts tax at your average rate on estimated salary "after making adjustment of tax withheld from employee under other heads and tax credit admissible under section 61 and 63 during the tax year after obtaining documentary evidence". You do not have to wait for the return: once the employer has the receipts or certificates, the remaining monthly deductions can be reduced. ### Worked example (illustrative figures) Sana is a manager in Islamabad. Her salary for tax year 2027 is Rs. 3,600,000 and she has no other income. During the year she pays Rs. 300,000 into a voluntary pension fund and gives Rs. 100,000 by crossed cheque to a hospital run by the Provincial Government. 1. **Tax before credits (A).** Under the clause (2) salaried table, income from Rs. 3,200,000 to Rs. 4,100,000 is taxed at Rs. 316,000 plus 25% of the amount above Rs. 3,200,000. Rs. 316,000 + 25% of Rs. 400,000 = **Rs. 416,000**. 2. **Average rate (A/B).** Rs. 416,000 / Rs. 3,600,000 = 0.11556, about 11.56%. 3. **Pension credit.** Cap is 20% of Rs. 3,600,000 = Rs. 720,000. She paid Rs. 300,000, which is lower, so C = Rs. 300,000. Credit = 0.11556 x 300,000 = **Rs. 34,667**. 4. **Donation credit.** Cap is 30% of Rs. 3,600,000 = Rs. 1,080,000. C = Rs. 100,000. Credit = 0.11556 x 100,000 = **Rs. 11,556**. 5. **Tax after credits.** Rs. 416,000 - Rs. 34,667 - Rs. 11,556 = **Rs. 369,777**. So Rs. 400,000 of contributions and donations reduced her tax by Rs. 46,223. The saving per rupee equals her average rate, not her top slab rate of 25%. Rounding may shift these figures by a rupee. ### What if my contributions are larger than the cap? Only the capped amount counts. If Sana had paid Rs. 900,000 into the pension fund, C would be Rs. 720,000. The Ordinance text for sections 61 and 63 does not provide for carrying the unused excess to a later year. ### What if I donate to a relative's trust or a body I am linked with? The proviso to section 61(2) lowers the cap for an individual to fifteen per cent of taxable income where the sum is paid or property given to an associate. ### Common mistakes - **Treating the credit as a deduction from income.** Both are credits against tax under the (A/B) x C formula. - **Handing over cash.** Section 61(4) counts cash donations only when paid by crossed cheque. - **Assuming any charity qualifies.** Section 61(1) lists the kinds of recipient; a non-profit organization must meet the Ordinance's definition, and Thirteenth Schedule entities are named in that Schedule. - **Transferring an old employer scheme balance and expecting a credit.** Section 63(3) says a transfer from an approved employment pension or annuity scheme or approved occupational saving scheme to an individual pension account does not qualify. - **Not giving the employer evidence.** Section 149(1) ties the payroll adjustment to documentary evidence. ### What to check in the official text Read sections 61 and 63 in full, including the provisos in section 63(2) about additional contributions for older members, which by their own words applied only up to 30 June 2019. Check the definition of "eligible person" in section 2(19A), the list of approved recipients in the Thirteenth Schedule, and section 149(1) for the payroll adjustment. ### Frequently asked #### How much can I put into a voluntary pension fund and still get the credit? Under section 63(2), the contribution counted is the lesser of what you actually paid in the year and twenty per cent of your taxable income for that year. The credit is your average tax rate multiplied by that amount. #### Does a cash donation count for the section 61 credit? Section 61(4) counts a cash amount paid as a donation only if it was paid by a crossed cheque drawn on a bank. The text does not mention other payment methods, so this page does not say how they are treated. #### Will my employer reduce my monthly tax for these contributions? Section 149(1) directs the employer to compute the deduction after making adjustment for tax credits admissible under sections 61 and 63 during the tax year, after obtaining documentary evidence. The payroll adjustment therefore depends on the employer holding proof of the contribution or donation. ### Citations - [Income Tax Ordinance, 2001, section 63 (Contribution to an Approved Pension Fund)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#63-contribution-to-an-approved-pension-fund), as amended to 2026-06-30: "shall be entitled to a tax credit for a tax year in respect of any contribution or premium paid in the year by the person in approved pension fund under the Voluntary Pension System Rules, 2005." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 61 (Charitable donations)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#61-charitable-donations), as amended to 2026-06-30: "an individual or association of persons, thirty per cent of the taxable income of the person for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "adjustment of tax withheld from employee under other heads and tax credit admissible under section 61" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 4 (Tax on taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4-tax-on-taxable-income), as amended to 2026-06-30: "The income tax payable by a taxpayer for a tax year shall be computed by applying the rate or rates of tax applicable to the taxpayer under this Ordinance to the taxable income of the taxpayer for the year, and from the resulting amount shall be subtracted any tax credits allowed to the taxpayer for the year." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 2(19A), definition of eligible person](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Too much tax was deducted from my salary; how do I get a refund? Source: https://qanoondigest.com/faq/salaried-employees/refund-excess-tax-deducted-from-salary Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer Section 168(5) of the Income Tax Ordinance sends any tax credit you cannot use to a refund under section 170. You claim the excess by filing your return. Section 170A lets the Board refund verified amounts electronically without an application; otherwise section 170 requires an application within three years, decided by written order within sixty days. **Applies to:** Salaried individuals whose employer deducted more tax during the year than their actual liability for that tax year. ### Why does over-deduction happen? Section 149 of the Income Tax Ordinance, 2001 makes an employer deduct tax at the employee's average rate "on the estimated income of the employee chargeable under the head 'Salary' for the tax year". An estimate can be wrong. Common reasons are leaving a job mid-year, an expected bonus that is not paid, or a pay cut. Section 149(1) also lets the employer make adjustments during the year for "any excess deduction or deficiency arising out of any previous deduction". So the first place an over-deduction can be corrected is the employer's own later deductions in the same tax year. Once the year ends, or once you have left that employer, the correction has to come through your return. ### What does the law say about refunds? **Section 168(2) and (5).** Tax deducted from salary is allowed as a tax credit in the tax year of deduction. A credit, or part of a credit, that cannot be used against the tax for that year "shall be refunded to the taxpayer in accordance with section 170". **Section 170, the application route.** - Sub-section (1): a taxpayer who has paid tax in excess of the amount properly chargeable "may apply to the Commissioner for a refund of the excess". - Sub-section (2): the application must be in the prescribed form, verified in the prescribed manner, and made within three years of the later of the date the assessment order for that tax year was issued or the date the tax was paid. - Sub-section (3): the Commissioner first applies the excess against other income tax due from you, then against other outstanding tax liabilities, and refunds the remainder. - Sub-section (4): the Commissioner must serve a written order within sixty days of receiving the application, after giving you an opportunity of being heard. - Sub-section (5): you can appeal against that order, or against the failure to pass one within sixty days. Rule 71 of the Income Tax Rules, 2002 says the application must be in the proforma in Part VI of the First Schedule to those Rules. **Section 170A, the electronic route.** Commencing from tax year 2021, the Board "may process and issue refund to the taxpayer who has filed the return of income without requiring refund application", to the extent the credit is verified by the Board's computerised system. The amount is transferred electronically to the taxpayer's notified bank account. **Section 171, delay compensation.** Where a refund is not paid within three months of the date it becomes due, the Commissioner pays compensation at KIBOR plus 0.5 per cent per annum for the period after those three months. A proviso suspends this while a claim believed to be inadmissible is being investigated. ### How does it work in practice? The common thread is the return. Section 170A applies only to a taxpayer "who has filed the return of income", and a section 170 claim is measured against the tax properly chargeable, which the return declares. A salaried person who is owed a refund therefore has a reason to file even if not otherwise required to. In the return you declare your salary for the year, work out the tax at the salary rates, and claim credit for all tax deducted. If the credit is larger, the difference is the refund. ### Worked example (illustrative figures) The name and amounts are made up. The tax is from the tax year 2027 salary table. **Ali, a site engineer in Peshawar, leaves his job on 31 December 2026 and has no income afterwards in tax year 2027** His employer estimated a full year's salary of Rs. 150,000 x 12 = Rs. 1,800,000. - Estimated annual tax: Rs. 6,000 + 11% x Rs. 600,000 = Rs. 72,000 - Monthly deduction: Rs. 72,000 / 12 = Rs. 6,000 - Deducted July to December: 6 x Rs. 6,000 = Rs. 36,000 His actual salary for tax year 2027 is 6 x Rs. 150,000 = Rs. 900,000. - Actual tax: 1% x (Rs. 900,000 - Rs. 600,000) = Rs. 3,000 - Credit under section 168: Rs. 36,000 - Excess: Rs. 36,000 - Rs. 3,000 = **Rs. 33,000** Ali files his tax year 2027 return by 30 September 2027 declaring Rs. 900,000 of salary and Rs. 36,000 of tax deducted. Under section 168(5) the Rs. 33,000 goes to refund. If the Board issues it under section 170A, it is credited to his notified bank account. If not, he can apply under section 170, within three years of the later of the assessment order date or the date the tax was paid. If Ali owed any other income tax, section 170(3) says the Commissioner would first set the Rs. 33,000 against that before paying out the balance. ### What if my employer can still fix it? If you are still with the same employer and the tax year has not ended, section 149(1) allows the employer to adjust the excess in later deductions. For example, if an expected bonus was cancelled in March, the April to June deductions can be reduced to reflect the lower estimate. ### Common mistakes - **"Refunds are only for businesses."** Section 170 applies to any taxpayer who paid more than the amount properly chargeable. - **"I did not file, so FBR will refund automatically."** Section 170A applies only to a taxpayer who has filed a return. - **"There is no time limit."** Section 170(2)(c) sets three years. - **"The refund is paid in full no matter what."** Section 170(3) nets it against other tax you owe first. ### What to check in the official text Read sections 168, 170, 170A and 171, and rule 71 of the Income Tax Rules, 2002 for the application form. Chapter XVIB of the Rules, amended to 24 November 2023, describes the Centralized Income Tax Refund Office, which pays sanctioned refunds. The Board's rules for the automatic process under section 170A, and any notifications after 24 November 2023, are not in this corpus. ### Frequently asked #### How long do I have to claim a refund of salary tax? Section 170(2)(c) says the application must be made within three years of the later of the date the Commissioner issued the assessment order for that tax year or the date the tax was paid. The Finance Act, 2016 changed this from two years to three. #### Do I have to apply, or does the refund come automatically? From tax year 2021, section 170A allows the Board to process and issue a refund to a person who has filed a return without a refund application, to the extent the tax credit is verified by its computerised system, paid into the taxpayer's notified bank account. The word used is may, so where no refund issues under section 170A, the application route in section 170 remains. #### What if the Commissioner does not decide my refund application? Section 170(4) requires a written order within sixty days of the application, after giving you an opportunity of being heard. Section 170(5) allows an appeal against the order or against the failure to pass one within that time. ### Citations - [Income Tax Ordinance, 2001, section 170 (Refunds)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#170-refunds), as amended to 2026-06-30: "A taxpayer who has paid tax in excess of the amount which the taxpayer is properly chargeable under this Ordinance may apply to the Commissioner for a refund of the excess." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 170A (Electronic processing and electronic issuance of Refunds by the Board)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#170a-electronic-processing-and-electronic-issuance-of-refunds-by-the-board), as amended to 2026-06-30: "the Board may process and issue refund to the taxpayer who has filed the return of income without requiring refund application by the taxpayer" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "shall be refunded to the taxpayer in accordance with section 170" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "any excess deduction or deficiency arising out of any previous deduction" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 171 (Additional payment for delayed refunds)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#171-additional-payment-for-delayed-refunds), as amended to 2026-06-30: "Where a refund due to a taxpayer is not paid within three months of the date on which it becomes due" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 71 (Section 170 application)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#71-section-170-application), as amended to 2023-11-24: "An application under section 170 for a refund of tax shall be in the proforma specified in Part VI of the First Schedule to these rules." Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf --- ## What is the last date for salaried people to file their return, and what is the penalty for filing late? Source: https://qanoondigest.com/faq/salaried-employees/salary-return-deadline-late-filing-penalty Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer Section 118(3) makes a salaried individual's return due on 30 September after the tax year ends, so 30 September 2027 for tax year 2027. Section 182 then charges the higher of 0.1% of tax payable or Rs. 1,000 for each day late, minimum Rs. 10,000, capped at 200% of tax, reduced if filed within three months. **Applies to:** Individuals with 75% or more of their income from salary who are required to file a return under section 114. ### What is the due date? Section 118(3)(a) of the Income Tax Ordinance, 2001 deals with "a return required to be filed through e-portal in the case of a salaried individual". It fixes the date as the 30th day of September next following the end of the tax year. Clause (b) sets the same 30 September date for any other person who is not a company. The tax year runs from 1 July to 30 June. So: | Tax year | Income period | Return due | |---|---|---| | 2026 | 1 July 2025 to 30 June 2026 | 30 September 2026 | | 2027 | 1 July 2026 to 30 June 2027 | 30 September 2027 | A footnote in the consolidated text records that the Finance Act, 2019 changed the salaried date from 31 August to 30 September. ### Can the deadline be extended? Section 119 lets a person apply in writing to the Commissioner for more time. Three conditions apply: - **Timing.** Section 119(2) says the application "shall be made by the due date", so it must be made on or before 30 September. - **Reason.** Section 119(3) lists absence from Pakistan, sickness or other misadventure, or any other reasonable cause. - **Length.** Section 119(4) says an extension "should not exceed fifteen days" unless exceptional circumstances justify longer. Its proviso says that where the Commissioner has not granted an extension, the Chief Commissioner may, on the taxpayer's application, grant an extension or further extension of up to fifteen days, again unless exceptional circumstances justify more. Section 119(6) adds that an extension does not change the due date for payment of tax for the purpose of default surcharge. An extension moves the filing date, not the payment date. ### What is the penalty for filing late? Section 182(1) applies a Table of offences and penalties. Serial 1 covers a person who "fails to furnish a return of income as required under section 114 within the due date". The penalty is the higher of: - (a) 0.1% of the tax payable for that tax year for each day of default; or - (b) Rs. 1,000 for each day of default. Three provisos then adjust the figure: | Rule | What the Table says | |---|---| | Minimum | Rs. 10,000 for an individual having seventy-five percent or more income from salary; Rs. 50,000 in all other cases | | Maximum | Not more than two hundred percent of tax payable in the tax year | | Early filing relief | Reduced by 75%, 50% and 25% if the return is filed within one, two and three months after the due date or extended due date | The Explanation to serial 1, substituted by the Finance Act, 2026, defines "tax payable" as the higher of the tax on the assessed taxable income, or the tax payable for the immediately preceding tax year for which a return was duly filed. ### Worked example (illustrative figures) The names and salaries are made up. The tax is worked out from the tax year 2027 salary table, and the penalty from serial 1 of the section 182 Table. Tax year 2027 returns are due 30 September 2027. **Farhan, Lahore, salary Rs. 1,800,000, tax payable Rs. 72,000** Tax: Rs. 6,000 + 11% x (Rs. 1,800,000 - Rs. 1,200,000) = Rs. 6,000 + Rs. 66,000 = Rs. 72,000. *Case 1: files on 20 October 2027 (20 days late)* - (a) 0.1% x Rs. 72,000 = Rs. 72 a day, x 20 = Rs. 1,440 - (b) Rs. 1,000 x 20 = Rs. 20,000 - Higher figure: Rs. 20,000. Cap: 200% x Rs. 72,000 = Rs. 144,000, not reached - Filed within one month, so reduced by 75%: Rs. 20,000 x 25% = Rs. 5,000 The Table does not say whether the Rs. 10,000 minimum is applied before or after the 75% reduction. Read one way, the penalty is Rs. 5,000; read the other way, it is Rs. 10,000. The law does not resolve this. *Case 2: files on 8 January 2028 (100 days late)* - Days: October 31 + November 30 + December 31 + January 8 = 100 - (b) Rs. 1,000 x 100 = Rs. 100,000, higher than (a) Rs. 7,200 - More than three months after the due date, so no reduction - Below the Rs. 144,000 cap, so the penalty is Rs. 100,000 **Sana, Karachi, salary Rs. 9,600,000, tax payable Rs. 2,334,000** Tax: Rs. 1,424,000 + 35% x (Rs. 9,600,000 - Rs. 7,000,000) = Rs. 1,424,000 + Rs. 910,000 = Rs. 2,334,000. *Files on 19 November 2027 (50 days late)* - (a) 0.1% x Rs. 2,334,000 = Rs. 2,334 a day, x 50 = Rs. 116,700 - (b) Rs. 1,000 x 50 = Rs. 50,000 - Higher figure: Rs. 116,700 - Filed after one month but within two months, so reduced by 50%: Rs. 58,350 For a high earner the percentage limb overtakes the Rs. 1,000 a day limb, so each day costs more. ### What if I had an extension? The relief bands run from "the due date or extended due date". If the Commissioner extended Farhan's date by fifteen days to 15 October 2027 and he filed on 20 October, he would be 5 days late, not 20. ### Common mistakes - **"The penalty is only Rs. 1,000 a day."** It is the higher of that figure and 0.1% of tax payable a day. For anyone whose tax payable exceeds Rs. 1,000,000, the percentage limb is larger. - **"No tax is due this year, so no penalty."** The Explanation measures tax payable as the higher of this year's tax and the tax payable for the last year a return was duly filed, so last year's figure can set the penalty. - **"I can ask for an extension in October."** Section 119(2) requires the application by the due date. ### What to check in the official text Read section 118(3), section 119 in full, and serial 1 of the Table in section 182(1). The Table is printed across several pages of the source PDF with its footnotes showing earlier versions, including the Explanation substituted by the Finance Act, 2026. Any general extension of the filing date announced by the Board for a particular year is issued separately and is not reproduced here. ### Frequently asked #### What is the minimum penalty for a salaried person who files late? Serial 1 of the Table in section 182 sets a minimum of Rs. 10,000 for an individual with seventy-five percent or more income from salary, against Rs. 50,000 in other cases. The table does not say whether this minimum applies before or after the reduction for filing within three months. #### Can I get more time to file? Yes, if you apply in writing to the Commissioner by the due date. Section 119 allows an extension for absence from Pakistan, sickness or other reasonable cause, normally up to fifteen days. Where the Commissioner has not granted an extension, the Chief Commissioner may grant up to fifteen days on application. #### Is there a penalty if my tax payable is zero? The Explanation defines tax payable as the higher of the current year's assessed tax or the tax payable for the last year for which a return was duly filed, so nil tax this year does not always mean nil tax payable. Where tax payable is genuinely nil, the Table sets a Rs. 10,000 minimum but also caps the penalty at 200% of tax payable, and it does not say how those two provisos interact. ### Citations - [Income Tax Ordinance, 2001, section 118 (Method of furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#118-method-of-furnishing-returns-and-other-documents), as amended to 2026-06-30: "on or before the 30th day of September next following the end of the tax year to which the return relates" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 119 (Extension of time for furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#119-extension-of-time-for-furnishing-returns-and-other-documents), as amended to 2026-06-30: "An extension of time under sub-section (3) should not exceed fifteen days from the due date for furnishing the return of income" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 182 (Offences and penalties)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182-offences-and-penalties), as amended to 2026-06-30: "Any person who commits any offence specified in column (2) of the Table below shall, in addition to and not in derogation of any punishment to which he may be liable under this Ordinance or any other law, be liable to the penalty mentioned against that offence in column (3) thereof" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 182(1), Table, serial 1 (failure to furnish a return of income under section 114 within the due date)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "every person (other than a company) whose taxable income for the year exceeds the maximum amount that is not chargeable to tax under this Ordinance for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), Table (substituted by the Finance Act, 2026)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## I received salary arrears this year; can they be taxed at the rates of the year I earned them? Source: https://qanoondigest.com/faq/salaried-employees/salary-arrears-taxed-at-earlier-rates Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer Yes, if the arrears push you into higher rates. Section 12(7) of the Income Tax Ordinance lets you elect, by written notice to the Commissioner, to have arrears taxed at the rates that would have applied in the year you rendered the services. Section 12(8) sets the deadline: the due date for your return for the year you received them. **Applies to:** Employees who receive back pay, pay revision arrears or other salary in arrears relating to an earlier tax year. Salary arrears are taxed in the year you receive them, but the Income Tax Ordinance gives you a choice about the rates. If adding the arrears to this year's salary pushes you into a higher slab than you would have faced had they been paid on time, section 12(7) lets you elect the older year's rates instead. The election is not automatic: you make it in writing, before a deadline. ### What does the law say? Section 12(1) charges salary "received by an employee in a tax year" in that year. Arrears paid in tax year 2027 for work done in tax year 2026 are therefore tax year 2027 income by default. Section 12(7) creates the relief. It applies where two conditions are both met: 1. an amount chargeable as salary "is paid to an employee in arrears"; and 2. "as a result the employee is chargeable at higher rates of tax than would have been applicable" had it been paid in the year the services were rendered. When both hold, the employee may, "by notice in writing to the Commissioner", elect for the arrears to be taxed at the rates that would have applied in the year the services were rendered. Section 12(8) sets the time limit. The election must be made by the due date for furnishing the employee's return of income or employer certificate for the tax year in which the amount was received, or by a later date the Commissioner allows. Section 118(3) makes 30 September after the end of the tax year the due date for an individual's return. For arrears received between 1 July 2026 and 30 June 2027 (tax year 2027), that is 30 September 2027, unless extended. ### How does it work in practice? Your employer deducts tax on salary under section 149 at your average rate on your estimated salary for the tax year in which the payment is made, computed at the rates in Division I of Part I of the First Schedule. Arrears paid this year are salary received this year, and section 149 does not refer to the section 12(7) election. Section 12(7) is an election you make to the Commissioner, not an instruction to your employer, so the relief is claimed through your own return and notice. Any tax deducted beyond what you finally owe is a refund matter. The Ordinance does not set out a formula for working out "the rates of tax that would have been applicable" to the arrears. One way to read it, used in the example below, is to compare the extra tax the arrears cause in each year. Because the Ordinance does not settle the method, a figure worked out this way is not certain. ### Worked example (illustrative figures) Sana works for a public sector body in Islamabad. In tax year 2027 her regular salary is Rs. 2,200,000. After a pay revision she also receives Rs. 600,000 of arrears for work done in tax year 2026, when her salary was Rs. 1,000,000. All amounts are invented. The rates are real. Tax year 2027 uses the table in clause (2) of Division I, Part I, First Schedule, as amended by the Finance Act, 2026. Tax year 2026 uses the table the Finance Act, 2026 replaced, which the source PDF prints in the footnote to that clause. | Taxable salary | Tax year 2026 table | Tax year 2027 table | |---|---|---| | Up to Rs. 600,000 | 0% | 0% | | Rs. 600,001 to 1,200,000 | 1% of amount over 600,000 | 1% of amount over 600,000 | | Rs. 1,200,001 to 2,200,000 | 6,000 + 11% over 1,200,000 | 6,000 + 11% over 1,200,000 | | Rs. 2,200,001 to 3,200,000 | 116,000 + 23% over 2,200,000 | 116,000 + 20% over 2,200,000 | | Rs. 3,200,001 to 4,100,000 | 346,000 + 30% over 3,200,000 | 316,000 + 25% over 3,200,000 | | Above Rs. 4,100,000 | 616,000 + 35% over 4,100,000 | 541,000 + 29% (to 5,600,000), then higher bands | **Without the election (arrears taxed in tax year 2027):** 1. Salary plus arrears: 2,200,000 + 600,000 = 2,800,000 2. Tax: 116,000 + 20% of 600,000 = 116,000 + 120,000 = 236,000 3. Tax on regular salary alone: 6,000 + 11% of 1,000,000 = 116,000 4. Extra tax caused by the arrears: 236,000 - 116,000 = **Rs. 120,000** **With the election (arrears at tax year 2026 rates):** 1. Tax year 2026 salary plus arrears: 1,000,000 + 600,000 = 1,600,000 2. Tax on that: 6,000 + 11% of 400,000 = 6,000 + 44,000 = 50,000 3. Tax on tax year 2026 salary alone: 1% of 400,000 = 4,000 4. Extra tax caused by the arrears: 50,000 - 4,000 = **Rs. 46,000** On this reading, Sana's arrears cost Rs. 46,000 at the earlier year's rates against Rs. 120,000 at this year's rates, a difference of Rs. 74,000. Both conditions in section 12(7) are met: the arrears were paid late, and they pushed her into a higher rate. ### What if ...? **The arrears cover several past years?** Section 12(7) refers to "the tax year in which the services were rendered". Where arrears relate to more than one year, each portion relates to its own year. The Ordinance does not spell out the apportionment. **My earlier year's income was higher than this year's?** Then the condition in section 12(7)(b) may not be met, because paying the arrears now does not push you into higher rates. The election is only available where it does. **I missed 30 September?** Section 12(8) allows the election "by such later date as the Commissioner may allow". Whether a later date is allowed is the Commissioner's decision. ### Common mistakes - **Assuming the employer applies old rates.** The election in section 12(7) is made by the employee to the Commissioner. - **Thinking arrears belong to the old year's return.** Section 12(1) taxes salary in the year received. Only the rates change. - **Assuming the old year is always cheaper.** The tax year 2027 table charges less than the tax year 2026 table on income above Rs. 2,200,000. Whether the election helps depends on the salary in both years. ### What to check in the official text Read section 12(7) and (8) together, and section 118(3) for the return due date. Take both rate tables from the source PDF of the First Schedule: the current clause (2) table, and the footnoted table for the earlier year. If your arrears relate to tax year 2025 or earlier, use the table in force for that year, which appears in the earlier footnotes to the same clause. ### Frequently asked #### Are salary arrears taxable in the year I receive them? Yes. Section 12(1) charges salary received by an employee in a tax year, so arrears are taxed in the year they are paid. Section 12(7) only changes the rates that apply, and only if you elect. #### What is the deadline to elect earlier year rates for arrears? Section 12(8) says the election must be made by the due date for furnishing your return of income for the tax year in which you received the arrears, or a later date the Commissioner allows. For a salaried individual, section 118(3) sets that due date at 30 September after the tax year ends. #### Does the election happen automatically? No. Section 12(7) requires a notice in writing to the Commissioner. Without it, the arrears are taxed with the rest of your salary at the current year's rates. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "the employee may, by notice in writing to the Commissioner, elect for the amount to be taxed at the rates of tax that would have been applicable if the salary had been paid to the employee in the tax year in which the services were rendered." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 118 (Method of furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#118-method-of-furnishing-returns-and-other-documents), as amended to 2026-06-30: "(b) in the case of a return of income for any person (other than a company), as described under clause (a), on or before the 30th day of September next following the end of the tax year to which the return relates." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "(ii) any excess deduction or deficiency arising out of any previous deduction; or" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), footnote: Table substituted by the Finance Act, 2026 (tax year 2026 table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## I have salary plus rental income or a side business; do I still get the salaried tax rates? Source: https://qanoondigest.com/faq/salaried-employees/salary-plus-rental-business-income-rates Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer Only if salary stays above 75% of your taxable income. Clause (2) of Division I, Part I of the First Schedule gives the lower salaried rates where salary income exceeds seventy-five per cent of taxable income. Otherwise the clause (1) table for other individuals applies to your whole taxable income, including the salary. **Applies to:** Salaried individuals who also earn rent from property, business or professional income, or other taxable income in the same tax year. ### What does the law say? Division I of Part I of the First Schedule to the Income Tax Ordinance, 2001 has two tables for individuals. - **Clause (1)** sets the rates for "every individual and association of persons except a salaried individual". - **Clause (2)** sets lower rates, but only "where the income of an individual chargeable under the head 'salary' exceeds seventy-five per cent of his taxable income". So the test is a ratio, not a label. Having a job does not by itself put you on the salaried table. What matters is salary income (as defined in section 12) divided by your total taxable income for the tax year. Section 4 then applies whichever table fits to your whole taxable income and subtracts any tax credits. ### What are the two tables for tax year 2027? These are the tables in the Ordinance as amended to 30 June 2026, which apply to tax year 2027 (1 July 2026 to 30 June 2027). The clause (2) table was substituted by the Finance Act, 2026; the clause (1) table was last substituted by the Finance Act, 2024. **Clause (2), salary above 75% of taxable income** | Taxable income | Tax | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,000 to Rs. 1,200,000 | 1% of the amount above Rs. 600,000 | | Rs. 1,200,000 to Rs. 2,200,000 | Rs. 6,000 + 11% of the amount above Rs. 1,200,000 | | Rs. 2,200,000 to Rs. 3,200,000 | Rs. 116,000 + 20% of the amount above Rs. 2,200,000 | | Rs. 3,200,000 to Rs. 4,100,000 | Rs. 316,000 + 25% of the amount above Rs. 3,200,000 | | Rs. 4,100,000 to Rs. 5,600,000 | Rs. 541,000 + 29% of the amount above Rs. 4,100,000 | | Rs. 5,600,000 to Rs. 7,000,000 | Rs. 976,000 + 32% of the amount above Rs. 5,600,000 | | Above Rs. 7,000,000 | Rs. 1,424,000 + 35% of the amount above Rs. 7,000,000 | **Clause (1), all other individuals** | Taxable income | Tax | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,000 to Rs. 1,200,000 | 15% of the amount above Rs. 600,000 | | Rs. 1,200,000 to Rs. 1,600,000 | Rs. 90,000 + 20% of the amount above Rs. 1,200,000 | | Rs. 1,600,000 to Rs. 3,200,000 | Rs. 170,000 + 30% of the amount above Rs. 1,600,000 | | Rs. 3,200,000 to Rs. 5,600,000 | Rs. 650,000 + 40% of the amount above Rs. 3,200,000 | | Above Rs. 5,600,000 | Rs. 1,610,000 + 45% of the amount above Rs. 5,600,000 | In each band the lower figure is excluded and the upper figure included ("exceeds ... but does not exceed"). ### How does it work in practice? Rent from property is chargeable under the head "Income from Property" and business profit under "Income from Business". Both are added to salary to arrive at taxable income. The more of that total comes from non-salary sources, the closer you get to the 75% line. There is a cliff at the line. If salary is exactly 75% of taxable income, the law says "exceeds", so clause (2) does not apply. Crossing the line changes the rate on every rupee of taxable income, not just the extra income. Your employer's deduction under section 149 is computed on your estimated salary income only. The employer is not taxing your rent or business, so if the clause (1) table ends up applying, the extra tax is not collected through payroll. ### Worked example (illustrative figures) Bilal works at a bank in Karachi. His salary for tax year 2027 is Rs. 2,400,000. **Case A: rental income of Rs. 600,000** (after deductions allowed for property income). 1. Taxable income = Rs. 2,400,000 + Rs. 600,000 = Rs. 3,000,000. 2. Salary share = 2,400,000 / 3,000,000 = 80%. That exceeds 75%, so clause (2) applies. 3. Tax = Rs. 116,000 + 20% of (3,000,000 - 2,200,000) = Rs. 116,000 + Rs. 160,000 = **Rs. 276,000**. **Case B: a side business earning Rs. 1,000,000.** 1. Taxable income = Rs. 2,400,000 + Rs. 1,000,000 = Rs. 3,400,000. 2. Salary share = 2,400,000 / 3,400,000 = about 70.6%. That is not above 75%, so clause (1) applies. 3. Tax = Rs. 650,000 + 40% of (3,400,000 - 3,200,000) = Rs. 650,000 + Rs. 80,000 = **Rs. 730,000**. 4. For comparison, the clause (2) table on the same Rs. 3,400,000 would give Rs. 316,000 + 25% of Rs. 200,000 = Rs. 366,000. The failed test costs Rs. 364,000. **Where is Bilal's line?** With salary of Rs. 2,400,000, salary exceeds 75% only while taxable income is below Rs. 3,200,000 (because 2,400,000 / 0.75 = 3,200,000). So his other taxable income must stay below Rs. 800,000 for the salaried table to apply. ### What if my taxable income is above Rs. 10 million? Section 4AB imposes a surcharge of ten percent of the income tax imposed under Division I where taxable income exceeds rupees ten million, with a proviso that for "an individual deriving income chargeable under the head 'Salary', no surcharge shall be payable". The text does not say whether a person with both salary and substantial other income falls within that proviso. That question is left open here. ### What if I have a loss from the business? The 75% test compares salary with taxable income. How a business loss interacts with salary is governed by the loss set-off rules of the Ordinance, which are outside this page. ### Common mistakes - **Thinking a job title decides the table.** Clause (2) turns on the ratio of salary income to taxable income. - **Applying the higher rate only to the extra income.** Section 4 applies the applicable rates to all taxable income. - **Relying on the employer's certificate as the final figure.** Section 149 covers salary only; the employer's deduction does not reflect your rent or business. - **Treating exactly 75% as enough.** The word used is "exceeds". ### What to check in the official text Read Division I of Part I of the First Schedule (both clauses and their footnotes) in the Ordinance amended to 30 June 2026, together with sections 4, 4AB, 12 and 149. The tables in our copy of the consolidated text are laid out across page breaks, so confirm each band against the official PDF before relying on a figure. ### Frequently asked #### What is the 75% test for salaried tax rates? Clause (2) of Division I in Part I of the First Schedule applies the salaried table only where income under the head Salary exceeds seventy-five per cent of taxable income. If salary is 75% or less, the clause (1) table for other individuals applies instead. #### Does the higher table apply only to my rent or business income? No. Section 4 applies the rate or rates applicable to the taxpayer to the whole taxable income. Once the 75% test fails, the clause (1) table is applied to your total taxable income, salary included. #### Does my employer know which table applies to me? Section 149 has the employer deduct on your estimated salary income only. The law does not say how an employer should account for income it does not know about, so any extra tax caused by other income is settled when your own tax for the year is worked out. ### Citations - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "Where the income of an individual chargeable under the head “salary” exceeds seventy-five per cent of his taxable income, the rates of tax to be applied shall be as set out in the following table" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "the rates of tax imposed on income of every individual and association of persons except a salaried individual shall be as set out in the following Table" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 4 (Tax on taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4-tax-on-taxable-income), as amended to 2026-06-30: "The income tax payable by a taxpayer for a tax year shall be computed by applying the rate or rates of tax applicable to the taxpayer under this Ordinance to the taxable income of the taxpayer for the year, and from the resulting amount shall be subtracted any tax credits allowed to the taxpayer for the year." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "Any salary received by an employee in a tax year, other than salary that is exempt from tax under this Ordinance, shall be chargeable to tax in that year under the head “Salary”." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 4AB (surcharge)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "Provided that in case of an individual deriving income chargeable under the head “Salary”, 7[no surcharge shall be payable" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What is the salary tax deduction certificate, and does my employer have to give it to me? Source: https://qanoondigest.com/faq/salaried-employees/employer-salary-tax-deduction-certificate Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer Yes. Section 164(1) of the Income Tax Ordinance requires every person who deducts tax from a payment, which includes an employer deducting from salary under section 149, to give the employee a certificate of the tax deducted with copies of the Computerized Payment Receipts, at the time of deduction. Section 164(2) says these are attached to the return. **Applies to:** Employees whose employer deducts income tax from salary, and anyone preparing a salaried person's return. ### What does the law say? Section 149 of the Income Tax Ordinance, 2001 makes the person paying salary deduct tax "at the time of payment". Section 149 sits in Division III of Part V of Chapter X, the division for deductions from payments. Section 164(1) then says every person deducting tax from a payment under Division III shall, "at the time of collection or deduction of the tax", furnish to the person paid: - copies of the Computerized Payment Receipt (CPR), or any other equivalent document; and - a certificate setting out the amount of tax deducted and such other particulars as may be prescribed. A proviso adds that where the deductor is notified as a SWAPS agent, the SWAPS Payment Receipt (SPR) replaces the CPR. Section 164(2) turns to the employee: a person required to file a return "shall attach to the return" copies of the CPR or SPR on the basis of which the certificate was given for tax deducted in that year. ### What is a CPR and why does it matter? A footnote shows the Finance Act, 2022 substituted "Computerized Payment Receipt (CPR)" for the older words "challan of payment", so the CPR is the payment document for the tax. The certificate is the employer's statement of what it deducted from you; the CPR copies relate to the payment of that tax. Section 164 asks for both. A second footnote records that section 164(2) once said the certificate "shall be treated as sufficient evidence of the collection or deduction for the purposes of section 168". Those words were removed. The current text asks for the CPR copies instead. ### How does the employer report my tax to FBR? Section 165 requires every person deducting tax under Division III to file quarterly statements with the Commissioner. Each statement sets out the name, CNIC, NTN and address of each person paid, the total payments and the tax deducted. Section 165(2) sets the due dates: | Quarter ending | Statement due | |---|---| | 31 March | 20 April | | 30 June | 20 July | | 30 September | 20 October | | 31 December | 20 January | Section 165(6) adds a separate annual statement for anyone deducting tax under section 149. Rule 44(5) of the Income Tax Rules, 2002 (amended to 24 November 2023) sets that annual statement's due date as 31 July after the end of the financial year. Section 165(7) separately requires prescribed persons to e-file an annual statement within thirty days of the end of the tax year. These statements are how deducted tax is linked to your CNIC or NTN in FBR's records. ### How is the certificate used in my return? Section 168(1)(b) treats tax deducted "as tax paid by the person from whom the tax was collected or deducted". Section 168(2) allows a tax credit for it in the tax year of deduction. The certificate and CPR copies are the documents that support that credit in your return. ### Worked example (illustrative figures) The name and figures are made up. The salary tax is from the tax year 2027 table. **Hira, a pharmacist employed by a Karachi hospital, salary Rs. 1,440,000 for tax year 2027** - Tax on Rs. 1,440,000: Rs. 6,000 + 11% x Rs. 240,000 = Rs. 32,400 - The hospital deducts Rs. 2,700 a month (Rs. 32,400 / 12) - Each month it deposits the tax and gets a CPR - Under section 164(1), Hira is entitled to a certificate showing the tax deducted plus copies of the CPRs - The hospital lists her CNIC and the Rs. 2,700 monthly deductions in its quarterly statements under section 165 - When Hira files her tax year 2027 return by 30 September 2027, she claims a credit of Rs. 32,400 under section 168 and attaches the CPR copies under section 164(2) - Her tax liability is Rs. 32,400, her credit is Rs. 32,400, so nothing further is payable ### What if I worked for two employers in the year? Each employer that deducted tax owes you its own certificate under section 164(1), because the duty falls on "every person" deducting tax. Your return claims credit for the combined deductions. ### Is there a prescribed form for the salary certificate? Not in the Rules we hold. Rule 42 of the Income Tax Rules, 2002 prescribes a certificate form for deductions under Division III, but it applies "except in the case of salary". Division I of that Part of the Rules, headed "Employer's certificate", no longer contains a rule: a footnote records that rule 41 was omitted by SRO 1062(I)/2007. The salary certificate format is therefore not prescribed in this edition of the Rules. The obligation in section 164(1) itself does not exclude salary. ### Common mistakes - **"The certificate alone proves the tax was paid."** The words that made the certificate sufficient evidence for section 168 were omitted. The CPR copies are what section 164(2) asks you to attach. - **"The employer only has to give it if I ask."** Section 164(1) places the duty on the employer at the time of deduction, without a request. - **"My salary slip is the certificate."** A pay slip shows the deduction, but section 164(1) asks for a certificate plus CPR copies. ### What to check in the official text Read sections 164 and 165 with their footnotes, and rule 44 of the Income Tax Rules, 2002. In the site copy of the Rules, rule 42 is printed under the number "342" because of a footnote marker in the source PDF. Forms prescribed after 24 November 2023 are not in this corpus. ### Frequently asked #### When must the employer give the certificate? Section 164(1) says at the time of collection or deduction of the tax. The Ordinance does not provide for the salary certificate to wait until the end of the year. #### What if my employer refuses to give a certificate? The duty in section 164(1) is on the employer, and nothing in section 168 makes your credit depend on holding the certificate. The employer must still report the deduction against your CNIC or NTN in its statements under section 165, which is another record of the tax. #### Do I need the certificate if I am not filing a return? Section 164(2) links the attachment requirement to a person required to furnish a return. If you are not required to file, the section does not ask you to attach anything, but the certificate remains your record of the tax deducted. ### Citations - [Income Tax Ordinance, 2001, section 164 (Certificate of collection or deduction of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#164-certificate-of-collection-or-deduction-of-tax), as amended to 2026-06-30: "A person required to furnish a return of taxable income for a tax year shall attach to the return" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "shall, at the time of payment, deduct tax from the amount paid at the employee’s average rate of tax" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 165 (Statements)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#165-statements), as amended to 2026-06-30: "Every person deducting tax from payment under section 149 shall furnish to the Commissioner an annual statement in the prescribed form and manner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "shall be treated as tax paid by the person from whom the tax was collected or deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 44 (Statement of tax collected or deducted)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#44-statement-of-tax-collected-or-deducted), as amended to 2023-11-24: "a person responsible for deducting tax under section 149 shall furnish or e-file annual statement by the 31st day of the month of July after the end of a financial year" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Rules, 2002, Rule 42, Certificate of collection or deduction of tax (printed as rule 342 in the site copy)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24), as amended to 2023-11-24 Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf --- ## How much income tax is payable on my salary in tax year 2027, and up to what salary is there no tax? Source: https://qanoondigest.com/faq/salaried-employees/salary-tax-slabs-tax-year-2027 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer For tax year 2027 (1 July 2026 to 30 June 2027), clause (2) of Division I, Part I of the First Schedule charges no tax on taxable salary up to Rs. 600,000 a year. Above that the rates rise in eight slabs from 1% to 35%, and section 4AB adds no surcharge on salary income. **Applies to:** Individuals whose salary is more than 75% of their taxable income, for tax year 2027. ### What does the law say? Section 12 of the Income Tax Ordinance, 2001 makes salary taxable under the head "Salary". The rate comes from the First Schedule, Part I, Division I, clause (2). That clause applies "where the income of an individual chargeable under the head 'salary' exceeds seventy-five per cent of his taxable income". The table in it was substituted by the Finance Act, 2026, so it governs tax year 2027, which covers income earned from 1 July 2026 to 30 June 2027. These are the slabs as printed in the consolidated Ordinance amended to 30 June 2026: | Annual taxable income | Tax | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,001 to Rs. 1,200,000 | 1% of the amount over Rs. 600,000 | | Rs. 1,200,001 to Rs. 2,200,000 | Rs. 6,000 + 11% of the amount over Rs. 1,200,000 | | Rs. 2,200,001 to Rs. 3,200,000 | Rs. 116,000 + 20% of the amount over Rs. 2,200,000 | | Rs. 3,200,001 to Rs. 4,100,000 | Rs. 316,000 + 25% of the amount over Rs. 3,200,000 | | Rs. 4,100,001 to Rs. 5,600,000 | Rs. 541,000 + 29% of the amount over Rs. 4,100,000 | | Rs. 5,600,001 to Rs. 7,000,000 | Rs. 976,000 + 32% of the amount over Rs. 5,600,000 | | Above Rs. 7,000,000 | Rs. 1,424,000 + 35% of the amount over Rs. 7,000,000 | So the tax-free limit for a salaried individual in tax year 2027 is Rs. 600,000 of taxable income a year, which is Rs. 50,000 a month. ### Is there a surcharge on high salaries? No. Section 4AB, which the consolidated text prints inside section 4, imposes a surcharge of ten percent of the income tax where taxable income exceeds Rs. 10 million. Its proviso then says that for an individual deriving income chargeable under the head "Salary", no surcharge is payable. A salaried person earning Rs. 12 million a year therefore pays only the table rate. ### How does it work in practice? You do not normally pay this tax yourself during the year. Section 149 requires the person paying your salary to deduct tax each time salary is paid, at your average rate worked out on your estimated annual salary using the Division I rates. The annual figure in the table is what matters; the monthly deduction is just that annual tax spread across the year. "Taxable income" is not the same as basic pay. Section 12 counts allowances, bonuses, perquisites and many reimbursements as salary, so your taxable salary is usually your gross pay, not just your basic. ### Worked example (illustrative figures) The salaries below are made up. The rates are the tax year 2027 rates from the table above. **Ayesha, a school coordinator in Multan, Rs. 80,000 a month** - Annual salary: Rs. 80,000 x 12 = Rs. 960,000 - Slab: Rs. 600,001 to Rs. 1,200,000, so 1% of the amount over Rs. 600,000 - Amount over Rs. 600,000: Rs. 960,000 - Rs. 600,000 = Rs. 360,000 - Tax: 1% x Rs. 360,000 = **Rs. 3,600 a year**, or Rs. 300 a month **Bilal, an accountant in Lahore, Rs. 150,000 a month** - Annual salary: Rs. 1,800,000 - Slab: Rs. 1,200,001 to Rs. 2,200,000 - Amount over Rs. 1,200,000: Rs. 600,000 - Tax: Rs. 6,000 + (11% x Rs. 600,000 = Rs. 66,000) = **Rs. 72,000 a year**, or Rs. 6,000 a month **Sana, a bank manager in Karachi, Rs. 800,000 a month** - Annual salary: Rs. 9,600,000 - Slab: above Rs. 7,000,000 - Amount over Rs. 7,000,000: Rs. 2,600,000 - Tax: Rs. 1,424,000 + (35% x Rs. 2,600,000 = Rs. 910,000) = **Rs. 2,334,000 a year**, or Rs. 194,500 a month - Surcharge: none, because of the salary proviso to section 4AB Notice that Sana's overall tax is about 24% of her salary, not 35%. The 35% applies only to the rupees above Rs. 7,000,000. ### What if my salary is 75% or less of my taxable income? Clause (2) applies only where salary is more than 75% of taxable income. If you also have large business or other income, so that salary is 75% or less, clause (1) of Division I applies instead. Clause (1) has its own table for individuals other than salaried individuals. It is covered on a separate page about combining salary with rental or business income. ### What if I work only part of the year? The table applies to the taxable income of the tax year. If you started work in January, only the salary you actually receive from January to June counts, and it is measured against the same annual slabs. Someone earning Rs. 100,000 a month for six months has Rs. 600,000 of salary for the year and falls in the 0% slab. ### Common mistakes - **"The 0% limit is Rs. 600,000 of basic salary."** The limit is on taxable income. Allowances and perquisites that section 12 includes in salary count towards it. - **"Crossing into a higher slab makes my whole salary taxable at the higher rate."** The table is marginal. Earning one rupee more than Rs. 1,200,000 increases your tax by 11 paisa, not by 11% of your whole salary. - **"Last year's rates still apply."** The Finance Act, 2026 substituted the table. The previous table, shown in the footnote of the source PDF, charged 23%, 30% and 35% on the upper slabs. Use the rates for the tax year in which the salary is received. ### What to check in the official text Read clause (2) of Division I, Part I of the First Schedule in the source PDF, including the footnote that shows the table it replaced. Read section 4AB, printed within section 4 in this consolidated text, for the surcharge and its salary proviso. Tax credits for items such as donations or pension contributions reduce the tax worked out from this table; they are dealt with on separate pages. ### Frequently asked #### Is a salary of Rs. 50,000 a month taxable in tax year 2027? Rs. 50,000 a month is Rs. 600,000 a year, which is exactly the top of the 0% slab in clause (2) of Division I of the First Schedule. If that is your only salary and there are no taxable perquisites on top of it, the tax works out to nil. #### Does the 10% surcharge apply to salaried people earning over Rs. 10 million? No. Section 4AB, printed inside section 4 of the consolidated Ordinance, charges a 10% surcharge where taxable income exceeds Rs. 10 million, but its proviso says no surcharge is payable by an individual deriving income under the head Salary. #### Is the 35% rate charged on my whole salary? No. The table is progressive. Each rate applies only to the part of taxable income inside that slab, and the fixed rupee amount in each row already covers the tax on the lower slabs. ### Citations - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), Table (substituted by the Finance Act, 2026)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 4 (Tax on taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4-tax-on-taxable-income), as amended to 2026-06-30: "a surcharge shall be payable by every individual and association of persons at the rate of ten percent of the income tax imposed under Division I of Part I of the First Schedule where the taxable income exceeds rupees ten million" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "Any salary received by an employee in a tax year, other than salary that is exempt from tax under this Ordinance, shall be chargeable to tax in that year under the head “Salary”." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is there still a tax rebate for full-time teachers and researchers? Source: https://qanoondigest.com/faq/salaried-employees/teachers-researchers-tax-reduction-status Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer Not for tax year 2027. Clause (3A) of Part III of the Second Schedule reduced a full-time teacher's or researcher's salary tax by 25%, but its own proviso says it ceases to have effect after tax year 2025. The Ordinance amended to 30 June 2026 contains no replacement, so ordinary salaried rates apply. **Applies to:** Full-time teachers and researchers employed in non-profit education or research institutions recognized by HEC, a Board of Education or an HEC-recognized university, including government research institutions. ### What does the law say? Part III of the Second Schedule to the Income Tax Ordinance, 2001 lists reductions in tax liability. Clause (3A) says the tax payable by a full-time teacher or a researcher employed in a non-profit education or research institution duly recognized by the Higher Education Commission, a Board of Education or a University recognized by the Higher Education Commission, including a government research institution, is reduced by 25% of the tax payable on his income from salary. Two provisos follow. The first excludes a teacher of the medical profession who has private practice income or a share of fees received from patients. The second, which decides the question, says the clause "shall be deemed to have been in force with effect from the first day of July, 2022 and shall cease to have effect after tax year 2025." A footnote records that clause (3A) was inserted by the Finance Act, 2025. The consolidated text amended to 30 June 2026 contains no later clause that restores or extends it. ### What happened to the older rebate? An earlier version of the teacher reduction sat inside the old clause (1) of Part III. The consolidated text shows clause (1) as omitted by the Finance Act, 2022 and reproduces its former wording in a footnote, which included a 25% reduction for full-time teachers and researchers. A further footnote shows that before the Finance Act, 2006 the reduction was worded as a 75% further reduction. Neither version is current law. Putting the pieces together: | Tax year | Position in the consolidated text | |---|---| | Before clause (3A) | Reduction existed in the old clause (1), later omitted by the Finance Act, 2022 | | 2023, 2024, 2025 | Clause (3A), inserted by the Finance Act, 2025 with effect from 1 July 2022 | | 2026 and 2027 | No reduction; clause (3A) ceased after tax year 2025 | The exact tax year from which the old clause stopped applying depends on the commencement of the Finance Act, 2022, which this page does not trace. ### How does it work in practice for tax year 2027? A teacher's employer deducts tax under section 149 at the employee's average rate, computed with the salaried rates in Division I of Part I of the First Schedule. With no reduction clause in force, nothing in the Ordinance tells the employer to cut that amount by 25% for tax year 2027. A teacher is taxed like any other salaried individual. ### Worked example (illustrative figures) Farah is a full-time lecturer at a non-profit private university in Peshawar recognized by the Higher Education Commission. Her salary is Rs. 3,000,000 a year and she has no other income. **Tax year 2027 (no reduction).** 1. The clause (2) salaried table taxes income from Rs. 2,200,000 to Rs. 3,200,000 at Rs. 116,000 plus 20% of the amount above Rs. 2,200,000. 2. Rs. 116,000 + 20% of Rs. 800,000 = Rs. 116,000 + Rs. 160,000 = **Rs. 276,000**. 3. No clause (3A) reduction applies. Tax remains Rs. 276,000. **Tax year 2025 (reduction in force), for comparison.** The salaried table for tax year 2025 is the one the Finance Act, 2025 replaced, reproduced in a footnote of the consolidated text. It taxed income from Rs. 2,200,000 to Rs. 3,200,000 at Rs. 180,000 plus 25% of the amount above Rs. 2,200,000. 1. Tax before reduction: Rs. 180,000 + 25% of Rs. 800,000 = Rs. 180,000 + Rs. 200,000 = Rs. 380,000. 2. Clause (3A) reduction: 25% of Rs. 380,000 = Rs. 95,000. 3. Tax payable: Rs. 380,000 - Rs. 95,000 = **Rs. 285,000**. Farah's tax year 2027 figure is lower than her tax year 2025 figure even without the rebate, because the salaried slabs were cut in the meantime. The rebate's end does not by itself mean a higher bill; it depends on salary and the table for each year. ### What if my employer did not apply the reduction in tax years 2023 to 2025? Clause (3A) was inserted in 2025 but deemed in force from 1 July 2022, so for those three years a teacher's tax payable was reducible after the fact. How an earlier year is reopened, whether through a revised return or a refund claim, is governed by other provisions of the Ordinance that this page does not cover. ### Common mistakes - **Relying on old circulars or social media posts.** The only operative text is clause (3A), and it has expired. - **Assuming every teacher qualified.** The institution had to be non-profit and recognized as the clause describes, and medical teachers with private practice were excluded. - **Reading the omitted clause (1) footnote as current law.** Footnotes in the consolidated text show repealed wording for reference only. ### What to check in the official text Read Part III of the Second Schedule in the Ordinance amended to 30 June 2026, with its footnotes on clauses (1) and (3A), and the Finance Act, 2026 for any new provision. Check any later Finance Act for tax years after 2027. ### Frequently asked #### Can a teacher claim the 25% reduction for tax year 2027? No provision in the Ordinance amended to 30 June 2026 gives it. Clause (3A) of Part III of the Second Schedule says it ceases to have effect after tax year 2025, and tax year 2027 runs from 1 July 2026 to 30 June 2027. #### Which years did clause (3A) cover? It was inserted by the Finance Act, 2025 and deemed to be in force from 1 July 2022, the start of tax year 2023. It ceased after tax year 2025, so it covered tax years 2023, 2024 and 2025. #### Were doctors who teach covered? Clause (3A) excluded a teacher of the medical profession who derives income from private medical practice or receives a share of consideration received from patients. ### Citations - [Income Tax Ordinance, 2001, Second Schedule, Part III, clause (3A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "shall be deemed to have been in force with effect from the first day of July, 2022 and shall cease to have effect after tax year 2025." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part III, clause (3A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "shall be reduced by an amount equal to 25% of tax payable on his income from salary" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part III, clause (1) (omitted by the Finance Act, 2022, footnote text)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## I work two jobs at the same time; how is tax on both salaries worked out? Source: https://qanoondigest.com/faq/salaried-employees/tax-on-two-jobs-same-time Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer Your two salaries are added together and taxed once on the slab table for salaried individuals. Under section 149 each employer deducts tax on its own estimate, which often falls short because a higher combined salary sits in a higher slab. Tax deducted is credited under section 168, and the balance is settled through your return under section 114. **Applies to:** People who hold two or more paid jobs with different employers in the same tax year, including a day job plus a part-time teaching or evening post. Two jobs mean two payslips but one tax bill. The Income Tax Ordinance adds every salary you receive in the tax year together and applies the slab table once. Each employer deducts tax separately under section 149, and because each one usually sees only its own payroll, the combined deduction is often too low. The difference is settled when you file your return. ### What does the law say? **One charge on all salary.** Section 12(1) makes "any salary received by an employee in a tax year" chargeable in that year under the head Salary. It does not create a separate charge per employer. Salary from both jobs goes into one figure. **One slab table.** For an individual whose salary is more than seventy-five per cent of taxable income, tax year 2027 rates are in clause (2) of Division I, Part I, First Schedule: | Taxable income | Tax | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,001 to 1,200,000 | 1% of amount over 600,000 | | Rs. 1,200,001 to 2,200,000 | Rs. 6,000 + 11% of amount over 1,200,000 | | Rs. 2,200,001 to 3,200,000 | Rs. 116,000 + 20% of amount over 2,200,000 | | Rs. 3,200,001 to 4,100,000 | Rs. 316,000 + 25% of amount over 3,200,000 | | Rs. 4,100,001 to 5,600,000 | Rs. 541,000 + 29% of amount over 4,100,000 | | Rs. 5,600,001 to 7,000,000 | Rs. 976,000 + 32% of amount over 5,600,000 | | Above Rs. 7,000,000 | Rs. 1,424,000 + 35% of amount over 7,000,000 | **Each employer deducts.** Section 149(1) requires "every person responsible for paying salary to an employee" to deduct tax at the employee's average rate, computed on "the estimated income of the employee chargeable under the head Salary for the tax year". Section 149(2) defines the average rate as the tax on that estimated salary divided by the estimated salary. **Credit, not final tax.** Section 168(2) gives you a credit for tax deducted from your pay against the tax due on your taxable income for the year. Section 149 is not among the final taxes listed in section 168(3), so the deductions are adjustable against your total liability. Section 168(5) provides for a refund of credit that cannot be used. **Return.** Section 114(1)(ab) requires a return from every individual whose taxable income exceeds the maximum amount not chargeable to tax. The return is where both salaries and both employers' deductions come together. ### How does it work in practice? Section 149(1) refers to the employee's estimated salary income for the tax year, not only the salary one employer pays. It also lets an employer adjust for "tax withheld from the employee under this Ordinance during the tax year", after obtaining documentary evidence. So the law allows an employer to take your other salary and the tax already deducted from it into account. It does not set out a procedure for you to tell each employer about the other job, or oblige an employer to ask. Where neither employer knows about the other, each computes tax as if its salary were your only income, and a shortfall builds up. ### Worked example (illustrative figures) Hina works as an accountant for a textile firm in Lahore, paid Rs. 1,800,000 for tax year 2027, and teaches evening classes at a private college, paid Rs. 1,200,000. The salaries are invented; the rates are the tax year 2027 table above. **What each employer deducts, knowing only its own salary:** 1. Textile firm, on Rs. 1,800,000: 6,000 + 11% of 600,000 = 6,000 + 66,000 = 72,000 2. College, on Rs. 1,200,000: 1% of 600,000 = 6,000 3. Total deducted: 72,000 + 6,000 = **Rs. 78,000** **What the law actually charges on total salary:** 1. Total salary: 1,800,000 + 1,200,000 = 3,000,000 2. Band above Rs. 2,200,000 and up to Rs. 3,200,000: 116,000 + 20% of 800,000 = 116,000 + 160,000 = **Rs. 276,000** **Balance:** 276,000 - 78,000 = **Rs. 198,000** still payable. Section 168(2) credits the Rs. 78,000 already deducted, and Hina's return for tax year 2027 would show Rs. 198,000 as tax due. If the textile firm had documentary evidence of the college salary and its deductions, it could compute her average rate on Rs. 3,000,000 under section 149 and deduct the difference through the year instead. ### What if ...? **Both employers over-deduct?** That is less common but possible, for example if one employer estimates your salary for a full year and you leave early. Section 168(5) provides that unusable credit is refunded. **One of the jobs is really a contract for services?** Payments for services as an independent contractor are not salary, and tax on them is deducted under different provisions. Whether a post is employment depends on the facts of the engagement. This page covers only two salaried jobs. **My second income is small?** The slab table still applies to the total. A small second salary can push part of your income into the next band. ### Common mistakes - **Using the zero band twice.** The Rs. 600,000 zero-rate band applies once, to total taxable income. - **Treating employer deductions as the final bill.** They are credits under section 168(2), not a settlement. - **Not filing because tax was deducted.** Section 114(1)(ab) ties the return obligation to taxable income, not to whether tax was deducted. ### What to check in the official text Read section 149(1) and (2) for how employers compute deductions, section 168(2), (3) and (5) for credit and refund, and section 114(1) for who must file. Take the rates from clause (2) of Division I, Part I, First Schedule. If your salary is not more than seventy-five per cent of your taxable income, clause (1) of the same Division applies instead. ### Frequently asked #### Does each employer give me a separate tax-free slab? No. Section 12(1) charges all salary you receive in a tax year under one head, and the slab table applies once to your total taxable income. The zero-rate band up to Rs. 600,000 is used only once. #### Why is the tax deducted by two employers less than my actual tax? Each employer applies the slab table to the salary it knows about. Two smaller salaries each sit in lower bands, while the combined figure sits in a higher band, so the total deducted falls short of the tax on the total. #### Is the tax my employers deduct final? No. Salary deduction under section 149 is not in the final tax list in section 168(3), so it is credited against your total tax under section 168(2). Any balance is payable with your return, and any excess is refundable under section 168(5). ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "Any salary received by an employee in a tax year, other than salary that is exempt from tax under this Ordinance, shall be chargeable to tax in that year under the head “Salary”." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule on the estimated income of the employee chargeable under the head “Salary” for the tax year in which the payment is made" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "every person (other than a company) whose taxable income for the year exceeds the maximum amount that is not chargeable to tax under this Ordinance for the year;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What counts as salary for tax purposes: are overtime, commission and perks included? Source: https://qanoondigest.com/faq/salaried-employees/what-counts-as-salary-for-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer Yes. Section 12 of the Income Tax Ordinance defines salary as any amount received from employment, and lists overtime, bonus, commission, fees, allowances, reimbursed expenses and perquisites. Section 13 sets how perks such as a car, utilities or a cheap loan are valued. Section 12(4) allows no deduction for your own work expenses. **Applies to:** Employees in Pakistan who receive pay, allowances or benefits from an employer and want to know which parts are taxed. Almost everything your employer pays or provides because of your job counts as salary for income tax. Section 12 of the Income Tax Ordinance, 2001 casts the net wide on purpose: basic pay, overtime, bonus, commission, allowances, reimbursed expenses and benefits in kind are all "Salary" unless a specific provision of the Ordinance exempts them. ### What does the law say? Section 12(1) charges tax on "any salary received by an employee in a tax year", other than salary that is exempt. Section 12(2) then defines salary as any amount received from any employment, "whether of a revenue or capital nature", and lists what is included: | Item on your payslip or in your contract | Where section 12(2) covers it | |---|---| | Basic pay, wages, leave pay, payment in lieu of leave, overtime, bonus, commission, fees, gratuity, hardship or danger supplements | Clause (a) | | Perks and benefits, even if you cannot turn them into cash | Clause (b) | | Allowances: cost of living, rent, utilities, education, entertainment, travel and similar | Clause (c) | | Your own expenses that the employer pays or reimburses | Clause (d) | | Joining bonus, payment for agreeing to changed terms, termination and golden handshake payments, non-compete payments, certain provident fund receipts | Clause (e) | | Pension or annuity | Clause (f) | | Amounts taxed as salary under the employee share scheme provisions of the Ordinance | Clause (g) | Two exclusions sit inside the definition. An allowance "solely expended in the performance of the employee's duties" is not salary, and neither is a reimbursement of expenditure incurred "on behalf of the employer" in doing the job. The Explanation to clause (c) narrows the first exclusion: an allowance paid monthly on a fixed basis or as a percentage of salary, or one that is not wholly and actually spent on the employer's behalf, does not qualify. Section 12(5) adds that it does not matter who pays. An amount counts as received from employment even if it comes from an associate of the employer, a third party under an arrangement with the employer, or a past or prospective employer, and even if it is paid to your associate rather than to you. ### How are perks valued? Section 13 sets the taxable value of benefits in kind (clause (b) above). It does not apply to allowances or reimbursements, which are taxed at the amount paid. - **Car for private use (s.13(3)):** an amount "computed as may be prescribed", meaning under the Income Tax Rules. - **Driver, cook, gardener or other domestic help (s.13(5)):** the total salary the employer paid that person for serving you, less anything you paid the employer. - **Utilities (s.13(6)):** fair market value of electricity, gas, water and telephone provided, less what you paid. - **Loan at no or low profit (s.13(7)):** profit at the benchmark rate, or the shortfall below it. The second proviso says this does not apply to loans of one million rupees or less. Section 13(14) sets the benchmark rate at five per cent for tax year 2003, rising one per cent a year but not above ten per cent. - **Debt waived by the employer (s.13(9)) or your debt paid to someone else (s.13(10)):** the full amount. - **Property transferred or services provided (s.13(11)):** fair market value less what you paid. - **Housing (s.13(12)):** an amount computed as prescribed. - **Any other perk (s.13(13)):** fair market value when provided, less what you paid, unless the rules say otherwise. ### Can I deduct my own work costs? No. Section 12(4) says: "No deduction shall be allowed for any expenditure incurred by an employee in deriving amounts chargeable to tax under the head “Salary”." Petrol for commuting, a laptop you bought, or professional memberships you pay yourself do not reduce your taxable salary. Relief comes only through the specific exemptions in the Second Schedule, tax credits and tax reductions the Ordinance provides. ### Worked example (illustrative figures) Bilal is a sales executive in Faisalabad. His tax year 2027 package, with all amounts invented: | Item | Rs. | |---|---| | Basic pay (12 x 110,000) | 1,320,000 | | Fixed monthly fuel allowance (12 x 15,000) | 180,000 | | Sales commission | 250,000 | | Overtime | 60,000 | | Company provides electricity at his home (utilities, s.13(6)), fair market value | 36,000 | | **Total salary** | **1,846,000** | The fuel allowance is paid on a fixed monthly basis, so under the Explanation to section 12(2)(c) it is not treated as solely spent on duties. The electricity is a utility provided by the employer (section 13(14)(c) defines utilities to include electricity, gas, water and telephone), valued at fair market value under section 13(6). Tax year 2027 rates for an individual whose salary is more than seventy-five per cent of taxable income are in clause (2) of Division I, Part I, First Schedule. Rs. 1,846,000 falls in the band above Rs. 1,200,000 and up to Rs. 2,200,000: Rs. 6,000 plus 11% of the amount above Rs. 1,200,000. 1. Amount above Rs. 1,200,000: 1,846,000 - 1,200,000 = 646,000 2. 11% of 646,000 = 71,060 3. Tax for the year: 6,000 + 71,060 = **Rs. 77,060** If Bilal had wrongly left out commission, overtime and the electricity, his employer's estimate would be Rs. 1,500,000 and the tax Rs. 39,000 (6,000 + 11% of 300,000). The gap of Rs. 38,060 would still be owed. Section 149 requires the employer to deduct on the employee's estimated salary income for the year, so every element above belongs in that estimate. ### What if the benefit is exempt? Section 12(1) excludes "salary that is exempt from tax under this Ordinance". Exemptions for particular allowances or benefits sit in the Second Schedule and other provisions, each with its own conditions. This page does not list them. An item is exempt only if a provision of the Ordinance exempts it, so an exemption can always be traced to a specific clause. ### Common mistakes - **"Perks are free because I never get cash."** Section 12(2)(b) includes a perquisite "whether convertible to money or not". - **"My allowance is for travel, so it is not taxed."** The label is irrelevant. The Explanation to section 12(2)(c) excludes fixed monthly or percentage allowances from the "solely expended" carve-out. - **"A payment from the group's other company is not my salary."** Section 12(5)(a) covers payments by an associate of the employer or a third party under an arrangement with the employer. - **"If my employer pays my tax, that is the end of it."** Section 12(3) grosses the salary up by the tax the employer pays. ### What to check in the official text Read section 12 in full, including the Explanation to clause (2)(c), and section 13 for the perk you receive. The car and housing values in section 13(3) and 13(12) depend on the Income Tax Rules, 2002, so check the current rule. Check the Second Schedule for any exemption before assuming an item is tax free. The tax year 2027 slab table is clause (2) of Division I, Part I of the First Schedule. ### Frequently asked #### Is overtime pay taxed as salary in Pakistan? Yes. Section 12(2)(a) names overtime payment in the list of pay that counts as salary. It is added to your other salary and taxed on the same slab table. #### Are fixed monthly allowances tax free if they are called travel or fuel allowance? No, not because of the name. Section 12(2)(c) includes allowances in salary, and its Explanation says an allowance paid monthly on a fixed basis or as a percentage of salary is not treated as spent solely on the employer's duties. Only a specific exemption in the Ordinance takes an amount out. #### Can I deduct my commuting or work phone costs from my salary? No. Section 12(4) says no deduction is allowed for any expenditure incurred by an employee in deriving salary. The only reliefs are the specific exemptions, credits and reductions the Ordinance provides. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "Salary means any amount received by an employee from any employment, whether of a revenue or capital nature, including -" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 13 (Value of perquisites)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#13-value-of-perquisites), as amended to 2026-06-30: "the amount chargeable to tax to the employee under the head “Salary” for that year shall include the fair market value of the utilities provided, as reduced by any payment made by the employee for the utilities." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule on the estimated income of the employee chargeable under the head “Salary” for the tax year in which the payment is made" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do Zakat, my children's tuition fees or my house loan reduce my salary tax? Source: https://qanoondigest.com/faq/salaried-employees/zakat-tuition-home-loan-salary-tax-relief Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: yes. ### Short answer Each can, in a different way. Section 60 deducts Zakat paid under the Zakat and Ushr Ordinance from income. Section 60D gives a small tuition allowance only where taxable income is under Rs. 1.5 million. Section 63A credits profit on a loan for one house up to 2,500 square feet or flat up to 2,000 square feet. **Applies to:** Salaried individuals who pay Zakat, pay their children's school or college fees, or pay profit on a bank or government loan for their own house or flat. ### What does the law say? The Income Tax Ordinance, 2001 treats these three expenses in two different ways. **Deductible allowances** reduce taxable income. Section 9 defines taxable income as total income "reduced (but not below zero) by the total of any deductible allowances under Part IX". Zakat (section 60) and tuition fees (section 60D) are in this group. **Tax credits** reduce the tax itself. Profit on a house loan (section 63A) is a credit worked out with the formula (A/B) x C, where A is tax before credits, B is taxable income and C is the amount allowed. | Expense | Section | Type | Limit | Through payroll? | |---|---|---|---|---| | Zakat | 60 | Deductible allowance | Amount paid under the Zakat and Ushr Ordinance, 1980 | Not mentioned in section 149 | | Children's tuition fee | 60D | Deductible allowance | Lesser of 5% of fees paid, 25% of taxable income, Rs. 60,000 per child; only if taxable income is under Rs. 1.5 million | No, section 60D(5) excludes it | | Profit on house loan | 63A | Tax credit | Lesser of profit paid and 30% of taxable income | Not mentioned in section 149 | ### How does each one work in practice? **Zakat.** The allowance covers Zakat "paid by the person in a tax year under the Zakat and Ushr Ordinance, 1980". The text does not extend it to Zakat given privately. Section 60(2) excludes Zakat already taken into account when computing income from other sources, and section 60(3) says any part that cannot be deducted in the year is not refunded or carried forward or back. **Tuition fees.** Section 60D(1) allows the deduction only where "the taxable income of the individual is less than one and a half million rupees". Section 60D(4) lets either parent claim it, on giving the National Tax Number or name of the educational institution. Nothing unused carries forward. The text does not say whether the Rs. 1.5 million test is applied before or after the allowance itself, so this page does not decide that. **House loan.** Section 63A was inserted by the Finance Act, 2025. The loan must come from a scheduled bank, a financial institution regulated by the Securities and Exchange Commission of Pakistan, Government, a Local Government, a statutory body or a listed public company, and must be used to build (including land) or buy one personal house with land area up to 2,500 square feet or a flat up to 2,000 square feet. Once claimed, section 63A(4) bars a credit for another house or flat for the next fifteen tax years. Section 63A(3) excludes profit already deductible against rental income. An earlier deductible allowance for profit on a house loan was omitted by the Finance Act, 2022, and survives in the consolidated text only as a footnote. ### Worked example (illustrative figures) **Imran, a school administrator in Rawalpindi, tax year 2027.** Salary Rs. 1,400,000. Zakat of Rs. 30,000 was deducted under the Zakat and Ushr Ordinance. He paid Rs. 400,000 in tuition fees for two children. 1. **Tuition allowance.** Lesser of 5% of Rs. 400,000 = Rs. 20,000; 25% of taxable income (well above Rs. 20,000); and Rs. 60,000 x 2 = Rs. 120,000. Allowance = **Rs. 20,000**. 2. **Taxable income.** Rs. 1,400,000 - Rs. 30,000 - Rs. 20,000 = **Rs. 1,350,000**. 3. **Tax.** The clause (2) salaried table taxes income from Rs. 1,200,000 to Rs. 2,200,000 at Rs. 6,000 plus 11% of the amount above Rs. 1,200,000. Rs. 6,000 + 11% of Rs. 150,000 = **Rs. 22,500**. 4. **Without the allowances.** Rs. 6,000 + 11% of Rs. 200,000 = Rs. 28,000. The two allowances save Rs. 5,500. **Hina, an engineer in Faisalabad, tax year 2027.** Salary Rs. 3,000,000. She paid Rs. 250,000 of profit to a scheduled bank on a loan used to buy a house on a plot of 1,800 square feet. 1. **Tax before credit (A).** Rs. 116,000 + 20% of (3,000,000 - 2,200,000) = **Rs. 276,000**. 2. **Average rate (A/B).** 276,000 / 3,000,000 = 9.2%. 3. **C.** Lesser of Rs. 250,000 and 30% of Rs. 3,000,000 (Rs. 900,000) = Rs. 250,000. 4. **Credit.** 9.2% x Rs. 250,000 = **Rs. 23,000**. Tax after credit = Rs. 253,000. ### What if my employer already deducted the full tax? Section 149(1) lists only tax withheld under other heads and the donation and pension fund credits as adjustments. Imran's employer would deduct on Rs. 1,400,000, so the Rs. 5,500 difference would be settled when his tax for the year is worked out. The same applies to Hina's credit. ### Common mistakes - **Assuming the tuition allowance equals the fee paid.** The first limit is five per cent of the fee. - **Claiming tuition allowance on a higher income.** It is available only where taxable income is under Rs. 1.5 million. - **Using the old house loan allowance.** That provision was omitted in 2022; section 63A is the current rule and has size limits. - **Claiming a second property.** Section 63A covers one house or flat, then locks out another claim for fifteen tax years. ### What to check in the official text Read sections 9, 60, 60D and 63A in the Ordinance amended to 30 June 2026, and the Zakat and Ushr Ordinance, 1980 (not in this corpus) for what counts as Zakat paid under it. ### Frequently asked #### Is Zakat deducted from my income or from my tax? From income. Section 60 makes Zakat paid under the Zakat and Ushr Ordinance, 1980 a deductible allowance, and section 9 reduces total income by deductible allowances to arrive at taxable income. The saving therefore depends on the slab rate that applies to the top part of your income, not on a fixed percentage. #### Why is the tuition fee allowance so small? Section 60D(2) caps it at the lesser of five per cent of the tuition fee paid, twenty-five per cent of taxable income, and sixty thousand rupees multiplied by the number of children. On Rs. 400,000 of fees the first limit gives Rs. 20,000. #### Can my employer reduce my monthly tax for these? Section 60D(5) says the tuition allowance is not taken into account for deduction under section 149. Section 149(1) mentions only tax withheld under other heads and the donation and pension fund credits, so it does not mention Zakat or the house loan credit either. These reliefs are claimed when your tax for the year is computed. ### Citations - [Income Tax Ordinance, 2001, section 60 (Zakat)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#60-zakat), as amended to 2026-06-30: "A person shall be entitled to a deductible allowance for the amount of any Zakat paid by the person in a tax year under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980)." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 60D (Deductible allowance for education expenses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#60d-deductible-allowance-for-education-expenses), as amended to 2026-06-30: "an amount computed by multiplying sixty thousand with number of children of the individual." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 63A (Tax credit for interest paid on low-cost housing loan)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#63a-tax-credit-for-interest-paid-on-low-cost-housing-loan), as amended to 2026-06-30: "construction (including land) or acquisition of one personal house having land area up to two thousand five hundred square feet or flat having total area up to two thousand square feet." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 9 (Taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#9-taxable-income), as amended to 2026-06-30: "reduced (but not below zero) by the total of any deductible allowances under Part IX of this Chapter of the person for the year." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "adjustment of tax withheld from employee under other heads and tax credit admissible under section 61" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- # Pensioners and senior citizens Pension, commutation, retirement benefits and relief for older taxpayers. ## Is army, government and private-company pension all taxed the same way now? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/government-army-private-pension-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer For the monthly pension itself, yes. The Finance Act, 2025 omitted sub-clause (i) of clause (9) of the Second Schedule, which had exempted armed forces and government pension. Section 12(2A) now applies to pension from any former employer: 0% up to Rs. 10 million, 5% above, and nothing from age seventy. Some retirement lump sums are still treated differently. **Applies to:** Retired members of the Armed Forces, retired Federal and Provincial Government employees, and retirees of banks, companies and corporations who draw a pension. ### What does the law say? The monthly pension of a retired soldier, civil servant or bank officer is now taxed under the same rule. Section 12(2)(f) of the Income Tax Ordinance, 2001 treats "any pension or annuity" as salary, and section 12(2A), inserted by the Finance Act, 2025, sets how that pension is charged. It draws no line between the Armed Forces, government and a private employer. It speaks only of "the amount received by an individual from a former employer". Under section 12(2A)(i), pension is charged as a final tax at the rates in the proviso to clause (2) of Division I of Part I of the First Schedule, and an individual who has attained the age of seventy years is not charged to tax on pension income. For tax year 2027 (1 July 2026 to 30 June 2027) the table is: | Amount of pension received | Rate | |---|---| | Does not exceed Rs. 10 million | 0% of the amount | | Exceeds Rs. 10 million | 5% of the amount exceeding Rs. 10 million | Section 12(2A)(ii) adds one exception that also applies to every sector: if the pensioner "continues to work for former employer or its associate", the pension is taxed at the ordinary rates in clause (1) or (2) of Division I. ### What changed in 2025? Until the Finance Act, 2025, armed forces and government pension had its own exemption. Clause (9) of Part I of the Second Schedule had two sub-clauses. Sub-clause (i) exempted pension "received in respect of services rendered by a member of the Armed Forces of Pakistan or Federal Government or a Provincial Government". Clause (8) separately exempted pension from any former employer to a citizen of Pakistan. Section 10 of the Finance Act, 2025 provides that "clause (8) and sub-clause (i) of clause (9) shall be omitted". Both general pension exemptions ended together, and section 12(2A) took their place for all former employers. What survives is sub-clause (ii) of clause (9): pension "granted under the relevant rules to the families and dependents of public servants or members of the Armed Forces of Pakistan who die during service". That is a family pension for deaths in service, not a retirement pension. ### What about injury and invalid pensions? These lost their separate exemptions much earlier. The footnotes to Part I of the Second Schedule record that the Finance Act, 2006 omitted: - clause (10), pension granted to a public servant for injuries received in the performance of duties; - clause (11), pension granted to a public servant invalidated from service on account of bodily disability; - clause (14), pension granted to Armed Forces personnel for injuries received in the performance of their duties; - clause (15), pension granted to Armed Forces personnel invalidated from service on account of bodily disability attributable to, or aggravated by, such service. No clause in the current Part I replaces them for the pensioner personally, so such a pension falls under section 12(2A) with every other pension. ### Where do real differences remain? The monthly pension is treated alike, but some lump sums paid at retirement are not: | Payment | Armed Forces and government | Private employer | |---|---|---| | Commutation of pension | Clause (12): exempt if received from Government | Exempt under clause (12) only under a pension scheme approved by the Board for that clause; otherwise clause (13) limits | | Gratuity or commutation under clause (13) | Sub-clause (i): the amount receivable under the service rules (also covers Local Government and statutory bodies) | Sub-clauses (ii) to (iv): approved gratuity fund, up to Rs. 300,000 under a Board-approved scheme, or the lesser of 50% or Rs. 75,000 | | Leave encashment preparatory to retirement | Clause (19): exempt for the Armed Forces and Federal or Provincial Government employees | Not covered by clause (19) | ### Worked example (illustrative figures) Four people retire and no longer work for their former employers. The pension amounts are invented; the rates are the tax year 2027 pension table. | Retiree | Former employer | Pension in tax year 2027 | Tax | |---|---|---|---| | Subedar (retd) Ghulam Abbas, Jhelum, age 58 | Pakistan Army | Rs. 1,440,000 | Rs. 0 | | Shahida, Peshawar, age 62 | Provincial Government | Rs. 2,160,000 | Rs. 0 | | Arif, Karachi, age 63 | A private bank | Rs. 4,500,000 | Rs. 0 | | Waseem, Lahore, age 65 | A listed company | Rs. 12,500,000 | Rs. 125,000 | Waseem's figure: 1. Amount above Rs. 10 million: 12,500,000 - 10,000,000 = Rs. 2,500,000 2. Tax at 5%: 2,500,000 x 5% = **Rs. 125,000** If Waseem's pension had come from the Army or a provincial government instead, the calculation would be the same. If he were seventy or older, section 12(2A)(i) would charge nothing. ### Common mistakes - **Treating army or government pension as exempt under clause (9).** Sub-clause (i) of clause (9) was omitted by the Finance Act, 2025. Only sub-clause (ii), family pension after death in service, remains. - **Relying on the old injury or invalid pension clauses.** Clauses (10), (11), (14) and (15) were omitted in 2006. - **Assuming all retirement benefits are now treated alike.** Commutation, gratuity and leave encashment still depend on who the employer was, under clauses (12), (13) and (19). ### What to check in the official text Read section 12(2) and (2A) of the Income Tax Ordinance, 2001 as amended to 30 June 2026, and the proviso to clause (2) of Division I of Part I of the First Schedule for the pension table. In Part I of the Second Schedule, read clause (9) with its footnotes, the footnotes recording the omitted clauses (10), (11), (14) and (15), and clauses (12), (13) and (19). Section 10 of the Finance Act, 2025 is the amending text. Service pension rules of the Armed Forces or any government are not part of this corpus. ### Frequently asked #### Is army pension still fully exempt from income tax? Not under a separate clause. Sub-clause (i) of clause (9), which exempted pension for service in the Armed Forces or the Federal or a Provincial Government, was omitted by the Finance Act, 2025. Army pension now falls under section 12(2A) like any other pension from a former employer. #### Are disability or injury pensions exempt? Not under their own clauses. Clauses (10), (11), (14) and (15), which covered injury and invalid pensions for public servants and Armed Forces personnel, were omitted by the Finance Act, 2006. Such a pension is treated like any other pension under section 12(2A). #### Is family pension after death in service still exempt? Yes. Sub-clause (ii) of clause (9) remains and exempts pension granted under the relevant rules to the families and dependents of public servants or members of the Armed Forces who die during service. ### Citations - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (9), sub-clause (i) (omitted by the Finance Act 2025, footnote)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "received in respect of services rendered by a member of the Armed Forces of Pakistan or Federal Government or a Provincial Government;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (9), sub-clause (ii)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "granted under the relevant rules to the families and dependents of public servants or members of the Armed Forces of Pakistan who die during service." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clauses (10), (11), (14) and (15) (omitted by the Finance Act, 2006, footnotes)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "Any pension granted to the personnel of the Armed Forces of Pakistan (including personnel of the Territorial Force and the National Service of Pakistan) invalidated from service with such Forces on account of bodily disability attributable to, or aggravated by, such service." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "the pension shall be charged to tax as a final tax at the rates specified in the proviso to clause (2) of Division I of Part I of the First Schedule where the amount received by an individual from a former employer for a tax year exceeds ten million rupees" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2025, section 10 (Amendments in the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2025#10-amendments-in-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2025: "clause (8) and sub-clause (i) of clause (9) shall be omitted;" Official source: https://download1.fbr.gov.pk/Docs/2025629106147620FInanceAct2025.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clauses (12), (13) and (19)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "Any sum representing encashment of leave preparatory to retirement of a member of the Armed Forces of Pakistan or an employee of the Federal Government or a Provincial Government." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Did Budget 2026-27 change the tax on pension? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/budget-2026-27-changes-to-pension-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Not the pension rule itself. Section 5 of the Finance Act 2026 replaced the salaried slab table in clause (2) of Division I and removed the surcharge for salaried individuals, but it did not amend section 12(2A) or the pension table. For tax year 2027, pension stays at 0% up to Rs. 10 million and 5% above. **Applies to:** Pensioners in Pakistan comparing tax year 2026 with tax year 2027 after the June 2026 budget. ### What does the law say? The corpus holds the enacted Finance Act 2026, not the budget speech or the Finance Bill, so this page compares what the Act actually amended with the Income Tax Ordinance, 2001 as amended to 30 June 2026. The Act came into force on 1 July 2026, which is the start of tax year 2027. Section 5 of the Finance Act 2026 carries the Income Tax amendments. For pensioners, three things matter: | Item | Did the Finance Act 2026 change it? | |---|---| | Section 12(2A), the pension rule inserted in 2025 | No. Section 5 has no amendment to section 12. | | Section 149(1A), deduction on pension above ten million rupees | No. Section 5 has no amendment to section 149. | | Pension table (proviso to clause (2) of Division I) | No. Only the main table above the proviso was substituted. | | Salaried slab table in clause (2) of Division I | Yes. Replaced in full. | | Surcharge proviso in section 4AB | Yes. For individuals with salary income, "no surcharge shall be payable." | ### What stayed the same for most pensioners? Pension received by an individual from a former employer is still charged under the pension table for tax year 2027: | Pension received in the tax year | Rate of tax | |---|---| | Does not exceed ten million rupees | 0% of the amount | | Exceeds ten million rupees | 5% of the amount exceeding ten million rupees | Section 12(2A)(i) still says an individual who has attained seventy is not charged on pension income. A pensioner who is not working for the former employer therefore sees no change in the pension rate between tax year 2026 and tax year 2027. ### Who does the new slab table affect? Section 12(2A)(ii) sends the pension of an individual "who continues to work for former employer or its associate" to the ordinary rates in clause (1) or (2) of Division I. Clause (2) applies where salary exceeds seventy-five per cent of taxable income. For those pensioners, the new table matters. The consolidated text shows both versions: | Taxable income | Tax year 2026 (Finance Act 2025 table) | Tax year 2027 (Finance Act 2026 table) | |---|---|---| | Up to Rs. 600,000 | 0% | 0% | | Rs. 600,001 to Rs. 1,200,000 | 1% of amount above Rs. 600,000 | 1% of amount above Rs. 600,000 | | Rs. 1,200,001 to Rs. 2,200,000 | Rs. 6,000 + 11% above Rs. 1,200,000 | Rs. 6,000 + 11% above Rs. 1,200,000 | | Rs. 2,200,001 to Rs. 3,200,000 | Rs. 116,000 + 23% above Rs. 2,200,000 | Rs. 116,000 + 20% above Rs. 2,200,000 | | Rs. 3,200,001 to Rs. 4,100,000 | Rs. 346,000 + 30% above Rs. 3,200,000 | Rs. 316,000 + 25% above Rs. 3,200,000 | | Rs. 4,100,001 to Rs. 5,600,000 | Rs. 616,000 + 35% above Rs. 4,100,000 | Rs. 541,000 + 29% above Rs. 4,100,000 | | Rs. 5,600,001 to Rs. 7,000,000 | Rs. 616,000 + 35% above Rs. 4,100,000 | Rs. 976,000 + 32% above Rs. 5,600,000 | | Above Rs. 7,000,000 | Rs. 616,000 + 35% above Rs. 4,100,000 | Rs. 1,424,000 + 35% above Rs. 7,000,000 | ### Worked example (illustrative figures) **Case 1: a re-hired pensioner.** Imran retired from a Faisalabad textile mill and was taken back by the same mill. He receives a pension of Rs. 1,200,000 and a salary of Rs. 2,400,000 in the year, Rs. 3,600,000 in all, with no other income. All of it is salary, so clause (2) applies. 1. Tax year 2026 table: Rs. 346,000 + 30% x (Rs. 3,600,000 - Rs. 3,200,000) = Rs. 346,000 + Rs. 120,000 = Rs. 466,000. 2. Tax year 2027 table: Rs. 316,000 + 25% x (Rs. 3,600,000 - Rs. 3,200,000) = Rs. 316,000 + Rs. 100,000 = **Rs. 416,000**. 3. Difference: Rs. 466,000 - Rs. 416,000 = Rs. 50,000 less in tax year 2027. **Case 2: an ordinary pensioner.** Shabana, 65, receives Rs. 1,200,000 of pension a year and does not work. Row 1 of the pension table applies in both years: **Rs. 0**. The budget made no difference to her. ### What about the surcharge? Before the Finance Act 2026, the proviso to section 4AB charged salaried individuals a surcharge of nine percent of Division I tax where income exceeded ten million rupees. The Finance Act 2026 substituted that wording with "no surcharge shall be payable" for an individual deriving income chargeable under the head "Salary". Whether the old nine percent surcharge reached the 5% pension tax in tax year 2026 is not spelled out in the text, so this page does not settle it. For tax year 2027 the proviso is plain. ### Common mistakes - **Treating news about new slabs as a change to pension tax.** The pension table was not touched. - **Applying the salaried slabs to every pension.** They apply to pension only where section 12(2A)(ii) does, that is where you still work for the former employer or its associate. - **Relying on Finance Bill proposals.** Only the enacted Act changes the law; this page reads the Act. ### What to check in the official text Read section 5 of the Finance Act 2026, especially the amendment to section 4AB and the substitution of the clause (2) table in the First Schedule. Then read section 12(2A) and the proviso to clause (2) of Division I of Part I of the First Schedule in the official consolidated PDF amended to 30 June 2026. Our copy of the Finance Act 2026 was transcribed from page images, so check figures against the official PDF before relying on them. ### Frequently asked #### Did the Finance Act 2026 change the Rs. 10 million pension threshold? No. The Finance Act 2026 does not amend section 12(2A) or section 149(1A), and the consolidated Ordinance amended to 30 June 2026 still shows the pension table at 0% up to ten million rupees and 5% of the amount above it. #### Which pensioners are affected by the new slab table? Those whose pension is taxed at the ordinary Division I rates, mainly people who continue to work for their former employer or its associate under section 12(2A)(ii). For them the lower 2026 slab rates apply to salary and pension together. #### Is there still a surcharge on high pensions? The proviso to section 4AB, as substituted by the Finance Act 2026, says that for an individual deriving income chargeable under the head Salary no surcharge shall be payable. Pension is salary under section 12(2)(f). ### Citations - [Finance Act, 2026, section 5 (Amendments of the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2026#5-amendments-of-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2026: "in Division I, in clause (2), for the Table, the following shall be substituted" Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "the pension of an individual who continues to work for former employer or its associate shall be charged to tax at the rates specified under clause (1) or (2) of Division I of Part I to First Schedule as the case may be." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), proviso (pension table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2) (rate table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount which is over and above rupees ten million" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 4AB (surcharge), proviso](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do I have to file an income tax return if my only income is pension? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/do-pensioners-need-to-file-tax-return Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Often yes. Section 114 looks beyond the pension's size. A return is required where income is subject to final taxation, or where you were charged to tax in either of the two preceding years, own a car above 1000 CC or qualifying property, or hold an NTN. Section 115 relieves widows and disabled persons from the property and car triggers only. **Applies to:** Retired individuals in Pakistan whose income is wholly or mainly a pension from a former employer, for tax year 2027. ### What does the law say? Section 114(1) of the Income Tax Ordinance, 2001 lists the persons who must file a return. It works as a checklist, and a retired person needs to pass through all of it, not only the question of how much tax the pension attracts. For an individual, the relevant parts are: - **Clause (ab):** every person (other than a company) whose taxable income for the year "exceeds the maximum amount that is not chargeable to tax". - **Clause (ae):** "every person whose income for the year is subject to final taxation under any provision of this Ordinance". - **Clause (b):** any other person who meets one of a list of conditions, set out below. Section 12(2A)(i) says pension "shall be charged to tax as a final tax" at the rates in the pension table in the First Schedule. For tax year 2027 that table charges 0% where the pension received does not exceed ten million rupees, and 5% of the amount exceeding ten million rupees where it does. The same sub-section says an individual who has attained the age of seventy years shall not be charged to tax on pension income. ### Which conditions in section 114(1)(b) catch retirees? Clause (b) applies to a person who: | Sub-clause | Condition, in the words of section 114(1)(b) | |---|---| | (i) | "has been charged to tax in respect of any of the two preceding tax years" | | (ii) | claims a loss carried forward | | (iii) | owns immovable property with a land area of five hundred square yards or more, or owns any flat, in the old municipal limits, a Cantonment or the Islamabad Capital Territory | | (iv) | owns immovable property with a land area of five hundred square yards or more in a rating area | | (v) | owns a flat with a covered area of two thousand square feet or more in a rating area | | (vi) | "owns a motor vehicle having engine capacity above 1000 CC" | | (vii) | "has obtained National Tax Number" | | (viii) | holds a commercial or industrial electricity connection with an annual bill above five hundred thousand rupees | | (ix) | is a resident registered with a chamber, trade body or professional body such as the Pakistan Bar Council or ICAP | | (x) | is a resident individual required to file a foreign income and assets statement | Sub-clause (i) matters for people who retired recently. If tax was charged on your salary in tax year 2025 or 2026, the text requires a return for tax year 2027 on that ground alone. Sub-clause (vii) catches almost everyone who held an NTN while working. ### What relief does section 115 give? Section 115(3) says four classes of person are not required to file "solely by reason of" sub-clauses (iii), (iv), (v) and (vi) of section 114(1)(b): - a widow; - an orphan below the age of twenty-five years; - a disabled person; and - a non-resident person, in the case of ownership of immovable property. The relief is narrow. It covers the property and car triggers only. A widow who holds an NTN, or who was charged to tax in either of the two preceding years, is still within clause (b) through sub-clause (vii) or (i). ### Worked example (illustrative figures) **Rashida, 67, Lahore.** A widow receiving a family pension of Rs. 85,000 a month, so Rs. 1,020,000 for tax year 2027. She owns a house on 600 square yards in a rating area and has never had an NTN. 1. Sub-clause (iv) would apply, because the land area is five hundred square yards or more. 2. Section 115(3)(a) removes that trigger for a widow. 3. No other sub-clause of clause (b) applies on these facts. Whether clause (ab) or (ae) applies to her pension is the open question discussed below. **Khalid, 63, Karachi.** A retired bank officer with a pension of Rs. 150,000 a month (Rs. 1,800,000 a year), a 1300 CC car and the NTN he used while employed. 1. Sub-clause (vi) applies: engine capacity above 1000 CC. 2. Sub-clause (vii) applies: he has obtained an NTN. 3. He is not a widow, orphan or disabled person, so section 115(3) does not help. The text requires him to file, even though his pension falls in the 0% row of the pension table. **Tariq, 66, Islamabad.** Pension of Rs. 900,000 a month, so Rs. 10,800,000 for the year. 1. The pension exceeds ten million rupees, so section 12(2A)(i) charges it as a final tax: 5% of Rs. 800,000 = Rs. 40,000. 2. His income is subject to final taxation, which is the wording of clause (ae). He is within section 114(1) on that ground. ### What if I still work for my former employer? Section 12(2A)(ii) says the pension of an individual who continues to work for the former employer or its associate is taxed at the ordinary rates in clause (1) or (2) of Division I. That pension is then added to salary and taxed on the slab table, which for tax year 2027 has a 0% row only where taxable income does not exceed Rs. 600,000. Above that, clause (ab) of section 114(1) applies in the ordinary way. ### What if my pension is below ten million rupees? This is where the text is not clear. Section 12(2A)(i) describes pension as charged "as a final tax" in wording that ties the final tax to an amount received that "exceeds ten million rupees". It does not say whether a pension under that figure, taxed at 0%, is "income subject to final taxation" for clause (ae), or "taxable income" for clause (ab). The same doubt applies to a pensioner aged seventy or more, whom section 12(2A)(i) says shall not be charged on pension income. This page does not resolve it. For many retirees it will not matter, because a clause (b) trigger such as an NTN or a car already applies. ### Common mistakes - **Treating a 0% pension as a reason not to file.** The filing test in section 114 is separate from the rate. The clause (b) triggers apply whatever the pension. - **Assuming the widow relief covers everything.** Section 115(3) switches off sub-clauses (iii) to (vi) only. - **Forgetting the two-year look-back.** Tax charged on your last years of salary brings in sub-clause (i) for the two years that follow. - **Filing the return without a wealth statement.** Section 116(2) says every resident individual filing a return shall furnish a wealth statement and wealth reconciliation statement with it. - **Thinking an old year is closed.** Section 114(4) and (5) let the Commissioner require a return for one or more of the last five completed tax years, and up to ten where no return was filed for any of the last five. ### What to check in the official text Read section 114(1) in full, including clause (c), under which the Board may notify further persons or classes of persons who must file; this corpus does not hold those notifications. Read section 115(3) for the exact reliefs, section 12(2A) for the final tax wording, and the proviso to clause (2) of Division I of Part I of the First Schedule in the official PDF, since our site copy of the Ordinance leaves out rate tables. The prescribed return form and the FBR portal steps are outside this corpus. ### Frequently asked #### My pension is below ten million rupees and taxed at 0%. Am I still required to file? The 0% rate does not answer the filing question on its own. Section 114(1)(b) requires a return from anyone who owns a motor vehicle above 1000 CC, qualifying property or an NTN, or who was charged to tax in either of the two preceding tax years, whatever the size of the pension. Whether a 0% pension counts as income subject to final taxation under clause (ae) is not settled by the text. #### I am a widow and own a house. Do I have to file? Section 115(3) says a widow is not required to file solely because of the property and vehicle triggers in sub-clauses (iii) to (vi) of section 114(1)(b). The relief does not cover the NTN trigger in sub-clause (vii), the two preceding years trigger in sub-clause (i), or the other clauses of section 114(1). #### Pension walon ko return file karni hoti hai? Under section 114, it depends on more than the pension. A retiree with a car above 1000 CC, qualifying property, an NTN, or tax charged in either of the last two tax years falls within section 114(1)(b), and a pension above ten million rupees is charged as a final tax under section 12(2A), which brings in section 114(1)(ae). ### Citations - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "every person whose income for the year is subject to final taxation under any provision of this Ordinance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 115 (Persons not required to furnish a return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#115-persons-not-required-to-furnish-a-return-of-income), as amended to 2026-06-30: "The following persons shall not be required to furnish a return of income for a tax year solely by reason of" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "the pension shall be charged to tax as a final tax at the rates specified in the proviso to clause (2) of Division I of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 116 (Wealth statement)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#116-wealth-statement), as amended to 2026-06-30: "shall furnish a wealth statement" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), salary table and proviso (pension table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Does a pensioner with rent or other income have to pay quarterly advance tax under section 147? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/pensioner-advance-tax-section-147 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Only if your other income is large enough. Section 147(1) leaves out income subject to deduction under section 149 and final-tax income, and section 147(2) switches the section off for an individual whose latest assessed taxable income, without those amounts, is less than one million rupees. Rent above that level brings quarterly instalments. **Applies to:** Retired individuals in Pakistan who receive a pension and also earn rent or other income that is not a final tax, for tax year 2027. ### What does the law say? Section 147(1) of the Income Tax Ordinance, 2001 makes every taxpayer "whose income was charged to tax for the latest tax year" liable to pay advance tax for the year, other than on three kinds of income: - **(b)** income chargeable to tax under sections 5, 6 and 7; - **(c)** "income subject to deduction of tax at source under section 149", which is the salary section; - **(d)** income from which tax was collected or deducted and "for which no tax credit is allowed as a result of sub-section (3) of section 168", which in plain words is income whose withholding is a final tax. Section 147(2) then says the section "does not apply to an individual where the individual's latest assessed taxable income excluding income referred to in clauses (b), (c) and (d) of sub-section (1) is less than one million rupees". So for a retiree the test has two steps. Take the latest assessed taxable income. Remove the excluded income. If what is left is below one million rupees, section 147 does not apply. ### Where does the pension fit? Pension is salary under section 12(2)(f). Section 149(1) requires tax deduction from salary, and section 149(1A) deals with pension specifically: the payer deducts tax where a former employee below seventy receives pension that exceeds ten million rupees in the year, and only on the part above that figure. Section 12(2A)(i) charges pension as a final tax at the pension table rates (for tax year 2027, 0% up to ten million rupees and 5% above it). Pension therefore falls within clause (c), at least where section 149 applies to it. The text does not say in so many words whether a pension below ten million rupees, from which section 149(1A) requires no deduction, is still "income subject to deduction of tax at source under section 149". That point matters only for someone whose other income sits just under one million rupees; see the variation below. ### Where does rent fit? Rent is chargeable under the head "Income from Property" by section 15(1). It is not in any of the three exclusions: - A footnote to section 147 records that clause (ba), "income chargeable to tax under section 15", was omitted by the Finance Act, 2013. - A footnote to section 155 records that its sub-section (2), which made tax deducted from rent "a final tax on the income from property", was omitted by the Finance Act, 2010. - Section 155 is not in the list in section 168(3) of final taxes that get no credit. Rent counts towards the one million rupee test, and tax deducted from it by a tenant is a credit, not a final tax. Section 155(3) lists the tenants who must deduct: governments, companies, non-profit organisations, certain businesses such as private schools and clinics, and individuals or associations paying gross rent of one and a half million rupees and above in a year. ### How is the quarterly amount worked out? Section 147(4B) applies to an individual whose latest assessed income is one million rupees or more as determined under sub-section (2). Each quarter's instalment is **(A / 4) - B**, where: - **A** is the tax assessed for the latest tax year; and - **B** is tax paid in the quarter for which credit is allowed under section 168, other than tax deducted under section 149. Section 147(8) gives a tax credit for the instalments against the year's tax. Section 147(7) treats an unpaid instalment as tax due under an assessment order. ### Worked example (illustrative figures) **Mr. Javed, 67, Lahore.** A retired bank officer with pension of Rs. 1,500,000 a year. He lets the upper floor of his house to a family for Rs. 120,000 a month (Rs. 1,440,000 a year). The tenant is an individual paying less than Rs. 1,500,000 a year, so is not a prescribed person under section 155(3) and deducts nothing. 1. Suppose his latest assessment, for tax year 2026, shows taxable income from property of Rs. 1,150,000 and tax assessed of Rs. 60,000. (Both are illustrative, not computed on this page.) 2. Excluded income: the pension, under clause (c). What remains is Rs. 1,150,000. 3. Rs. 1,150,000 is not less than one million rupees, so section 147(2) does not switch the section off. 4. Quarterly instalment: A / 4 = Rs. 60,000 / 4 = Rs. 15,000. B = Rs. 0, because no tax was deducted from the rent. 5. Instalment: Rs. 15,000 - Rs. 0 = **Rs. 15,000** each on 15 September 2026, 15 December 2026, 15 March 2027 and 15 June 2027, a total of **Rs. 60,000**, credited against his tax year 2027 tax. If his assessed property income had been Rs. 950,000, step 3 would give the opposite answer: below one million rupees, so no advance tax under section 147. ### What if my other income is just under one million rupees? Suppose assessed rent income is Rs. 900,000 and pension is Rs. 1,200,000. If the pension is excluded under clause (c), Rs. 900,000 is below the threshold and section 147 does not apply. If a 0% pension below ten million rupees were not treated as income subject to section 149, the total could cross one million rupees. The text does not settle this, and this page does not resolve it. ### What about profit on bank deposits? Clause (b) of section 147(1) names only the income charged under sections 5, 6 and 7. Tax on profit on debt received by individuals is imposed by a separate charging provision that clause (b) does not list. How that income is treated for the one million rupee test is not covered here. ### Common mistakes - **Counting the pension towards the threshold.** Clause (c) removes income subject to section 149. - **Treating rent tax as final.** The final-tax rule in section 155 was omitted in 2010, so rent counts and tax deducted from it is a credit. - **Using this year's income.** Section 147(2) looks at the latest assessed taxable income, not the current year's. - **Missing the 15th.** Individuals pay by the 15th of September, December, March and June under section 147(5). ### What to check in the official text Read section 147 in full, including sub-sections (1), (2), (4B), (5), (6) and (6B), and the footnotes recording omitted clause (ba). Read section 149(1) and (1A), section 12(2)(f) and (2A), section 155(3) for which tenants must deduct, and section 168(3) for the final taxes that get no credit. The rate a tenant deducts is in Division V of Part III of the First Schedule; read it in the official PDF, since our site copy leaves out tables. ### Frequently asked #### My only income is a pension. Do I pay advance tax? Section 147(1) leaves out income subject to deduction of tax at source under section 149, and pension is salary that section 149(1A) deals with. Section 147(2) then measures the one million rupee test without that income, so on a pension alone the section does not bite. #### When are the instalments due? Section 147(5) says an individual pays advance tax on or before 15 September, 15 December, 15 March and 15 June for the four quarters of the tax year. For tax year 2027 that means 15 September 2026 through 15 June 2027. #### What if my rent has fallen since the last assessment? Section 147(6) lets a taxpayer who expects the year's tax to be lower furnish an estimate to the Commissioner before the last instalment is due, and then pay the estimated amount in equal instalments on the remaining dates. Section 147(6B) lets the Commissioner reject an estimate that is not properly supported, after a hearing. ### Citations - [Income Tax Ordinance, 2001, section 147 (Advance tax paid by the taxpayer)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#147-advance-tax-paid-by-the-taxpayer), as amended to 2026-06-30: "income subject to deduction of tax at source under section 149" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "any person responsible for paying pension to a former employee who is below the age of seventy years and deriving pension income during a tax year in which the payment exceeds rupees ten million" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "the pension shall be charged to tax as a final tax at the rates specified in the proviso to clause (2) of Division I of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "No tax credit shall be allowed for any tax collected or deducted that is a final tax under" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 155 (Rent of immoveable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#155-rent-of-immoveable-property), as amended to 2026-06-30: "shall deduct tax from the gross amount of rent paid at the rate specified in Division V of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 15 (Income from property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#15-income-from-property), as amended to 2026-06-30: "shall be chargeable to tax in that year under the head “Income from Property”" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do I show exempt pension, commutation and gratuity in my return and wealth statement? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/retirement-benefits-in-wealth-statement Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 10 defines total income as income under all heads plus income exempt from tax, so an exempt commutation or gratuity still belongs in the return. Section 116 requires a wealth statement and wealth reconciliation, and the exempt lump sum is what explains a jump in assets in the retirement year. **Applies to:** Individuals in Pakistan who retire and receive commutation, gratuity or other retirement lump sums, and who file a return with a wealth statement for tax year 2027. ### What does the law say? Three provisions of the Income Tax Ordinance, 2001 answer this together. **Section 10 (total income).** The total income of a person for a tax year is the sum of "(a) person's income under all heads of income for the year; and (b) person's income exempt from tax under any of the provisions of this Ordinance." Exempt income is therefore part of total income by definition. **Section 9 (taxable income).** Taxable income is total income "under clause (a) of section 10", reduced by deductible allowances. Only the heads part is taxed. The exempt part sits in total income without adding tax. **Section 116 (wealth statement).** Section 116(2) says every resident individual filing a return shall furnish a wealth statement and wealth reconciliation statement for that year with the return. Section 116(1) lists what the statement covers: assets and liabilities (including foreign ones), those of a dependent spouse, minor children and other dependents, assets transferred, total expenditure, and "the reconciliation statement of wealth". ### Which retirement receipts are exempt? Part I of the Second Schedule exempts two kinds of lump sum: | Clause | What is exempt | |---|---| | (12) | "Any payment in the nature of commutation of pension received from Government or under any pension scheme approved by the Board" | | (13)(i) | Gratuity or commutation of an employee of the Government, a Local Government, or a statutory body or corporation, as receivable under the rules of service | | (13)(ii) | Any amount from a gratuity fund approved under Part III of the Sixth Schedule | | (13)(iii) | For any other employee, up to three hundred thousand rupees under a scheme for all employees approved by the Board | | (13)(iv) | Anyone else: fifty per cent of the amount or seventy-five thousand rupees, whichever is less | Clause (13) does not apply to a payment not received in Pakistan, a non-regular director, a non-resident employee, or a second gratuity from the same or any other employer. Any gratuity not exempt is salary, because section 12(2)(a) names gratuity in the definition of salary. ### Worked example (illustrative figures) **Case 1: exempt commutation.** Mrs. Farzana retired as a government college lecturer in Hyderabad on 30 June 2026. In tax year 2027 she receives pension of Rs. 100,000 a month and, in August 2026, commutation of Rs. 4,800,000 from Government. 1. Pension received: Rs. 100,000 x 12 = Rs. 1,200,000. 2. Commutation: Rs. 4,800,000, exempt under clause (12). 3. Net assets at 30 June 2026: Rs. 7,500,000. Household expenses for the year: Rs. 1,400,000. 4. Net assets at 30 June 2027: Rs. 7,500,000 + Rs. 1,200,000 + Rs. 4,800,000 - Rs. 1,400,000 = **Rs. 12,100,000**. Her wealth rose by Rs. 12,100,000 - Rs. 7,500,000 = Rs. 4,600,000. If she enters the commutation as an exempt inflow, the reconciliation balances. If she leaves it out, her stated sources explain only Rs. 7,500,000 + Rs. 1,200,000 - Rs. 1,400,000 = Rs. 7,300,000, leaving Rs. 12,100,000 - Rs. 7,300,000 = **Rs. 4,800,000** with no stated source. That is the situation section 111(1) addresses: money or investment whose source is not explained is added to income "to the extent it is not adequately explained". **Case 2: partly exempt gratuity.** Mr. Butt retires from a private pharmaceutical company in Lahore with a Board-approved gratuity scheme for all employees. He receives Rs. 900,000. 1. Exempt under clause (13)(iii): the amount not exceeding Rs. 300,000, so **Rs. 300,000**. 2. Taxable under the head "Salary": Rs. 900,000 - Rs. 300,000 = **Rs. 600,000**. 3. Section 10 total income includes both parts: Rs. 600,000 under the heads and Rs. 300,000 exempt. 4. In the wealth reconciliation the full Rs. 900,000 is the inflow that explains the larger bank balance. ### What if my pension itself was not taxed? The same logic applies. Section 12(2A)(i) charges pension at the pension table rates, which for tax year 2027 are 0% up to ten million rupees, and says an individual aged seventy or more is not charged on pension income. Pension that attracts no tax is still money received in the year, and the reconciliation needs it as a source for savings and spending. The text does not say which line of the return form it goes on; the form is outside this corpus. ### What if I spent the lump sum straight away? It still belongs in the reconciliation. Section 116(1)(d) covers "the total expenditures incurred by the person, and the person's spouse, minor children, and other dependents", and section 111(1)(c) covers a person who "has incurred any expenditure" without explaining its source. A wedding or Umrah paid from commutation shows as expenditure, with the commutation as its source. ### Common mistakes - **Treating "exempt" as "unreported".** Section 10 puts exempt income in total income. Exemption decides tax, not disclosure. - **Assuming every gratuity is fully exempt.** Only clause (13)(i) and (ii) exempt the full amount receivable. - **Leaving out a dependent spouse's assets.** Section 116(1)(b) covers them; the Explanation limits a spouse's assets to a dependent spouse. - **Waiting too long to correct.** Section 116(3) closes revision once the audit notice it names is received, and in any case after five years from the return due date. ### What to check in the official text Read sections 9, 10, 12(2), 111(1) and 116 in the official text, and clauses (12) and (13) of Part I of the Second Schedule in the official PDF. Clause (12) and clause (13)(iii) depend on schemes "approved by the Board"; which schemes are approved is not in this corpus. The prescribed return and wealth statement forms, and the portal fields where exempt income is entered, are also outside this corpus. ### Frequently asked #### If my commutation is exempt, why does it belong in my total income? Section 10 says total income is the sum of income under all heads and income exempt from tax under any provision of the Ordinance. Section 9 then builds taxable income only from the heads part, so the exempt amount is reported but not taxed. #### My assets doubled in the year I retired. Is that a problem? Not if the reconciliation shows where the money came from. Section 116(1)(e) makes the reconciliation statement of wealth part of the wealth statement, and section 111 taxes investments, money or expenditure only to the extent they are not adequately explained. An exempt commutation or gratuity entered as an inflow explains the increase. #### What if I already filed and left the lump sum out? Section 116(3) allows a revised wealth statement with a revised reconciliation and reasons, before the audit notice named in that sub-section is received. It cannot be revised after five years from the due date of the return for that year, and the Commissioner may declare a revision void if it does not correct a bona fide omission. ### Citations - [Income Tax Ordinance, 2001, section 10 (Total Income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#10-total-income), as amended to 2026-06-30: "person’s income exempt from tax under any of the provisions of this Ordinance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 9 (Taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#9-taxable-income), as amended to 2026-06-30: "The taxable income of a person for a tax year shall be the total income" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 116 (Wealth statement)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#116-wealth-statement), as amended to 2026-06-30: "the reconciliation statement of wealth" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "any pay, wages or other remuneration provided to an employee, including leave pay, payment in lieu of leave, overtime payment, bonus, commission., fees, gratuity" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 111 (Unexplained income or assets)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#111-unexplained-income-or-assets), as amended to 2026-06-30: "to the extent it is not adequately explained" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clauses (12) and (13)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is a golden handshake or early retirement package taxable, and can it be taxed at a lower average rate? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/golden-handshake-early-retirement-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, it is taxable. Section 12(2)(e)(iii) treats golden handshake and termination payments as salary. Section 12(6) lets you elect, by written notice to the Commissioner, to tax that amount at your average rate over the three preceding tax years, and section 12(8) requires the election by the return due date for the year of receipt. **Applies to:** Employees taking voluntary separation, early retirement or a negotiated exit package, including those who will also draw gratuity, commutation or a pension. ### What does the law say? Section 12(2)(e)(iii) of the Income Tax Ordinance, 2001 includes in salary any amount received "on termination of employment, whether paid voluntarily or under an agreement, including any compensation for redundancy or loss of employment and golden handshake payments". A voluntary separation scheme (VSS) payment, an early retirement bonus or a negotiated exit sum all fit these words. Section 12(1) taxes it in the tax year it is received. Section 12(6) gives the relief. An employee who received such an amount "may, by notice in writing to the Commissioner, elect for the amount to be taxed at the rate computed in accordance with the following formula": **A/B%**, where - **A** is the total tax paid or payable on the employee's total taxable income for the three preceding tax years, and - **B** is the employee's total taxable income for those three years. Section 12(8) says the election must be made by the due date for the return of income for the tax year in which the amount was received, "or by such later date as the Commissioner may allow". Section 118(3) sets that due date at 30 September after the end of the tax year. A package received between 1 July 2026 and 30 June 2027 falls in tax year 2027, so the election is due by 30 September 2027 unless extended. ### How do the parts of an early retirement package differ? An early retirement package usually has several parts, and the Ordinance treats each one differently: | Part of the package | Where the Ordinance deals with it | Tax position | |---|---|---| | Golden handshake, VSS or exit compensation | Section 12(2)(e)(iii) | Salary; A/B% election available under section 12(6) | | Gratuity | Section 12(2)(a) and Second Schedule clause (13) | Exempt up to the clause (13) limits; the rest is salary | | Commutation of pension | Second Schedule clauses (12) and (13) | Fully exempt if from Government or a Board-approved scheme; otherwise clause (13) limits | | Monthly pension afterwards | Section 12(2)(f) and 12(2A) | Final tax on pension; nothing from age seventy | Only the first row is covered by section 12(6). Labelling a payment "gratuity" or "handshake" in an offer letter does not change what it is; the Ordinance looks at what the payment is for. ### Worked example (illustrative figures) Nadia, 57, accepts early retirement from a textile company in Faisalabad in tax year 2027. All income figures are invented. The rates are the real ones from clause (2) of Division I, Part I of the First Schedule, and the earlier years' tables printed in its footnotes. - Ordinary salary received in tax year 2027 before leaving: Rs. 1,800,000 - Golden handshake: Rs. 4,000,000 - Taxable income, all salary, in the three preceding years: Rs. 3,000,000 (2024), Rs. 3,300,000 (2025), Rs. 3,500,000 (2026) **Step 1: A and B.** | Tax year | Taxable income (Rs.) | Band in that year's table | Tax (Rs.) | |---|---|---|---| | 2024 | 3,000,000 | 165,000 + 22.5% of amount over 2,400,000 | 300,000 | | 2025 | 3,300,000 | 430,000 + 30% of amount over 3,200,000 | 460,000 | | 2026 | 3,500,000 | 346,000 + 30% of amount over 3,200,000 | 436,000 | | **Total** | **9,800,000** | | **1,196,000** | Checks: 22.5% of 600,000 = 135,000; 30% of 100,000 = 30,000; 30% of 300,000 = 90,000. A/B = 1,196,000 / 9,800,000 = 12.20% (rounded). **Step 2: without the election.** All salary for tax year 2027 is taxed together on the tax year 2027 table. 1. Total: 1,800,000 + 4,000,000 = 5,800,000 2. Band above Rs. 5,600,000 and up to Rs. 7,000,000: 976,000 + 32% of the amount over 5,600,000 3. 32% of 200,000 = 64,000 4. Tax: 976,000 + 64,000 = **Rs. 1,040,000** **Step 3: with the section 12(6) election.** 1. Tax on the handshake: 4,000,000 x 1,196,000 / 9,800,000 = Rs. 488,163 (rounded to the rupee) 2. Tax on ordinary salary of Rs. 1,800,000: 6,000 + 11% of 600,000 = 6,000 + 66,000 = Rs. 72,000 3. Total: 488,163 + 72,000 = **Rs. 560,163** On these figures the election reduces Nadia's tax year 2027 liability by Rs. 479,837 (1,040,000 minus 560,163). Section 12(6) says "the amount", meaning the termination payment, is taxed at the A/B rate. It does not spell out whether the handshake is left out when placing the rest of the year's salary in a band. Step 3 follows the natural reading that ordinary salary is taxed on the table by itself. ### What if ...? **My average rate is higher than the slab rate?** The election is optional ("may ... elect"), so section 12(6) does not force a higher rate on anyone. **I had little or no income in one of the three years?** The formula uses totals over "the three preceding tax years". The Ordinance does not say how it works if a year had no taxable income, and this page does not assume a result. **The employer deducted tax at the full slab rate?** Section 149 requires the employer to deduct at your average rate on estimated salary using the Division I rates. The election is made by you to the Commissioner, not by the employer. Tax deducted beyond your final liability is dealt with through your return. **I start drawing a pension straight away?** The pension is taxed separately under section 12(2A), not at the A/B rate. ### Common mistakes - **Treating the handshake as tax free because it is compensation.** Section 12(2)(e)(iii) expressly makes it salary. - **Applying the A/B rate to gratuity or commutation.** Those have their own exemptions in clauses (12) and (13) of the Second Schedule; section 12(6) is limited to termination payments. - **Missing the deadline.** After the section 12(8) date, a later election depends on the Commissioner allowing it. ### What to check in the official text Read section 12(2)(e)(iii), 12(6) and 12(8) together, and section 118(3) for the return due date. The tax year 2024, 2025 and 2026 salary tables used for A are printed as footnotes under clause (2) of Division I, Part I of the First Schedule in the official PDF. A and B come from your own returns for those years, so the figures in them, not estimates, decide your rate. ### Frequently asked #### Is a voluntary separation or early retirement payment taxable? Yes. Section 12(2)(e)(iii) includes in salary any amount received on termination of employment, whether paid voluntarily or under an agreement, including compensation for loss of employment and golden handshake payments. There is no Second Schedule exemption for it in the clauses covering gratuity and commutation. #### How do I get the lower average rate? Section 12(6) requires notice in writing to the Commissioner electing the A/B% rate, where A is the tax on your total taxable income for the three preceding tax years and B is that total income. Section 12(8) sets the deadline as the return due date for the year of receipt, or a later date the Commissioner allows. #### Does the average rate also apply to my gratuity? Section 12(6) refers only to amounts under section 12(2)(e)(iii). Gratuity is named separately in section 12(2)(a) and has its own exemption in clause (13) of the Second Schedule. The Ordinance does not say the election extends to gratuity. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "on termination of employment, whether paid voluntarily or under an agreement, including any compensation for redundancy or loss of employment and golden handshake payments;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 118 (Method of furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#118-method-of-furnishing-returns-and-other-documents), as amended to 2026-06-30: "in the case of a return of income for any person (other than a company), as described under clause (a), on or before the 30th day of September next following the end of the tax year to which the return relates." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), footnotes: Tables substituted by the Finance Acts, 2024, 2025 and 2026 (tax year 2024, 2025 and 2026 tables)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clauses (12) and (13)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "Any income representing any payment received by way of gratuity or commutation of pension by an employee on his retirement or, in the event of his death, by his heirs as does not exceed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule on the estimated income of the employee chargeable under the head “Salary” for the tax year in which the payment is made" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is a golden handshake or early retirement package taxable, and can it be taxed at a lower average rate? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/golden-handshake-tax-average-rate Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, it is taxable. Section 12(2)(e)(iii) makes a golden handshake or redundancy payment on termination part of salary. Section 12(6) lets the employee elect, by written notice to the Commissioner, to tax that amount at the average rate paid over the three preceding tax years. Section 12(8) sets the deadline for the election. **Applies to:** Employees leaving under a voluntary separation scheme, early retirement package, redundancy or golden handshake, in government bodies, banks or private companies. ### What does the law say? A golden handshake is salary. Section 12(2) of the Income Tax Ordinance, 2001 defines salary as "any amount received by an employee from any employment, whether of a revenue or capital nature". Clause (e) of that sub-section then lists profits in lieu of or in addition to salary, and sub-clause (iii) covers any amount received "on termination of employment, whether paid voluntarily or under an agreement, including any compensation for redundancy or loss of employment and golden handshake payments". Section 12(1) charges salary to tax in the tax year it is received. Without an election, the golden handshake is added to the rest of the year's salary and taxed on the salaried table in clause (2) of Division I of Part I of the First Schedule. Section 12(6) offers an alternative. An employee who has received an amount under section 12(2)(e)(iii) in a tax year "may, by notice in writing to the Commissioner, elect for the amount to be taxed at the rate computed in accordance with the following formula": **A/B%**, where - **A** is the total tax paid or payable by the employee on the employee's total taxable income for the three preceding tax years; and - **B** is the employee's total taxable income for the three preceding tax years. Section 12(8) sets the time limit. The election "shall be made by the due date for furnishing the employee's return of income or employer certificate, as the case may be, for the tax year in which the amount was received or by such later date as the Commissioner may allow". ### Why does the election matter? The salaried table is progressive. For tax year 2027 (1 July 2026 to 30 June 2027) it runs from 0% on income up to Rs. 600,000 to Rs. 1,424,000 plus 35% of the amount above Rs. 7,000,000. A large one-off payment can push a whole year's income into the top band. The A/B% rate is based on what you actually paid in the three years before, which can be much lower than the top band a lump sum reaches. ### Worked example (illustrative figures) Imran leaves a bank in Lahore under a voluntary separation scheme in tax year 2027. He receives Rs. 1,800,000 of ordinary salary during the year and a golden handshake of Rs. 6,000,000. Over the three preceding tax years his total taxable income was Rs. 7,500,000 and the total tax on it was Rs. 450,000. All amounts are invented; the table is the real tax year 2027 salaried table. **Without the election** 1. Total salary: 1,800,000 + 6,000,000 = Rs. 7,800,000 2. Band above Rs. 7,000,000: 1,424,000 + 35% of (7,800,000 - 7,000,000) 3. 35% of 800,000 = 280,000 4. Tax: 1,424,000 + 280,000 = **Rs. 1,704,000** **With the section 12(6) election** 1. A/B% = 450,000 / 7,500,000 = 6% 2. Tax on the golden handshake: 6,000,000 x 6% = Rs. 360,000 3. Tax on the ordinary salary of Rs. 1,800,000: 6,000 + 11% of (1,800,000 - 1,200,000) = 6,000 + 66,000 = Rs. 72,000 4. Total: 360,000 + 72,000 = **Rs. 432,000** In this illustration the election lowers the tax by 1,704,000 - 432,000 = Rs. 1,272,000. Section 12(6) sets the rate for "the amount" received under section 12(2)(e)(iii). It does not spell out the rest of the computation, so step 3 reflects a reading in which the remaining salary is taxed on the normal table on its own. The section does not state this in so many words. ### Which parts of a retirement package qualify? Only the termination payment falls within section 12(2)(e)(iii). A package often bundles several items, and the Ordinance places them in different clauses: | Item | Where the Ordinance places it | Average-rate election? | |---|---|---| | Golden handshake, redundancy or loss-of-employment compensation | Section 12(2)(e)(iii) | Yes, section 12(6) | | Gratuity | Section 12(2)(a), with exemptions in clause (13) of Part I of the Second Schedule | Not mentioned in section 12(6) | | Leave pay or payment in lieu of leave | Section 12(2)(a) | Not mentioned in section 12(6) | | Amount from a provident or other fund | Section 12(2)(e)(iv) | Not mentioned in section 12(6) | | Pension | Section 12(2)(f) and section 12(2A) | Not mentioned in section 12(6) | Gratuity is the item most often confused with a golden handshake. Section 12(2)(a) names "gratuity" among pay and remuneration, so it sits under clause (a), not (e)(iii). Clause (13) of Part I of the Second Schedule gives it separate exemption limits instead. ### What if ...? **The payment is made in arrears for earlier service?** Section 12(7) is a different election: salary paid in arrears can be taxed at the rates that would have applied in the year the services were rendered. It is also subject to the section 12(8) deadline. **You had no taxable income in the three preceding years?** Section 12(6) defines A and B but does not say what happens when B is zero. The Ordinance is silent on that case. **The deadline has passed?** Section 12(8) allows the election "by such later date as the Commissioner may allow". It does not set conditions for that extension. ### Common mistakes - **Treating the golden handshake as tax-free capital.** Section 12(2) covers amounts "of a revenue or capital nature", and (e)(iii) names golden handshake payments. - **Applying the average rate to gratuity or leave pay.** Section 12(6) refers only to sub-clause (iii) of clause (e). - **Missing the notice.** The election is made by written notice to the Commissioner within the section 12(8) time limit. Without it, the normal table applies. ### What to check in the official text Read section 12(1), (2), (6), (7) and (8) of the Income Tax Ordinance, 2001 as amended to 30 June 2026, and the salaried table in clause (2) of Division I of Part I of the First Schedule for tax year 2027. Clause (13) of Part I of the Second Schedule covers gratuity. How the employer deducts tax on the payment, and the form of the notice, are not set out in section 12, and FBR forms are not part of this corpus. ### Frequently asked #### Is a golden handshake capital and therefore not taxable? No. Section 12(2) defines salary as any amount received from employment, whether of a revenue or capital nature, and section 12(2)(e)(iii) expressly names golden handshake payments and compensation for redundancy or loss of employment. #### How is the average rate worked out? Section 12(6) uses A/B%, where A is the total tax paid or payable on your total taxable income for the three preceding tax years and B is that total taxable income. The election is made by notice in writing to the Commissioner. #### Can gratuity be taxed at the average rate too? Section 12(6) refers only to amounts under section 12(2)(e)(iii). Gratuity is listed separately in section 12(2)(a), and the Ordinance does not extend the election to it. Gratuity has its own exemption limits in clause (13) of Part I of the Second Schedule. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "on termination of employment, whether paid voluntarily or under an agreement, including any compensation for redundancy or loss of employment and golden handshake payments;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2) (salary rate table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (13)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "Any income representing any payment received by way of gratuity or commutation of pension by an employee on his retirement or, in the event of his death, by his heirs as does not exceed -" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is government, armed forces or private-company pension taxed differently? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/government-army-private-pension-tax-difference Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer The monthly pension itself is now taxed the same way. The Finance Act 2025 omitted clause (8) and clause (9)(i) of the Second Schedule, which had exempted pensions and separately covered armed forces and government pensions, and section 12(2A) sends pension from any former employer to one table. Differences remain in commutation, gratuity, LPR encashment and family pensions. **Applies to:** Retired civil servants, armed forces personnel, and employees of banks, companies and other private employers receiving a pension in Pakistan for tax year 2027. ### What does the law say? For tax year 2027 the Income Tax Ordinance, 2001 does not tax a pension differently because the former employer was the Government, the Armed Forces, a bank or a company. Section 12(2)(f) treats every pension as salary. Section 12(2A)(i) sends pension to the pension table in the proviso to clause (2) of Division I of Part I of the First Schedule, which applies to "pension received by an individual from a former employer in a tax year" without naming any type of employer: | Pension received in tax year 2027 | Rate of tax | |---|---| | Does not exceed ten million rupees | 0% of the amount | | Exceeds ten million rupees | 5% of the amount exceeding ten million rupees | Two further rules also apply to every kind of pensioner. An individual who has attained seventy years is not charged on pension income under section 12(2A)(i). And under section 12(2A)(ii), a pensioner who continues to work for the former employer or its associate is taxed at the ordinary rates in clause (1) or (2) of Division I. ### What changed in 2025? Before the Finance Act 2025, the difference was written into Part I of the Second Schedule. The footnotes in the consolidated text quote the omitted wording: | Clause | Omitted wording | Omitted by | |---|---|---| | (8) | "Any pension received by a citizen of Pakistan from a former employer, other than where the person continues to work for the employer (or an associate of the employer)", with only the higher of two pensions exempt | Finance Act 2025 | | (9)(i) | Pension "received in respect of services rendered by a member of the Armed Forces of Pakistan or Federal Government or a Provincial Government" | Finance Act 2025 | Clause (9)(i) had no "higher of two pensions" limit and no condition about continuing to work, which is where government and military pensioners were treated differently from private ones. Section 10 of the Finance Act 2025 provides that "clause (8) and sub-clause (i) of clause (9) shall be omitted", and the same Act inserted section 12(2A) and the pension table. ### What about disability and injury pensions? Four older exemptions were removed much earlier, by the Finance Act 2006. The footnotes record them: - **Clause (10):** pension granted to a public servant in respect of injuries received in the performance of duties. - **Clause (11):** pension granted to a public servant invalidated from service on account of bodily disability. - **Clause (14):** pension granted to Armed Forces personnel, including the Territorial Force and the National Service, for injuries received in the performance of duties. - **Clause (15):** pension granted to Armed Forces personnel invalidated on account of bodily disability attributable to, or aggravated by, service. None of these is in force for tax year 2027. ### Where do real differences remain? | Item | Provision | Government or Armed Forces | Private employer | |---|---|---|---| | Family pension where the public servant or service member dies in service | Clause (9)(ii) | Exempt | Not covered by this clause | | Special family pension, dependents pension or children's allowance for families of Shaheeds | Clauses (16) and (17) | Exempt (Armed Forces, and Civil Armed Forces) | Not covered | | Commutation of pension | Clause (12) | Exempt when received from Government | Exempt only under a pension scheme approved by the Board | | Gratuity or commutation at retirement | Clause (13) | Government, Local Government or statutory body employee: amount receivable under service rules | Approved gratuity fund: exempt; Board-approved scheme: up to Rs. 300,000; otherwise the lesser of 50% and Rs. 75,000 | | Encashment of leave preparatory to retirement | Clause (19) | Exempt for Armed Forces and federal or provincial government employees | Not covered by this clause | ### Worked example (illustrative figures) Three retirees in tax year 2027, each aged 64 and none working for the former employer: | Retiree | Former employer | Monthly pension | Annual pension | Tax under the pension table | |---|---|---|---|---| | Col. (retd) Anwar, Rawalpindi | Pakistan Army | Rs. 180,000 | Rs. 2,160,000 | 0% = Rs. 0 | | Mr. Baig, Islamabad | Federal Government | Rs. 180,000 | Rs. 2,160,000 | 0% = Rs. 0 | | Ms. D'Souza, Karachi | Private bank | Rs. 180,000 | Rs. 2,160,000 | 0% = Rs. 0 | Each annual figure is Rs. 180,000 x 12 = Rs. 2,160,000, which does not exceed ten million rupees. Now suppose a retiree from any of the three receives Rs. 1,000,000 a month: 1. Annual pension: Rs. 1,000,000 x 12 = Rs. 12,000,000. 2. Amount above ten million: Rs. 12,000,000 - Rs. 10,000,000 = Rs. 2,000,000. 3. Tax at 5%: Rs. 2,000,000 x 5% = **Rs. 100,000**, whichever employer paid it. ### Common mistakes - **Relying on clause (9) as it used to read.** Only sub-clause (ii), for families of those who die in service, remains. - **Assuming a private pensioner is taxed at slab rates.** Section 12(2A)(ii) sends a pension to slab rates only where the pensioner continues to work for the former employer or its associate. - **Assuming lump sums follow the pension.** Commutation, gratuity and LPR encashment are still governed by clauses (12), (13) and (19), which do distinguish between employers. ### What to check in the official text Read section 12(2A), Part I of the Second Schedule from clause (8) to clause (19) with its footnotes, and the pension proviso in Division I of Part I of the First Schedule in the official PDF, since our site copy leaves out rate tables. Clause (12) and clause (13)(iii) depend on schemes approved by the Board, which are not in this corpus. Whether a particular re-employer is an "associate" of the former employer depends on the Ordinance's associate rules and the facts, and is not settled here. ### Frequently asked #### Is army pension still tax free? Not under a separate exemption. Clause (9)(i), which covered pension for services rendered by a member of the Armed Forces or a federal or provincial government employee, was omitted by the Finance Act 2025. Armed forces pension now goes through the same pension table as any other pension from a former employer: 0% up to ten million rupees and 5% above it for tax year 2027. #### Are disability or injury pensions of soldiers and civil servants exempt? The clauses that exempted them, clauses (10), (11), (14) and (15) of Part I of the Second Schedule, were omitted by the Finance Act 2006. What remains is clause (9)(ii) for families of those who die in service, and clauses (16) and (17) for the families and dependents of Shaheeds. #### Do private-sector retirees lose out on anything compared with government retirees? On the pension itself, no. On lump sums, yes: clause (12) exempts commutation from Government or a Board-approved scheme, clause (13) exempts a government employee's gratuity in full but caps most private gratuity, and clause (19) exempts LPR encashment only for the Armed Forces and federal or provincial government employees. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "the pension of an individual who continues to work for former employer or its associate shall be charged to tax at the rates specified under clause (1) or (2) of Division I of Part I to First Schedule as the case may be." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2025, section 10 (Amendments in the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2025#10-amendments-in-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2025: "clause (8) and sub-clause (i) of clause (9) shall be omitted;" Official source: https://download1.fbr.gov.pk/Docs/2025629106147620FInanceAct2025.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), proviso (pension table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (8) and clause (9)(i) (omitted by the Finance Act 2025, footnotes) and clause (9)(ii)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clauses (10), (11), (14) and (15) (omitted by the Finance Act 2006, footnotes)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clauses (12), (13), (16), (17) and (19)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Are pension arrears or a lump sum of back pension taxed at a higher rate? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/pension-arrears-tax-treatment Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Arrears count in the tax year you receive them, so a lump sum can lift the year's pension above ten million rupees or push a re-employed pensioner into a higher slab. Section 12(7) lets an employee elect, by notice to the Commissioner, for salary arrears to be taxed at the rates of the year the services were rendered. **Applies to:** Pensioners in Pakistan who receive pension arrears in tax year 2027, for example after a pension revision or a delayed start of payments. ### What does the law say? Pension is salary. Section 12(2)(f) of the Income Tax Ordinance, 2001 includes "any pension or annuity, or any supplement to a pension or annuity" in salary, and section 12(1) charges salary "received by an employee in a tax year" in that year. Arrears are therefore counted in the year they are received, not the year they relate to. Section 12(7) provides relief. Where any amount chargeable under the head "Salary" is paid in arrears, and as a result the employee is chargeable at higher rates than if it had been paid in the year the services were rendered, the employee may, by notice in writing to the Commissioner, elect for the amount to be taxed at the rates that would have applied in that earlier year. Section 12(8) sets the time limit: the election must be made by the due date for furnishing the return of income or employer certificate for the tax year in which the amount was received, or by a later date the Commissioner allows. ### How do arrears interact with the pension table? For tax year 2027 the pension table in the proviso to clause (2) of Division I of Part I of the First Schedule reads: | Pension received in the tax year | Rate of tax | |---|---| | Does not exceed ten million rupees | 0% of the amount | | Exceeds ten million rupees | 5% of the amount exceeding ten million rupees | The table speaks of pension "received ... in a tax year". Section 149(1A) likewise tells the payer to deduct tax only where the payment during the tax year exceeds ten million rupees, and only on the part above that figure. So arrears only change the answer for someone whose pension plus arrears in one year crosses ten million rupees. A pensioner aged seventy or more is not charged on pension income at all under section 12(2A)(i). ### Worked example (illustrative figures) **Case 1: pension table.** Brig. (retd) Hamid, 66, Rawalpindi, receives Rs. 9,500,000 of pension in tax year 2027. After a revision he also receives Rs. 1,000,000 of arrears for tax year 2026, when his pension had been Rs. 8,000,000. 1. Pension received in tax year 2027: Rs. 9,500,000 + Rs. 1,000,000 = Rs. 10,500,000. 2. Amount above ten million: Rs. 10,500,000 - Rs. 10,000,000 = Rs. 500,000. 3. Tax at 5%: Rs. 500,000 x 5% = **Rs. 25,000**. 4. Had the arrears been paid in tax year 2026, that year's pension would have been Rs. 9,000,000, below ten million rupees. This is the situation section 12(7) is written for. Whether the election can be applied to a pension charged as a final tax under section 12(2A), and treat tax year 2026 as the year "the services were rendered", is not stated in the text. **Case 2: re-employed pensioner on slab rates.** Mrs. Qureshi, 62, Lahore, still works part-time for her former employer, so section 12(2A)(ii) taxes her pension at the ordinary salary rates. Her salary and pension for tax year 2027 are Rs. 2,000,000, and she receives Rs. 1,000,000 of pension arrears relating to tax year 2026, when her income was also Rs. 2,000,000. Tax year 2027 salary table (clause (2) of Division I): 1. Without arrears: Rs. 2,000,000 is in the row Rs. 1,200,000 to Rs. 2,200,000. Tax = Rs. 6,000 + 11% of Rs. 800,000 = Rs. 6,000 + Rs. 88,000 = Rs. 94,000. 2. With arrears: Rs. 3,000,000 is in the row Rs. 2,200,000 to Rs. 3,200,000. Tax = Rs. 116,000 + 20% of Rs. 800,000 = Rs. 116,000 + Rs. 160,000 = Rs. 276,000. 3. Tax caused by the arrears in tax year 2027: Rs. 276,000 - Rs. 94,000 = **Rs. 182,000**. Tax year 2026 salary table (the table the Finance Act 2026 replaced, quoted in the footnote): 4. Rs. 2,000,000: Rs. 6,000 + 11% of Rs. 800,000 = Rs. 94,000. 5. Rs. 3,000,000: Rs. 116,000 + 23% of Rs. 800,000 = Rs. 116,000 + Rs. 184,000 = Rs. 300,000. 6. Tax the arrears would have caused in tax year 2026: Rs. 300,000 - Rs. 94,000 = **Rs. 206,000**. Here receiving the arrears later did not put her at higher rates, because the tax year 2027 table is lighter in that band. Condition (b) of section 12(7) asks whether the employee is chargeable at higher rates as a result of late payment, so on these figures the election would not help. ### What if the arrears relate to a year when pension was exempt? Until the Finance Act 2025, clause (8) of Part I of the Second Schedule exempted "any pension received by a citizen of Pakistan from a former employer", with exceptions. The footnote records its omission. Arrears for tax year 2025 or earlier that are received in tax year 2027 are still received in tax year 2027. Section 12(7) asks what rates would have applied in the year the services were rendered, but it does not say how an exemption that existed in that year is treated. This page does not resolve that. ### Common mistakes - **Assuming there is an "arrears rate".** There is none. Arrears are added to the year of receipt. - **Missing the deadline.** The section 12(8) election is due by the return or employer certificate due date for the year of receipt, unless the Commissioner allows more time. - **Electing without comparing.** Section 12(7) is available only where late payment causes higher rates. The tables changed between tax years 2026 and 2027, so the answer depends on the figures. ### What to check in the official text Read section 12(1), (2)(f), (2A), (7) and (8), and section 149(1A). Read the pension proviso and the clause (2) salary table in Division I of Part I of the First Schedule in the official PDF, including the footnote quoting the tax year 2026 table, since our site copy leaves out rate tables. The form of the notice to the Commissioner is not prescribed in the text we hold. ### Frequently asked #### Are pension arrears taxed at a special higher rate? No. There is no separate arrears rate. The arrears are added to the pension received in that tax year, and the pension table charges 0% up to ten million rupees and 5% on the amount above it for tax year 2027. Arrears only cost more when they lift the year's total past that figure, or into a higher slab for a pensioner still working for the former employer. #### What is the deadline for the section 12(7) election? Section 12(8) says the election must be made by the due date for furnishing the employee's return of income or employer certificate, as the case may be, for the tax year in which the amount was received, or by a later date the Commissioner allows. #### Does section 12(7) clearly cover pension arrears? Pension is salary under section 12(2)(f), and section 12(7) applies to any amount chargeable under the head Salary paid in arrears. But its test refers to the year in which the services were rendered, and the text does not say which year that is for a pension, or how the election works with the final tax pension table. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "the employee may, by notice in writing to the Commissioner, elect for the amount to be taxed at the rates of tax that would have been applicable if the salary had been paid to the employee in the tax year in which the services were rendered." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), proviso (pension table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), table for tax year 2027 and the substituted tax year 2026 table in its footnote](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "any person responsible for paying pension to a former employee who is below the age of seventy years and deriving pension income during a tax year in which the payment exceeds rupees ten million" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (8) (omitted by the Finance Act 2025, footnote)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is a benevolent fund grant or superannuation payment received by the family after a death taxable? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/benevolent-fund-grant-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Mostly not. Clause (24) of Part I of the Second Schedule exempts benevolent grants paid under the Central Employee Benevolent Fund and Group Insurance Act, 1969. Clause (25) exempts approved superannuation fund payments made on a beneficiary's death. Clause (13) exempts gratuity and commutation received by heirs, but only up to limits that depend on the employer. **Applies to:** Widows, children and other heirs who receive a lump sum from a benevolent fund, a superannuation fund or the employer after an employee dies. ### What does the law say? Three clauses of Part I of the Second Schedule to the Income Tax Ordinance, 2001 cover lump sums that a family commonly receives after an employee dies. **Clause (24)** exempts "Any benevolent grant paid from the Benevolent Fund to the employees or members of their families in accordance with the provisions of the Central Employee Benevolent Fund and Group Insurance Act, 1969." The exemption is tied to that Act. A grant from some other benevolent scheme is not described by the clause. **Clause (25)** exempts "Any payment from an approved superannuation fund made on the death of a beneficiary or in lieu of or in commutation of any annuity, or by way of refund of contribution on the death of a beneficiary". An "approved superannuation fund" is defined in section 2(4) as a fund approved by the Commissioner under Part II of the Sixth Schedule. **Clause (13)** exempts gratuity or commutation of pension received "by an employee on his retirement or, in the event of his death, by his heirs", up to limits set by four sub-clauses. ### How much gratuity can heirs receive tax free? The clause (13) limit depends on who the employer was and how the gratuity is paid. | Sub-clause | Employee | Exempt amount | |---|---|---| | (i) | Government, Local Government, statutory body or corporation established by law | The amount receivable under the rules and conditions of service | | (ii) | Member of a gratuity fund approved by the Commissioner under Part III of the Sixth Schedule | Any amount receivable from that fund | | (iii) | Any other employee, under a scheme for all employees approved by the Board | Up to three hundred thousand rupees | | (iv) | Anyone not covered by (i) to (iii) | Fifty per cent of the amount or seventy-five thousand rupees, whichever is less | The proviso after sub-clause (iv) says that nothing in "this sub-clause" applies to a payment not received in Pakistan, a payment by a company to a director who is not a regular employee, a payment to a non-resident employee, or a gratuity to an employee who has already received a gratuity from the same or any other employer. ### What is an approved superannuation fund? Rule 2 of Part II of the Sixth Schedule sets the conditions. The fund must be under an irrevocable trust connected with a trade or undertaking in Pakistan, the employer must contribute, benefits must be payable only in Pakistan, and its sole purpose must be annuities for employees on retirement or incapacity, "or for widows, children or dependants of persons who are or have been such employees on the death of these persons." Rule 5 shows the other side. Where employer contributions are repaid to an employee "during his life-time in circumstances other than those referred to in clause (25)", the trustees deduct tax at the rate applicable to the year of withdrawal. A refund of contributions on death falls inside clause (25) and is exempt. ### Worked example (illustrative figures) **Case 1, federal employee.** Tariq, an Upper Division Clerk in Islamabad, dies in service. His widow receives a benevolent grant of Rs. 600,000 under the 1969 Act and gratuity of Rs. 1,400,000 under his service rules. 1. Benevolent grant: exempt under clause (24), Rs. 0 taxable. 2. Gratuity: sub-clause (13)(i) exempts the amount receivable under the service rules, Rs. 0 taxable. 3. Total received: Rs. 2,000,000, all within the exemptions. **Case 2, private mill.** Rafiq worked at a spinning mill in Faisalabad. The mill pays his heirs a gratuity of Rs. 450,000 under a scheme for all employees approved by the Board. 1. Exempt under sub-clause (13)(iii): Rs. 300,000. 2. Not covered by clause (13): Rs. 450,000 - Rs. 300,000 = Rs. 150,000. **Case 3, no approved scheme.** A small trading firm in Hyderabad pays Rs. 200,000 gratuity to the heirs of a salesman. 1. Fifty per cent: 50% x Rs. 200,000 = Rs. 100,000. 2. The lesser of Rs. 100,000 and Rs. 75,000 is Rs. 75,000, which is exempt under sub-clause (13)(iv). 3. Not covered by clause (13): Rs. 200,000 - Rs. 75,000 = Rs. 125,000. Clause (13) says how much is exempt. It does not itself say how the balance received by heirs is charged, and this page does not guess. ### What if the payment is group insurance? Clause (24) refers to the Central Employee Benevolent Fund and Group Insurance Act, 1969, but its words exempt only a "benevolent grant paid from the Benevolent Fund". Part I of the Second Schedule contains no separate clause for group insurance under a private employer's policy. Section 7G, which from tax year 2026 taxes certain life insurance and family takaful payouts to individuals, does not reach a death claim. Section 7G(3) switches it off where the payout or benefit is made on account of the death or disability of the insured, or after four years from the policy's issue. This page found no other provision in the Ordinance that deals with a death claim paid to a family. ### Common mistakes - **Assuming every benevolent grant is covered.** Clause (24) names the 1969 Central Act only. Grants from other schemes need their own basis in the law. - **Treating all gratuity to heirs as exempt.** Only government-type employers and approved gratuity funds give a full exemption. Other employers are capped at Rs. 300,000 or Rs. 75,000. - **Confusing a superannuation fund with a provident fund.** Clause (25) applies to approved superannuation funds. Provident fund balances are dealt with by clauses (22) and (23). ### What to check in the official text Read clauses (13), (24) and (25) of Part I of the Second Schedule, section 2(4), rules 2 and 5 of Part II of the Sixth Schedule and section 7G. The Central Employee Benevolent Fund and Group Insurance Act, 1969 and any provincial benevolent fund laws are not part of this corpus, so eligibility for a grant and its amount must be confirmed from those laws or the paying office. ### Frequently asked #### Is the benevolent grant paid to a government employee's widow taxable? No, if it is paid from the Benevolent Fund under the Central Employee Benevolent Fund and Group Insurance Act, 1969. Clause (24) of Part I of the Second Schedule exempts such grants paid to employees or members of their families. #### Is gratuity paid to heirs after an employee's death fully exempt? It depends on the employer. Clause (13) exempts the full amount for a government, local government or statutory body employee under the service rules, and the full amount from an approved gratuity fund. For other employers the exemption is capped at Rs. 300,000 under a Board-approved scheme, or otherwise the lesser of 50% and Rs. 75,000. #### Is a group life insurance claim after death taxable? Part I of the Second Schedule has no clause that exempts group life insurance paid by a private employer or insurer. Section 7G(3)(a) says the section 7G tax on life insurance payouts does not apply where the payout is on account of the insured's death. ### Citations - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (24)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "Any benevolent grant paid from the Benevolent Fund to the employees or members of their families in accordance with the provisions of the Central Employee Benevolent Fund and Group Insurance Act, 1969." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (25)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "Any payment from an approved superannuation fund made on the death of a beneficiary or in lieu of or in commutation of any annuity" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (13)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "by an employee on his retirement or, in the event of his death, by his heirs as does not exceed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 2(4), definition of approved superannuation fund, and Sixth Schedule, Part II, rules 2 and 5](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 7G (Tax on certain payments by life insurance business)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#7g-tax-on-certain-payments-by-life-insurance-business), as amended to 2026-06-30: "(a) on account of death of the insured or participant;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is a pension I receive from abroad taxable if I live in Pakistan? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/foreign-pension-taxable-in-pakistan Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer If you are resident in Pakistan for the tax year, section 11(5) brings foreign-source income into your income, and section 101(11) makes a pension paid from abroad foreign-source unless a resident or a Pakistan permanent establishment pays it. Section 51 exempts a returning expatriate's foreign income for two years, and section 42(3) exempts certain UN pensions. **Applies to:** Pakistani citizens living in Pakistan who receive a pension or annuity from a foreign employer, foreign pension scheme or international organisation. ### What does the law say? Three steps in the Income Tax Ordinance, 2001 decide the answer. **Step 1: are you resident for the tax year?** Section 82 treats an individual as resident for a tax year if the individual is present in Pakistan for 183 days or more in the year, is a federal or provincial government employee posted abroad, or, being a citizen of Pakistan, "is not present in any other country for more than one hundred and eighty-two days during the tax year or who is not a resident taxpayer of any other country". A retiree who has moved home to Pakistan will usually meet the first test. **Step 2: where does the pension come from?** Section 101(11) says a pension or annuity is Pakistan-source income only "if it is paid by a resident or borne by a permanent establishment in Pakistan of a non-resident person". Section 101(16) adds that an amount is foreign-source income to the extent it is not Pakistan-source. A pension paid by a UK company scheme, a US employer plan or a Gulf government is therefore foreign-source. **Step 3: what does residence bring in?** Section 11(5) says the income of a resident person is computed by taking into account both Pakistan-source and foreign-source amounts. Section 11(6) says a non-resident is taxed only on Pakistan-source income. Section 12(2)(f) places "any pension or annuity" within salary, so a foreign pension is counted under the head "Salary". ### Which exemptions can apply? | Situation | Provision | Effect | |---|---|---| | Citizen returning after at least four tax years as a non-resident | Section 51(1) | Foreign-source income exempt in the tax year of becoming resident and the following tax year | | Pension from former employment with the United Nations or its specialised agencies, including the International Court of Justice | Section 42(3) | Pension exempt for a citizen of Pakistan, provided the salary from that employment was exempt under the Ordinance | | Non-resident for the tax year | Section 11(6) | Foreign pension not counted at all | ### Worked example (illustrative figures) **Mr. Aslam** worked in Manchester for 25 years and draws a pension from his former UK employer's scheme, worth about Rs. 4,800,000 a year. He was non-resident in tax years 2022 to 2025. He moved back to Lahore in August 2025 and has stayed. 1. Tax year 2026 (1 July 2025 to 30 June 2026): he is in Pakistan well over 183 days, so he becomes resident under section 82. 2. He was not resident in any of the four preceding tax years (2022, 2023, 2024, 2025), so section 51(1) applies. 3. His foreign-source income is exempt in tax year 2026, the year he became resident, and in tax year 2027, the following year. 4. From tax year 2028, section 51 no longer applies. The pension is paid by a non-resident scheme, so it is foreign-source under section 101(11) and (16), and section 11(5) counts it in his income. **Dr. Farah** retired from the World Health Organization, a UN specialised agency, and lives in Islamabad. Her WHO pension falls within section 42(3) if her WHO salary was exempt under the Ordinance. If it was, the pension is exempt whatever its size. ### What rate applies to a taxable foreign pension? The text does not answer this cleanly. Section 12(2A) and the pension table in the First Schedule apply to "pension received by an individual from a former employer". A pension from a foreign former employer, such as Mr. Aslam's company scheme, appears to fit those words, which would put it under the same pension table as a Pakistani employer's pension. A state pension such as the UK State Pension or US Social Security is not paid by a former employer. The Ordinance does not say which table such a payment falls under, and this page does not resolve that. ### What if tax was already deducted abroad? Relief for foreign tax paid, and the effect of any tax treaty between Pakistan and the paying country, are outside this page. Neither changes the source rule in section 101(11) or the residence rule in section 82. ### What if a Pakistani entity pays my pension abroad? The rule runs the other way. A pension paid by a resident person is Pakistan-source under section 101(11), so section 11(6) still brings it in even for a non-resident. ### Common mistakes - **Assuming money kept abroad is not income.** Section 11(5) looks at residence and source, not the location of the bank account. - **Counting the section 51 exemption from the date of arrival.** It runs for the tax year of becoming resident and the following tax year, which are July to June years. - **Missing the four-year condition.** Section 51(1) needs non-residence in every one of the four preceding tax years. A citizen who spent long visits at home and was resident in one of those years does not qualify. - **Treating every international pension as a UN pension.** Section 42(3) covers the United Nations and its specialised agencies, and only where the salary was exempt under the Ordinance. ### What to check in the official text Read sections 11(5) and (6), 82, 101(11) and (16), 51(1) and 42(3) in the official text, and the pension table in the First Schedule in the official PDF. Residents with foreign income or assets above certain thresholds also have a separate foreign income and assets statement to file with the return; that statement, foreign tax credits and tax treaties are not covered on this page. ### Frequently asked #### My UK pension is paid into a UK bank account. Does that make a difference? Section 11(5) does not turn on where the money is paid. For a resident, income under a head is computed by taking into account both Pakistan-source and foreign-source amounts. Where the pension lands matters for other rules, but not for whether a resident's foreign pension is counted. #### I came back to Pakistan last year after twenty years abroad. Is my foreign pension taxed now? Section 51(1) exempts the foreign-source income of a citizen who was not resident in any of the four tax years before becoming resident, for the tax year of becoming resident and the following tax year. From the third tax year of residence, the exemption in section 51 no longer applies. #### Is a pension from the UN or WHO taxable in Pakistan? Section 42(3) exempts a pension received by a citizen of Pakistan by virtue of former employment with the United Nations or its specialised agencies, including the International Court of Justice, provided the salary from that employment was exempt under the Ordinance. ### Citations - [Income Tax Ordinance, 2001, section 11 (Heads of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#11-heads-of-income), as amended to 2026-06-30: "The income of a resident person under a head of income shall be computed by taking into account amounts that are Pakistan-source income and amounts that are foreign-source income." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 101 (Geographical source of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#101-geographical-source-of-income), as amended to 2026-06-30: "A pension or annuity shall be Pakistan-source income if it is paid by a resident or borne by a permanent establishment in Pakistan of a non-resident person." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 82 (Resident individual)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#82-resident-individual), as amended to 2026-06-30: "being a citizen of Pakistan is not present in any other country for more than one hundred and eighty-two days during the tax year or who is not a resident taxpayer of any other country." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 51 (Foreign-source income of returning expatriates)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#51-foreign-source-income-of-returning-expatriates), as amended to 2026-06-30: "Any foreign- source income derived by a citizen of Pakistan in a tax year who was not a resident individual in any of the four tax years preceding the tax year in which the individual became a resident shall be exempt" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 42 (Diplomatic and United Nations exemptions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#42-diplomatic-and-united-nations-exemptions), as amended to 2026-06-30: "Any pension received by a person, being a citizen of Pakistan, by virtue of the person’s former employment in the United Nations or its specialised agencies (including the International Court of Justice)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "any pension or annuity, or any supplement to a pension or annuity" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is my provident fund balance taxable when I retire from a recognised fund? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/recognised-provident-fund-retirement-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No, not at retirement. Clause (23) of the Second Schedule and rule 4 of Part I of the Sixth Schedule exclude the accumulated balance of a recognised provident fund from total income. Tax is dealt with earlier: rule 3 adds employer contributions and interest above set limits to your income in the year they are credited. **Applies to:** Private-sector and corporate employees who leave or retire from an employer whose provident fund the Commissioner has recognised under Part I of the Sixth Schedule. ### What does the law say? The Income Tax Ordinance, 2001 treats a recognised provident fund in two stages: a yearly test while you are working, and an exclusion when the balance is paid out. **At payout.** Clause (23) of Part I of the Second Schedule exempts "The accumulated balance due and becoming payable to an employee participating in a recognized provident fund." Rule 4(1) of Part I of the Sixth Schedule says the same balance "shall be excluded from the computation of his total income". Rule 14(a) defines the accumulated balance as the balance to your credit, or the part you can claim under the fund's regulations, on the day you stop being an employee of the employer maintaining the fund. **Every year while you work.** Rule 3 picks out two parts of the "annual accretion" to your balance and treats them as income received by you in that year: | Part of the yearly credit | Taxable portion under rule 3 | |---|---| | Employer's contribution | The amount "in excess of one-tenth of the salary or Rs.150,000, whichever is low" | | Interest credited | The amount that exceeds one-third of salary, or interest allowed at a rate above the rate the Federal Government fixes by notification | For these limits, rule 14(h) gives "salary" a narrow meaning: it includes dearness allowance where the terms of employment provide for it, and excludes all other allowances and perquisites. In practice that is usually close to basic pay. ### How does it work in practice? The recognised fund is the exception to a general rule. Section 12(2)(e)(iv) counts an amount received from a provident fund as salary, except to the extent it repays your own contributions for which you had no deduction. Clause (23) removes a recognised fund's balance from that charge. Rule 2 sets conditions a fund must keep meeting to stay recognised. Among them, rule 2(1)(c) says the employer's contribution in a year "shall not exceed the amount of the contributions of the employee in that year", and rule 2(1)(g) makes the accumulated balance payable on the day you leave the employer. The trustees may, on your written request, keep all or part of it to be drawn later on demand. Rule 4(2) extends the exclusion where you change jobs and the balance is transferred straight into your individual account in a recognised fund kept by the new employer. ### Worked example (illustrative figures) Hina works for a pharmaceutical company in Karachi and retires in tax year 2027 (1 July 2026 to 30 June 2027). All amounts are invented. **Her last full year in the fund** 1. Salary for rule 3 purposes (basic pay only, no dearness allowance): **Rs. 1,800,000**. 2. Employer contribution credited: Rs. 180,000. 3. Limit: one-tenth of salary is Rs. 180,000; the fixed figure is Rs. 150,000. The lower is **Rs. 150,000**. 4. Excess treated as her income: Rs. 180,000 - Rs. 150,000 = **Rs. 30,000**. 5. Interest credited: Rs. 320,000. One-third of salary is Rs. 600,000, so the one-third test is not crossed. Whether the rate test is crossed depends on the notified rate, which is not in this corpus. Assume here that it is not. **Effect on her tax for that year.** Her taxable salary from all pay and allowances is Rs. 3,000,000. With the Rs. 30,000 added it becomes Rs. 3,030,000. Using the tax year 2027 slab in clause (2) of Division I of Part I of the First Schedule for income above Rs. 2,200,000 up to Rs. 3,200,000 (Rs. 116,000 plus 20% of the amount above Rs. 2,200,000): - Without the excess: Rs. 116,000 + 20% of Rs. 800,000 = Rs. 116,000 + Rs. 160,000 = **Rs. 276,000**. - With the excess: Rs. 116,000 + 20% of Rs. 830,000 = Rs. 116,000 + Rs. 166,000 = **Rs. 282,000**. - Extra tax caused by rule 3: **Rs. 6,000**. **At retirement.** The trustees pay her accumulated balance of Rs. 9,400,000. Under clause (23) and rule 4(1) none of it is added to her total income for tax year 2027. ### What if the fund loses its recognition? Rule 101 of the Income Tax Rules, 2002 covers this. The balance to your credit at the end of the financial year before recognition was withdrawn is paid free of tax, and "the remainder of the accumulated balance due to him shall be liable to tax as if the fund had never been recognized." Where the balance is included in total income, rule 5 of Part I of the Sixth Schedule tells the Commissioner to work out the tax that would have been payable in each year concerned if the fund had not been recognised, and to charge the shortfall over tax already paid. Rule 6 requires the trustees to deduct that amount when they pay out, treating the balance as if it were salary. ### What if I own more than ten per cent of the company? Rule 98 of the Income Tax Rules, 2002 limits the exempted contributions of an employee and employer to Rs. 1,000 a month where the employee holds shares carrying more than ten per cent of the company's voting power. ### Common mistakes - **Thinking the exemption covers every company fund.** Clause (23) applies only to a fund the Commissioner has recognised. An unrecognised fund falls under section 12(2)(e)(iv). - **Expecting the whole balance to be checked at retirement.** The rule 3 limits are applied year by year, in the year each credit is made. - **Measuring the limit against gross pay.** Rule 14(h) excludes allowances other than dearness allowance from "salary" for this Part. ### What to check in the official text Read clause (23) of Part I of the Second Schedule, rules 2, 3, 4, 5, 6 and 14 of Part I of the Sixth Schedule, section 2(48) and section 12(2)(e)(iv), and rules 98, 99 and 101 of the Income Tax Rules, 2002. Confirm with the trustees that your fund holds a recognition order. The interest rate notified under rule 3(b) is outside this corpus. ### Frequently asked #### Is the whole recognised provident fund balance tax free when I retire? Clause (23) of Part I of the Second Schedule exempts the accumulated balance due and becoming payable to an employee participating in a recognised provident fund, and rule 4(1) of Part I of the Sixth Schedule excludes it from total income. Any employer contribution or interest above the rule 3 limits was already added to your income in the year it was credited. #### What are the yearly limits on employer contributions and interest? Rule 3 of Part I of the Sixth Schedule treats as your income the employer's contribution in excess of one-tenth of salary or Rs. 150,000, whichever is lower, and interest in so far as it exceeds one-third of salary or is credited at a rate above the rate notified by the Federal Government. That notified rate is not reproduced in the Ordinance. #### How do I know whether my company's fund is recognised? Section 2(48) defines a recognised provident fund as one recognised by the Commissioner under Part I of the Sixth Schedule. Recognition is an order made to the fund, so the trustees or the employer can say whether one exists and from what date it took effect. ### Citations - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (23)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Sixth Schedule, Part I (Recognised Provident Funds), rules 2, 3, 4, 5, 6 and 14](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "“recognised provident fund” means a provident fund recognised by the Commissioner in accordance with Part I of the Sixth Schedule;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "from a provident or other fund, to the extent to which the amount is not a repayment of contributions made by the employee to the fund in respect of which the employee was not entitled to a deduction" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, Rules 98, 99 and 101](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24), as amended to 2023-11-24 Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is commuted pension (the lump sum at retirement) taxable? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/is-commuted-pension-taxable Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It depends on who pays it. Clause (12) of Part I of the Second Schedule exempts, without a cap, commutation of pension received from Government or under a pension scheme approved by the Board. Other commutation falls under clause (13), which caps the exempt amount, in some cases at the lesser of 50% or Rs. 75,000. **Applies to:** Retiring employees, and heirs of employees who die, who receive a lump sum in exchange for part of a monthly pension, from Government or a private employer. ### What does the law say? Commutation means giving up part of your future monthly pension in exchange for a lump sum paid at retirement. Section 12(2)(f) of the Income Tax Ordinance, 2001 includes "any pension or annuity" in salary, and section 12(2) covers amounts "whether of a revenue or capital nature". Section 12 does not use the word "commutation", but the Second Schedule treats commutation as income and exempts it in two clauses of Part I. **Clause (12): full exemption.** "Any payment in the nature of commutation of pension received from Government or under any pension scheme approved by the Board for the purpose of this clause." There is no rupee limit in clause (12). **Clause (13): limited exemption.** This clause covers "any payment received by way of gratuity or commutation of pension by an employee on his retirement or, in the event of his death, by his heirs" up to the following limits: | Sub-clause | Who | Exempt amount | |---|---|---| | (i) | Employee of the Government, a Local Government, or a statutory body or corporation established by law | The amount receivable under the rules and conditions of the employee's service | | (ii) | Payment from a gratuity fund approved by the Commissioner under Part III of the Sixth Schedule | Any amount receivable from that fund | | (iii) | Any other employee, under a scheme applicable to all employees and approved by the Board for this sub-clause | Up to Rs. 300,000 | | (iv) | Any employee to whom (i), (ii) and (iii) do not apply | 50% of the amount receivable or Rs. 75,000, whichever is less | Sub-clause (ii) refers to a gratuity fund, so it is relevant to gratuity rather than commutation. ### How does it work in practice? Start with clause (12). If the commutation comes from Government, or from a pension scheme the Board has approved for clause (12), the whole lump sum is exempt and clause (13) does not need to be used. If clause (12) does not fit, move to clause (13). An employee of a statutory corporation is covered by sub-clause (i) up to what the service rules provide. A private sector employee is covered by sub-clause (iii) only if the employer's scheme applies to all employees and has Board approval for that sub-clause. Everyone else falls into sub-clause (iv). Clause (13) ends with a proviso that lists cases where "nothing in this sub-clause shall apply": a payment not received in Pakistan, a payment from a company to a director who is not a regular employee, and a payment to an employee who is not a resident individual. The proviso also removes the exemption for "any gratuity received by an employee who has already received any gratuity from the same or any other employer", which concerns gratuity, not commutation. The proviso is printed after sub-clause (iv), and the consolidated text does not make clear whether "this sub-clause" reaches sub-clauses (i) to (iii) as well. Any part of the commutation that is not exempt stays income under the head "Salary". ### Worked example (illustrative figures) All amounts are invented. **Case 1: Federal Government officer.** Nasreen retires as a Grade 19 officer in Islamabad and commutes part of her pension for Rs. 4,000,000. 1. The payment is commutation of pension received from Government. 2. Clause (12) exempts it with no cap. 3. Taxable amount: **Rs. 0** **Case 2: Private company, Board-approved pension scheme.** Kamran retires from a Karachi manufacturing company whose pension scheme is approved by the Board for clause (12). He commutes for Rs. 2,500,000. 1. The payment is under a pension scheme approved by the Board for clause (12). 2. Taxable amount: **Rs. 0** **Case 3: Private company, no approved scheme.** Farhan retires from a Multan trading firm with no Board-approved scheme and receives Rs. 400,000 as commutation. 1. Clause (12) does not apply. Sub-clauses (i), (ii) and (iii) of clause (13) do not apply either. 2. Sub-clause (iv): 50% of Rs. 400,000 = Rs. 200,000. The alternative limit is Rs. 75,000. 3. The lesser is Rs. 75,000, so Rs. 75,000 is exempt. 4. Taxable amount: 400,000 - 75,000 = **Rs. 325,000** ### What rate applies to the taxable part? The Ordinance does not settle this. Section 12(2A)(i) and the pension table in the proviso to clause (2) of Division I, Part I of the First Schedule tax "pension" received from a former employer at 0% up to Rs. 10 million. Neither mentions commutation. If the taxable commutation is treated as pension, Farhan's Rs. 325,000 would sit well inside the 0% band. If it is treated as ordinary salary for the year, it would be added to his other salary income and taxed on the clause (2) slab table for tax year 2027, where income up to Rs. 600,000 is taxed at 0% and the next band is 1% of the amount over Rs. 600,000. This page does not choose between the two. ### Common mistakes - **Assuming all commutation is tax free.** Clause (12) covers only Government and Board-approved schemes. Other commutation is capped under clause (13). - **Using the Rs. 300,000 limit without Board approval.** Sub-clause (iii) needs a scheme applicable to all employees and approved by the Board for that sub-clause. - **Forgetting the proviso.** A non-resident, or a director who is not a regular employee, may lose the clause (13) exemption entirely. ### What to check in the official text Read clauses (12) and (13) of Part I of the Second Schedule, including the proviso at the end of clause (13) and its footnotes, which show earlier versions of the clause. Section 12(2) sets out what counts as salary. If your employer says its scheme is Board-approved, check which clause the approval is for, because clause (12) and clause (13)(iii) each require approval "for the purpose" of that clause. The approvals themselves are not part of this corpus. ### Frequently asked #### Is commutation received by a government employee taxable? No. Clause (12) of Part I of the Second Schedule exempts any payment in the nature of commutation of pension received from Government, with no upper limit. Clause (13)(i) separately exempts commutation paid to Government, Local Government and statutory body employees under their service rules. #### My private employer's pension scheme is not Board-approved. What is exempt? Clause (12) does not apply, so the exemption comes from clause (13). If none of sub-clauses (i) to (iii) fits, sub-clause (iv) exempts 50% of the amount or Rs. 75,000, whichever is less. The rest is income. #### What rate applies to the taxable part of commutation? The Ordinance does not say expressly. Commutation is a lump sum in place of pension, but neither section 12(2A) nor the pension table in the First Schedule mentions commutation, so the text does not settle whether the pension table or the salary slab table applies to it. ### Citations - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (12)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "Any payment in the nature of commutation of pension received from Government or under any pension scheme approved by the 8[Board] for the purpose of this clause." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (13)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "Any income representing any payment received by way of gratuity or commutation of pension by an employee on his retirement or, in the event of his death, by his heirs as does not exceed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "any pension or annuity, or any supplement to a pension or annuity; and" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), proviso (pension rate table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is the pension paid to the family of a government servant or soldier who died in service exempt? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/died-in-service-shaheed-family-pension Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Clause (9)(ii) of Part I of the Second Schedule exempts any pension granted under the relevant rules to the families and dependents of public servants or Armed Forces members who die during service. Clauses (16) and (17) separately exempt the special family pension, dependents pension and children's allowance paid to Shaheed families of the armed and civil armed forces. **Applies to:** Widows, children and other dependents receiving pension because a public servant, soldier or civil armed forces member died while in service, including families of Shuhada. ### What does the law say? Three clauses in Part I of the Second Schedule to the Income Tax Ordinance, 2001 deal with pension paid to a family after a death in service. Part I lists incomes that "shall be exempt from tax, subject to the conditions and to the extent specified". **Clause (9)(ii)** exempts any pension "granted under the relevant rules to the families and dependents of public servants or members of the Armed Forces of Pakistan who die during service." **Clause (16)** exempts any income derived by the families and dependents of the "Shaheeds" belonging to the Pakistan Armed Forces "from the special family pension, dependents pension or children's allowance granted under the provisions of the Joint Services Instruction No. 5/66." **Clause (17)** gives the same exemption to the families and dependents of Shaheeds of the Civil Armed Forces of Pakistan "to whom the provisions of the Joint Services Instruction No. 5/66 would have applied had they belonged to the Pakistan Armed Forces", for "any like payment made to them". Without these clauses, a pension would be income: section 12(2)(f) lists "any pension or annuity, or any supplement to a pension or annuity" as salary. ### Who is covered by each clause? | Clause | Whose family | What is exempt | |---|---|---| | (9)(ii) | Public servants and members of the Armed Forces of Pakistan who die during service | Any pension granted under the relevant rules to the families and dependents | | (16) | Shaheeds of the Pakistan Armed Forces | Special family pension, dependents pension or children's allowance under Joint Services Instruction No. 5/66 | | (17) | Shaheeds of the Civil Armed Forces of Pakistan | Any like payment, where JSI 5/66 would have applied had they been in the Pakistan Armed Forces | Clause (9)(ii) is the widest of the three. It does not require the death to be a Shaheed's death. A clerk in a federal ministry who dies of illness while still in service is within its words, because the test is that the person died "during service". The clause does not define "public servants" or limit the term to federal employees. ### How has the law changed? Clause (9) used to be broader. Sub-clause (i) exempted pension "received in respect of services rendered by a member of the Armed Forces of Pakistan or Federal Government or a Provincial Government". The Finance Act 2025 omitted sub-clause (i), according to the footnote in the consolidated text. Only sub-clause (ii), for families of those who die during service, remains. The same wording used to sit in a separate clause (18). The Finance Act, 2006 omitted clause (18) and substituted clause (9), so the family pension exemption continued under clause (9) rather than being dropped. ### Worked example (illustrative figures) **Case 1.** Nasreen lives in Multan. Her husband, a Grade 14 assistant in a federal department, died of a heart attack while in service. She receives a family pension of Rs. 38,000 a month under the pension rules. 1. Annual family pension: Rs. 38,000 x 12 = Rs. 456,000. 2. Her husband died during service, and the pension is granted under the relevant rules, so clause (9)(ii) applies. 3. Taxable amount from the family pension: **Rs. 0**. **Case 2.** Shazia's husband, a Lance Naik, was martyred on duty. She receives a special family pension of Rs. 45,000 a month and a children's allowance of Rs. 6,000 a month for each of their two children, both under JSI 5/66. 1. Special family pension: Rs. 45,000 x 12 = Rs. 540,000. 2. Children's allowance: Rs. 6,000 x 2 x 12 = Rs. 144,000. 3. Total: Rs. 540,000 + Rs. 144,000 = Rs. 684,000, all exempt under clause (16). If Shazia also earns profit on a bank deposit, that profit is not a pension or allowance under JSI 5/66, and clause (16) does not cover it. ### What if my husband retired first and died later? Clause (9)(ii) is written for families of those "who die during service". A family pension that begins after a pensioner's death in retirement is not described by those words, and sub-clause (i), which covered service pensions of government and armed forces members generally, was omitted in 2025. The Ordinance does not contain a separate exemption for that family pension in Part I, so this page does not treat it as exempt. ### What if the payment is a lump sum, not a pension? The three clauses cover pension and, in clauses (16) and (17), the children's allowance. A lump sum paid after death, such as gratuity, commutation, a benevolent grant or a superannuation fund payment, is dealt with by other clauses of Part I, including clauses (13), (24) and (25). ### Common mistakes - **Assuming every government pension is still exempt.** Clause (9)(i) was omitted by the Finance Act 2025. Clause (9)(ii) survives only for families of those who die during service. - **Reading clause (16) as covering all income of a Shaheed family.** It covers income derived "from the special family pension, dependents pension or children's allowance". Rent, profit on savings and business income of the family are taxed under their own rules. - **Forgetting clause (17).** Families of Civil Armed Forces Shuhada are covered for like payments, not only families of the Pakistan Armed Forces. ### What to check in the official text Read clauses (9), (16) and (17) of Part I of the Second Schedule and the footnotes recording the omission of clause (9)(i) and clause (18). The "relevant rules" under which a family pension is granted, and Joint Services Instruction No. 5/66 itself, are not part of this corpus, so the terms of the pension and who counts as a dependent must be confirmed from those instruments or the pension sanctioning office. ### Frequently asked #### Is the family pension of a government employee who died in service taxable? No. Clause (9)(ii) of Part I of the Second Schedule exempts any pension granted under the relevant rules to the families and dependents of public servants who die during service. The exemption covers the pension itself, not other income the family earns. #### Is the pension of a Shaheed's widow and children taxed? Clause (16) exempts income that families and dependents of Shaheeds of the Pakistan Armed Forces derive from the special family pension, dependents pension or children's allowance granted under Joint Services Instruction No. 5/66. Clause (17) extends the same treatment to Shaheed families of the Civil Armed Forces for any like payment. #### Does clause (9)(ii) cover the widow of a retired officer? The clause speaks of families of those who die during service. A person who retired and died later did not die during service, so the clause as written does not reach that family pension. Its treatment is a separate question. ### Citations - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (9), sub-clause (ii)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "(ii) granted under the relevant rules to the families and dependents of public servants or members of the Armed Forces of Pakistan who die during service." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (16)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "from the special family pension, dependents pension or children's allowance granted under the provisions of the Joint Services" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (17)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "Any income derived by the families and dependents of the "Shaheeds" belonging to the Civil Armed Forces of Pakistan" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (9), sub-clause (i) (omitted by the Finance Act 2025, footnote) and clause (18) (omitted by the Finance Act, 2006, footnote)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "any pension or annuity, or any supplement to a pension or annuity" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is family pension received by a widow taxable? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/widow-family-pension-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Some family pensions are exempt outright. Clause (9)(ii) of Part I of the Second Schedule exempts pension to families of public servants and Armed Forces members who die during service, and clauses (16) and (17) cover families of Shaheeds. For other family pensions, section 12(2A) is worded around pension from a former employer, which leaves their treatment unclear. **Applies to:** Widows and other dependents receiving a family pension after the death of a government servant, a member of the Armed Forces, or a private-sector employee or pensioner. ### What does the law say? The Income Tax Ordinance, 2001 treats family pension in three different ways, depending on how the employee died and who the employer was. **1. Death during service (public servants and Armed Forces).** Clause (9) of Part I of the Second Schedule now reads, in the part still in force: "Any pension ... (ii) granted under the relevant rules to the families and dependents of public servants or members of the Armed Forces of Pakistan who die during service." Sub-clause (i), which exempted service pensions of the Armed Forces and government employees, was omitted by the Finance Act, 2025. Sub-clause (ii) was not. **2. Families of Shaheeds.** Clause (16) exempts income of the families and dependents of Shaheeds of the Pakistan Armed Forces from the special family pension, dependents pension or children's allowance granted under Joint Services Instruction No. 5/66. Clause (17) gives the same exemption to families of Shaheeds of the Civil Armed Forces to whom that instruction would have applied had they belonged to the Pakistan Armed Forces. **3. Every other family pension.** Section 12(2)(f) includes "any pension or annuity" in salary. Section 12(2A)(i), inserted by the Finance Act, 2025, then says pension is charged as a final tax at the rates in the pension proviso to clause (2) of Division I of Part I of the First Schedule "where the amount received by an individual from a former employer for a tax year exceeds ten million rupees", and that an individual who has reached seventy "shall not be charged to tax on pension income". The pension table charges 0% on pension up to Rs. 10 million and 5% of the amount above Rs. 10 million. ### How does it work in practice? | Situation | What the text says | |---|---| | Husband was a federal, provincial or other public servant, or in the Armed Forces, and died in service | Family pension exempt, clause (9)(ii) | | Husband was a Shaheed of the Armed Forces or Civil Armed Forces | Special family pension and similar payments exempt, clauses (16) and (17) | | Husband retired (government or private) and died afterwards | No exempting clause. Pension is salary under section 12(2)(f). Whether section 12(2A) and the pension table apply is unclear | | Husband was a private-sector employee who died in service | No exempting clause. Clause (9)(ii) refers to "public servants". Same uncertainty over section 12(2A) | **Why the last two rows are unclear.** Section 12(2A)(i) and the pension proviso both speak of pension received by an individual "from a former employer". A widow receiving family pension was usually never employed by the payer. The Ordinance does not say whether family pension falls inside that wording, whether it is taxed at the ordinary salary rates instead, or whether section 12(5)(c), which treats amounts paid to an employee's associate as received by the employee, has any role after the employee's death. This page does not resolve that question. ### Worked example (illustrative scenarios) Three widows each receive a family pension of Rs. 1,200,000 in tax year 2027 (1 July 2026 to 30 June 2027). 1. **Rukhsana, Peshawar.** Her husband, a teacher in a provincial government school, died in service. Her pension is granted under the relevant rules to the family of a public servant who died during service. Clause (9)(ii) exempts the full Rs. 1,200,000. 2. **Shazia, Rawalpindi.** Her husband, a soldier, was declared Shaheed and she receives a special family pension under Joint Services Instruction No. 5/66. Clause (16) exempts that income. 3. **Nasreen, Hyderabad.** Her husband retired from a private cement company and died two years later. No clause exempts her pension. If the pension table applies to her, Rs. 1,200,000 is below Rs. 10 million and the rate is 0%, so tax is Rs. 0. If it does not apply, the pension would be salary taxed under the ordinary rates, and the Ordinance does not say which reading is right. ### What if the widow is seventy or older? Section 12(2A)(i) says the individual who has attained the age of seventy years "shall not be charged to tax on pension income". That sentence sits in the same clause as the "former employer" wording, and the Ordinance does not say whether it reaches family pension. The age relief is clearest for a pensioner's own pension. ### What if she owns a house or a car? Section 114(1)(b) requires a return from people who, among other things, own immovable property of 500 square yards or more, a flat in the areas described, or a motor vehicle above 1000 CC (sub-clauses (iii) to (vi)). Section 115(3)(a) lists "A widow" among persons not required to file "solely by reason of" those sub-clauses. The relief is limited to those triggers. A widow still falls under section 114 if, for example, her taxable income exceeds the amount not chargeable to tax (clause (ab)) or her income is subject to final taxation (clause (ae)). ### Common mistakes - **Assuming the Finance Act, 2025 ended all pension exemptions.** It omitted clause (8) and clause (9)(i). Clause (9)(ii) for death during service remains. - **Applying clause (9)(ii) to a pensioner who died after retiring.** Its text is about those who "die during service". - **Treating section 115(3) as a full exemption from filing.** It only removes the property and vehicle triggers. ### What to check in the official text Read clauses (9), (16) and (17) of Part I of the Second Schedule, section 12(2)(f), 12(2A) and 12(5), sections 114(1) and 115(3), and the pension proviso to clause (2) of Division I of Part I of the First Schedule. Joint Services Instruction No. 5/66 and the pension rules that grant a family pension are outside this corpus. ### Frequently asked #### Is the family pension of a government employee who died in service taxable? No. Clause (9)(ii) of Part I of the Second Schedule exempts any pension granted under the relevant rules to the families and dependents of public servants or members of the Armed Forces of Pakistan who die during service. #### My husband retired from a private company and then died. Is my family pension taxed? No Second Schedule clause exempts it. Section 12(2)(f) makes pension part of salary, and the pension table in the First Schedule, which charges 0% up to Rs. 10 million a year, is tied by section 12(2A) to pension received from a former employer. The Ordinance does not say whether a widow's family pension counts as received from her former employer, so the text leaves the answer unclear. #### Does a widow have to file a tax return? Section 115(3) says a widow is not required to file solely because she owns property of the size described, or a motor vehicle above 1000 CC, under section 114(1)(b)(iii) to (vi). Other reasons for filing in section 114, such as taxable income above the amount not chargeable to tax, are not removed by that relief. ### Citations - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (9)(ii)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clauses (16) and (17)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "the pension shall be charged to tax as a final tax at the rates specified in the proviso to clause (2) of Division I of Part I of the First Schedule where the amount received by an individual from a former employer for a tax year exceeds ten million rupees" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 115 (Persons not required to furnish a return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#115-persons-not-required-to-furnish-a-return-of-income), as amended to 2026-06-30: "The following persons shall not be required to furnish a return of income for a tax year solely by reason of" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "owns a motor vehicle having engine capacity above 1000 CC" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), proviso (pension table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is GP Fund money received at retirement taxable, including the interest? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/gp-fund-payment-retirement-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Not if the fund is one to which the Provident Funds Act, 1925 applies. Clause (22) of Part I of the Second Schedule exempts any payment from such a fund, and its wording does not split subscriptions from interest or profit. The Ordinance does not list which funds that Act covers, so coverage of your fund needs confirming. **Applies to:** Federal and provincial government servants and others whose General Provident Fund or similar fund is governed by the Provident Funds Act, 1925. ### What does the law say? Clause (22) of Part I of the Second Schedule to the Income Tax Ordinance, 2001 is one line long: > "Any payment from a provident fund to which the Provident Funds Act, 1925 (XIX of 1925) applies." Section 53 gives Second Schedule exemptions effect "subject to any conditions and to the extent specified therein". Clause (22) states no rupee limit, no condition about age or length of service, and no split between what you subscribed and what the fund added. Its test is about the fund: is it a fund to which the 1925 Act applies? Without the clause, the starting point would be section 12(2)(e)(iv). That provision counts as salary any amount received "from a provident or other fund", except the part that repays contributions for which you were not entitled to a deduction. In other words, the profit and any employer share would be salary. Clause (22) takes a 1925 Act fund out of that charge. ### How does it work in practice? GP Fund is usually built from monthly subscriptions cut from a government servant's pay, with profit credited each year. At retirement the final payment combines both. - **If the fund is under the 1925 Act:** the whole final payment is exempt under clause (22). It is not added to your salary for the tax year in which it is paid. - **The fund's own income:** clause (57)(3)(i) separately exempts "Any income" of "a provident fund to which the Provident Funds Act, 1925 (XIX of 1925), applies". That is the fund's income, not yours, but it means the investment income is not taxed inside the fund either. - **The recognition rules do not apply:** rule 15 of Part I of the Sixth Schedule says that Part "shall not apply to any provident fund to which the Provident Funds Act, 1925 (XIX of 1925) applies." So the yearly limits on employer contributions and interest in rule 3 of that Part, which apply to recognised funds, are not the test for a 1925 Act fund. ### Worked example (illustrative figures) Tariq, a schoolteacher employed by the Federal Government in Islamabad, retires in tax year 2027 (1 July 2026 to 30 June 2027). His accounts office pays his GP Fund final payment. All amounts are invented. | Part of the payment | Amount | |---|---| | His own subscriptions over his service | Rs. 3,100,000 | | Profit credited by the fund | Rs. 1,700,000 | | **Total paid** | **Rs. 4,800,000** | 1. Tariq confirms from his fund's rules that the Provident Funds Act, 1925 applies to it. 2. Clause (22) exempts "Any payment" from that fund. Both the Rs. 3,100,000 and the Rs. 1,700,000 are part of the payment. 3. Amount added to his taxable income for tax year 2027: **Rs. 0**. **Contrast, same figures, fund not covered by the Act and not recognised.** Section 12(2)(e)(iv) would leave out only the repayment of his own contributions for which he had no deduction, Rs. 3,100,000 on these figures. The Rs. 1,700,000 of profit would be salary for tax year 2027. ### What if I take money out before retirement? Clause (22) says "Any payment", and nothing in its text limits it to the final payment at retirement. The Ordinance does not separately address advances or withdrawals from a 1925 Act fund during service, and this page does not go further than the wording of the clause. ### What if the member dies and the family is paid? The clause again turns on the fund, not on who receives the money. A payment from a 1925 Act fund to a nominee or family member is still a "payment from a provident fund" of that kind. ### What if my employer is a corporation or autonomous body? Some such bodies run provident funds recognised by the Commissioner rather than funds under the 1925 Act. For those, clause (23) and Part I of the Sixth Schedule apply instead, with the yearly rule 3 limits. The related page on recognised funds covers that route. ### Common mistakes - **Assuming "government employee" is the test.** Clause (22) names the Provident Funds Act, 1925, not a class of employer. - **Treating the profit as taxable salary.** For a 1925 Act fund, clause (22) does not carve the profit out of "Any payment". - **Applying the recognised-fund limits.** Rule 15 of Part I of the Sixth Schedule keeps 1925 Act funds out of that Part. ### What to check in the official text Read clause (22), clause (23) and clause (57)(3) of Part I of the Second Schedule, section 12(2)(e)(iv), section 53, and rule 15 of Part I of the Sixth Schedule. The Provident Funds Act, 1925 and the GP Fund rules of your service are outside this corpus. Your accounts office or fund rules are where to confirm that the Act applies to your fund. ### Frequently asked #### Is the interest or profit in my GP Fund taxable? Clause (22) of Part I of the Second Schedule exempts any payment from a provident fund to which the Provident Funds Act, 1925 applies. The clause does not separate your own subscriptions from the profit credited on them, so on its wording the whole payment is covered. #### Does clause (22) apply to every government employee's fund? The clause is tied to the Provident Funds Act, 1925, not to the employer. The Ordinance does not say which funds that Act governs, and the Act itself is not in this corpus, so the rules of your particular fund decide whether clause (22) applies. #### What if my fund is not covered by the 1925 Act? Then clause (22) does not help. If the Commissioner has recognised the fund, clause (23) exempts the accumulated balance. If neither applies, section 12(2)(e)(iv) treats the payment as salary except the part that repays your own non-deductible contributions. ### Citations - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (22)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "from a provident or other fund, to the extent to which the amount is not a repayment of contributions made by the employee to the fund in respect of which the employee was not entitled to a deduction" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 53 (Exemptions and tax concessions in the Second Schedule)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#53-exemptions-and-tax-concessions-in-the-second-schedule), as amended to 2026-06-30: "exempt from tax under this Ordinance, subject to any conditions and to the extent specified therein" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Sixth Schedule, Part I (Recognised Provident Funds), rule 15](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clauses (23) and (57)(3)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is gratuity taxable when I retire from government or a private company? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/is-gratuity-taxable-at-retirement Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Gratuity is salary under section 12(2)(a), but clause (13) of Part I of the Second Schedule exempts it in four ways: fully for Government, Local Government and statutory body employees under their service rules, fully from an approved gratuity fund, up to Rs. 300,000 under a Board-approved scheme, and otherwise the lesser of 50% or Rs. 75,000. **Applies to:** Employees receiving gratuity on retirement from Government, a statutory body or a private employer, and heirs who receive gratuity after an employee's death. ### What does the law say? Section 12(2)(a) of the Income Tax Ordinance, 2001 lists gratuity as part of salary: "any pay, wages or other remuneration provided to an employee, including ... gratuity". Section 12(1) then taxes salary in the year it is received, "other than salary that is exempt from tax under this Ordinance". The exemption is clause (13) of Part I of the Second Schedule. It covers "any payment received by way of gratuity or commutation of pension by an employee on his retirement or, in the event of his death, by his heirs", up to these limits: | Sub-clause | Who it covers | Exempt amount | |---|---|---| | (i) | Employee of the Government, a Local Government, or a statutory body or corporation established by law | The amount receivable under the rules and conditions of the employee's service | | (ii) | Anyone paid from a gratuity fund approved by the Commissioner under Part III of the Sixth Schedule | Any amount receivable from that fund | | (iii) | Any other employee, under a scheme applicable to all employees of the employer and approved by the Board for this sub-clause | Up to Rs. 300,000 | | (iv) | Any employee to whom (i), (ii) and (iii) do not apply | 50% of the amount receivable or Rs. 75,000, whichever is less | ### When is the exemption lost? A proviso printed after sub-clause (iv) says "nothing in this sub-clause shall apply": - (a) to any payment which is not received in Pakistan; - (b) to any payment received from a company by a director of such company who is not a regular employee; - (c) to any payment received by an employee who is not a resident individual; - and to any gratuity received by an employee who has already received any gratuity from the same or any other employer. The last limb matters to people who retire twice, for example from the Army and later from a private company: the second gratuity may not get the exemption. The consolidated text prints the proviso directly after sub-clause (iv) and does not make clear whether "this sub-clause" also reaches sub-clauses (i) to (iii). This page does not settle that. ### How does it work in practice? Whatever part of the gratuity is not exempt is salary for the tax year you receive it. It is added to your other salary for that year and taxed on the salaried table in clause (2) of Division I, Part I of the First Schedule, which for tax year 2027 includes these bands: | Taxable income | Tax | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,001 to Rs. 1,200,000 | 1% of the amount over Rs. 600,000 | | Rs. 1,200,001 to Rs. 2,200,000 | Rs. 6,000 + 11% of the amount over Rs. 1,200,000 | | Rs. 2,200,001 to Rs. 3,200,000 | Rs. 116,000 + 20% of the amount over Rs. 2,200,000 | Higher bands continue up to 35% above Rs. 7,000,000. ### Worked example (illustrative figures) Four people retire in tax year 2027, each receiving the same invented gratuity of Rs. 1,000,000 and each having earned Rs. 1,500,000 of ordinary salary earlier in the year. The rates are the real tax year 2027 rates. **Tax on the Rs. 1,500,000 salary alone:** 6,000 + 11% of (1,500,000 - 1,200,000) = 6,000 + 33,000 = Rs. 39,000. | Retiree | Sub-clause | Exempt | Taxable gratuity | |---|---|---|---| | Rubina, Federal Government clerk | (i) | Rs. 1,000,000 | Rs. 0 | | Asif, bank employee paid from an approved gratuity fund | (ii) | Rs. 1,000,000 | Rs. 0 | | Zeeshan, pharmaceutical company with a Board-approved scheme | (iii) | Rs. 300,000 | Rs. 700,000 | | Hina, small Sialkot export firm, no approved fund or scheme | (iv) | Rs. 75,000 | Rs. 925,000 | **Zeeshan:** 1. Total salary: 1,500,000 + 700,000 = 2,200,000 2. Band Rs. 1,200,001 to Rs. 2,200,000: 6,000 + 11% of 1,000,000 = 6,000 + 110,000 = Rs. 116,000 3. Extra tax because of the gratuity: 116,000 - 39,000 = **Rs. 77,000** **Hina:** 1. Sub-clause (iv): 50% of 1,000,000 = 500,000. The lesser of Rs. 500,000 and Rs. 75,000 is Rs. 75,000. 2. Taxable gratuity: 1,000,000 - 75,000 = 925,000 3. Total salary: 1,500,000 + 925,000 = 2,425,000 4. Band Rs. 2,200,001 to Rs. 3,200,000: 116,000 + 20% of 225,000 = 116,000 + 45,000 = Rs. 161,000 5. Extra tax because of the gratuity: 161,000 - 39,000 = **Rs. 122,000** Rubina and Asif pay only the Rs. 39,000 on their ordinary salary. ### What if ...? **The employee dies before retirement?** Clause (13) applies to gratuity received "in the event of his death, by his heirs" on the same limits. **My employer's fund is approved, but only by the Board for sub-clause (iii)?** Sub-clause (ii) needs approval by the Commissioner under Part III of the Sixth Schedule. A Board-approved scheme under (iii) is a different thing and carries the Rs. 300,000 cap. **I also received commutation?** Clause (13) covers "gratuity or commutation of pension". Commutation from Government or a Board-approved pension scheme is separately exempt in full under clause (12). ### Common mistakes - **Assuming all private gratuity is tax free.** Only gratuity from an approved gratuity fund is fully exempt; otherwise the cap is Rs. 300,000 or Rs. 75,000. - **Taking 50% as the exempt amount.** Sub-clause (iv) gives the lesser of 50% or Rs. 75,000, so for any gratuity above Rs. 150,000 the exemption is Rs. 75,000. - **Ignoring the second-gratuity rule.** The proviso removes the exemption for an employee who has already received gratuity from the same or any other employer. ### What to check in the official text Read clause (13) of Part I of the Second Schedule with its proviso and footnotes (the Rs. 300,000 figure replaced "two" hundred thousand under the Finance Act, 2016). Part III of the Sixth Schedule sets the conditions for an approved gratuity fund. Which sub-clause an employer's fund or scheme is approved under is a fact about that employer; the approvals themselves are not part of this corpus. ### Frequently asked #### Is gratuity from a government job taxable? No, to the extent it is paid under the employee's service rules. Clause (13)(i) of Part I of the Second Schedule exempts, for an employee of the Government, a Local Government or a statutory body or corporation, the amount receivable in accordance with the rules and conditions of service. #### How much private company gratuity is tax free? If it comes from a gratuity fund approved by the Commissioner under Part III of the Sixth Schedule, all of it. Under a Board-approved scheme applying to all employees, up to Rs. 300,000. Otherwise, 50% of the amount or Rs. 75,000, whichever is less. #### Can the taxable gratuity be taxed at my average rate like a golden handshake? Section 12(6) allows the average-rate election only for amounts under section 12(2)(e)(iii), payments on termination of employment. Gratuity is named separately in section 12(2)(a), and the Ordinance does not say that the election extends to it. ### Citations - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (13)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "in the case of any employee to whom sub-clause (i), (ii) and (iii) do not apply, fifty per cent of the amount receivable or seventy-five thousand rupees, whichever is the less:" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "any pay, wages or other remuneration provided to an employee, including leave pay, payment in lieu of leave, overtime payment, bonus, commission., fees, gratuity or work condition" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Sixth Schedule, Part III (Approved Gratuity Funds)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (12)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "Any payment in the nature of commutation of pension received from Government or under any pension scheme approved by the 8[Board] for the purpose of this clause." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is LPR encashment taxable at retirement? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/lpr-leave-encashment-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It depends on the employer. Clause (19) of Part I of the Second Schedule exempts encashment of leave preparatory to retirement for Armed Forces members and Federal or Provincial Government employees. No clause extends this to others, so for other employees it is salary under section 12(2)(a) as payment in lieu of leave. **Applies to:** Retiring members of the Armed Forces, federal and provincial government employees, and other employees paid for unused leave at retirement. ### What does the law say? Two provisions of the Income Tax Ordinance, 2001 decide the answer. **Section 12(2)(a)** defines salary to include "any pay, wages or other remuneration provided to an employee, including leave pay, payment in lieu of leave". Cash paid for leave not taken is therefore salary unless something exempts it. **Clause (19) of Part I of the Second Schedule** is that exemption, and it is narrow. It covers: > "Any sum representing encashment of leave preparatory to retirement of a member of the Armed Forces of Pakistan or an employee of the Federal Government or a Provincial Government." Section 53 gives effect to Second Schedule exemptions, "subject to any conditions and to the extent specified therein". Clause (19) sets no rupee cap, so where it applies, the whole encashment sum is exempt. | Who retires | LPR or leave encashment | |---|---| | Member of the Armed Forces of Pakistan | Exempt under clause (19) | | Employee of the Federal Government | Exempt under clause (19) | | Employee of a Provincial Government | Exempt under clause (19) | | Anyone else (private company, bank, NGO, and any employer the clause does not name) | Salary under section 12(2)(a) | ### How does it work in practice? **Government and Armed Forces.** The encashment is left out of taxable salary. The clause is tied to leave "preparatory to retirement", so its text does not reach leave encashed during service for some other reason. **Everyone else.** The amount is added to salary for the tax year in which it is received. Section 12(5)(b) treats amounts paid by "a past employer" as received from employment, so encashment paid a few months after you leave is still salary. Where salary is more than seventy-five per cent of taxable income, the rates in clause (2) of Division I of Part I of the First Schedule apply. **Statutory bodies and corporations.** The Second Schedule shows that the drafters named such bodies when they meant to. Clause (13)(i), on gratuity and commutation, refers to "an employee of the Government, a Local Government, a statutory body or corporation". Clause (19) does not. The Ordinance does not say whether an employee of a government-owned corporation counts as an "employee of the Federal Government" for clause (19), and this page does not settle that point. ### Worked example (illustrative figures) Two people retire in tax year 2027 (1 July 2026 to 30 June 2027). Each earned Rs. 2,000,000 of salary in that year before retiring, has no other income, and receives Rs. 600,000 for unused leave. **Asif, an assistant in a Punjab Government department in Lahore** 1. The Rs. 600,000 is encashment of leave preparatory to retirement of a Provincial Government employee, exempt under clause (19). 2. Taxable salary stays **Rs. 2,000,000**. 3. Clause (2), slab above Rs. 1,200,000 up to Rs. 2,200,000: Rs. 6,000 plus 11% of Rs. 800,000 = Rs. 6,000 + Rs. 88,000 = **Rs. 94,000**. **Bushra, a branch officer at a private bank in Multan** 1. The Rs. 600,000 is payment in lieu of leave, salary under section 12(2)(a). 2. Taxable salary is Rs. 2,000,000 + Rs. 600,000 = **Rs. 2,600,000**. 3. Clause (2), slab above Rs. 2,200,000 up to Rs. 3,200,000: Rs. 116,000 plus 20% of Rs. 400,000 = Rs. 116,000 + Rs. 80,000 = **Rs. 196,000**. The same Rs. 600,000 costs Bushra Rs. 196,000 - Rs. 94,000 = **Rs. 102,000** in extra tax that Asif does not pay. ### What if the encashment is paid in a later tax year? For a private-sector employee, the amount is still salary because section 12(5)(b) covers amounts from a past employer. If it is paid late and, as a result, falls to be taxed at higher rates than in the year the service was rendered, section 12(7) allows an election, by notice to the Commissioner, to be taxed at the rates of the earlier year. Whether leave encashment counts as an amount "paid to an employee in arrears" in a given case is a question of fact the Ordinance does not settle. ### What if I take leave instead of encashing it? Salary paid while on leave is "leave pay" under section 12(2)(a), taxed as ordinary salary. Clause (19) speaks of "encashment", so it is about the cash sum paid in place of leave, not about salary drawn during leave. ### Common mistakes - **Assuming every retiree's leave encashment is exempt.** Clause (19) names three groups only. - **Assuming a government-linked employer is enough.** The clause's text names the Federal and Provincial Governments and the Armed Forces, not corporations or local governments. - **Confusing LPR encashment with gratuity.** Gratuity has its own rules and limits under clause (13). They are separate exemptions. ### What to check in the official text Read clause (19) of Part I of the Second Schedule, section 12(2)(a), 12(5) and 12(7), and section 53. If your employer is a corporation or authority, check your service rules and any clarification from the Board, which is not in this corpus, before treating clause (19) as applicable. ### Frequently asked #### Is LPR encashment of a federal government employee taxable? No. Clause (19) of Part I of the Second Schedule exempts any sum representing encashment of leave preparatory to retirement of an employee of the Federal Government or a Provincial Government, and of a member of the Armed Forces of Pakistan. #### Does the exemption cover employees of corporations, autonomous bodies or local governments? Clause (19) names only the Armed Forces, the Federal Government and a Provincial Government. By contrast, clause (13)(i) on gratuity expressly adds a Local Government and statutory bodies or corporations, so the difference in wording is visible in the text. The Ordinance does not say that clause (19) reaches those other employers. #### My private employer paid unused leave on retirement. Is it taxable? Yes, as the text stands. Section 12(2)(a) includes payment in lieu of leave in salary, and no Second Schedule clause exempts it for private-sector employees. It is added to your other salary for the tax year in which it is received. ### Citations - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (19)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "any pay, wages or other remuneration provided to an employee, including leave pay, payment in lieu of leave, overtime payment, bonus" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 53 (Exemptions and tax concessions in the Second Schedule)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#53-exemptions-and-tax-concessions-in-the-second-schedule), as amended to 2026-06-30: "exempt from tax under this Ordinance, subject to any conditions and to the extent specified therein" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (13)(i)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## I am over 70. Do I pay any tax on my pension at all? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/pension-tax-after-age-seventy Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No tax is charged on the pension itself. Section 12(2A)(i) of the Income Tax Ordinance says an individual who has attained the age of seventy years shall not be charged to tax on pension income, whatever its size, and section 149(1A) requires deduction only from pensioners below seventy. Other income is not covered. **Applies to:** Pensioners in Pakistan aged seventy or above who receive a pension from a former employer, for tax year 2027. ### Is pension taxed once I reach seventy? No. Section 12(2A)(i) of the Income Tax Ordinance, inserted by section 10 of the Finance Act 2025, says that "the individual who has attained the age of seventy years shall not be charged to tax on pension income". The Ordinance as amended to 30 June 2026 keeps this rule, so it applies to tax year 2027 (1 July 2026 to 30 June 2027). The sentence sits inside the same clause that sets up the pension table. Section 12(2A)(i) first sends pension from a former employer to the rates in the proviso to clause (2) of Division I of Part I of the First Schedule (0% up to Rs. 10 million, 5% of the amount above that), and then carves out pensioners aged seventy or above. For them, the table is never reached. ### Does the size of the pension matter? Not for the age rule. The Rs. 10 million threshold belongs to the pension table. The seventy-year rule in section 12(2A)(i) is not tied to an amount. A retired professor in Peshawar with a modest pension and a retired senior judge with a pension well above Rs. 10 million are treated the same once each has attained seventy. ### How does it work in practice? The collection side matches the charging side. Section 149(1A) requires a person paying pension to deduct tax on the amount over Rs. 10 million, but only for a former employee "who is below the age of seventy years". A pension-paying office or bank paying a pensioner aged seventy or more has no duty under section 149(1A) to deduct tax from that pension. ### Worked example (illustrative figures) **Mr. Ghulam Rasool, aged 74, Faisalabad**, receives a pension of Rs. 1,100,000 a month for tax year 2027 from his former employer. He does not work for the former employer or any associate. 1. Annual pension: Rs. 1,100,000 x 12 = Rs. 13,200,000 2. If he were below seventy, the pension table would apply: Rs. 13,200,000 - Rs. 10,000,000 = Rs. 3,200,000; 5% x Rs. 3,200,000 = Rs. 160,000 3. He has attained seventy, so section 12(2A)(i) says he "shall not be charged to tax on pension income". 4. Tax on the pension: **Rs. 0** Step 2 is shown only to make the effect of the age rule visible. ### What does the relief not cover? **Other income.** Section 12(2A) is about "pension under clause (f) of sub-section (2)" of section 12, meaning pension and annuity counted as salary. It says nothing about profit on bank deposits, rent, dividends or business income. Those are taxed under their own provisions whatever the person's age. **Working for the former employer.** Section 12(2A)(ii) is a separate rule: "the pension of an individual who continues to work for former employer or its associate shall be charged to tax at the rates specified under clause (1) or (2) of Division I". The Ordinance does not say which of the two sub-clauses wins where a person over seventy still works for the former employer. The text leaves that open, and this page does not resolve it. **Lump sums.** Commutation, gratuity and provident fund payments are dealt with under other provisions and clauses of the Second Schedule, not by the age seventy rule. ### What if I turn seventy partway through the tax year? Section 12(2A)(i) uses the words "has attained the age of seventy years", and section 149(1A) uses "below the age of seventy years" in relation to the time of payment. Neither provision says whether the age is tested on the first day of the tax year, the last day, or payment by payment. The law is silent on how a pension received partly before and partly after the seventieth birthday is split. ### Common mistakes - **Thinking the Rs. 10 million limit still applies at seventy.** It does not; the age rule is separate from the pension table. - **Thinking every kind of income becomes tax-free at seventy.** The words in section 12(2A)(i) are "pension income". - **Assuming the age rule overrides the working-for-former-employer rule.** The Ordinance does not say that. ### What to check in the official text Read section 12(2A)(i) and (ii) and section 149(1A) in the Ordinance amended to 30 June 2026. The same wording appears in section 10 of the Finance Act 2025, which inserted it. The Ordinance does not say in these provisions how a pension payer is to verify age. Filing obligations and any separate senior citizen provisions are outside the scope of this page. ### Frequently asked #### Does the age seventy rule have an upper limit on the pension amount? Section 12(2A)(i) sets no amount limit for this part of the rule. It says the individual who has attained the age of seventy years shall not be charged to tax on pension income, so the Rs. 10 million threshold in the pension table does not come into it. #### Should the pension office deduct any tax from me after seventy? Section 149(1A) places the deduction duty on a person paying pension to a former employee who is below the age of seventy years. It does not impose that duty for a pensioner aged seventy or more. #### Is my bank profit or rent also tax-free after seventy? No such relief appears in section 12(2A). It speaks only of pension income. Profit on deposits, rent, dividends and business income are taxed under their own provisions, and this page does not cover them. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "the pension shall be charged to tax as a final tax at the rates specified in the proviso to clause (2) of Division I of Part I of the First Schedule where the amount received by an individual from a former employer for a tax year exceeds ten million rupees" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2025, section 10 (Amendments in the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2025#10-amendments-in-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2025: "the individual who has attained the age of seventy years shall not be charged to tax on pension income; and" Official source: https://download1.fbr.gov.pk/Docs/2025629106147620FInanceAct2025.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "any person responsible for paying pension to a former employee who is below the age of seventy years and deriving pension income during a tax year in which the payment exceeds rupees ten million" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), proviso (pension table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## I am over 70, do I pay any tax on my pension at all? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/pension-tax-exemption-age-seventy Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No tax is charged on the pension itself. Section 12(2A)(i) of the Income Tax Ordinance says an individual who has attained the age of seventy years shall not be charged to tax on pension income, and section 149(1A) limits deduction at source to former employees below seventy. Rent, bank profit and other income are still taxed. **Applies to:** Pensioners in Pakistan aged seventy or more, for tax year 2027. ### What does the law say? Pension is salary. Section 12(2)(f) of the Income Tax Ordinance, 2001 counts "any pension or annuity, or any supplement to a pension or annuity" as salary. The Finance Act 2025, in section 10, then inserted section 12(2A), which has two parts. - **Clause (i)** charges pension from a former employer as a final tax at the rates in the pension table (the proviso to clause (2) of Division I of Part I of the First Schedule), and ends with the words: "the individual who has attained the age of seventy years shall not be charged to tax on pension income". - **Clause (ii)** says the pension of an individual who continues to work for the former employer or its associate is taxed at the ordinary rates in clause (1) or (2) of Division I. The withholding rule follows the same line. **Section 149(1A)** requires the payer to deduct tax on pension above ten million rupees only for "a former employee who is below the age of seventy years". For a pensioner aged seventy or more, section 149(1A) does not apply. ### How does it work in practice? For tax year 2027 (1 July 2026 to 30 June 2027), the rules sort pensioners into three groups: | Your position | Rule | Tax on the pension | |---|---|---| | Below seventy, pension from former employer up to Rs. 10,000,000 | Pension table, row 1 | 0% | | Below seventy, pension above Rs. 10,000,000 | Pension table, row 2, deducted under section 149(1A) | 5% of the amount above Rs. 10,000,000 | | Seventy or older | Section 12(2A)(i), last words | Not charged | The pension payer has no deduction duty under section 149(1A) once you are seventy. The Ordinance does not set out how the payer is to verify age; that is a matter of the payer's own records and any procedure outside this corpus. ### Worked example (illustrative figures) Two retired bank officers in Karachi each receive a pension of Rs. 1,100,000 a month, Rs. 13,200,000 for tax year 2027. Neither works for the former bank. **Rashid, aged 68** 1. Amount above ten million: Rs. 13,200,000 - Rs. 10,000,000 = Rs. 3,200,000. 2. Tax at 5%: Rs. 3,200,000 x 5% = **Rs. 160,000**, deducted by the payer under section 149(1A). **Zubair, aged 73** 1. Section 12(2A)(i): an individual who has attained seventy "shall not be charged to tax on pension income". 2. Tax on the pension: **Rs. 0**. Section 149(1A) does not apply to him, because he is not below seventy. The difference in this example is Rs. 160,000 a year. For a pensioner below seventy whose pension is Rs. 10,000,000 or less, the age rule changes nothing in rupee terms, because the pension table already charges 0%. ### What does the age rule not cover? - **Other income.** The words are "pension income". Rent, profit on bank deposits or savings certificates, dividends and business income are taxed under their own provisions. This page does not cover those rates. - **Continuing work for the former employer.** Section 12(2A)(ii) sends the pension of someone who keeps working for the former employer or its associate to the ordinary slab rates. Section 12(2A) does not state which clause wins when both apply, so the position of a person over seventy who still works there is not settled by the text. - **Lump sums.** Commutation and gratuity are dealt with in separate Second Schedule clauses, not in section 12(2A). See the related pages. ### What if I turn seventy halfway through the year? The text uses "has attained the age of seventy years" in section 12(2A)(i) and "below the age of seventy years" in section 149(1A). It does not say whether age is tested on the first day of the tax year, the last day, or at each payment. This page does not resolve that point. ### Common mistakes - **Assuming the rule is a general senior citizen exemption.** Section 12(2A)(i) removes only pension income from charge. - **Thinking seventy-plus pensioners fall under section 149(1A).** That sub-section is limited to former employees below seventy. - **Expecting a ten million limit to apply after seventy.** No amount is attached to the age seventy wording. - **Relying on the old clause (8) exemption.** It was omitted by the Finance Act 2025; the age rule now sits in section 12(2A). ### What to check in the official text Read section 12(2A) and section 149(1A) of the Ordinance amended to 30 June 2026, and the pension table in the proviso to clause (2) of Division I of Part I of the First Schedule in the official PDF, since our site copy does not reproduce rate tables. Section 10 of the Finance Act 2025 shows the text of section 12(2A) as it was inserted. Whether you must still file a return when no tax is charged on the pension is a separate question, covered on the related page about filing returns. ### Frequently asked #### Does the age seventy rule depend on the size of my pension? The wording of section 12(2A)(i) sets no amount for this part: the individual who has attained the age of seventy years shall not be charged to tax on pension income. The ten million rupee figure matters to pensioners below seventy. #### Is my bank profit or rent also exempt after seventy? No. Section 12(2A)(i) speaks only of pension income. Other income is charged under its own head and its own rules, which this page does not cover. #### What if I am over seventy and still work for my former employer? Section 12(2A)(ii) says the pension of an individual who continues to work for the former employer or its associate is taxed at the ordinary Division I rates. The text does not say which of the two clauses prevails for a person who is both over seventy and still working there, so this page does not settle that point. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "any pension or annuity, or any supplement to a pension or annuity" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "any person responsible for paying pension to a former employee who is below the age of seventy years and deriving pension income during a tax year in which the payment exceeds rupees ten million" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), proviso (pension table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2025, section 10 (Amendments in the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2025#10-amendments-in-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2025: "the pension shall be charged to tax as a final tax at the rates specified in the proviso to clause (2) of Division I of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2025629106147620FInanceAct2025.pdf --- ## Is my pension taxable in Pakistan after the Finance Act 2025 changes, and what applies in tax year 2027? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/is-pension-taxable-in-pakistan Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Pension is technically taxable again, but most pensioners pay nothing. The Finance Act 2025 omitted the old exemptions in clauses (8) and (9)(i) of the Second Schedule and inserted section 12(2A). Under the First Schedule pension table, pension from a former employer is taxed at 0% up to Rs. 10 million a year, and 5% only above that. **Applies to:** Retired individuals in Pakistan who receive a pension from a former employer, government or private, for tax year 2027. ### What does the law say? Pension is income under the head "Salary", and since the Finance Act 2025 it is no longer exempt by default. Section 12(2)(f) of the Income Tax Ordinance lists "any pension or annuity, or any supplement to a pension or annuity" as part of salary. What changed is the exemption that used to sit on top of that rule. Before 1 July 2025, two clauses in Part I of the Second Schedule kept most pensions out of tax: - **Clause (8)** exempted any pension received by a citizen of Pakistan from a former employer, unless the person continued to work for that employer or its associate. - **Clause (9)(i)** exempted pension for service in the Armed Forces of Pakistan or with the Federal or a Provincial Government. Section 10 of the Finance Act 2025, in its amendments to the Second Schedule, says "clause (8) and sub-clause (i) of clause (9) shall be omitted". The footnotes in the consolidated Ordinance record both omissions and reproduce the old wording. In their place, the same Finance Act inserted section 12(2A) and a pension table as a proviso to clause (2) of Division I of Part I of the First Schedule. That is why headlines said "pension is now taxable" while most pensioners saw no deduction at all. ### What rates apply to pension in tax year 2027? The Ordinance as amended to 30 June 2026 keeps the Finance Act 2025 rule, so these rates govern tax year 2027 (1 July 2026 to 30 June 2027). The proviso states that for "pension received by an individual from a former employer in a tax year", the rate is: | Pension received in the tax year | Rate of tax | |---|---| | Does not exceed Rs. 10 million | 0% of the amount | | Exceeds Rs. 10 million | 5% of the amount exceeding Rs. 10 million | Section 12(2A)(i) says pension "shall be charged to tax as a final tax" at these rates. It also says an individual who has attained the age of seventy years "shall not be charged to tax on pension income". ### How does it work in practice? For most retirees the result is the same as before: no tax on the pension itself. A retired clerk, teacher or army havaldar receiving a pension well below Rs. 10 million a year falls in the 0% row. Two groups are affected differently: 1. **Pensioners under 70 receiving more than Rs. 10 million a year.** Only the part above Rs. 10 million is taxed, at 5%. Section 149(1A) requires the person paying the pension to deduct tax on the amount over Rs. 10 million at the time of payment. 2. **Pensioners who keep working for their former employer or its associate.** Section 12(2A)(ii) takes their pension out of the pension table and charges it at the ordinary slab rates in clause (1) or (2) of Division I. ### Worked example (illustrative figures) **Mrs. Rukhsana, a retired schoolteacher in Multan**, receives a pension of Rs. 95,000 a month. - Annual pension: Rs. 95,000 x 12 = Rs. 1,140,000 - This does not exceed Rs. 10 million, so row 1 of the pension table applies. - Tax: 0% of Rs. 1,140,000 = **Rs. 0** **Mr. Shahid, a retired senior officer in Islamabad, aged 64**, receives Rs. 950,000 a month. - Annual pension: Rs. 950,000 x 12 = Rs. 11,400,000 - Amount exceeding Rs. 10 million: Rs. 11,400,000 - Rs. 10,000,000 = Rs. 1,400,000 - Tax: 5% of Rs. 1,400,000 = **Rs. 70,000** The first Rs. 10 million of his pension carries no tax. ### What if my situation is different? **What if I am 70 or older?** Section 12(2A)(i) says an individual who has attained seventy "shall not be charged to tax on pension income", and section 149(1A) limits the deduction duty to pensioners below seventy. **What if I receive a family pension after a public servant died in service?** Clause (9)(ii) of the Second Schedule was not omitted. It still exempts pension granted under the relevant rules to the families and dependants of public servants or members of the Armed Forces who die during service. **What if I commuted part of my pension?** Clause (12) of Part I of the Second Schedule still exempts "any payment in the nature of commutation of pension received from Government or under any pension scheme approved by the Board". That lump sum is a different question from the monthly pension. ### Common mistakes - **"Pension is now taxed at my old salary rates."** Not for an ordinary retiree. Slab rates apply to pension only under section 12(2A)(ii), where the person continues to work for the former employer or its associate. - **"5% is charged on the whole pension once it crosses Rs. 10 million."** The table charges 5% "of the amount exceeding rupees ten million", not of the full amount. - **"Government pensions are still exempt under clause (9)."** Sub-clause (i), which covered government and Armed Forces pensions, was omitted. Only sub-clause (ii), for families of those who die in service, remains. ### What to check in the official text Read section 12(2A) alongside the proviso to clause (2) of Division I of Part I of the First Schedule in the Ordinance amended to 30 June 2026. Check the Second Schedule, Part I, footnotes to clauses (8) and (9) for the wording that was removed. Section 12(2A)(i) is drafted as a single long sentence joining the Rs. 10 million rule and the age seventy rule, and the Ordinance does not define "former employer" for this purpose; read the full clause yourself rather than relying on a summary. Whether you must file a return is a separate question under the Ordinance's filing provisions and is not answered by the pension table. ### Frequently asked #### Did the Finance Act 2025 make every pension taxable? It removed the blanket exemptions in clause (8) and clause (9)(i) of the Second Schedule, so pension is no longer exempt by default. It also added section 12(2A) and a pension rate table that charges 0% on pension up to Rs. 10 million a year from a former employer, so an ordinary pension still carries no tax. #### Is the rule the same for tax year 2027? Yes. The Income Tax Ordinance as amended to 30 June 2026 still contains section 12(2A) and the pension table in the proviso to clause (2) of Division I of Part I of the First Schedule, with rates of 0% up to Rs. 10 million and 5% of the amount above Rs. 10 million. #### Are government and army pensions still treated separately? Not under the pension table. The old clause (9)(i) exemption for pensions of the Armed Forces and Federal and Provincial Government employees was omitted by the Finance Act 2025. The table applies to pension received by an individual from a former employer without separating government and private employers. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "the pension shall be charged to tax as a final tax at the rates specified in the proviso to clause (2) of Division I of Part I of the First Schedule where the amount received by an individual from a former employer for a tax year exceeds ten million rupees" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), proviso (pension table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (8) (omitted) and clause (9), sub-clause (i) (omitted), with footnotes](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "any person responsible for paying pension to a former employee who is below the age of seventy years and deriving pension income during a tax year in which the payment exceeds rupees ten million" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2025, section 10 (Amendments in the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2025#10-amendments-in-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2025: "clause (8) and sub-clause (i) of clause (9) shall be omitted;" Official source: https://download1.fbr.gov.pk/Docs/2025629106147620FInanceAct2025.pdf --- ## Is my pension taxable in Pakistan after the Finance Act 2025 changes? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/is-pension-taxable-in-pakistan-2027 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Pension is part of salary under section 12(2)(f), and the Finance Act 2025 removed the old blanket exemptions. But section 12(2A) and the First Schedule pension table charge pension from a former employer at 0% up to Rs. 10 million a year and 5% only above that, and pensioners aged seventy or more are not charged at all. **Applies to:** Retired individuals receiving a pension from a former employer in Pakistan, government or private, for tax year 2027. ### What does the law say? Pension is income under the head "Salary". Section 12(2)(f) of the Income Tax Ordinance, 2001 includes in salary "any pension or annuity, or any supplement to a pension or annuity". That part is not new. What changed is how pension is exempted and what rate applies. Until the Finance Act 2025, two clauses of Part I of the Second Schedule kept most pensions out of tax: | Old clause | What it exempted (as quoted in the footnotes of the consolidated text) | Status now | |---|---|---| | Clause (8) | "Any pension received by a citizen of Pakistan from a former employer", except where the person continued to work for that employer or an associate | Omitted by the Finance Act 2025 | | Clause (9)(i) | Pension "received in respect of services rendered by a member of the Armed Forces of Pakistan or Federal Government or a Provincial Government" | Omitted by the Finance Act 2025 | | Clause (9)(ii) | Pension granted under the relevant rules to families and dependents of public servants or members of the Armed Forces who die during service | Still in force | Section 10 of the Finance Act 2025 did both things at once: it omitted those clauses and inserted a new sub-section (2A) into section 12, plus a pension rate table as a proviso to clause (2) of Division I of Part I of the First Schedule. The Finance Act 2025 came into force on 1 July 2025, and the text amended to 30 June 2026 still carries these rules for tax year 2027. ### How much tax does the pension table charge? The proviso applies to "pension received by an individual from a former employer in a tax year". For tax year 2027 (1 July 2026 to 30 June 2027) it reads: | Pension received in the tax year | Rate of tax | |---|---| | Does not exceed ten million rupees (Rs. 10,000,000) | 0% of the amount | | Exceeds ten million rupees | 5% of the amount exceeding ten million rupees | Section 12(2A)(i) says pension is charged "as a final tax" at these rates, and adds that an individual "who has attained the age of seventy years shall not be charged to tax on pension income". Section 149(1A) then tells the payer of a pension to deduct tax only on the amount "over and above rupees ten million", and only for a former employee below seventy. So the headline "pension is now taxable" is technically true, because the exemption is gone. For a pensioner receiving Rs. 10,000,000 or less in the year, the rate in the table is still 0%. ### Worked example (illustrative figures) **Case 1.** Nasreen, 64, a retired school principal in Multan, receives a pension of Rs. 95,000 a month. 1. Pension for tax year 2027: Rs. 95,000 x 12 = Rs. 1,140,000. 2. This does not exceed Rs. 10,000,000, so row 1 of the pension table applies: 0%. 3. Tax on the pension: **Rs. 0**. Section 149(1A) requires no deduction, because the payment does not exceed ten million rupees. **Case 2.** Tariq, 66, a retired senior officer in Islamabad, receives Rs. 900,000 a month. 1. Pension for the year: Rs. 900,000 x 12 = Rs. 10,800,000. 2. Amount above ten million: Rs. 10,800,000 - Rs. 10,000,000 = Rs. 800,000. 3. Tax at 5% of the excess: Rs. 800,000 x 5% = **Rs. 40,000**. If Tariq were 70 or older, section 12(2A)(i) says he would not be charged on the pension at all. ### What if I still work for my old employer? Then the pension table does not apply. Section 12(2A)(ii) says the pension of an individual "who continues to work for former employer or its associate" is taxed at the ordinary rates in clause (1) or (2) of Division I. That is the same rule the old clause (8) carried, now written into section 12 itself. ### What if the pension is a family pension? Clause (9)(ii) of Part I of the Second Schedule still exempts pension granted under the relevant rules to the families and dependents of public servants or members of the Armed Forces who die during service. Only sub-clause (i) was omitted. A family pension that does not fall within clause (9)(ii) is not addressed separately by the pension table, which speaks of pension received by an individual from a former employer. ### Common mistakes - **Reading "exemption removed" as "fully taxable at slab rates".** Section 12(2A) sends pension from a former employer to the separate pension table, where the first Rs. 10,000,000 is at 0%. - **Assuming government and military pensions are still exempt under clause (9).** Sub-clause (i) was omitted by the Finance Act 2025. What remains in clause (9) is the family pension of those who die in service. - **Applying 5% to the whole pension.** The table charges 5% "of the amount exceeding rupees ten million", not of the whole amount. - **Forgetting the age rule.** Section 12(2A)(i) removes pension income from charge for an individual who has attained seventy. ### What to check in the official text Read section 12(2)(f) and 12(2A), section 149(1A), and the proviso to clause (2) of Division I of Part I of the First Schedule in the official PDF, since our site copy of the Ordinance does not reproduce rate tables. The footnotes under Part I of the Second Schedule quote the omitted clause (8) and clause (9)(i) word for word. Two points are not settled by the text: whether a pension below ten million rupees still counts as income "subject to final taxation" for return-filing purposes, and how a final-tax pension interacts with other income in the same year. This page does not resolve either. ### Frequently asked #### Did the Finance Act 2025 make all pensions taxable? It removed the Second Schedule exemptions in clause (8) and clause (9)(i), so pension is no longer exempt by default. At the same time it inserted section 12(2A) and a pension rate table that charges 0% on pension up to Rs. 10 million a year from a former employer, so most pensions still carry no tax. #### Pension par tax kitna lagega? Under the First Schedule pension table for tax year 2027, the rate is 0% where the pension received does not exceed ten million rupees, and 5% of the amount exceeding ten million rupees where it does. A pensioner aged seventy or more is not charged on pension income under section 12(2A)(i). #### Is a government pension treated differently from a private pension? Not any more under the pension table. The old exemption in clause (9)(i) for Armed Forces and government pensions was omitted by the Finance Act 2025, and the table in the First Schedule applies to pension received by an individual from a former employer, without separating government and private employers. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "any pension or annuity, or any supplement to a pension or annuity" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), proviso (pension table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (8) (omitted) and clause (9)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "any person responsible for paying pension to a former employee who is below the age of seventy years and deriving pension income during a tax year in which the payment exceeds rupees ten million" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2025, section 10 (Amendments in the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2025#10-amendments-in-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2025: "clause (8) and sub-clause (i) of clause (9) shall be omitted;" Official source: https://download1.fbr.gov.pk/Docs/2025629106147620FInanceAct2025.pdf --- ## Is my provident fund or GP Fund balance taxable when I retire? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/provident-fund-taxable-at-retirement Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Usually not. Clause (23) of the Second Schedule and rule 4 of Part I of the Sixth Schedule exclude the accumulated balance of a recognised provident fund from total income, and clause (22) exempts any payment from a fund under the Provident Funds Act, 1925. Recognised-fund limits are applied yearly, not at retirement. **Applies to:** Retiring employees and government servants who are paid out of a recognised provident fund or a fund governed by the Provident Funds Act, 1925. ### What does the law say? The starting point is section 12 of the Income Tax Ordinance, 2001. Section 12(2)(e)(iv) puts into "Salary" any amount received "from a provident or other fund", except the part that repays the employee's own contributions for which no deduction was allowed. Read alone, that would tax most of a provident fund payout. Two exemptions in Part I of the Second Schedule take most retirement payouts out of that charge, and section 53 gives the Second Schedule its force. | Type of fund | Where the exemption is | What the text exempts | |---|---|---| | A fund to which the Provident Funds Act, 1925 applies | Second Schedule, Part I, clause (22) | "Any payment from a provident fund to which the Provident Funds Act, 1925 (XIX of 1925) applies." | | A recognised provident fund | Second Schedule, Part I, clause (23), and Sixth Schedule, Part I, rule 4 | "The accumulated balance due and becoming payable to an employee participating in a recognized provident fund." | Section 2(48) defines a recognised provident fund as one recognised by the Commissioner under Part I of the Sixth Schedule. Rule 4(1) of that Part repeats the exclusion: the accumulated balance due and becoming payable to an employee in a recognised fund "shall be excluded from the computation of his total income", subject to rules the Board may make. ### How does it work in practice? **Government and other Provident Funds Act funds.** Clause (22) covers "any payment" from a fund to which the 1925 Act applies. It is not limited to the balance at retirement and has no rupee cap. Rule 15 of Part I of the Sixth Schedule also says that Part "shall not apply" to a fund governed by the 1925 Act, so the yearly limits described below are not applied to such a fund. The Ordinance does not name which funds the 1925 Act covers. Whether a General Provident Fund or any other fund qualifies is a question of the fund's own governing rules, which are outside this corpus. **Recognised funds in companies.** The exemption at retirement comes with a yearly test. Rule 3 of Part I of the Sixth Schedule treats two parts of each year's increase in your balance as received by you in that year, taxable in that year: 1. employer contributions above one-tenth of your salary or Rs. 150,000, "whichever is low"; and 2. interest credited above one-third of your salary, or credited at a rate higher than a rate the Federal Government may notify. "Salary" for this purpose, under rule 14(h), includes dearness allowance where the terms of employment provide for it, but excludes all other allowances and perquisites. So a fund balance can be exempt at retirement while part of it was already taxed in earlier years. ### Worked example (illustrative figures) Imran worked for a textile mill in Faisalabad with a recognised provident fund. His salary as defined in rule 14(h) was Rs. 1,200,000 a year in his last year. 1. **Rule 3 limit on employer contribution.** One-tenth of Rs. 1,200,000 is Rs. 120,000. The other figure is Rs. 150,000. The lower is **Rs. 120,000**. 2. **Employer contributed Rs. 144,000 that year.** The excess is Rs. 144,000 - Rs. 120,000 = **Rs. 24,000**, treated as received by Imran that year and included in his total income for that year. 3. **Interest check.** One-third of Rs. 1,200,000 is Rs. 400,000. The fund credited Rs. 180,000 of interest, which is below that ceiling. Whether the interest rate also passes the second test depends on the rate notified by the Federal Government, which is not in this corpus. 4. **At retirement.** Imran's accumulated balance is Rs. 4,800,000. Under clause (23) and rule 4(1), the whole Rs. 4,800,000 is excluded from his total income in the year it becomes payable. The Rs. 24,000 from step 2 was taxable in the year it was credited, not again at retirement. If Imran had instead been paid Rs. 4,800,000 from a fund governed by the Provident Funds Act, 1925, clause (22) would exempt the payment and rule 3 would not apply at all because of rule 15. ### What if the balance stays in the fund after I leave? Rule 2(1)(g) of Part I of the Sixth Schedule makes the balance payable on the day you cease to be an employee, but its proviso lets the trustees, at your written request, keep all or part of it "to be drawn by him at any time on demand", and the fund may then credit interest on it. The rule does not say how interest earned after you leave is treated for tax, so this page does not state a result for that interest. ### What if the fund was never recognised? Then clause (23) does not apply, and the payment falls back to section 12(2)(e)(iv). Only the repayment of your own non-deductible contributions is left out of salary. That case is covered in the related page on unrecognised provident funds. ### Common mistakes - **Assuming every provident fund is recognised.** Recognition is an order of the Commissioner under rule 1 of Part I of the Sixth Schedule. A company having a fund does not by itself make it recognised. - **Thinking the exemption is only at retirement.** Clause (23) speaks of the balance "due and becoming payable", and rule 2(1)(g) makes it payable when employment ends, whatever the reason. Clause (22) covers "any payment". - **Ignoring the yearly excess.** Rule 3 amounts are taxed in the year they are credited, so an employer's certificate for those years should reflect them. ### What to check in the official text Read clauses (22) and (23) of Part I of the Second Schedule, and rules 1 to 4, 14 and 15 of Part I of the Sixth Schedule. Confirm with your fund's trustees whether the fund is recognised, and from what date. For a government fund, check whether the fund's own rules state that the Provident Funds Act, 1925 applies. The interest rate notification referred to in rule 3(b) is not in this corpus. ### Frequently asked #### Is the whole provident fund balance tax free at retirement? For a recognised provident fund, clause (23) of Part I of the Second Schedule and rule 4(1) of Part I of the Sixth Schedule exclude the accumulated balance due and becoming payable from total income. The parts that exceed the rule 3 limits are taxed in the year they are credited, not when the balance is paid out. #### Is GP Fund taxable when a government servant retires? Clause (22) of Part I of the Second Schedule exempts any payment from a provident fund to which the Provident Funds Act, 1925 applies. The Ordinance does not list which funds that Act covers, so whether a particular GP Fund qualifies depends on the rules under which that fund is maintained. #### What if I move my balance to my new employer's fund? Rule 4(2) of Part I of the Sixth Schedule applies the same exclusion where, on leaving a job, the accumulated balance is transferred to the employee's individual account in a recognised provident fund maintained by the new employer. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "from a provident or other fund, to the extent to which the amount is not a repayment of contributions made by the employee to the fund in respect of which the employee was not entitled to a deduction" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "“recognised provident fund” means a provident fund recognised by the Commissioner in accordance with Part I of the Sixth Schedule;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clauses (22) and (23)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Sixth Schedule, Part I (Recognised Provident Funds), rules 1 to 4, 14 and 15](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 53 (Exemptions and tax concessions in the Second Schedule)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#53-exemptions-and-tax-concessions-in-the-second-schedule), as amended to 2026-06-30: "exempt from tax under this Ordinance, subject to any conditions and to the extent specified therein" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is the tax on Behbood or Pensioners' Benefit Account profit final, or do I pay more when I file? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/is-behbood-profit-tax-final Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It is not final. Clause (103) of Part IV of the Second Schedule says section 7B, whose tax section 8 makes final, does not apply to Behbood Savings Certificate or Pensioner's Benefit Account profit. The profit is taxed at Division I rates with your other income, within the 5% cap in clause (6) of Part III, through the return. **Applies to:** Holders of Bahbood Savings Certificates or a Pensioners' Benefit Account who need to report the profit in their return for tax year 2027. ### What does the law say? Most profit on debt received by an individual in Pakistan is taxed as a separate, final block. Section 7B imposes a tax at the Division IIIA rate on "every person, other than a company, who receives a profit on debt" from the payers listed in section 151(1)(a) to (d), which include National Savings. Section 8(1) says the tax imposed under section 7B "shall be a final tax on the amount in respect of which the tax is imposed", and that amount "shall not be chargeable to tax under any head of income in computing the taxable income". Behbood Savings Certificate and Pensioner's Benefit Account profit is taken out of that system. Clause (103) of Part IV of the Second Schedule reads: "The provisions of section 7B shall not apply to yield or profit on investment in Bahbood Savings Certificate or Pensioner's Benefit Account, provided that tax on the said yield or profit on debt is paid at the rates specified in Division I of Part I of the First Schedule subject to clause (6) of Part III." Clause (6) of Part III then caps that tax at 5% of the profit. Clause (36A) of Part IV adds that section 151(1)(a), the withholding rule for National Savings yield, does not apply to this profit either. ### So is the tax final? No. Because section 7B does not apply, section 8 does not make the tax final. The profit is ordinary income from other sources, added to your taxable income and taxed at Division I rates, with a ceiling of 5% of the profit. | Question | Ordinary National Savings profit | Behbood / Pensioner's Benefit Account profit | |---|---|---| | Charging rule | Section 7B, Division IIIA rate on the gross amount | Division I rates, via clause (103) | | Final tax? | Yes, section 8(1) | No | | Withholding under section 151(1)(a) | Applies | Disapplied by clause (36A) | | Part of taxable income? | No, section 8(1)(a) | Yes | | Ceiling | None stated | 5% of the profit, clause (6) of Part III | ### How does it work in practice? Three things follow for the return. 1. **The profit goes into taxable income.** It is not a separate final block, so it counts toward the Division I bands along with any other taxable income. 2. **The return may be required because of it.** Section 114(1)(ab) requires a return from "every person (other than a company) whose taxable income for the year exceeds the maximum amount that is not chargeable to tax". For tax year 2027 the first band of clause (1) of Division I is 0% up to Rs. 600,000. 3. **Tax due is paid with the return.** Section 114(2)(d) says a return "shall be accompanied with evidence of payment of due tax as per return of income". Since clause (36A) switches off section 151(1)(a), the Ordinance does not provide for this tax to be deducted at source first. Whether National Savings deducts anything in practice is an administrative matter outside this corpus. This page describes only what the Ordinance says. ### Worked example (illustrative figures) Anwar, a retired shopkeeper in Quetta, has no salary, pension or business income for tax year 2027. His only income is Rs. 1,440,000 of profit on Bahbood Savings Certificates. He is not a salaried individual, so clause (1) of Division I applies. 1. Taxable income: Rs. 1,440,000. This exceeds Rs. 600,000, so section 114(1)(ab) requires a return. 2. Division I, clause (1): Rs. 90,000 + 20% x (Rs. 1,440,000 - Rs. 1,200,000) = Rs. 90,000 + Rs. 48,000 = Rs. 138,000. 3. Clause (6) of Part III cap: 5% x Rs. 1,440,000 = Rs. 72,000. 4. Tax payable on the profit: the lower figure, **Rs. 72,000**. 5. No deduction under section 151(1)(a) was required during the year, so Rs. 72,000 is the tax due with the return. If the same Rs. 1,440,000 had instead been profit on an ordinary deposit taxed under section 7B, it would sit outside taxable income as a final block and Anwar's taxable income would be nil. The two regimes produce different return positions. ### What if I have pension, rent or business income too? Other taxable income is added to the Behbood profit, which can move the whole taxable income into a higher Division I band. The 5% ceiling still limits the tax "in respect of" the profit, but the Ordinance does not say how to divide one Division I tax figure between the profit and the other income before comparing it with 5%. This page does not choose a method. Pension is a further complication. The Ordinance charges pension from a former employer under its own pension table and does not charge a pensioner aged seventy or more. How that pension interacts with the salaried and non-salaried tables in Division I is not answered clearly by the text. ### Common mistakes - **Treating Behbood profit like other National Savings profit.** Clause (103) removes section 7B, so the final-tax treatment in section 8 does not follow. - **Leaving the profit out of the return.** Because it is not final, it is part of taxable income. - **Paying Division I tax without the cap.** Clause (6) limits the tax on the profit to 5% of it. - **Assuming the Shuhada Family Welfare Account is covered by clause (103).** It is named in clauses (6) and (36A), but not in clause (103). ### What to check in the official text Read sections 7B, 8(1), 114(1) and 114(2)(d), and 151(1)(a); clause (6) of Part III and clauses (36A) and (103) of Part IV of the Second Schedule; and clause (1) of Division I of Part I of the First Schedule in the official PDF, where the rate tables appear. Return forms and filing steps are prescribed by FBR outside this corpus. ### Frequently asked #### Is Behbood Savings Certificate profit taxed under final tax? No. Section 8 makes the section 7B tax on profit on debt final, but clause (103) of Part IV of the Second Schedule says section 7B shall not apply to Bahbood Savings Certificate or Pensioner's Benefit Account profit. The profit is taxed at Division I rates instead, subject to the 5% cap. #### Do I have to show Behbood profit in my income tax return? Because the profit is taxed at Division I rates and not as a final tax, it forms part of taxable income. Section 114(1)(ab) requires a return from every person other than a company whose taxable income exceeds the maximum amount not chargeable to tax for the year. #### Will I owe extra tax when I file? Possibly. Clause (36A) of Part IV means section 151(1)(a) withholding does not apply to this profit, so the Ordinance does not provide for tax to be taken at source. The tax worked out at Division I rates, within the 5% cap, is paid with the return, and section 114(2)(d) requires the return to be accompanied with evidence of payment of due tax. ### Citations - [Income Tax Ordinance, 2001, Second Schedule, Part III, clause (6), and Part IV, clauses (36A) and (103)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "The provisions of section 7B shall not apply to yield or profit on investment in Bahbood Savings Certificate or Pensioner’s Benefit Account" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 7B (Tax on profit on debt)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#7b-tax-on-profit-on-debt), as amended to 2026-06-30: "a tax shall be imposed, at the rate specified in Division IIIA of Part I of the First Schedule, on every person, other than a company, who receives a profit on debt" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 8 (General provisions relating to taxes imposed under sections 5, 5A, 5AA, 6, 6A, 7, 7A, 7B and 7G)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#8-general-provisions-relating-to-taxes-imposed-under-sections-5-5a-5aa-6-6a-7-7a-7b-and-7g), as amended to 2026-06-30: "shall be a final tax on the amount in respect of which the tax is imposed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "every person (other than a company) whose taxable income for the year exceeds the maximum amount that is not chargeable to tax under this Ordinance for the year;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 151 (Profit on debt)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#151-profit-on-debt), as amended to 2026-06-30: "a person pays yield on an account, deposit or a certificate under the National Savings Scheme or Post Office Savings Account;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1) (rate table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is there still a 50% tax reduction or a separate tax slab for senior citizens aged 60 or above? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/senior-citizen-tax-rebate-pakistan Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No. Clause (1A) of Part III of the Second Schedule, which cut tax by 50% for taxpayers aged 60 or more with taxable income up to one million rupees, was omitted by the Finance Act, 2014. The tax year 2027 slabs have no age-based rates. The only age rule left is section 12(2A): no tax on pension from age seventy. **Applies to:** Individuals aged 60 or above in Pakistan, and their families, checking whether age alone reduces income tax for tax year 2027. ### What did the old senior citizen rule say? It said that a taxpayer aged 60 or more paid half the tax, if their income was modest. Clause (1A) of Part III of the Second Schedule to the Income Tax Ordinance, 2001 read, as quoted in the footnote of the consolidated text: > "(1A) Where the taxable income [other than income on which the deduction of tax is final], in a tax year, of a taxpayer aged [60] years or more on the first day of that tax year does not exceed [one million] rupees, his tax liability on such income shall be reduced by 50%." Part III is headed "Reduction in tax liability", and this was one of its reductions. It had three limits: age 60 on the first day of the tax year, taxable income not above one million rupees, and no reduction on income already taxed by final deduction. ### Is that rule still in force? No. Section 7 of the Finance Act, 2014, amending Part III of the Second Schedule, says "clause (1A) shall be omitted". The consolidated Ordinance amended to 30 June 2026 shows clause (1A) as an empty bracket with the old wording only in a footnote. Older FBR press releases and articles describing a 50% senior citizen rebate refer to this omitted clause. ### Is there a separate slab for people over 60 in tax year 2027? No. For tax year 2027 (1 July 2026 to 30 June 2027) Division I of Part I of the First Schedule has two tables for individuals, and neither mentions age. **Clause (2), where salary exceeds seventy-five per cent of taxable income:** | Taxable income | Rate of tax | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,000 to Rs. 1,200,000 | 1% of the amount exceeding Rs. 600,000 | | Rs. 1,200,000 to Rs. 2,200,000 | Rs. 6,000 + 11% of the amount exceeding Rs. 1,200,000 | | Rs. 2,200,000 to Rs. 3,200,000 | Rs. 116,000 + 20% of the amount exceeding Rs. 2,200,000 | | Rs. 3,200,000 to Rs. 4,100,000 | Rs. 316,000 + 25% of the amount exceeding Rs. 3,200,000 | | Rs. 4,100,000 to Rs. 5,600,000 | Rs. 541,000 + 29% of the amount exceeding Rs. 4,100,000 | | Rs. 5,600,000 to Rs. 7,000,000 | Rs. 976,000 + 32% of the amount exceeding Rs. 5,600,000 | | Above Rs. 7,000,000 | Rs. 1,424,000 + 35% of the amount exceeding Rs. 7,000,000 | **Clause (1), other individuals and associations of persons:** | Taxable income | Rate of tax | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,000 to Rs. 1,200,000 | 15% of the amount exceeding Rs. 600,000 | | Rs. 1,200,000 to Rs. 1,600,000 | Rs. 90,000 + 20% of the amount exceeding Rs. 1,200,000 | | Rs. 1,600,000 to Rs. 3,200,000 | Rs. 170,000 + 30% of the amount exceeding Rs. 1,600,000 | | Rs. 3,200,000 to Rs. 5,600,000 | Rs. 650,000 + 40% of the amount exceeding Rs. 3,200,000 | | Above Rs. 5,600,000 | Rs. 1,610,000 + 45% of the amount exceeding Rs. 5,600,000 | A 65-year-old and a 35-year-old with the same taxable income from the same source pay the same tax under these tables. ### What age rule is left? Only one, and it is about pension. Section 12(2A)(i), inserted by the Finance Act, 2025, charges pension from a former employer under a separate pension table (0% up to ten million rupees a year, 5% of the amount above that), and adds that "the individual who has attained the age of seventy years shall not be charged to tax on pension income". Section 149(1A) matches this: the payer deducts tax only for a former employee "below the age of seventy years" whose pension for the year exceeds ten million rupees. The age-70 rule applies to pension income alone. Rent, business profit, profit on savings and other income of a person over 70 are taxed like anyone else's. ### Worked example (illustrative figures) **Case 1.** Ghulam Rasool, 66, retired and now runs a small stationery shop in Sialkot. His taxable income from the shop for tax year 2027 is Rs. 1,000,000, and he has no salary. 1. Clause (1) applies, because he is not a salaried individual. 2. Rs. 1,000,000 falls in the Rs. 600,000 to Rs. 1,200,000 band. 3. Tax: 15% x (Rs. 1,000,000 - Rs. 600,000) = 15% x Rs. 400,000 = **Rs. 60,000**. 4. No age reduction applies. Under the omitted clause (1A), a taxpayer of his age with income not above one million rupees would have had the liability reduced by 50%. That clause no longer exists. **Case 2.** Zubaida, 72, a retired schoolteacher in Peshawar, receives a pension of Rs. 1,500,000 for the year from her former employer. Under section 12(2A)(i) she is not charged to tax on that pension, because she has attained seventy. If she also earned profit on a bank deposit, that profit would be taxed under its own rules regardless of her age. ### What if I am between 60 and 70 and receive a pension? Your pension still goes through the pension table in the First Schedule: 0% on pension up to ten million rupees in the tax year and 5% of the amount above that. Most pensioners in this age range therefore pay no tax on pension, but that is because of the pension table, not because of age. ### Common mistakes - **Relying on an old press release.** The 50% reduction for those aged 60 or more was omitted by the Finance Act, 2014. - **Expecting a lower slab at 60 or 65.** Division I contains no age-based rows or tables. - **Stretching the age-70 rule to all income.** Section 12(2A)(i) speaks only of "pension income". - **Confusing the savings cap with an age benefit.** The 5% cap in clause (6) of Part III on Bahbood Savings Certificate and Pensioners Benefit Account profit is tied to those products, not to the investor's age as such. ### What to check in the official text Read the footnote under Part III of the Second Schedule for the omitted clause (1A), section 7 of the Finance Act, 2014, the two tables in Division I of Part I of the First Schedule and the pension proviso after them, section 12(2A) and section 149(1A). Our site copy of the Ordinance does not reproduce the rate tables, so read them in the official PDF. Provincial taxes and any relief outside the Income Tax Ordinance are not covered here. ### Frequently asked #### Do senior citizens get a 50% income tax rebate in Pakistan? Not any more. The rebate was in clause (1A) of Part III of the Second Schedule and covered taxpayers aged 60 or more with taxable income up to one million rupees. The Finance Act, 2014 omitted that clause, and nothing has replaced it. #### Is there a separate tax slab for people over 60? No. Division I of Part I of the First Schedule has one table for salaried individuals and one for other individuals and associations of persons. Neither table changes with the taxpayer's age. #### What tax benefit do people over 70 get? Section 12(2A)(i) says an individual who has attained the age of seventy years shall not be charged to tax on pension income. It applies to pension only, not to rent, business income or profit on savings. ### Citations - [Income Tax Ordinance, 2001, Second Schedule, Part III, clause (1A) (omitted by the Finance Act, 2014, footnote)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "his tax liability on such income shall be reduced by 50%." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2014, Section 7, paragraph (40), Second Schedule, Part III, item (b): clause (1A) shall be omitted](https://qanoondigest.com/acts/finance-act/finance-act-2014), as amended to 2014 Official source: https://download1.fbr.gov.pk/Docs/201471875944299FinanceAct2014-15.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clauses (1) and (2) (rate tables)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "shall not be charged to tax on pension income" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "any person responsible for paying pension to a former employee who is below the age of seventy years and deriving pension income during a tax year in which the payment exceeds rupees ten million" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can I transfer my provident fund to a pension fund at retirement without paying tax? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/transfer-provident-fund-to-pension-fund Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Largely yes. Clause (23C) of Part I of the Second Schedule exempts any withdrawal from an approved pension fund that represents a provident fund balance transferred into it under the Voluntary Pension System Rules, 2005. Section 63(3) adds that such a transfer earns no tax credit, because the money was never a fresh contribution. **Applies to:** Employees and retirees with a balance in a recognised provident fund who are offered a transfer into an approved pension fund run by a pension fund manager. ### What does the law say? Three provisions of the Income Tax Ordinance, 2001 work together here. **Clause (23C) of Part I of the Second Schedule** exempts "Any withdrawal of accumulated balance from approved pension fund that represent the transfer of balance of approved provident fund to the said approved pension fund under the Voluntary Pension System Rules , 2005." The Finance Act, 2012 inserted it. It protects the money when it later comes out of the pension fund. **Section 63(3)** says "The transfer by the members of approved employment pension or annuity scheme or approved occupational saving scheme of their existing balance to their individual pension accounts maintained with one or more pension fund managers shall not qualify for tax credit under this section." Section 2(3E) defines an "Approved Occupational Savings Scheme" as "any approved gratuity fund or recognized provident fund". So a provident fund balance moved into a VPS account does not earn the section 63 credit. **Rule 4 of Part I of the Sixth Schedule** excludes from total income "the accumulated balance due and becoming payable to an employee participating in a recognised provident fund". Rule 4(2) extends this where, on leaving one job, the employee joins another employer and the balance is transferred to that employer's recognised provident fund. Clause (23) of Part I of the Second Schedule separately exempts the accumulated balance due to an employee participating in a recognised provident fund, and clause (22) exempts payments from a provident fund to which the Provident Funds Act, 1925 applies. ### How does it work in practice? At retirement, the balance in a recognised provident fund is already outside total income under clause (23) and rule 4(1). Taking it as cash does not attract income tax on that balance. The question is what happens if you leave it invested by moving it into an approved pension fund instead. | Step | Provision | Effect | |---|---|---| | Balance becomes payable from recognised provident fund | Clause (23); Sixth Schedule rule 4(1) | Excluded from income | | Balance transferred into your individual pension account | Section 63(3) | No section 63 tax credit on the transferred amount | | Later withdrawal of the part that represents the transferred balance | Clause (23C) | Exempt | | Later withdrawal of your own VPS contributions and their growth | Clause (23A) | Up to 50% exempt at retirement; the rest taxed at the section 12(6) rate | So the transferred money stays exempt, and your own contributions follow the separate 50% rule. The pension fund manager needs to track which part of the account came from the provident fund. How it does that is set by the Voluntary Pension System Rules, 2005, which are outside this corpus. ### Worked example (illustrative figures) Naveed retires from a textile mill in Faisalabad. His recognised provident fund balance is Rs. 4,000,000. He already has Rs. 1,000,000 in his own VPS account from earlier contributions, and he moves the provident fund balance into the same pension fund. 1. Provident fund balance at retirement: Rs. 4,000,000, excluded from income under clause (23) and rule 4(1). 2. Transfer into the pension fund: no section 63 credit, because section 63(3) excludes transferred balances. 3. Account after transfer: Rs. 4,000,000 transferred + Rs. 1,000,000 own contributions = Rs. 5,000,000 (growth ignored for simplicity). 4. Naveed later withdraws the Rs. 4,000,000 that represents the transferred balance. Clause (23C): **exempt**. 5. From the Rs. 1,000,000 of his own contributions, clause (23A) exempts up to 50% at retirement, which is Rs. 500,000. Anything above that is taxed at his section 12(6) rate. Clause (23A) measures 50% of "the accumulated balance". The text does not say whether the transferred provident fund money counts in that balance when computing the 50%. This page follows the separation clause (23C) makes, but the point is not settled by the wording. ### What if my provident fund is not recognised? Clause (23C) speaks of an "approved provident fund", a term the Ordinance does not define. The defined terms are "recognised provident fund" in section 2(48) and "Approved Occupational Savings Scheme" in section 2(3E). A balance from an unrecognised fund is taxed under section 12(2)(e)(iv), which includes in salary amounts received "from a provident or other fund" to the extent they are not a repayment of the employee's own non-deductible contributions. Whether clause (23C) can reach an unrecognised fund is not answered by the text. ### What if I change jobs instead of retiring? Rule 4(2) of the Sixth Schedule covers a transfer to a recognised provident fund maintained by the new employer. It keeps the balance excluded from income. It does not deal with transfers into a pension fund; that route is covered only by clause (23C) and section 63(3). ### Common mistakes - **Claiming the section 63 credit on the rollover.** Section 63(3) expressly denies it. - **Applying the 50% limit to the transferred amount.** Clause (23C) exempts withdrawals representing the transferred balance on their own terms. - **Reading rule 4(2) as covering pension funds.** It speaks only of a recognised provident fund of another employer. - **Assuming any provident fund qualifies.** The exemption for the balance itself in clause (23) and rule 4 depends on the fund being recognised by the Commissioner under Part I of the Sixth Schedule. ### What to check in the official text Read clauses (22), (23), (23A) and (23C) of Part I of the Second Schedule, section 63(3), section 2(3E) and 2(48), and rules 4 and 5 of Part I of the Sixth Schedule. Confirm with the pension fund manager that the transfer is recorded as a provident fund balance under the Voluntary Pension System Rules, 2005, which are not held in this corpus. ### Frequently asked #### Is money moved from my provident fund into a VPS account taxed when I take it out? Clause (23C) of Part I of the Second Schedule exempts any withdrawal from an approved pension fund that represents the transfer of an approved provident fund balance into it. That part of the account is outside the 50% limit in clause (23A), which deals with your own contributions. #### Can I claim the section 63 pension credit on the transferred amount? No. Section 63(3) says the transfer of an existing balance from an approved occupational saving scheme into an individual pension account shall not qualify for tax credit. Section 2(3E) defines that scheme to include a recognised provident fund. #### Does rule 4(2) of the Sixth Schedule cover a move into a pension fund? Rule 4(2) covers a transfer to a recognised provident fund maintained by a new employer when you change jobs. It does not mention pension funds. The pension fund route is covered by clause (23C) and section 63(3) instead. ### Citations - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (23C)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "Any withdrawal of accumulated balance from approved pension fund that represent the transfer of balance of approved provident fund to the said approved pension fund under the Voluntary Pension System Rules , 2005." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 63 (Contribution to an Approved Pension Fund)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#63-contribution-to-an-approved-pension-fund), as amended to 2026-06-30: "shall not qualify for tax credit under this section" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Sixth Schedule, Part I, rule 4](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "the employee obtains employment with any other employer and the accumulated balance due and becoming payable to him is transferred to his individual account in any recognised provident fund maintained by such other employer." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "from a provident or other fund, to the extent to which the amount is not a repayment of contributions made by the employee to the fund in respect of which the employee was not entitled to a deduction" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clauses (22), (23) and (23A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 2(3E), definition of approved occupational savings scheme, and section 2(48), recognised provident fund](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do I have to file an income tax return if my only income is pension? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/pensioner-income-tax-return-filing Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer A pension taxed at 0% does not by itself end the duty to file. Section 114 also requires a return from anyone holding an NTN, owning a car above 1000 CC or qualifying property, or charged to tax in either of the two preceding years. Section 115 lifts only the property and car triggers for widows and disabled persons. **Applies to:** Retired individuals in Pakistan whose income is wholly or mainly a pension, including those who stopped filing after retirement, for tax year 2027. ### What does the law say? Section 114(1) of the Income Tax Ordinance, 2001 lists who must file a return of income for a tax year. For an individual living on a pension, three parts matter: - **Clause (ab):** a person (other than a company) "whose taxable income for the year exceeds the maximum amount that is not chargeable to tax". - **Clause (ae):** "every person whose income for the year is subject to final taxation under any provision of this Ordinance". - **Clause (b):** any other person who meets one of a list of conditions, whatever the size of the income. The tax on the pension itself comes from section 12(2A)(i). Pension is charged "as a final tax" at the rates in the pension table in the First Schedule, and an individual who has attained the age of seventy years is not charged on pension income. For tax year 2027 (1 July 2026 to 30 June 2027) that table reads: | Pension received in the tax year | Rate of tax | |---|---| | Does not exceed ten million rupees | 0% of the amount | | Exceeds ten million rupees | 5% of the amount exceeding ten million rupees | So the rate answers "how much tax", and section 114 answers "must I file". They are separate questions. ### Which conditions catch people who retired years ago? Clause (b) of section 114(1) covers a person who: | Sub-clause | Condition | |---|---| | (i) | "has been charged to tax in respect of any of the two preceding tax years" | | (iii) to (v) | owns land of five hundred square yards or more in the listed areas or in a rating area, any flat in the listed areas, or a flat of two thousand square feet or more in a rating area | | (vi) | "owns a motor vehicle having engine capacity above 1000 CC" | | (vii) | "has obtained National Tax Number" | Sub-clauses (ii), (viii), (ix) and (x) cover carried-forward losses, large commercial electricity bills, membership of a chamber or professional body, and the foreign income and assets statement. For someone who retired long ago, sub-clause (i) usually falls away once two full tax years pass without tax being charged. Sub-clause (vii) does not fall away. The text says "has obtained", so an NTN taken out during working life keeps the condition met. ### What relief does section 115 give? Section 115(3) says a widow, an orphan below the age of twenty-five years, a disabled person and (for immovable property only) a non-resident person are not required to file "solely by reason of" sub-clauses (iii), (iv), (v) and (vi) of section 114(1)(b). The relief covers property and the car. It does not switch off the NTN condition, the two-year look-back, or clauses (ab) and (ae). ### Worked example (illustrative figures) **Mr. Aslam, 64, Multan.** Retired from a public sector company on 30 June 2023. Pension Rs. 110,000 a month, so Rs. 1,320,000 in tax year 2027. Owns a 1000 CC car. Holds the NTN he used while employed. Has not filed since tax year 2023. 1. Pension table: Rs. 1,320,000 does not exceed ten million rupees, so tax is 0%. 2. Sub-clause (i): the two tax years before 2027 are 2025 and 2026. His salary was charged in tax year 2023, so this condition is not met on these facts. 3. Sub-clause (vi): his car is 1000 CC, not "above 1000 CC", so this condition is not met. 4. Sub-clause (vii): he has obtained an NTN. **This condition is met**, so section 114(1)(b) requires a return for tax year 2027. **Mrs. Shaheen, 70, Karachi.** A widow on a family pension, owning a 1300 CC car and no NTN, with no tax charged in tax years 2025 or 2026. Sub-clause (vi) would apply, but section 115(3)(a) removes it for a widow. No other condition in clause (b) is met on these facts. **Mr. Qazi, 65, Islamabad.** Pension Rs. 950,000 a month, so Rs. 11,400,000 for the year. 1. Amount above ten million: Rs. 11,400,000 - Rs. 10,000,000 = Rs. 1,400,000. 2. Tax at 5%: Rs. 1,400,000 x 5% = **Rs. 70,000**, charged as a final tax. 3. His income is subject to final taxation, which is the wording of clause (ae). ### What if I stopped filing and never heard from FBR? Section 114(4) lets the Commissioner, by written notice, require a person who in the Commissioner's opinion was required to file but did not, to file within thirty days or another period in the notice. Section 114(5) limits this to the last five completed tax years, extended to the last ten where no return was filed for any of the last five, and removes the limit where the Commissioner records that the person has foreign income or foreign assets. ### How does the Active Taxpayers List fit in? Section 181A(1) says the Board "shall have the power to institute active taxpayers' list", and section 181A(2) says the list is regulated as prescribed. The Ordinance text does not set out the list's rules, so this page does not describe them. Section 114B is where the list meets the filing duty. It lets the Board issue an income tax general order against persons "not appearing on active taxpayers' list but are liable to file return". The order may disable mobile phones or SIMs, discontinue electricity or gas connections, or restrict foreign travel for citizens (with exclusions such as NICOP holders and persons going for Hajj or Umrah). Under section 114B(4), no one is included unless a section 114(4) notice was issued, its compliance date has passed and the return has not been filed. Section 114B(3) allows restoration once the return is filed or the person shows they were not liable. ### Common mistakes - **Reading 0% as "no return".** The rate and the filing duty are separate. Section 114(1)(b) applies whatever the pension. - **Forgetting the old NTN.** Sub-clause (vii) is met by having obtained an NTN, not by using it. - **Stretching the widow relief.** Section 115(3) covers sub-clauses (iii) to (vi) only. - **Treating the list as the law.** The duty comes from section 114; section 181A only creates the power to keep the list. ### What to check in the official text Read section 114(1), (4) and (5), section 115(3), section 114B and section 181A. Clause (c) of section 114(1) lets the Board notify further persons who must file; those notifications are not in this corpus. Whether a pension below ten million rupees, or the pension of a person aged seventy or more, counts as income "subject to final taxation" for clause (ae) is not stated in the text. The pension table is in the proviso to clause (2) of Division I of Part I of the First Schedule; read it in the official PDF, since our site copy leaves out tables. The rules regulating the Active Taxpayers List and the FBR portal steps are outside this page. ### Frequently asked #### I stopped filing when I retired. Does that still matter? It can. Section 114(1)(b)(vii) applies to anyone who has obtained a National Tax Number, and that condition does not lapse on retirement. Section 114(4) and (5) also let the Commissioner require a return for one or more of the last five completed tax years, or the last ten where no return was filed for any of the last five. #### My pension is below ten million rupees. Am I outside the filing rules? Not automatically. The pension table charges 0% up to ten million rupees for tax year 2027, but section 114(1)(b) turns on an NTN, property, a car above 1000 CC and tax charged in the two preceding years, not on the rate. Whether a 0% pension on its own is income subject to final taxation under clause (ae) is not settled by the text. #### Does the Active Taxpayers List decide whether I must file? No. Section 181A only gives the Board power to institute the list and says it is regulated as prescribed. The duty to file comes from section 114. Section 114B lets the Board act against people not on the list who are liable to file, after a section 114(4) notice has gone unanswered. ### Citations - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "has been charged to tax in respect of any of the two preceding tax years" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 115 (Persons not required to furnish a return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#115-persons-not-required-to-furnish-a-return-of-income), as amended to 2026-06-30: "The following persons shall not be required to furnish a return of income for a tax year solely by reason of" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "the pension shall be charged to tax as a final tax at the rates specified in the proviso to clause (2) of Division I of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 181A (Active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181a-active-taxpayers-list), as amended to 2026-06-30: "The Board shall have the power to institute active taxpayers’ list." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114B (Powers to enforce filing of returns)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114b-powers-to-enforce-filing-of-returns), as amended to 2026-06-30: "the Board shall have the powers to issue income tax general order in respect of persons who are not appearing on active taxpayers’ list but are liable to file return under the provisions of the Ordinance." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), proviso (pension table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## If I get pension and a salary from a new job, how is each taxed? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/pension-and-salary-from-new-job Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer They are taxed separately. Section 12(2A)(i) taxes pension from a former employer as a final tax under its own table: 0% up to Rs. 10 million a year and 5% above that, with nothing at all from age seventy. Salary from an unrelated new employer is taxed at the clause (2) slab rates, deducted monthly under section 149. **Applies to:** Retired individuals drawing a pension from a former employer who have taken a salaried job with a different, unrelated employer. ### What does the law say? Both payments fall under the head "Salary". Section 12(2)(f) includes "any pension or annuity" in salary, and section 12(2)(a) includes pay and wages. What changes is the rate table each one uses. **Pension.** Section 12(2A), inserted by the Finance Act, 2025, sets a separate rule for pension. Under section 12(2A)(i) the pension "shall be charged to tax as a final tax at the rates specified in the proviso to clause (2) of Division I of Part I of the First Schedule" where the amount received from a former employer exceeds ten million rupees in a tax year. The same sub-clause says an individual who has attained the age of seventy years "shall not be charged to tax on pension income". The proviso table in the First Schedule has two rows: | Pension received from a former employer in a tax year | Rate | |---|---| | Up to Rs. 10,000,000 | 0% of the amount | | Above Rs. 10,000,000 | 5% of the amount exceeding Rs. 10,000,000 | **Salary from the new job.** Section 12(2A)(ii) sends pension to the ordinary slab rates only where the individual "continues to work for former employer or its associate". A job with an unrelated employer does not trigger that sub-clause, so the pension stays on the table above. The new salary itself is taxed on the salaried table in clause (2) of Division I, Part I of the First Schedule, which applies where salary is more than 75% of taxable income. For tax year 2027 (1 July 2026 to 30 June 2027) that table reads: | Taxable income | Tax | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,001 to Rs. 1,200,000 | 1% of the amount over Rs. 600,000 | | Rs. 1,200,001 to Rs. 2,200,000 | Rs. 6,000 + 11% of the amount over Rs. 1,200,000 | | Rs. 2,200,001 to Rs. 3,200,000 | Rs. 116,000 + 20% of the amount over Rs. 2,200,000 | | Rs. 3,200,001 to Rs. 4,100,000 | Rs. 316,000 + 25% of the amount over Rs. 3,200,000 | | Rs. 4,100,001 to Rs. 5,600,000 | Rs. 541,000 + 29% of the amount over Rs. 4,100,000 | | Rs. 5,600,001 to Rs. 7,000,000 | Rs. 976,000 + 32% of the amount over Rs. 5,600,000 | | Above Rs. 7,000,000 | Rs. 1,424,000 + 35% of the amount over Rs. 7,000,000 | ### How is the tax collected on each? Two different people deduct tax, under two different sub-sections of section 149. - **Your new employer** deducts under section 149(1), at your average rate worked out on your estimated salary for the year using the Division I rates. - **Your pension payer** deducts under section 149(1A). That sub-section applies only to a former employee below the age of seventy whose pension for the tax year exceeds Rs. 10 million, and only "from the amount which is over and above rupees ten million". For most pensioners the pension is well under Rs. 10 million, so the pension payer deducts nothing and the only monthly deduction is from the new salary. ### Worked example (illustrative figures) Tariq Mahmood, 62, retired from a private bank in Lahore. He now works for an unrelated software company. His figures for tax year 2027 are invented; the rates are the real ones cited above. - Pension from the bank: Rs. 100,000 a month, Rs. 1,200,000 for the year - Salary from the software company: Rs. 150,000 a month, Rs. 1,800,000 for the year **Pension.** Rs. 1,200,000 is below Rs. 10,000,000, so the proviso table gives 0%. Tax on pension: **Rs. 0**. The bank deducts nothing under section 149(1A). **Salary.** Rs. 1,800,000 falls in the Rs. 1,200,001 to Rs. 2,200,000 band. 1. Amount over Rs. 1,200,000: 1,800,000 - 1,200,000 = 600,000 2. 11% of 600,000 = 66,000 3. Tax: 6,000 + 66,000 = **Rs. 72,000**, or Rs. 6,000 a month if spread evenly **Total tax for the year: Rs. 72,000.** **Comparison: if Tariq had gone back to work for the bank.** Section 12(2A)(ii) would then tax his pension at the clause (1) or (2) rates. Treating pension and salary together as Rs. 3,000,000 of salary income on the clause (2) table: 1. Amount over Rs. 2,200,000: 3,000,000 - 2,200,000 = 800,000 2. 20% of 800,000 = 160,000 3. Tax: 116,000 + 160,000 = **Rs. 276,000** On these figures, choosing an unrelated employer keeps Rs. 204,000 (276,000 minus 72,000) of tax off the year, simply because the pension stays on its own table. ### What if ...? **My pension is above Rs. 10 million?** Only the part above Rs. 10 million is taxed, at 5%. A pension of Rs. 12,000,000 gives 5% of Rs. 2,000,000 = Rs. 100,000, deducted by the pension payer under section 149(1A). The new salary is still taxed separately on clause (2). **I turn seventy during the year?** Section 12(2A)(i) removes tax on pension income for an individual who "has attained the age of seventy years". The text does not say how a birthday part way through a tax year is treated, so this page does not settle that point. **The new employer is a subsidiary or group company of my old employer?** Then it may be an "associate", and section 12(2A)(ii) moves the pension to the slab rates. That situation is covered on the page about working for a former employer. ### Common mistakes - **Adding the pension to the salary on the slab table.** Section 12(2A)(i) keeps pension from an unrelated former employer on its own table as a final tax. - **Assuming the new employer will ignore pension rules entirely.** Section 149(1) only covers the new employer's own salary; the pension payer's deduction is a separate duty under section 149(1A). - **Thinking the Rs. 10 million figure is an exemption with a cliff.** The proviso table charges 5% only on the amount exceeding Rs. 10 million, not on the whole pension. ### What to check in the official text Read section 12(2)(f) and 12(2A) together, then section 149(1) and (1A). The pension table is the proviso at the end of clause (2) in Division I, Part I of the First Schedule; it is a table, so read it in the official PDF. Section 12(2A) does not itself explain when a new employer counts as the former employer's "associate", so check that point if your new employer has any link to the old one. Section 12(2A) also does not say in terms whether a pension below Rs. 10 million is left out of the taxable income used to place your salary in a slab; the example above follows the separate-table reading that the words "final tax" point to. ### Frequently asked #### Is my pension added to my new salary to work out my tax slab? Section 12(2A)(i) charges pension from a former employer as a final tax under its own table, and the new salary is taxed at the clause (2) slab rates, so the two are computed separately. Section 12(2A)(ii) puts pension on the slab rates only where you keep working for your former employer or its associate. #### Will the new employer deduct tax on my pension? Section 149(1) tells the new employer to deduct tax on your estimated salary at the clause (2) rates. Tax on pension is dealt with in section 149(1A), which places it on the person paying the pension, and only on the amount above Rs. 10 million a year. #### I am 71 and still working. Is my pension taxed? No. Section 12(2A)(i) says an individual who has attained the age of seventy years shall not be charged to tax on pension income. Your new salary is still taxed at the clause (2) rates like anyone else's. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "the pension shall be charged to tax as a final tax at the rates specified in the proviso to clause (2) of Division I of Part I of the First Schedule where the amount received by an individual from a former employer for a tax year exceeds ten million rupees" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "any person responsible for paying pension to a former employee who is below the age of seventy years and deriving pension income during a tax year in which the payment exceeds rupees ten million, shall at the time of payment, deduct tax from the amount which is over and above rupees ten million" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), proviso (pension rate table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## I retired but still work, either on contract for my old employer or in a new job. How is my pension taxed? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/pension-while-working-after-retirement Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It depends on who you work for. Section 12(2A)(ii) charges the pension of someone who continues to work for the former employer or its associate at the ordinary rates in clause (1) or (2) of Division I. With an unrelated employer, the pension stays under the 0% and 5% pension table and the new salary is taxed through section 149. **Applies to:** Retired individuals receiving a pension who also earn pay from work, either for the former employer or its associate, or for a new unrelated employer, in tax year 2027. ### What does the law say about pension if I keep working? The answer turns on who you work for. Section 12(2A) of the Income Tax Ordinance, as amended to 30 June 2026 and applying to tax year 2027, has two parts: - **Section 12(2A)(i)** charges pension from a former employer at the pension table in the proviso to clause (2) of Division I of Part I of the First Schedule: 0% where the pension does not exceed Rs. 10 million, and 5% of the amount exceeding Rs. 10 million. - **Section 12(2A)(ii)** says "the pension of an individual who continues to work for former employer or its associate shall be charged to tax at the rates specified under clause (1) or (2) of Division I of Part I to First Schedule as the case may be." So a retiree who keeps working for the same organisation, or an associate of it, loses the pension table. A retiree who takes a job with an unrelated employer keeps it. The idea is not new. The old clause (8) of the Second Schedule, omitted by the Finance Act 2025, also excluded a pensioner who "continues to work for the employer (or an associate of the employer)". ### Which slab table applies under section 12(2A)(ii)? Clause (2) of Division I applies "where the income of an individual chargeable under the head 'salary' exceeds seventy-five per cent of his taxable income". Clause (1) covers other individuals. For tax year 2027 the clause (2) salary table reads: | Taxable income | Rate of tax | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,001 to Rs. 1,200,000 | 1% of the amount exceeding Rs. 600,000 | | Rs. 1,200,001 to Rs. 2,200,000 | Rs. 6,000 + 11% of the amount exceeding Rs. 1,200,000 | | Rs. 2,200,001 to Rs. 3,200,000 | Rs. 116,000 + 20% of the amount exceeding Rs. 2,200,000 | | Rs. 3,200,001 to Rs. 4,100,000 | Rs. 316,000 + 25% of the amount exceeding Rs. 3,200,000 | | Rs. 4,100,001 to Rs. 5,600,000 | Rs. 541,000 + 29% of the amount exceeding Rs. 4,100,000 | | Rs. 5,600,001 to Rs. 7,000,000 | Rs. 976,000 + 32% of the amount exceeding Rs. 5,600,000 | | Above Rs. 7,000,000 | Rs. 1,424,000 + 35% of the amount exceeding Rs. 7,000,000 | A retiree whose main income is not salary would fall under clause (1), which has higher rates: 15% of the amount between Rs. 600,000 and Rs. 1,200,000, rising to 45% above Rs. 5,600,000. ### How is the new salary taxed? Section 149(1) requires every person paying salary to deduct tax "from the amount paid at the employee's average rate of tax computed at the rates specified in Division I of Part I of the First Schedule" on the employee's estimated salary income for the year. That applies to contract pay from the former employer if it is salary, and to salary from any new employer. ### Worked example (illustrative figures) Both people below receive a pension of Rs. 100,000 a month (Rs. 1,200,000 a year) and a salary of Rs. 150,000 a month (Rs. 1,800,000 a year), are under seventy, and have no other income. **Case A: Mr. Tariq, Faisalabad, rehired on contract by the textile mill that pays his pension.** Section 12(2A)(ii) applies. This example assumes the pension and the contract pay are both salary and are added together; section 12(2A)(ii) gives the rates but does not spell out the aggregation. 1. Pension + contract pay: Rs. 1,200,000 + Rs. 1,800,000 = Rs. 3,000,000 2. All of it is salary, so salary exceeds 75% of taxable income and the clause (2) table applies. 3. Rs. 3,000,000 falls in the Rs. 2,200,001 to Rs. 3,200,000 row. 4. Tax: Rs. 116,000 + 20% x (Rs. 3,000,000 - Rs. 2,200,000) = Rs. 116,000 + Rs. 160,000 = **Rs. 276,000** **Case B: Mrs. Nasreen, Lahore, working for an unrelated school.** Section 12(2A)(i) keeps her pension under the pension table. 1. Pension: Rs. 1,200,000 does not exceed Rs. 10 million, so 0% applies. Tax on pension: Rs. 0. 2. New salary: Rs. 1,800,000 under the clause (2) table (this assumes the pension, being charged separately, does not push her salary below the 75% test). 3. Tax: Rs. 6,000 + 11% x (Rs. 1,800,000 - Rs. 1,200,000) = Rs. 6,000 + Rs. 66,000 = **Rs. 72,000** Same money, different employer: Rs. 276,000 against Rs. 72,000 in this illustration. ### What if the facts are less clear? **What if my contract is a consultancy, not employment?** Section 12(2A)(ii) says "continues to work", not "continues to be employed". Whether consultancy fees count as salary, and whether a consultancy is "work" for the former employer, are separate questions. The text of section 12(2A) does not answer them. **What if I rejoin after a gap?** The word "continues" suggests unbroken work, but the Ordinance does not say whether a return after a break is covered. **What if I am over seventy?** Section 12(2A)(i) says a person who has attained seventy "shall not be charged to tax on pension income". The Ordinance does not say whether that prevails over section 12(2A)(ii) for someone still working for the former employer. ### Common mistakes - **Assuming any job ends the pension table.** Section 12(2A)(ii) is limited to the former employer "or its associate". "Associate" is a defined term elsewhere in the Ordinance and is not examined here. - **Assuming a contract avoids the rule.** The clause speaks of work, not a particular type of appointment. - **Using the pension table for the new salary.** The table applies to pension only; the salary follows section 149 and the slab tables. ### What to check in the official text Read section 12(2A)(i) and (ii) and section 149(1), then clauses (1) and (2) of Division I of Part I of the First Schedule and the pension proviso, all in the Ordinance amended to 30 June 2026. Check the Ordinance's definition of "associate" if the new employer is linked to the old one. ### Frequently asked #### Does contract work for my old employer count as continuing to work for it? Section 12(2A)(ii) uses the words continues to work for former employer or its associate and does not limit them to permanent employment. The Ordinance does not define work for this clause, so whether a particular contract falls inside it is not settled by the text alone. #### If I join a completely different company, is my pension still at 0%? Section 12(2A)(ii) applies only to work for the former employer or its associate. Where the new employer is neither, the pension stays under section 12(2A)(i) and the pension table, which charges 0% up to Rs. 10 million a year and 5% of the amount above that. #### How is the salary from my new job taxed? Section 149(1) requires the new employer to deduct tax at your average rate of tax computed at the rates in Division I of Part I of the First Schedule. For a person whose salary exceeds seventy-five per cent of taxable income, that means the clause (2) salary table. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "the pension of an individual who continues to work for former employer or its associate shall be charged to tax at the rates specified under clause (1) or (2) of Division I of Part I to First Schedule as the case may be." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2) (salary table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1) (table for individuals other than salaried)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), proviso (pension table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## I retired but now work on contract for the same company. Is my pension taxed? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/pension-while-working-for-former-employer Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, at ordinary rates. Section 12(2A)(ii) says the pension of an individual who continues to work for the former employer or its associate is taxed at the rates in clause (1) or (2) of Division I of the First Schedule, not under the pension table. The first Rs. 10 million at 0% is not available in that case. **Applies to:** Retired individuals in Pakistan who receive a pension and also work for the same former employer, or an associate of it, in tax year 2027. ### What does the law say? Section 12(2A) of the Income Tax Ordinance, 2001, inserted by the Finance Act 2025, gives pension two different treatments. - **Clause (i):** pension from a former employer is charged as a final tax at the rates in the pension table (the proviso to clause (2) of Division I of Part I of the First Schedule): 0% up to ten million rupees in a tax year, 5% of the amount above that. - **Clause (ii):** "the pension of an individual who continues to work for former employer or its associate shall be charged to tax at the rates specified under clause (1) or (2) of Division I". So if you are drawing a pension and still working for the organisation that pays it, or for an associate of that organisation, the pension leaves the pension table and joins the ordinary salaried or non-salaried slabs. This is not a new idea. The omitted clause (8) of Part I of the Second Schedule, as quoted in the footnotes of the consolidated text, exempted pension from a former employer "other than where the person continues to work for the employer (or an associate of the employer)". Section 12(2A)(ii) keeps that exclusion. Section 12(5)(b) also matters here. It treats an amount as received from employment whether it is paid by the employee's employer or "by a past employer". A pension paid by the company you used to work for is therefore still salary, even though the job it relates to has ended. ### Which slab table applies? Division I has two tables. Clause (2) applies "where the income of an individual chargeable under the head 'salary' exceeds seventy-five per cent of his taxable income". Clause (1) covers other individuals. Both pension and a salary from re-employment are salary, so for most re-hired pensioners clause (2) applies. For tax year 2027 (1 July 2026 to 30 June 2027) the clause (2) table is: | Taxable income | Tax | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,001 to Rs. 1,200,000 | 1% of the amount above Rs. 600,000 | | Rs. 1,200,001 to Rs. 2,200,000 | Rs. 6,000 + 11% of the amount above Rs. 1,200,000 | | Rs. 2,200,001 to Rs. 3,200,000 | Rs. 116,000 + 20% of the amount above Rs. 2,200,000 | | Rs. 3,200,001 to Rs. 4,100,000 | Rs. 316,000 + 25% of the amount above Rs. 3,200,000 | | Rs. 4,100,001 to Rs. 5,600,000 | Rs. 541,000 + 29% of the amount above Rs. 4,100,000 | | Rs. 5,600,001 to Rs. 7,000,000 | Rs. 976,000 + 32% of the amount above Rs. 5,600,000 | | Above Rs. 7,000,000 | Rs. 1,424,000 + 35% of the amount above Rs. 7,000,000 | If salary is 75% or less of taxable income, for instance because of large rental or business income, the clause (1) table applies instead, with rates rising from 15% to 45%. ### How is the tax collected? Section 149(1) requires the person paying salary to deduct tax at the employee's average rate, computed at the Division I rates on the employee's estimated income chargeable under the head "Salary" for the year. The special pension deduction rule in section 149(1A) does not fit this case, because it is built around the pension table and the ten million rupee threshold. The Ordinance does not spell out how two payers (a pension fund and the employer's payroll) are to share the deduction when the pension comes from a separate fund. ### Worked example (illustrative figures) Dr. Farah retired from a private hospital in Lahore. She receives a pension of Rs. 150,000 a month from the hospital and has been re-engaged by the same hospital at Rs. 200,000 a month. She has no other income and is below seventy. 1. Pension for tax year 2027: Rs. 150,000 x 12 = Rs. 1,800,000. 2. Salary: Rs. 200,000 x 12 = Rs. 2,400,000. 3. Total salary income: Rs. 1,800,000 + Rs. 2,400,000 = Rs. 4,200,000. All of it is salary, so clause (2) applies. 4. Tax: Rs. 541,000 + 29% x (Rs. 4,200,000 - Rs. 4,100,000) = Rs. 541,000 + Rs. 29,000 = **Rs. 570,000**. Had Farah taken her new job at an unrelated hospital, section 12(2A)(ii) would not apply. Her pension of Rs. 1,800,000 would fall under the pension table at 0%, and only the new salary would be taxed at the slab rates. ### What if I am over seventy and still working there? Section 12(2A)(i) says an individual who has attained seventy is not charged on pension income, while clause (ii) sends the pension of someone still working for the former employer to slab rates. The text does not say which clause prevails when both describe the same person. This page does not settle that point. ### Common mistakes - **Assuming the pension table applies to every pension.** Clause (ii) removes it for anyone still working for the former employer or its associate. - **Ignoring associates.** Re-employment by a group company can count; "associate" is a defined term in the Ordinance, and the exclusion covers the former employer "or its associate". - **Taxing the salary alone at slab rates.** Clause (ii) puts the pension itself on slab rates too, which pushes the combined amount into a higher band. ### What to check in the official text Read section 12(2A) and 12(5), section 149(1), and clauses (1) and (2) of Division I of Part I of the First Schedule in the official PDF, since our site copy does not reproduce rate tables. If you work under a consultancy or contract rather than as an employee, check how the arrangement is described, because section 12(2A)(ii) does not define "continues to work". ### Frequently asked #### Does a contract job count as continuing to work for my former employer? Section 12(2A)(ii) uses the words continues to work for former employer or its associate and does not define them. The Ordinance does not say whether a consultancy or fixed-term contract counts, so this page does not settle that point. #### Which slab table applies to my pension and salary together? Section 12(2A)(ii) points to clause (1) or (2) of Division I, as the case may be. Clause (2) applies where income chargeable under the head Salary exceeds seventy-five per cent of taxable income, which is usually the case when pension and salary are the main income. #### What if I work for a different, unrelated company? Section 12(2A)(ii) is limited to the former employer or its associate. Pension from a former employer where you do not work for it or an associate falls under the pension table, at 0% up to ten million rupees and 5% above. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "the pension of an individual who continues to work for former employer or its associate shall be charged to tax at the rates specified under clause (1) or (2) of Division I of Part I to First Schedule as the case may be." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2) (rate table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1) (rate table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), proviso (pension table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do I have to show exempt pension, commutation and gratuity in my return and wealth statement? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/declare-commutation-gratuity-wealth-statement Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, in practice. Section 116 requires a resident individual who files a return to attach a wealth statement and wealth reconciliation. A commutation or gratuity exempt under clause (12) or (13) of the Second Schedule is still the source of your savings or the plot you bought, and section 111 taxes assets whose source is not adequately explained. **Applies to:** Retired individuals in Pakistan who received a commutation of pension, gratuity or other lump sum at retirement and file an income tax return. ### What does the law say? Two rules work together. Section 116(2) says every resident taxpayer being an individual who files a return shall furnish a wealth statement and a wealth reconciliation statement for that year along with the return. Section 114(2)(e) repeats the point: a return "shall be accompanied with a wealth statement as required under section 116". Section 116(1) describes what a wealth statement covers: total assets and liabilities, including foreign ones, those of a dependent spouse, minor children and other dependents, assets transferred to others, total expenditure, and "the reconciliation statement of wealth". Section 111(1) then deals with money and assets whose source is not explained. Where a person "has made any investment or is the owner of any money or valuable article" and offers no explanation of its nature and source, or an explanation the Commissioner does not find satisfactory, the amount is included in income chargeable under the head "Income from Other Sources" to the extent it is not adequately explained. Nothing in section 111 says that an exempt receipt is excused from explaining wealth. An exempt commutation is not taxed, but it is still where the money came from. ### Which retirement receipts are exempt? | Receipt | Where the law deals with it | Extent of exemption | |---|---|---| | Commutation of pension from Government, or under a pension scheme approved by the Board | Second Schedule, Part I, clause (12) | Whole payment | | Gratuity or commutation of an employee of the Government, a Local Government, or a statutory body or corporation | Clause (13)(i) | Amount receivable under the rules and conditions of service | | Gratuity from a gratuity fund approved under Part III of the Sixth Schedule | Clause (13)(ii) | Amount receivable from the fund | | Gratuity or commutation of any other employee, under a scheme for all employees approved by the Board | Clause (13)(iii) | Up to Rs. 300,000 | | Any other employee | Clause (13)(iv) | 50% of the amount or Rs. 75,000, whichever is less | Clause (13) does not apply to a payment not received in Pakistan, to a director who is not a regular employee, to an employee who is not a resident individual, or to a gratuity received by someone who has already received a gratuity from the same or any other employer. Gratuity that is not exempt is salary: section 12(2)(a) names gratuity in the definition. ### Worked example (illustrative figures) **Case 1: exempt commutation.** Mr. Siddiqui, a retired federal officer in Peshawar, retires in August 2026 and receives commutation of Rs. 4,200,000 from Government, plus pension of Rs. 90,000 a month. His net assets at 30 June 2026 were Rs. 12,000,000. 1. Pension received in tax year 2027: Rs. 90,000 x 12 = Rs. 1,080,000. 2. Commutation received: Rs. 4,200,000, exempt under clause (12). 3. Household expenses for the year: Rs. 1,300,000. 4. Net assets at 30 June 2027, as reconciled: Rs. 12,000,000 + Rs. 1,080,000 + Rs. 4,200,000 - Rs. 1,300,000 = **Rs. 15,980,000**. Suppose he leaves the commutation out of the reconciliation, but his closing assets (bank balance and a plot) still total Rs. 15,980,000. The sources he has shown explain only Rs. 12,000,000 + Rs. 1,080,000 - Rs. 1,300,000 = Rs. 11,780,000. The gap of Rs. 15,980,000 - Rs. 11,780,000 = **Rs. 4,200,000** has no stated source. That is the kind of unexplained money or investment section 111(1) is written for. Showing the commutation as an exempt inflow closes the gap. **Case 2: partly exempt gratuity.** Ms. Naqvi retires from a private trading company in Faisalabad that has no approved gratuity fund and no Board-approved scheme. She receives a gratuity of Rs. 1,000,000. 1. Clause (13)(iv): 50% of Rs. 1,000,000 = Rs. 500,000. The cap is Rs. 75,000. The lesser is **Rs. 75,000** exempt. 2. Taxable as salary: Rs. 1,000,000 - Rs. 75,000 = **Rs. 925,000**. 3. In her wealth reconciliation, the full Rs. 1,000,000 is the inflow that explains her larger bank balance. The Rs. 925,000 is also income in her return. ### What if I spent the lump sum straight away? The reconciliation still needs it. Section 116(1)(d) covers "the total expenditures incurred by the person, and the person's spouse, minor children, and other dependents". A daughter's wedding or Hajj paid from commutation is expenditure, and the commutation is its source. Section 111(1)(c) applies to a person who "has incurred any expenditure" whose source is not explained, not only to assets still held. ### What if the money went into a Behbood or pensioners' account? The deposit is an asset in the wealth statement and the commutation is its source. The profit on it has its own treatment, which is outside this page. ### Common mistakes - **Reading "exempt" as "not reportable".** Exemption decides tax, not disclosure. The wealth statement under section 116 covers all assets, and the reconciliation needs every source. - **Treating every gratuity as fully exempt.** Only clause (13)(i) and (ii) exempt the full amount. Private employees without an approved fund or scheme have a small cap. - **Leaving out the family's assets.** Section 116(1)(b) covers the assets of a dependent spouse, minor children and other dependents. The Explanation says a spouse's assets are included only if the spouse is dependent. - **Relying on a late fix.** Section 116(3) allows revision only before the notice it describes and never after five years from the return due date. ### What to check in the official text Read section 116 in full, section 111(1), and clauses (12) and (13) of Part I of the Second Schedule in the official PDF. Clause (12) and clause (13)(iii) depend on schemes "approved by the Board"; which schemes are approved is not in this corpus. The prescribed wealth statement form and the return form are also outside this corpus, so the exact field in which an exempt receipt is entered is not covered here. ### Frequently asked #### If commutation is exempt, why does it need to appear anywhere? Clause (12) of the Second Schedule makes it exempt from tax, but section 116 asks for a reconciliation of your wealth from one year to the next. If the lump sum is left out, the growth in your assets has no stated source, and section 111 lets the Commissioner treat an unexplained investment or money as income from other sources. #### Is all of my gratuity exempt? It depends on the employer. Clause (13) exempts the amount receivable under the service rules for a government, local government or statutory body employee, and any amount from an approved gratuity fund. For others it caps the exemption at Rs. 300,000 under a Board-approved scheme, or otherwise the lesser of 50% and Rs. 75,000. #### Can I correct a wealth statement that left out my commutation? Section 116(3) allows a revised wealth statement with a revised reconciliation and reasons, before a notice under the provision it names is received. It cannot be revised after five years from the due date of the return for that year, and the Commissioner may declare a revision void if it is not a bona fide correction. ### Citations - [Income Tax Ordinance, 2001, section 116 (Wealth statement)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#116-wealth-statement), as amended to 2026-06-30: "the total expenditures incurred by the person, and the person’s spouse, minor children, and other dependents during the period or periods specified in the notice" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 111 (Unexplained income or assets)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#111-unexplained-income-or-assets), as amended to 2026-06-30: "the amount credited, value of the investment, money, value of the article, or amount of expenditure shall be included in the person’s income chargeable to tax under the head “Income from Other Sources” to the extent it is not adequately explained" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "shall be accompanied with a wealth statement as required under section 116" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "any pay, wages or other remuneration provided to an employee, including leave pay, payment in lieu of leave, overtime payment, bonus, commission., fees, gratuity" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (12)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (13)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What tax applies to profit on Behbood Savings Certificates and the Pensioners' Benefit Account, and is it final? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/behbood-pensioner-benefit-account-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It is not a final tax. Clause (36A) of Part IV of the Second Schedule switches off withholding under section 151(1)(a), and clause (103) switches off section 7B. The profit is taxed as income from other sources at Division I rates, but clause (6) of Part III caps that tax at 5% of the profit. **Applies to:** Individuals, including retirees and widows, who earn profit on Bahbood Savings Certificates, a Pensioner's Benefit Account or a Shuhada Family Welfare Account, for tax year 2027. ### What does the law say? Four provisions of the Income Tax Ordinance, 2001 decide how this profit is taxed, and they work together. 1. **Section 39(1)(c)** puts "profit on debt" under the head "Income from Other Sources". Profit on these certificates and accounts is profit on debt. 2. **Clause (36A) of Part IV of the Second Schedule** says section 151(1)(a) "shall not apply in respect of any amount paid as yield or profit on investment in Bahbood Savings Certificate or Pensioner's Benefit Account and Shuhada Family Welfare Account." Section 151(1)(a) is the rule that makes a payer deduct tax when it "pays yield on an account, deposit or a certificate under the National Savings Scheme or Post Office Savings Account". 3. **Clause (103) of Part IV** says section 7B "shall not apply" to yield or profit on Bahbood Savings Certificates or the Pensioner's Benefit Account, "provided that tax on the said yield or profit on debt is paid at the rates specified in Division I of Part I of the First Schedule subject to clause (6) of Part III." 4. **Clause (6) of Part III** says the tax payable under section 39(1)(c) on this profit, and on the Shuhada Family Welfare Account, "shall not exceed 5% of such profit." ### Is it a final tax? No. Section 7B would normally tax profit on debt from a National Savings payer as a separate charge. Clause (103) removes this profit from section 7B. The profit is instead included in your income and taxed at the ordinary Division I slab rates, with the result capped at 5% of the profit. Because clause (36A) removes withholding, nothing is normally deducted when the profit is paid. The cap was 10% until the Finance Act, 2022 substituted 5%, according to the footnote to clause (6). ### What are the Division I rates for tax year 2027? For an individual whose salary is not more than seventy-five per cent of taxable income, clause (1) of Division I applies for tax year 2027 (1 July 2026 to 30 June 2027): | Taxable income | Rate of tax | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,000 to Rs. 1,200,000 | 15% of the amount exceeding Rs. 600,000 | | Rs. 1,200,000 to Rs. 1,600,000 | Rs. 90,000 + 20% of the amount exceeding Rs. 1,200,000 | | Rs. 1,600,000 to Rs. 3,200,000 | Rs. 170,000 + 30% of the amount exceeding Rs. 1,600,000 | | Rs. 3,200,000 to Rs. 5,600,000 | Rs. 650,000 + 40% of the amount exceeding Rs. 3,200,000 | | Above Rs. 5,600,000 | Rs. 1,610,000 + 45% of the amount exceeding Rs. 5,600,000 | Where income chargeable under the head "Salary" is more than seventy-five per cent of taxable income, clause (2) and its own table apply instead. ### Worked example (illustrative figures) Each case assumes the person's only income for tax year 2027 is profit on these savings, so clause (1) applies. **Case 1.** Parveen, a widow in Rawalpindi, earns Rs. 1,000,000 profit on Bahbood Savings Certificates. 1. Division I tax: 15% x (Rs. 1,000,000 - Rs. 600,000) = 15% x Rs. 400,000 = Rs. 60,000. 2. Clause (6) cap: 5% x Rs. 1,000,000 = Rs. 50,000. 3. Tax payable: the lower figure, **Rs. 50,000**. **Case 2.** Abdul Hameed, a retired headmaster in Sukkur, earns Rs. 700,000 profit on a Pensioner's Benefit Account. 1. Division I tax: 15% x (Rs. 700,000 - Rs. 600,000) = 15% x Rs. 100,000 = Rs. 15,000. 2. Clause (6) cap: 5% x Rs. 700,000 = Rs. 35,000. 3. Tax payable: **Rs. 15,000**, because the slab tax is already below the cap. **Case 3.** Profit of Rs. 550,000 with no other income falls in the 0% band, so no tax is payable. ### What if I also have pension, rent or other income? The profit is then added to taxable income with that other income, and the slab tax is worked out on the total. Clause (6) caps the tax on the profit at 5% of the profit, but the Ordinance does not set out a method for splitting the total slab tax between the profit and the other income. This page does not supply one. ### What if tax was deducted anyway? If tax was deducted on this profit despite clause (36A), or you paid more than the capped liability, section 170(1) lets a taxpayer who has paid tax in excess of the amount properly chargeable apply to the Commissioner for a refund. Under section 170(2) the application is made in the prescribed form within three years of the later of the assessment order for that tax year or the date the tax was paid. Section 170(4) gives the Commissioner sixty days to decide. ### What about the Shuhada Family Welfare Account? Clauses (6) and (36A) name the Shuhada Family Welfare Account alongside the other two. Clause (103), which takes profit out of section 7B, names only Bahbood Savings Certificates and the Pensioner's Benefit Account. The text does not explain the difference, and this page does not decide whether section 7B reaches that account. ### Common mistakes - **Treating the profit as final and leaving it out of the return.** Clause (103) removes it from section 7B, so it is taxed in the normal computation. - **Applying 5% to all the profit.** Five per cent is a ceiling, not a flat rate. When the slab tax is lower, as in Case 2, the lower amount applies. - **Expecting age to change the rate.** The cap is attached to these products, not to the investor's age. ### What to check in the official text Read clause (6) of Part III and clauses (36A) and (103) of Part IV of the Second Schedule, sections 7B, 39, 151 and 170, and the Division I tables in the First Schedule, which our site copy does not reproduce. Who may invest in Bahbood Savings Certificates, the Pensioner's Benefit Account or the Shuhada Family Welfare Account, and the profit rates they pay, are set by National Savings rules that are outside this corpus. ### Frequently asked #### Is tax deducted at source on Behbood Savings Certificate profit? No. Clause (36A) of Part IV of the Second Schedule says section 151(1)(a) does not apply to yield or profit on Bahbood Savings Certificates, the Pensioner's Benefit Account and the Shuhada Family Welfare Account. Tax is worked out in the investor's own return instead. #### What is the maximum tax on Behbood profit? Clause (6) of Part III of the Second Schedule says the tax payable on this profit under section 39(1)(c) shall not exceed 5% of the profit. If the normal Division I slab tax on it is lower, the lower figure applies. #### Is Behbood profit a final tax? No. Clause (103) of Part IV takes it out of section 7B, provided tax is paid at the Division I rates subject to the 5% cap. It is therefore taxed through the normal computation, not as a separate final charge. ### Citations - [Income Tax Ordinance, 2001, Second Schedule, Part III, clause (6), read with First Schedule, Part I, Division I, clause (1)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "in respect of any amount paid as yield or profit on investment in Bahbood Savings Certificate or Pensioners Benefit Account" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clauses (36A) and (103)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "(103) The provisions of section 7B shall not apply to yield or profit on investment in Bahbood Savings Certificate or Pensioner’s Benefit Account" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 7B (Tax on profit on debt)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#7b-tax-on-profit-on-debt), as amended to 2026-06-30: "on every person, other than a company, who receives a profit on debt from any person mentioned in clauses (a) to (d)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 151 (Profit on debt)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#151-profit-on-debt), as amended to 2026-06-30: "a person pays yield on an account, deposit or a certificate under the National Savings Scheme or Post Office Savings Account" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 39 (Income from other sources)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#39-income-from-other-sources), as amended to 2026-06-30: "(c) profit on debt;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 170 (Refunds)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#170-refunds), as amended to 2026-06-30: "A taxpayer who has paid tax in excess of the amount which the taxpayer is properly chargeable under this Ordinance may apply to the Commissioner for a refund of the excess." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What tax is charged on Behbood Savings Certificate and Pensioners' Benefit Account profit? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/tax-on-behbood-and-pensioners-benefit-account Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Clause (6) of Part III of the Second Schedule caps the tax on Bahbood Savings Certificate, Pensioners Benefit Account and Shuhada Family Welfare Account profit at 5% of that profit. Clause (103) of Part IV taxes Behbood and Pensioners' Benefit Account profit at ordinary Division I rates within that cap, and clause (36A) disapplies section 151(1)(a) withholding. **Applies to:** Individuals who hold Bahbood Savings Certificates, a Pensioners' Benefit Account or a Shuhada Family Welfare Account, for tax year 2027. ### What does the law say? Three clauses of the Second Schedule to the Income Tax Ordinance, 2001 set the treatment of these products, and they override the rules that normally apply to National Savings profit. **The normal rule.** Profit on debt is income under section 39(1)(c). For an individual, section 7B imposes a separate tax on "the gross amount of the profit on debt" at the Division IIIA rate, and section 151(1)(a) makes the payer deduct tax where "a person pays yield on an account, deposit or a certificate under the National Savings Scheme or Post Office Savings Account". **The special rule.** For Behbood and Pensioners' Benefit Account profit, three clauses change that: | Clause | What it says | Products covered | |---|---|---| | Part III, clause (6) | Tax payable under section 39(1)(c) on the profit "shall not exceed 5% of such profit" | Bahbood Savings Certificate, Pensioners Benefit Account, Shuhada Family Welfare Account | | Part IV, clause (36A) | Section 151(1)(a) "shall not apply" to the profit | Bahbood Savings Certificate, Pensioner's Benefit Account, Shuhada Family Welfare Account | | Part IV, clause (103) | Section 7B "shall not apply", provided tax is "paid at the rates specified in Division I of Part I of the First Schedule subject to clause (6) of Part III" | Bahbood Savings Certificate, Pensioner's Benefit Account | Put together: the profit is taken out of the flat section 7B charge, taxed at the normal slab rates in Division I, and the tax on it can never be more than 5% of the profit. The 5% figure was 10% until the Finance Act, 2022 substituted it. The Shuhada Family Welfare Account was added to clause (6) and clause (36A) by the Finance Act, 2018. ### How does it work in practice? You work out the tax under Division I as for any other income, then compare it with 5% of the profit. The lower figure is the most you pay on that profit. For an individual who is not a salaried individual, clause (1) of Division I sets the tax year 2027 rates (1 July 2026 to 30 June 2027): | Taxable income | Rate of tax | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,000 to Rs. 1,200,000 | 15% of the amount exceeding Rs. 600,000 | | Rs. 1,200,000 to Rs. 1,600,000 | Rs. 90,000 + 20% of the amount exceeding Rs. 1,200,000 | | Rs. 1,600,000 to Rs. 3,200,000 | Rs. 170,000 + 30% of the amount exceeding Rs. 1,600,000 | | Rs. 3,200,000 to Rs. 5,600,000 | Rs. 650,000 + 40% of the amount exceeding Rs. 3,200,000 | | Above Rs. 5,600,000 | Rs. 1,610,000 + 45% of the amount exceeding Rs. 5,600,000 | Because clause (36A) disapplies section 151(1)(a), the Ordinance does not require the payer to withhold tax from this profit under that section. The tax is settled through your own tax position for the year. ### Worked example (illustrative figures) Rukhsana, a widow in Rawalpindi, has no salary, business or other income. Her only income for tax year 2027 is profit on Bahbood Savings Certificates. **Case A: profit of Rs. 840,000 (Rs. 70,000 a month).** 1. Division I, clause (1): 15% x (Rs. 840,000 - Rs. 600,000) = 15% x Rs. 240,000 = Rs. 36,000. 2. Clause (6) cap: 5% x Rs. 840,000 = Rs. 42,000. 3. The Division I figure is lower, so the tax is **Rs. 36,000**. **Case B: profit of Rs. 1,440,000 (Rs. 120,000 a month).** 1. Division I, clause (1): Rs. 90,000 + 20% x (Rs. 1,440,000 - Rs. 1,200,000) = Rs. 90,000 + Rs. 48,000 = Rs. 138,000. 2. Clause (6) cap: 5% x Rs. 1,440,000 = Rs. 72,000. 3. The tax "shall not exceed" the cap, so the tax is **Rs. 72,000**. **Case C: profit of Rs. 540,000.** This is within the 0% band of Division I, so the tax is **Rs. 0**. ### What if I hold a Shuhada Family Welfare Account? The 5% cap in clause (6) and the withholding exclusion in clause (36A) both name the Shuhada Family Welfare Account. Clause (103), which removes section 7B and applies Division I rates, names only the Bahbood Savings Certificate and the Pensioner's Benefit Account. The text does not explain how section 7B and the 5% cap fit together for Shuhada Family Welfare Account profit, and this page does not resolve it. ### What if I also have other income? The Behbood profit is added to your taxable income for Division I, so other income can push it into a higher band. The 5% ceiling still limits the tax "in respect of" the profit, but the Ordinance does not set out a method for splitting one Division I figure between the profit and your other income. The companion page on whether this tax is final covers the return side. ### Common mistakes - **Assuming the ordinary National Savings rules apply.** Clauses (36A) and (103) take this profit out of section 151(1)(a) and section 7B. - **Paying 5% on every rupee of profit.** The 5% is a ceiling. If the Division I tax is lower, as in Case A, the lower figure applies. - **Using the old 10% cap.** It was replaced by 5% from the Finance Act, 2022. - **Treating the cap as an age concession.** It attaches to the product, whoever the holder is. ### What to check in the official text Read clause (6) of Part III and clauses (36A) and (103) of Part IV of the Second Schedule, sections 7B, 39(1)(c) and 151(1)(a), and clause (1) of Division I in Part I of the First Schedule in the official PDF, since our site copy does not reproduce the rate tables. Who may open these accounts, and the profit rates they pay, are set outside the Income Tax Ordinance and are not covered here. ### Frequently asked #### What is the maximum tax on Behbood Savings Certificate profit? Clause (6) of Part III of the Second Schedule says the tax payable on this profit shall not exceed 5% of such profit. The cap was 10% until the Finance Act, 2022 substituted 5%. #### Is tax deducted from Behbood profit when it is paid? Clause (36A) of Part IV of the Second Schedule says clause (a) of section 151(1), the withholding rule for National Savings yield, shall not apply to Bahbood Savings Certificate or Pensioner's Benefit Account profit. The Ordinance instead taxes the profit at Division I rates through clause (103), capped at 5%. #### Who is allowed to invest in Behbood or the Pensioners' Benefit Account? The Income Tax Ordinance does not say. Eligibility for these National Savings products is set by rules that are not part of this corpus, so this page does not describe it. ### Citations - [Income Tax Ordinance, 2001, Second Schedule, Part III, clause (6)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "The tax payable under clause (c) of sub-section (1) of section 39, in respect of any amount paid as yield or profit on investment in Bahbood Savings Certificate or Pensioners Benefit Account" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clauses (36A) and (103)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "The provisions of clause (a) of sub-section (1) of section 151 shall not apply in respect of any amount paid as yield or profit on investment in Bahbood Savings Certificate or Pensioner’s Benefit Account" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 151 (Profit on debt)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#151-profit-on-debt), as amended to 2026-06-30: "a person pays yield on an account, deposit or a certificate under the National Savings Scheme or Post Office Savings Account;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 7B (Tax on profit on debt)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#7b-tax-on-profit-on-debt), as amended to 2026-06-30: "a tax shall be imposed, at the rate specified in Division IIIA of Part I of the First Schedule, on every person, other than a company, who receives a profit on debt" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 39 (Income from other sources)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#39-income-from-other-sources), as amended to 2026-06-30: "profit on debt;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1) (rate table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is benevolent fund or group insurance money received by the family after a death taxable? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/benevolent-grant-group-insurance-after-death Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Mostly not. Clause (24) of Part I of the Second Schedule exempts benevolent grants paid under the Central Employee Benevolent Fund and Group Insurance Act, 1969, and clause (13) exempts gratuity or commutation received by heirs within set limits. Section 7G taxes some life insurance payouts, but section 7G(3)(a) excludes a payout made on account of the insured's death. **Applies to:** Heirs and family members of employees and pensioners who receive benevolent grants, gratuity, commutation or insurance money after a death. ### What does the law say? Three provisions of the Income Tax Ordinance, 2001 cover most money a family receives after a death. **Benevolent grant: clause (24).** Part I of the Second Schedule exempts: > "Any benevolent grant paid from the Benevolent Fund to the employees or members of their families in accordance with the provisions of the Central Employee Benevolent Fund and Group Insurance Act, 1969." The clause has no rupee cap. It is tied to the Benevolent Fund under that Act. **Gratuity and commutation paid to heirs: clause (13).** This clause exempts gratuity or commutation of pension received "by an employee on his retirement or, in the event of his death, by his heirs", up to these limits: | Sub-clause | Whose gratuity or commutation | Exempt amount | |---|---|---| | (i) | Employee of the Government, a Local Government, or a statutory body or corporation established by law | The amount receivable under the rules and conditions of service | | (ii) | Paid from a gratuity fund approved by the Commissioner under Part III of the Sixth Schedule | The amount receivable from the fund | | (iii) | Other employees, under a scheme for all employees approved by the Board | Up to Rs. 300,000 | | (iv) | Anyone to whom (i) to (iii) do not apply | 50% of the amount receivable or Rs. 75,000, whichever is less | A proviso printed after sub-clause (iv) says the exemption does not apply to a payment not received in Pakistan, to a payment from a company to a director who is not a regular employee, to a payment to an employee who is not a resident individual, or to gratuity received by an employee who has already received gratuity from the same or another employer. **Life insurance payouts: sections 7G and 151B.** Section 7G, inserted by the Finance Act, 2026, taxes an individual who receives a payout from a life insurance business, for tax year 2026 and onwards, at the rates in Division IC of Part III of the First Schedule. Section 7G(3) switches this off where the payout is made "on account of death of the insured or participant", on account of disability, or after four years from the policy's issue. Section 151B, which requires the insurer to deduct the tax, has the same three exclusions. ### How does it work in practice? **The benevolent grant** is simply left out of income if it comes from the Benevolent Fund under the 1969 Act. The clause covers grants to "employees or members of their families", so it is not limited to payments after a death. **The group insurance sum** is the gap. The 1969 Act has "Group Insurance" in its title, but clause (24) exempts only "any benevolent grant". Our copy of the Ordinance has no Second Schedule clause that names a group insurance payout to heirs. What the text does say is that where the payout is made by a life insurance business on account of death, section 7G does not tax it and section 151B does not require deduction. Whether such a sum is income of the heirs under any other provision is not addressed in the sections read for this page. **Gratuity paid to heirs** follows the clause (13) limits above. For a government employee who dies in service, sub-clause (i) exempts what the service rules provide. For a private employer without an approved fund or scheme, only the smaller of half the amount or Rs. 75,000 is exempt. The Ordinance does not spell out how the remainder is taxed in the hands of heirs. ### Worked example (illustrative figures) **Scenario 1: government employee dies in service.** Tariq, a federal government clerk in Islamabad, dies in service. His widow receives a benevolent grant from the Benevolent Fund under the 1969 Act, gratuity under his service rules, and a group insurance sum. - Benevolent grant: exempt under clause (24). - Gratuity: exempt under clause (13)(i), to the amount receivable under his service rules. - Group insurance: no clause names it. If paid by a life insurance business on account of his death, section 7G does not apply. **Scenario 2: private life policy.** Farah in Lahore held a life policy on her husband's life. Premiums paid totalled Rs. 500,000. 1. **He dies eighteen months after the policy was issued, and the insurer pays Rs. 2,000,000.** The payout is on account of death, so section 7G(3)(a) applies and no section 7G tax is charged. Section 151B(3)(a) means the insurer deducts nothing. 2. **Compare: the policy had been surrendered at the same point, with no death, for Rs. 560,000.** The taxable amount under section 7G(2) is the payout less premiums: Rs. 560,000 - Rs. 500,000 = Rs. 60,000. Division IC charges 10% where the payout is made after one year but before four years from issue: 10% of Rs. 60,000 = **Rs. 6,000**, a final tax under section 7G(4). **Scenario 3: private-sector gratuity to heirs.** Kamran worked for a private trading firm in Sialkot with no approved gratuity fund or Board-approved scheme. After his death, his heirs receive Rs. 400,000 of gratuity. Under clause (13)(iv), 50% of Rs. 400,000 is Rs. 200,000, and the lesser of Rs. 200,000 and Rs. 75,000 is **Rs. 75,000** exempt. The remaining Rs. 325,000 is not covered by the clause. ### What if the insured becomes disabled rather than dying? Section 7G(3)(b) and section 151B(3)(b) exclude a payout made on account of disability of the insured or participant in the same way as a death payout. ### Common mistakes - **Assuming clause (24) covers every benevolent fund.** It is tied to the Benevolent Fund under the 1969 Act. Clause (57)(3)(iii) of Part I exempts the income of a Board-approved benevolent fund or group insurance scheme itself, which is a different thing from a payment to a family. - **Assuming all insurance payouts are now taxed.** Section 7G excludes payouts on death, on disability, and after four years. - **Applying the government gratuity rule to a private employer.** Clause (13)(i) is limited to government, local government and statutory bodies. ### What to check in the official text Read clauses (13) and (24) of Part I of the Second Schedule, sections 7G and 151B, and Division IC of Part III of the First Schedule. The Central Employee Benevolent Fund and Group Insurance Act, 1969 itself is outside this corpus, so check with the paying office which payment is a benevolent grant and which is a group insurance sum. ### Frequently asked #### Is a benevolent grant paid to a government servant's family taxable? No, if it is paid from the Benevolent Fund under the Central Employee Benevolent Fund and Group Insurance Act, 1969. Clause (24) of Part I of the Second Schedule exempts any benevolent grant paid from that Fund to employees or members of their families. #### Is the group insurance sum paid on an employee's death taxable? Clause (24) names only the benevolent grant, not the group insurance sum, even though both are paid under the same 1969 Act. No Second Schedule clause in our copy names group insurance payouts. If the payout comes from a life insurance business, section 7G does not apply to it because it is made on account of death. #### Is gratuity paid to heirs after an employee dies taxable? Clause (13) of Part I of the Second Schedule exempts gratuity or commutation received by an employee's heirs in the event of his death, up to the limit that applies to the employer type: the full amount under service rules for government and statutory body employees, and set limits for others. ### Citations - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (24)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (13)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 7G (Tax on certain payments by life insurance business)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#7g-tax-on-certain-payments-by-life-insurance-business), as amended to 2026-06-30: "on account of death of the insured or participant" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 151B (Certain payments by life insurance companies and takaful operators)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#151b-certain-payments-by-life-insurance-companies-and-takaful-operators), as amended to 2026-06-30: "is made on account of death of the insured or participant" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IC](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (57)(3)(iii)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much tax is charged on a pension above Rs 10 million a year, and is it on the whole pension or only the excess? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/tax-on-pension-above-10-million Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Only the excess is taxed. The pension table in the proviso to clause (2), Division I, Part I of the First Schedule charges 0% on pension up to Rs. 10 million and 5% of the amount exceeding Rs. 10 million. Section 12(2A)(i) makes this a final tax. Pensioners aged seventy or more are not charged at all. **Applies to:** Individuals below seventy who receive more than Rs. 10 million of pension in a tax year from a former employer, such as retired judges and senior officers. ### What does the law say about pension above Rs. 10 million? The Ordinance taxes only the part of a pension above Rs. 10 million, at 5%. The rate is in the proviso to clause (2) of Division I of Part I of the First Schedule, which applies to "pension received by an individual from a former employer in a tax year". In the Ordinance as amended to 30 June 2026, which governs tax year 2027, the table reads: | S. No. | Description | Rate of tax | |---|---|---| | 1 | Where the amount of pension received does not exceed rupees ten million | 0% of the amount | | 2 | Where the amount of pension received exceeds rupees ten million | 5% of the amount exceeding rupees ten million | Section 12(2A)(i), inserted by the Finance Act 2025, points to this table and says the pension "shall be charged to tax as a final tax" at these rates where the amount received from a former employer for a tax year exceeds ten million rupees. ### Is it the whole pension or only the excess? Only the excess. Row 2 does not say "5% of the pension". It says "5% of the amount exceeding rupees ten million". A pensioner whose pension is Rs. 10,500,000 is taxed on Rs. 500,000, not on Rs. 10,500,000. There is no cliff at the threshold: moving from Rs. 10,000,000 to Rs. 10,000,001 adds a tax of five paisa, not a jump. The rate is also flat. Unlike the salary slabs in clause (2), the pension table has no further bands above Rs. 10 million. A pension of Rs. 30 million is taxed at the same 5% on its excess as a pension of Rs. 11 million. ### What does "final tax" mean here? Section 12(2A)(i) calls the pension tax a final tax. Section 169 sets out what final tax generally means under the Ordinance: under section 169(2), the income "shall not be chargeable to tax under any head of income in computing the taxable income of the person", no deduction is allowed for expenditure, the income is not reduced by deductible allowances or losses, and the tax is not reduced by tax credits. One caution: section 169(1) as printed lists particular withholding provisions by number and does not name section 12(2A) or section 149(1A). The "final tax" label for pension comes from section 12(2A)(i) itself. How far each consequence in section 169(2) carries over is not spelled out in either provision, and this page does not resolve it. ### How is the tax collected? Section 149(1A) requires any person responsible for paying pension to a former employee below seventy, where the payment in a tax year exceeds rupees ten million, to "deduct tax from the amount which is over and above rupees ten million" at the time of payment. In practice the pension-paying office, bank or former employer withholds it. There is a drafting point about which rates that deduction uses; it is covered on the related page about who deducts tax on a high pension. ### Worked example (illustrative figures) **Justice (retd.) Saeed, aged 66, Lahore**, receives a pension of Rs. 1,050,000 a month from his former employer for all of tax year 2027. 1. Annual pension: Rs. 1,050,000 x 12 = Rs. 12,600,000 2. Is it above Rs. 10 million? Yes, so row 2 applies. 3. Amount exceeding Rs. 10 million: Rs. 12,600,000 - Rs. 10,000,000 = Rs. 2,600,000 4. Tax: 5% x Rs. 2,600,000 = **Rs. 130,000** 5. Tax as a share of the whole pension: Rs. 130,000 / Rs. 12,600,000 = about 1.03% If the 5% were wrongly applied to the whole pension, the figure would be Rs. 630,000 (5% x Rs. 12,600,000), almost five times the correct amount. **A second check, Brigadier (retd.) Naveed, aged 61, Rawalpindi**, with a pension of Rs. 10,200,000 for the year: - Excess: Rs. 10,200,000 - Rs. 10,000,000 = Rs. 200,000 - Tax: 5% x Rs. 200,000 = **Rs. 10,000** ### What if my situation is different? **What if I turn seventy during the year?** Section 12(2A)(i) says an individual who "has attained the age of seventy years" is not charged on pension income, and section 149(1A) applies only to former employees "below the age of seventy years". Neither provision says how a pension received partly before and partly after the seventieth birthday in one tax year is split. The text is silent on that point. **What if I still work for my former employer?** Section 12(2A)(ii) takes the pension out of this table altogether. It is charged at the ordinary rates in clause (1) or (2) of Division I, which are much higher than 5%. **What if I get more than one pension?** The table refers to "pension received by an individual from a former employer". The Ordinance does not say in this proviso whether pensions from two former employers are added together against one Rs. 10 million threshold. Treat that as an open question. ### Common mistakes - **Applying 5% to the full pension.** The table charges 5% only on the amount exceeding Rs. 10 million. - **Adding pension to other income to pick a salary slab.** For a pensioner not working for the former employer, section 12(2A)(i) sends the pension to the pension table, not to the clause (2) salary slabs. - **Assuming a refund of tax deducted on the excess.** Final tax is generally not reduced by tax credits under section 169(2). Check the provisions yourself before planning around a refund. ### What to check in the official text Read the proviso to clause (2) of Division I of Part I of the First Schedule in the Ordinance amended to 30 June 2026, together with section 12(2A) and section 149(1A). Compare section 169(1) and 169(2) if you need to know exactly how the final tax label operates. The figures on this page apply to tax year 2027; a later Finance Act can change the threshold or rate. ### Frequently asked #### Is 5% charged on my whole pension once it crosses Rs. 10 million? No. Row 2 of the pension table charges 5% of the amount exceeding rupees ten million. The first Rs. 10 million stays in the 0% row even when the total is higher. #### What does it mean that the pension tax is final? Section 12(2A)(i) says the pension is charged to tax as a final tax at the table rates. In general terms, section 169(2) says income under final tax is not added to taxable income under any head, and the tax is not reduced by deductions, losses or tax credits. Section 169(1) as printed does not list section 12(2A) or section 149(1A) by name, so read both provisions together. #### Does the Rs. 10 million limit apply to a pensioner over seventy? No. Section 12(2A)(i) says an individual who has attained the age of seventy years shall not be charged to tax on pension income, and section 149(1A) confines the deduction duty to former employees below seventy. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "the pension shall be charged to tax as a final tax at the rates specified in the proviso to clause (2) of Division I of Part I of the First Schedule where the amount received by an individual from a former employer for a tax year exceeds ten million rupees" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), proviso (pension table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount which is over and above rupees ten million" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "the income shall not be chargeable to tax under any head of income in computing the taxable income of the person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much tax is charged on a pension above Rs 10 million a year, and who deducts it? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/tax-on-pension-above-ten-million Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer For tax year 2027 the First Schedule pension table charges 5% only on the part of a year's pension above ten million rupees, as a final tax under section 12(2A). Section 149(1A) makes the person paying the pension deduct it at source on that excess, for a former employee below seventy. The first Rs. 10,000,000 stays at 0%. **Applies to:** Individuals below seventy who receive more than Rs. 10,000,000 of pension in a tax year from a former employer and no longer work for that employer. ### What does the law say? Three provisions of the Income Tax Ordinance, 2001 decide this. **Section 12(2A)(i)** says pension under section 12(2)(f) is "charged to tax as a final tax at the rates specified in the proviso to clause (2) of Division I of Part I of the First Schedule" where the amount an individual receives from a former employer for a tax year exceeds ten million rupees. The same clause says an individual who has attained seventy is not charged on pension income. **The pension table** in that proviso sets the rates for tax year 2027 (1 July 2026 to 30 June 2027): | Pension received in the tax year | Rate of tax | |---|---| | Does not exceed ten million rupees | 0% of the amount | | Exceeds ten million rupees | 5% of the amount exceeding ten million rupees | **Section 149(1A)** handles collection. Any person responsible for paying pension to a former employee who is below seventy, where the payment in the tax year exceeds ten million rupees, must at the time of payment deduct tax "from the amount which is over and above rupees ten million" at the rate in Division I. The deduction is made after adjusting tax already withheld from the former employee under other heads and admissible tax credits, on documentary evidence, and it also corrects any earlier excess, shortfall or failure to deduct. ### How does it work in practice? The payer, usually the pension disbursing office or the former employer's pension fund, tracks how much pension it has paid you in the tax year. Nothing is deducted while the running total stays at or below Rs. 10,000,000. Once payments cross that figure, tax is deducted from the part above it. Section 149(1A) also mentions tax "deducted under section 4AB", the surcharge. Section 4AB charges a surcharge on individuals whose taxable income exceeds ten million rupees, but its proviso, as substituted by the Finance Act 2026, says that for an individual deriving income chargeable under the head "Salary", "no surcharge shall be payable". Pension is salary under section 12(2)(f). Because the tax is final, section 114(1)(ae) still requires a return of income for the year: it covers "every person whose income for the year is subject to final taxation". ### Worked example (illustrative figures) Brigadier (retd.) Kamran, 67, lives in Rawalpindi and receives a pension of Rs. 1,000,000 a month. He does no work for his former employer. 1. **Annual pension.** Rs. 1,000,000 x 12 = Rs. 12,000,000. 2. **Amount above the threshold.** Rs. 12,000,000 - Rs. 10,000,000 = Rs. 2,000,000. 3. **Tax for the year.** 5% x Rs. 2,000,000 = **Rs. 100,000**. 4. **Effective rate on the whole pension.** Rs. 100,000 / Rs. 12,000,000 = about 0.83%. **When is it deducted?** Section 149(1A) says tax is deducted "at the time of payment" from the amount over ten million rupees. If each monthly payment is Rs. 1,000,000, the running total reaches Rs. 10,000,000 with the April payment (July to April is ten months). The May and June payments are entirely above the threshold, so 5% x Rs. 1,000,000 = Rs. 50,000 would be deducted from each, Rs. 100,000 in total. The Ordinance does not prescribe a monthly spreading method, so a payer that estimates the annual pension and spreads the tax across the year would be following a practice the text neither requires nor forbids. **A second figure.** A pension of Rs. 15,000,000 would bear 5% x Rs. 5,000,000 = Rs. 250,000. ### What if I turn seventy during the year? Section 12(2A)(i) removes pension from charge for an individual "who has attained the age of seventy years", and section 149(1A) applies only to a former employee "below the age of seventy years". The text does not say how a birthday in the middle of a tax year is handled, so this page does not settle that point. ### What if I receive pension from two former employers? The table and section 12(2A)(i) speak of the amount received "from a former employer". The text does not say whether two pensions from two different employers are added together for the ten million test. See the related page on two pensions. ### Common mistakes - **Charging 5% on the whole pension.** The table taxes only "the amount exceeding rupees ten million". - **Expecting slab rates.** The ordinary Division I slabs apply to pension only where you still work for the former employer or its associate, under section 12(2A)(ii). - **Assuming a final tax means no return.** Section 114(1)(ae) requires one where income is subject to final taxation. - **Expecting a deduction after seventy.** Section 149(1A) is limited to former employees below seventy. ### What to check in the official text Read section 12(2A), section 149(1A), section 114(1)(ae) and section 4AB with its proviso, then the proviso to clause (2) of Division I of Part I of the First Schedule in the official PDF, because our site copy of the Ordinance does not reproduce rate tables. Note that section 149(1A) refers to "the rate provided in Division I" without naming the proviso; the only Division I rate written for pension is the 5% in the pension table. ### Frequently asked #### Is the 5% charged on my whole pension once it crosses Rs. 10 million? No. Row 2 of the pension table charges 5% of the amount exceeding rupees ten million. On a pension of Rs. 12,000,000 the tax is 5% of Rs. 2,000,000, which is Rs. 100,000. #### Who deducts the tax on my pension? Section 149(1A) places the duty on any person responsible for paying pension to a former employee below seventy. The payer deducts at the time of payment, from the amount over and above rupees ten million in the tax year. #### If the tax is final, do I still file a return? Section 114(1)(ae) requires a return from every person whose income for the year is subject to final taxation under any provision of the Ordinance. Section 12(2A)(i) describes pension above ten million rupees as charged as a final tax, so that clause reaches this case. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "the pension shall be charged to tax as a final tax at the rates specified in the proviso to clause (2) of Division I of Part I of the First Schedule where the amount received by an individual from a former employer for a tax year exceeds ten million rupees" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), proviso (pension table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "shall at the time of payment, deduct tax from the amount which is over and above rupees ten million at the rate provided in Division I of Part I of the First Schedule of the Ordinance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "every person whose income for the year is subject to final taxation under any provision of this Ordinance;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 4AB (surcharge), proviso](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How is money withdrawn from a Voluntary Pension Scheme taxed at or before retirement? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/voluntary-pension-scheme-withdrawal-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Clause (23A) of Part I of the Second Schedule exempts up to 50% of the accumulated VPS balance received at retirement, on disability or by nominated survivors on death. A withdrawal before retirement age, or above 50% at or after retirement, is taxed at the section 12(6) average rate, deducted by the pension fund manager when it pays. **Applies to:** Individuals holding an individual pension account with a pension fund manager under the Voluntary Pension System Rules, 2005, and their nominated survivors. ### What does the law say? The Voluntary Pension System (VPS) is dealt with in three places in the Income Tax Ordinance, 2001: section 63 gives a tax credit when you pay in, clause (23A) of Part I of the Second Schedule decides what is exempt when you take money out, and section 12(6) supplies the rate for the part that is not exempt. Clause (23A) exempts "the accumulated balance upto 50% received from the voluntary pension system offered by a pension fund manager under the Voluntary Pension System Rules, 2005" at the time of the eligible person's: - (a) retirement; - (b) disability rendering him unable to work; or - (c) death, when received by his nominated survivors. Its proviso then says that, excluding the disability and death cases, a withdrawal "before retirement age" or a withdrawal "at the time of or after retirement age in excess of fifty percent of the accumulated balance" is charged at the rate specified in section 12(6), and "the pension fund manager shall at the time of making payment deduct tax at the said rate." The 50% figure was 25% until the Finance Act, 2009 substituted it, according to the footnote in the consolidated text. ### What is the section 12(6) rate? Section 12(6) sets an average rate based on your own past tax record. The rate is A/B%, where "A is the total tax paid or payable by the employee on the employee's total taxable income for the three preceding tax years; and B is the employee's total taxable income for the three preceding tax years." In plain terms: add up the tax on your last three years' taxable income, divide it by the total taxable income of those three years, and apply that percentage to the taxable part of the withdrawal. A person whose tax in the three earlier years was low gets a low rate on the withdrawal. Section 12(6) is written in terms of an "employee". Clause (23A) borrows its rate for every VPS withdrawal, including by a self-employed account holder. The text does not explain how the formula is read for someone who was not an employee in those years. ### How does it work in practice? The pension fund manager applies these rules when it pays you. Section 156B, which used to set out the deduction duty separately, was omitted by the Finance Act, 2020, and the duty now sits in the proviso to clause (23A) itself. | Situation | Treatment under clause (23A) | |---|---| | Withdrawal at retirement, up to 50% of the accumulated balance | Exempt | | Withdrawal at or after retirement age, the amount above 50% | Taxed at the section 12(6) rate, deducted by the pension fund manager | | Withdrawal before retirement age | Taxed at the section 12(6) rate, deducted by the pension fund manager | | Disability rendering the person unable to work | Up to 50% exempt; the proviso's charge does not apply to this case | | Death, balance received by nominated survivors | Up to 50% exempt; the proviso's charge does not apply to this case | One gap is worth knowing. In the disability and death cases the exemption still stops at 50%, but the proviso's section 12(6) charge is expressly switched off. The clause does not say how an amount above 50% paid in those two cases is taxed, and this page does not guess. "Retirement age" is not defined in the Ordinance. It comes from the Voluntary Pension System Rules, 2005, which are not part of this corpus. ### How does the section 63 credit work on contributions? Section 63(1) gives an "eligible person" who earns income under the head "Salary" or "Income from Business" a credit for contributions to an approved pension fund. An eligible person, under section 2(19A), is an individual Pakistani holding a valid National Tax Number, CNIC or NICOP. The credit is computed as (A/B) x C, where A is your tax before credits, B is your taxable income, and C is the lesser of the contribution paid in the year or twenty per cent of your taxable income. The older extra allowance of 2% a year for people joining after age forty applied only up to 30 June 2019. ### Worked example (illustrative figures) Farhan, a retired accountant in Karachi, has Rs. 6,000,000 in his individual pension account when he reaches retirement age. He asks for Rs. 3,600,000 as a lump sum. 1. Exempt limit under clause (23A): 50% x Rs. 6,000,000 = Rs. 3,000,000. 2. Amount above 50%: Rs. 3,600,000 - Rs. 3,000,000 = Rs. 600,000. 3. His last three returns show tax of Rs. 90,000, Rs. 105,000 and Rs. 135,000 = Rs. 330,000 (A), on taxable income of Rs. 2,000,000, Rs. 2,200,000 and Rs. 2,400,000 = Rs. 6,600,000 (B). 4. Section 12(6) rate: 330,000 / 6,600,000 = 5%. 5. Tax the pension fund manager deducts: Rs. 600,000 x 5% = **Rs. 30,000**. 6. Farhan receives Rs. 3,600,000 - Rs. 30,000 = Rs. 3,570,000. If Farhan had taken exactly Rs. 3,000,000, no tax would be deducted. **Early withdrawal.** Sana, 44, a pharmacist in Lahore, withdraws Rs. 500,000 before retirement age. The whole amount falls under the proviso. If her own section 12(6) rate works out at 4%, the deduction is Rs. 500,000 x 4% = Rs. 20,000. ### What if the balance is used for an income payment plan or annuity? Clause (23B) used to exempt monthly instalments from an income payment plan bought out of the pension account, where the balance was invested for ten years. The Finance Act, 2022 omitted clause (23B). The Ordinance text we hold does not set out a replacement rule for these instalments, so this page does not say how they are now taxed. ### Common mistakes - **Treating the whole balance as tax free.** Clause (23A) exempts "upto 50%". The rest is taxable when withdrawn. - **Assuming the charge is at slab rates.** The proviso uses the section 12(6) average rate, not the Division I tables. - **Thinking disability or death payouts are taxed like early withdrawals.** The proviso expressly excludes sub-clauses (b) and (c). - **Looking for section 156B.** It was omitted in 2020; the deduction rule is now in clause (23A). ### What to check in the official text Read clause (23A) and the footnotes on the omitted clause (23B) in Part I of the Second Schedule, section 12(6), section 63 and the definitions in section 2(19A), 2(29B) and 2(40A). Retirement age, disability conditions and income payment plan terms are set by the Voluntary Pension System Rules, 2005, which are outside this corpus. ### Frequently asked #### How much of my VPS balance can I take tax free at retirement? Clause (23A) of Part I of the Second Schedule exempts the accumulated balance up to 50% received at the time of retirement. Anything withdrawn at or after retirement age in excess of fifty percent of the accumulated balance is taxed at the section 12(6) rate. #### Is an early VPS withdrawal fully taxable? The proviso to clause (23A) taxes a withdrawal before retirement age at the section 12(6) rate, except in cases of disability rendering the person unable to work or payment to nominated survivors on death. The pension fund manager deducts the tax when it makes the payment. #### Do I lose the section 63 credit I claimed when I contributed? Section 63 gives the credit in the year the contribution is paid. The Ordinance text we hold does not say that an earlier credit is reversed when money is later withdrawn; the withdrawal is dealt with through clause (23A) instead. ### Citations - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (23A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "in case of withdrawal before retirement age or withdrawal at the time of or after retirement age in excess of fifty percent of the accumulated balance, tax shall be" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "A is the total tax paid or payable by the employee on the employee’s total taxable income for the three preceding tax years; and B is the employee’s total taxable income for the three preceding tax years." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 63 (Contribution to an Approved Pension Fund)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#63-contribution-to-an-approved-pension-fund), as amended to 2026-06-30: "shall be entitled to a tax credit for a tax year in respect of any contribution or premium paid in the year by the person in approved pension fund under the Voluntary Pension System Rules, 2005." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 2(19A), definition of eligible person, and section 2(29B), individual pension account](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (23B) (omitted by the Finance Act, 2022, footnote)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 156B (omitted by the Finance Act, 2020, footnote)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## My company's provident fund is not recognised. How is my PF withdrawal taxed? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/unrecognised-provident-fund-withdrawal-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 12(2)(e)(iv) treats an amount received from a provident fund as salary, except the part that repays your own contributions made without a tax deduction. Employer contributions and profit are therefore taxed as salary when paid. The clause (23) exemption covers only a fund recognised by the Commissioner under the Sixth Schedule. **Applies to:** Private-sector employees who receive a payout from an employer's provident fund that the Commissioner has not recognised. ### What does the law say? Section 12(2) of the Income Tax Ordinance, 2001 lists what counts as "Salary". Sub-clause (iv) of clause (e) includes any amount received "from a provident or other fund, to the extent to which the amount is not a repayment of contributions made by the employee to the fund in respect of which the employee was not entitled to a deduction". In plain terms, a payout from a provident fund splits into two parts: | Part of the payout | Treatment under section 12(2)(e)(iv) | |---|---| | Your own contributions, made out of salary without a tax deduction | Not salary. It is a repayment of your money. | | Employer contributions, and profit or interest on the whole balance | Salary, taxed in the year you receive it | The main exemption for provident fund payouts, clause (23) of Part I of the Second Schedule, covers only "the accumulated balance due and becoming payable to an employee participating in a recognized provident fund". Section 2(48) defines a recognised fund as one recognised by the Commissioner under Part I of the Sixth Schedule. A fund without that recognition gets no help from clause (23). ### How does it work in practice? **Recognition is a formal order.** Rule 1 of Part I of the Sixth Schedule says the Commissioner "may accord recognition" to a fund that meets rule 2, and may withdraw it. Rule 2 sets conditions such as: contributions by employees as a definite proportion of salary, employer contributions not above the employee's contributions, the fund vested in two or more trustees (or the Official Trustees) under a trust which "shall not be recoverable save with the consent of all the beneficiaries", and the balance payable on the day the employee leaves. A company can run a provident fund for years without ever applying. Only the fund's trustees or the employer can confirm whether an order exists. **The amount is added to your salary for the year of receipt.** Because the taxable part is "Salary", it is added to your other salary in that tax year. Where salary is more than seventy-five per cent of taxable income, clause (2) of Division I of Part I of the First Schedule sets the rates. A large payout in the year you leave can push your income into a higher slab. The sections read for this page do not set out a separate withholding rule for payments by the trustees of an unrecognised fund. **Compare the recognised fund.** Rule 3 of Part I of the Sixth Schedule taxes only the yearly excess of employer contributions and interest over set limits, and rule 4 then excludes the accumulated balance at payout. The unrecognised fund has no such split: the employer's share and all profit are taxed together, at the end. ### Worked example (illustrative figures) Sana worked for a pharmaceutical distributor in Karachi. The company's provident fund was never recognised. She leaves in tax year 2027 (1 July 2026 to 30 June 2027), after earning Rs. 1,500,000 of salary in that year, and has no other income. The fund pays her Rs. 3,000,000, made up of: - her own contributions: Rs. 1,200,000 - employer contributions: Rs. 1,200,000 - profit credited over the years: Rs. 600,000 1. **Taxable part of the payout.** Rs. 3,000,000 - Rs. 1,200,000 (own contributions) = **Rs. 1,800,000**, added to salary. 2. **Total salary.** Rs. 1,500,000 + Rs. 1,800,000 = **Rs. 3,300,000**. 3. **Tax under clause (2) for tax year 2027.** Income above Rs. 3,200,000 up to Rs. 4,100,000 is taxed at Rs. 316,000 plus 25% of the amount above Rs. 3,200,000. Rs. 316,000 + 25% of Rs. 100,000 = Rs. 316,000 + Rs. 25,000 = **Rs. 341,000**. 4. **Without the payout.** Rs. 1,500,000 falls in the slab above Rs. 1,200,000 up to Rs. 2,200,000: Rs. 6,000 plus 11% of Rs. 300,000 = Rs. 6,000 + Rs. 33,000 = **Rs. 39,000**. 5. **Extra tax caused by the payout.** Rs. 341,000 - Rs. 39,000 = **Rs. 302,000**. Had the fund been recognised, and had the yearly rule 3 limits been respected, the Rs. 3,000,000 would have been excluded from her total income and her tax for the year would have stayed at Rs. 39,000. ### What if the fund is recognised later? Rule 7 of Part I of the Sixth Schedule deals with a fund that is recognised while it already holds balances. An account is drawn up to the day before recognition, and the amount moved into the recognised fund becomes the "transferred balance". Rule 7(3) says any part not transferred "shall be liable to income tax" under the Ordinance outside that Part. Rule 7(4) has the Commissioner calculate what in the transferred balance would have been taxable had the Part applied from the start, and that amount is treated as income in the year recognition takes effect. The calculation depends on Board rules not held in this corpus. ### What if I withdraw only part of the balance while still employed? Section 12(2)(e)(iv) is not limited to payments on leaving: it applies to "any amount" received from the fund, to the same extent. The same split between your own contributions and the rest applies to each payment. ### Common mistakes - **Treating the whole payout as tax free.** Clause (23) applies only to recognised funds. - **Treating the whole payout as taxable.** Your own non-deductible contributions are carved out by section 12(2)(e)(iv) itself. - **Relying on the three-year averaging rule.** Section 12(6) is worded for sub-clause (iii) amounts, not sub-clause (iv). ### What to check in the official text Read section 12(2)(e)(iv) and 12(6), section 2(48), clause (23) of Part I of the Second Schedule, and rules 1, 2, 7 and 12 of Part I of the Sixth Schedule. Ask the fund's trustees for a statement that separates your own contributions from employer contributions and profit, and whether any recognition order was ever made. ### Frequently asked #### Is my own contribution taxed again when I withdraw it? No. Section 12(2)(e)(iv) excludes the part of the payout that is a repayment of contributions made by the employee for which the employee was not entitled to a deduction. Those contributions came out of salary that was already taxed. #### Can I spread the tax on a PF payout over three years? Section 12(6) lets an employee elect an average rate based on the three preceding tax years, but its text refers only to amounts under sub-clause (iii) of section 12(2)(e), which covers termination payments such as golden handshakes. It does not mention sub-clause (iv), which is the provident fund sub-clause. #### Can my employer get the fund recognised? Rule 1 of Part I of the Sixth Schedule lets the Commissioner recognise a fund that meets the conditions in rule 2, and rule 12 gives the employer an appeal to the Board against a refusal. Rule 7 then sets out how the balance already in the fund on the date of recognition is treated. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "from a provident or other fund, to the extent to which the amount is not a repayment of contributions made by the employee to the fund in respect of which the employee was not entitled to a deduction" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "“recognised provident fund” means a provident fund recognised by the Commissioner in accordance with Part I of the Sixth Schedule;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (23)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Sixth Schedule, Part I (Recognised Provident Funds), rules 1, 2, 7 and 12](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## I receive two pensions. Are both exempt or only one? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/tax-on-two-pensions-pakistan Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer The old 'higher of the pensions' rule no longer exists: the Finance Act, 2025 omitted Second Schedule clause (8). Under section 12(2A)(i) pension from a former employer is taxed at 0% up to Rs. 10 million a year and 5% above. The text does not say whether two pensions are added together for that threshold. **Applies to:** Individuals who draw pensions from two former employers, for example a government or armed forces pension and a pension from a later private or corporate employer. ### What did the law say before 2025? Until the Finance Act, 2025, the answer was in the Second Schedule. Clause (8) of Part I exempted "any pension received by a citizen of Pakistan from a former employer", except where the person continued to work for that employer or an associate. Its proviso dealt with your exact situation: "where the person receives more than one such pension, the exemption applies only to the higher of the pensions received." So one pension was exempt and the smaller one was taxable. The Finance Act, 2025 omitted clause (8). The consolidated Ordinance amended to 30 June 2026 prints it only as a footnote. The same Act also omitted sub-clause (i) of clause (9), which exempted pension received for service in the Armed Forces or the Federal or a Provincial Government. What remains of clause (9) is sub-clause (ii), covering pension granted to the families and dependents of public servants or Armed Forces members who die during service. ### What does the law say now? Section 12(2A), inserted by the same Finance Act, 2025, replaced the exemption with a rate rule. Under section 12(2A)(i), pension is charged "as a final tax" at the rates in the proviso to clause (2) of Division I, Part I of the First Schedule where the amount received "from a former employer" for a tax year exceeds ten million rupees. An individual who has attained the age of seventy years "shall not be charged to tax on pension income". The pension table reads: | Pension received from a former employer in a tax year | Rate | |---|---| | Up to Rs. 10,000,000 | 0% of the amount | | Above Rs. 10,000,000 | 5% of the amount exceeding Rs. 10,000,000 | In effect the choice between two pensions has gone. Neither pension is singled out; each one is pension and falls under the same table. For most pensioners, whose combined pensions are far below Rs. 10 million a year, the result is no tax on either. ### Where is the law unclear? The Ordinance does not say how two pensions from two former employers are combined. The wording points in different directions: - Section 12(2A)(i) speaks of "the amount received by an individual from a former employer", and the table heading speaks of "pension received by an individual from a former employer". Both use the singular, which could mean each employer's pension is tested on its own. - The same sub-clause and the table are framed around the individual and "a tax year", which could support adding everything the individual receives in the year. - Section 149(1A) makes each "person responsible for paying pension" deduct tax only where "the payment" exceeds Rs. 10 million. Each payer can only see its own payment, so in practice neither payer deducts tax where each pension is below the threshold on its own. This page does not choose between these readings. ### Worked example (illustrative figures) Brigadier (retired) Saleem, 66, of Rawalpindi draws an Armed Forces pension and a pension from a corporation he joined after leaving the Army. All amounts are invented to show the effect of the threshold; the rates are the real ones cited above. - Pension A: Rs. 6,500,000 for tax year 2027 - Pension B: Rs. 4,500,000 for tax year 2027 - Total: Rs. 11,000,000 **Reading 1: each pension tested separately.** 1. Pension A: Rs. 6,500,000 is not above Rs. 10,000,000, so 0%. Tax Rs. 0. 2. Pension B: Rs. 4,500,000 is not above Rs. 10,000,000, so 0%. Tax Rs. 0. 3. Total tax: **Rs. 0** **Reading 2: pensions added together.** 1. Total pension: 6,500,000 + 4,500,000 = 11,000,000 2. Amount above Rs. 10,000,000: 11,000,000 - 10,000,000 = 1,000,000 3. Tax at 5%: 5% of 1,000,000 = **Rs. 50,000** Under either reading, neither payer deducts tax under section 149(1A), because neither payment exceeds Rs. 10 million on its own. If Reading 2 were applied, the Rs. 50,000 would have to be settled another way, and the Ordinance does not spell out how for this case. For comparison, under the pre-2025 clause (8), Pension A (the higher) would have been exempt and Pension B taxable in full at the slab rates. That rule does not apply to tax year 2027. ### What if ...? **I still work for one of the two former employers?** Section 12(2A)(ii) says the pension of an individual who continues to work for the former employer or its associate is taxed at the clause (1) or (2) slab rates. That would move that pension off the pension table, even if the other one stays on it. **One of the pensions is a family pension?** Clause (9)(ii) of the Second Schedule still exempts pension granted under the relevant rules to families and dependents of public servants or Armed Forces members who die during service. **I am seventy or older?** Section 12(2A)(i) removes tax on "pension income" for an individual who has attained seventy. The words are not limited to one pension. ### Common mistakes - **Relying on the "higher of the pensions" rule.** It was part of clause (8), which the Finance Act, 2025 omitted. - **Assuming a government or army pension is still exempt by name.** Clause (9)(i) was also omitted in 2025; such pensions now fall under section 12(2A) like any other. - **Treating the Rs. 10 million figure as a cliff.** The table charges 5% only on the amount exceeding Rs. 10 million. ### What to check in the official text Read section 12(2A), then the pension table at the end of clause (2) of Division I, Part I of the First Schedule, which is a table and is best read in the official PDF. The footnotes to Part I of the Second Schedule reproduce the omitted clause (8) and clause (9)(i). Section 149(1A) sets how each pension payer deducts tax. If your combined pensions are above Rs. 10 million while each one is below it, the Ordinance text does not answer how the threshold applies, and any FBR clarification on it is outside this corpus. ### Frequently asked #### Does the 'higher of the two pensions' exemption still apply? No. That rule was the proviso to clause (8) of Part I of the Second Schedule, and the Finance Act, 2025 omitted the whole clause. Pension is now dealt with by section 12(2A) and the pension table in the First Schedule. #### Are two pensions added together for the Rs. 10 million limit? The Ordinance does not say. Section 12(2A)(i) and the pension table both speak of pension received from a former employer, in the singular, and section 149(1A) makes each payer test its own payment. Whether the threshold applies per former employer or to the total is not settled by the text. #### I am over seventy. Are both pensions tax free? Section 12(2A)(i) says an individual who has attained the age of seventy years shall not be charged to tax on pension income. The words cover pension income generally, not one pension, so on the text both pensions fall within it. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "the pension shall be charged to tax as a final tax at the rates specified in the proviso to clause (2) of Division I of Part I of the First Schedule where the amount received by an individual from a former employer for a tax year exceeds ten million rupees" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (8) (omitted by the Finance Act, 2025, footnote)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "Provided that where the person receives more than one such pension, the exemption applies only to the higher of the pensions received." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (9) (sub-clause (i) omitted by the Finance Act, 2025)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "granted under the relevant rules to the families and dependents of public servants or members of the Armed Forces of Pakistan who die during service." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), proviso (pension rate table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "any person responsible for paying pension to a former employee who is below the age of seventy years and deriving pension income during a tax year in which the payment exceeds rupees ten million, shall at the time of payment, deduct tax from the amount which is over and above rupees ten million" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## I receive two pensions. Are both covered, or only one? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/tax-on-two-pensions Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer The old rule that exempted only the higher of two pensions ended when the Finance Act, 2025 omitted clause (8) of the Second Schedule. Section 12(2A) now taxes pension received from a former employer at 0% up to Rs. 10 million and 5% above. The Ordinance does not say whether two pensions are added together for that limit. **Applies to:** Pensioners who draw pension from two former employers, such as the Armed Forces and a later bank, or two separate government services. ### What did the law say about two pensions before 2025? Before the Finance Act, 2025, only one of two pensions from former employers was exempt under clause (8). Clause (8) of Part I of the Second Schedule exempted "any pension received by a citizen of Pakistan from a former employer", and its proviso added: "where the person receives more than one such pension, the exemption applies only to the higher of the pensions received." A separate sub-clause, clause (9)(i), exempted pension received for services rendered as a member of the Armed Forces of Pakistan or the Federal or a Provincial Government. Anyone who retired from government service and later drew a second pension from a bank or company was dealing with both clauses at once. ### What does the law say now? Both of those exemptions are gone. Section 10 of the Finance Act, 2025, in its amendments to the Second Schedule, provides that "clause (8) and sub-clause (i) of clause (9) shall be omitted". The consolidated Ordinance, amended to 30 June 2026, now shows clause (8) only as a footnote. The same Finance Act inserted section 12(2A). Pension under section 12(2)(f) is: - charged "as a final tax" at the rates in the proviso to clause (2) of Division I of Part I of the First Schedule "where the amount received by an individual from a former employer for a tax year exceeds ten million rupees"; - not charged at all for "the individual who has attained the age of seventy years"; - taxed at the ordinary rates under clause (1) or (2) of Division I where the individual "continues to work for former employer or its associate". The pension table in the First Schedule, for tax year 2027 (1 July 2026 to 30 June 2027), reads: | Amount of pension received | Rate | |---|---| | Does not exceed Rs. 10 million | 0% of the amount | | Exceeds Rs. 10 million | 5% of the amount exceeding Rs. 10 million | So the question is no longer which pension is exempt. It is whether each pension is measured against the Rs. 10 million line on its own, or both together. ### Where is the law silent? The Ordinance does not say how pensions from two former employers are combined. Three points in the text are relevant, and none of them settles it: 1. Section 12(2A)(i) speaks of "the amount received by an individual from a former employer", singular. 2. The First Schedule proviso speaks of "pension received by an individual from a former employer in a tax year". 3. Section 149(1A) makes "any person responsible for paying pension" deduct tax only when "the payment exceeds rupees ten million". Each payer can see only its own payment. The wording points towards each former employer's pension being tested separately, but no provision says so expressly, and none says the opposite. This page does not choose between the two readings. ### Worked example (illustrative figures) Colonel (retired) Tariq in Rawalpindi is 64. In tax year 2027 he receives an Armed Forces pension of Rs. 7,200,000 and a pension from a bank he later worked for of Rs. 4,800,000. He no longer works for either. The amounts are invented; the rates are the tax year 2027 pension table. **Reading 1: each pension tested separately** 1. Armed Forces pension: Rs. 7,200,000, below Rs. 10,000,000. Tax at 0% = Rs. 0. 2. Bank pension: Rs. 4,800,000, below Rs. 10,000,000. Tax at 0% = Rs. 0. 3. Total tax on pension: **Rs. 0**. **Reading 2: both pensions added together** 1. Total pension: 7,200,000 + 4,800,000 = Rs. 12,000,000. 2. Amount above Rs. 10 million: 12,000,000 - 10,000,000 = Rs. 2,000,000. 3. Tax at 5%: 2,000,000 x 5% = **Rs. 100,000**. **Withholding:** under section 149(1A) each payer looks at its own payment. Neither Rs. 7,200,000 nor Rs. 4,800,000 exceeds Rs. 10 million, so on the text neither payer is required to deduct tax under that sub-section. Neither reading asks which of the two pensions is higher. That question belonged to the omitted clause (8) proviso and plays no part in the current calculation. ### What if ...? **One pension alone is above Rs. 10 million?** Then that pension crosses the line under either reading. Section 149(1A) requires its payer to deduct tax on the amount over Rs. 10 million, unless you have turned seventy. **You still work for one of the former employers?** Section 12(2A)(ii) says the pension of an individual who continues to work for the former employer or its associate is taxed at the ordinary rates in clause (1) or (2) of Division I. That applies to the pension from that employer. The Ordinance does not say how it interacts with a second pension from a different employer. **You are seventy or older?** Section 12(2A)(i) says you "shall not be charged to tax on pension income". It does not limit this to one pension. ### Common mistakes - **Relying on the "higher of the two pensions" rule.** It was part of clause (8), which the Finance Act, 2025 omitted. - **Assuming government or army pension is still separately exempt.** Clause (9)(i) was omitted by the same amendment. Only clause (9)(ii), family pension for those who die in service, remains. - **Reading the payer's zero deduction as a final answer.** Section 149(1A) governs what the payer deducts. It does not decide how two pensions are combined for the charge itself. ### What to check in the official text Read section 12(2A) and section 149(1A) of the Income Tax Ordinance, 2001 as amended to 30 June 2026, and the proviso to clause (2) of Division I of Part I of the First Schedule for the pension table. The footnotes under clause (8) and clause (9) of Part I of the Second Schedule reproduce the omitted wording. Section 10 of the Finance Act, 2025 is the amending text. Any FBR circular or clarification on combining pensions is not part of this corpus. ### Frequently asked #### Does the rule that only the higher pension is exempt still apply? No. That rule was the proviso to clause (8) of Part I of the Second Schedule. Section 10 of the Finance Act, 2025 omitted clause (8) in full, so the proviso went with it. #### Are my two pensions added together for the Rs. 10 million limit? The Ordinance does not say. Section 12(2A)(i) refers to the amount received from a former employer, in the singular, and section 149(1A) looks at each payer's own payment, but no provision states how pensions from two former employers are combined. #### I am over seventy. Is the second pension taxed? Section 12(2A)(i) says an individual who has attained the age of seventy years shall not be charged to tax on pension income. The words refer to pension income generally rather than to one pension. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "the pension shall be charged to tax as a final tax at the rates specified in the proviso to clause (2) of Division I of Part I of the First Schedule where the amount received by an individual from a former employer for a tax year exceeds ten million rupees" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (8) (omitted by the Finance Act 2025, footnote)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "Provided that where the person receives more than one such pension, the exemption applies only to the higher of the pensions received." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2025, section 10 (Amendments in the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2025#10-amendments-in-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2025: "clause (8) and sub-clause (i) of clause (9) shall be omitted;" Official source: https://download1.fbr.gov.pk/Docs/2025629106147620FInanceAct2025.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), proviso (pension table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "any person responsible for paying pension to a former employee who is below the age of seventy years and deriving pension income during a tax year in which the payment exceeds rupees ten million, shall at the time of payment, deduct tax from the amount which is over and above rupees ten million" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is the tax on a pension above Rs 10 million deducted at source, or do I pay it with my return? Source: https://qanoondigest.com/faq/pensioners-senior-citizens/who-deducts-tax-on-high-pension Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It is deducted at source. Section 149(1A) requires any person paying pension to a former employee below seventy, where the payment in a tax year exceeds Rs. 10 million, to deduct tax at the time of payment from the amount above Rs. 10 million. It refers to Division I rates, while section 12(2A) points to the pension table. **Applies to:** Pensioners below seventy receiving more than Rs. 10 million of pension a year, and the offices, banks and employers that pay those pensions, for tax year 2027. ### Is the tax deducted at source? Yes. Section 149(1A) of the Income Tax Ordinance, inserted by the Finance Act 2025 and still in force in the Ordinance amended to 30 June 2026, makes the pension payer collect it. It applies to "any person responsible for paying pension to a former employee who is below the age of seventy years and deriving pension income during a tax year in which the payment exceeds rupees ten million". That person "shall at the time of payment, deduct tax from the amount which is over and above rupees ten million". So the tax is withheld from the pension as it is paid, in the same way that section 149(1) makes an employer deduct tax from salary. The section does not describe it as a tax the pensioner pays separately with the return. ### Who counts as the person responsible for paying? The section uses the general words "any person responsible for paying pension". It does not name particular offices. Whoever actually pays the pension, whether a government accounts office, a bank acting for a pension fund, or a private former employer, falls within those words if the other conditions are met. The duty applies only when three conditions hold together: 1. the recipient is a **former employee**; 2. the recipient is **below the age of seventy years**; and 3. the **payment in the tax year exceeds Rs. 10 million**. A pensioner aged seventy or more is outside section 149(1A), which matches section 12(2A)(i): such an individual "shall not be charged to tax on pension income". ### What adjustments does the payer make? Section 149(1A) tells the payer to make the deduction after adjusting for tax withheld from the former employee under other heads and for tax credits under sections 61 (charitable donations) and 63 (contribution to an approved pension fund), on documentary evidence. It also allows the payer to correct any excess deduction or deficiency from an earlier deduction, or a failure to deduct during the year. ### Where does the wording not line up? There are two drafting points the Ordinance leaves open. This page records them without choosing an answer. **Which rates?** Section 149(1A) says the payer deducts "at the rate provided in Division I of Part I of the First Schedule". Section 12(2A)(i) says the pension is charged "at the rates specified in the proviso to clause (2) of Division I of Part I of the First Schedule". The proviso is part of Division I, and it holds the pension table: 0% up to Rs. 10 million, and 5% of the amount exceeding Rs. 10 million. Division I also contains the general slab tables in clauses (1) and (2). Section 149(1A) does not say which of these it means. **Credits against a final tax?** Section 12(2A)(i) calls the pension tax a final tax. Section 169(2)(d), describing final tax in general, says "the tax deducted shall not be reduced by any tax credit allowed under this Ordinance". Yet section 149(1A) tells the payer to adjust tax credits under sections 61 and 63. Section 169(1) as printed does not list section 149(1A) or 12(2A), so how the two fit together is not settled by the text. ### Worked example (illustrative figures) **Mr. Asif, aged 63, Karachi**, receives Rs. 1,100,000 a month from his former employer in tax year 2027. This example uses the pension table rate of 5% and spreads the deduction by cumulative payments. Section 149(1A) itself does not prescribe a month-by-month method. | Month | Pension paid | Cumulative | Amount above Rs. 10 million in this payment | 5% of that amount | |---|---|---|---|---| | July to March (9 months) | Rs. 9,900,000 | Rs. 9,900,000 | Rs. 0 | Rs. 0 | | April | Rs. 1,100,000 | Rs. 11,000,000 | Rs. 1,000,000 | Rs. 50,000 | | May | Rs. 1,100,000 | Rs. 12,100,000 | Rs. 1,100,000 | Rs. 55,000 | | June | Rs. 1,100,000 | Rs. 13,200,000 | Rs. 1,100,000 | Rs. 55,000 | | **Total** | **Rs. 13,200,000** | | **Rs. 3,200,000** | **Rs. 160,000** | Check: Rs. 13,200,000 - Rs. 10,000,000 = Rs. 3,200,000, and 5% of that is Rs. 160,000, which matches the total. A payer could instead estimate at the start of the year that payments will exceed Rs. 10 million and spread the deduction evenly; the annual figure under the pension table would be the same. ### What if something goes wrong? **What if the payer deducts nothing?** Section 149(1A) itself lists "failure to make deduction during the year" among the matters the payer adjusts for. The general consequences of non-deduction sit in other provisions of the Ordinance not covered on this page. **What if I work for the former employer again?** Section 12(2A)(ii) charges the pension at the ordinary rates in clause (1) or (2) of Division I instead of the pension table. Section 149(1A) does not say how its Rs. 10 million deduction rule applies in that case. ### Common mistakes - **Deducting on the whole pension.** The base is "the amount which is over and above rupees ten million". - **Deducting from a pensioner aged seventy or more.** Section 149(1A) covers only former employees "below the age of seventy years". - **Treating the rate question as settled.** The Ordinance wording differs between section 149(1A) and section 12(2A)(i). ### What to check in the official text Read section 149(1A) with section 12(2A) and the proviso to clause (2) of Division I of Part I of the First Schedule, all in the Ordinance amended to 30 June 2026. Check section 169(1) and (2) for the general effect of final tax. Any FBR circular explaining how section 149(1A) is to be applied is outside this corpus and has not been checked here. ### Frequently asked #### Who has to deduct the tax on a high pension? Section 149(1A) puts the duty on any person responsible for paying pension to a former employee who is below seventy and whose pension payment in the tax year exceeds Rs. 10 million. The tax is deducted at the time of payment. #### Is tax deducted on my whole pension once it crosses Rs. 10 million? No. Section 149(1A) says the payer deducts tax from the amount which is over and above rupees ten million. The first Rs. 10 million is not the base for the deduction. #### Which rate should the pension office use? Section 149(1A) says the rate provided in Division I of Part I of the First Schedule, while section 12(2A)(i) charges pension at the rates in the proviso to clause (2) of that Division, which is the 0% and 5% pension table. The Ordinance does not reconcile the two wordings, and this page does not resolve the point. ### Citations - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "shall at the time of payment, deduct tax from the amount which is over and above rupees ten million at the rate provided in Division I of Part I of the First Schedule of the Ordinance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "the pension shall be charged to tax as a final tax at the rates specified in the proviso to clause (2) of Division I of Part I of the First Schedule where the amount received by an individual from a former employer for a tax year exceeds ten million rupees" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), proviso (pension table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "the tax deducted shall not be reduced by any tax credit allowed under this Ordinance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 61 (Charitable donations)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#61-charitable-donations), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 63 (Contribution to an Approved Pension Fund)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#63-contribution-to-an-approved-pension-fund), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- # Freelancers and IT service exporters Income from Upwork, Fiverr and foreign clients, remittances and export of services. ## My bank deducted tax when my foreign payment arrived. Is that my final tax or do I owe more at filing time? Source: https://qanoondigest.com/faq/freelancers-it-exporters/bank-deducted-tax-on-payoneer-final-or-adjustable Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It can be final, on conditions. Section 154A(2) makes the bank's deduction a final tax once your return, any required withholding statements and, unless you are PSEB-registered, any required sales tax returns are filed. Section 169 then keeps that income out of taxable income. Miss a condition or opt out, and section 154A(3) removes final treatment. **Applies to:** Freelancers and service exporters in Pakistan who see income tax deducted on their bank statement when a foreign payment is converted. The deduction on your bank statement is designed to be the end of the matter, but the Ordinance makes that conditional. Section 154A(2) turns the bank's deduction into a final tax on the export income only when certain filings are in place. If they are not, or if you choose otherwise, section 154A(3) sends the income back to the normal rules. ### What does the law say? **The deduction.** Section 154A(1) requires every authorised dealer in foreign exchange to deduct tax at the time it realises foreign exchange proceeds from, among other things, software, IT and IT-enabled service exports by PSEB-registered exporters and services rendered outside Pakistan or exported from Pakistan. The rate comes from Division IVA of Part III of the First Schedule: for tax year 2027, 0.25% of proceeds for PSEB-registered exporters and 1% in any other case. **When it is final.** Section 154A(2) says the tax "shall be a final tax on the income arising from the transactions referred to in this section, upon fulfilment of the following conditions": - (a) the return has been filed; - (b) withholding tax statements for the tax year have been filed, if required under the Ordinance; - (c) sales tax returns under federal or provincial laws have been filed, if required, except that this condition does not apply to a PSEB-registered exporter under clause (a) of sub-section (1). Clause (d) adds that no credit for foreign taxes paid is allowed. **What "final" means.** Section 169(1)(b) lists sub-section (2) of section 154A among the provisions under which tax deducted is a final tax. Section 169(2) then says the income is not chargeable under any head of income, no expenditure is deductible, the income is not reduced by allowances or losses, and the tax deducted is not reduced by any tax credit. Section 168(3) confirms that no tax credit is given for a final tax under section 154A(2). **When it is not final.** Section 154A(3) says sub-section (2) "shall not apply to a person who does not fulfill the specified conditions or who opts not to be subject to final taxation". The option is exercised every year when the return is filed. ### How does it work in practice? There are two outcomes. **Conditions met, no opt-out.** The export income sits outside your taxable income. The amount the bank deducted is your income tax on it. There is nothing further to pay on that income, and section 169(2)(e) says there is no refund of the deduction unless it exceeds the amount you are chargeable to under the Ordinance. **Conditions not met, or opted out.** The final-tax treatment does not apply. The income is then computed under the normal rules for business income and taxed with the rest of your income. The tax the bank deducted is tax deducted under Division III of Part V of Chapter X, where section 154A sits, and section 168(2) allows a person a tax credit for tax deducted from a payment under that Division. Whether more tax is payable, or a refund arises, depends on the full computation, which this page does not work through. ### Worked example (illustrative figures) Bilal, a video editor in Faisalabad, receives foreign proceeds of Rs. 2,400,000 in tax year 2027. He is not PSEB-registered, so the 1% row applies. 1. Deduction by the bank: Rs. 2,400,000 x 1% = Rs. 24,000. **Scenario A: he files his return, meets the other conditions, and does not opt out.** 2. Section 154A(2) is satisfied, so the Rs. 24,000 is a final tax. 3. Under section 169(2)(a) the Rs. 2,400,000 is not added to his taxable income. 4. Tax payable on this income at filing: nil beyond the Rs. 24,000 already deducted. **Scenario B: he opts out of final taxation when filing.** 2. Section 154A(3) disapplies sub-section (2). 3. His income from this work is computed under the normal rules, with the Rs. 24,000 taken as a tax credit under section 168(2). 4. The final figure depends on his expenses, other income and the rate schedule for individuals, so no number is given here. ### What if ...? **What if I did not file sales tax returns?** For a PSEB-registered IT exporter, the proviso to section 154A(2)(c) removes that condition. For anyone else, the condition applies only "if required under the law". Provincial sales tax on services is outside this corpus, so whether a return is required in your province is not answered here. **What if I was also taxed in the client's country?** Section 154A(2)(d) says no credit for foreign taxes paid shall be allowed where the tax is final. **What if I am not on the active taxpayers' list?** The Tenth Schedule's higher rates do not apply to tax deducted under section 154A. Filing a return, though, is still the first condition for final tax. ### Common mistakes - **Assuming the deduction is automatically final.** It is final "upon fulfilment" of the section 154A(2) conditions, starting with a filed return. - **Claiming expenses against final-tax income.** Section 169(2)(b) rules this out. - **Treating the opt-out as a one-time choice.** The proviso to section 154A(3) says the option is exercised every year. ### What to check in the official text Read section 154A(2) and (3) together, then section 169(1)(b) and (2) for the consequences of final tax and section 168(2) and (3) for credits. Check Division IVA of Part III of the First Schedule for the rate that applied to your proceeds. The Board's procedure under section 154A(5) for how the tax is paid is not held in this corpus. ### Frequently asked #### What are the conditions for the deduction to be final? Section 154A(2) lists them: the return has been filed, withholding tax statements have been filed if the Ordinance requires them, and sales tax returns under federal or provincial law have been filed if required. The sales tax condition does not apply to a PSEB-registered exporter of software, IT or IT-enabled services. #### If the tax is final, can I claim my laptop and internet costs? No. Section 169(2)(b) says no deduction is allowable for expenditure incurred in deriving income that is subject to final tax. The deduction itself is the whole tax on that income. #### What happens if I do not file my return? Filing the return is the first condition in section 154A(2). Section 154A(3) says sub-section (2) does not apply to a person who does not fulfil the conditions, so the deduction is not treated as a final tax and the income falls to be dealt with under the normal provisions. ### Citations - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "The tax deductible under this section shall be a final tax on the income arising from the transactions referred to in this section, upon fulfilment of the following conditions" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "(a) the income shall not be chargeable to tax under any head of income in computing the taxable income of the person;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "No tax credit shall be allowed for any tax collected or deducted that is a final tax under-" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What did the 2026-27 budget change for freelancers, and how long does the 0.25% rate last? Source: https://qanoondigest.com/faq/freelancers-it-exporters/finance-act-2026-changes-freelancers Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 5 of the Finance Act, 2026 changed three things freelancers notice. The 0.25% rate for PSEB-registered IT exporters in Division IVA now runs up to tax year 2029 instead of 2026. New section 154B has banks deduct 5% from social media revenue. The section 236Y rate on foreign card payments fell from 5% to 0.5%. **Applies to:** Freelancers, IT exporters and content creators in Pakistan who receive foreign payments or pay foreign suppliers by card, from tax year 2027. The Finance Act, 2026 came into force on 1 July 2026, so its changes apply from tax year 2027 (1 July 2026 to 30 June 2027). For freelancers, three amendments in section 5 of that Act matter most: the export-of-services rate for PSEB-registered exporters, a new tax on social media revenue, and the rate on foreign card payments. ### What did the Finance Act, 2026 change? | Provision | Before tax year 2027 | From tax year 2027 | |---|---|---| | Division IVA, row 1 (PSEB-registered IT exporters) | 0.25% of proceeds for tax years 2024 up to 2026 | 0.25% of proceeds for tax years 2024 up to 2029 | | Division IVA, row 2 (any other case) | 1% of proceeds | 1% of proceeds (unchanged) | | Section 154B and Division IIIAB (social media revenue) | Did not exist | 5%, deducted by the bank or financial institution | | Section 236Y and Division XXVII (foreign card payments) | 5% of the amount remitted | 0.5% of the amount remitted | Each row above traces to section 5 of the Finance Act, 2026 and to the consolidated Income Tax Ordinance as amended to 30 June 2026. ### How long does the 0.25% rate last? Section 154A requires the bank to deduct tax from foreign exchange proceeds of exported services at the rates in Division IVA of Part III of the First Schedule. The first row of that Division covers export proceeds of computer software, IT services or IT-enabled services by persons registered with the Pakistan Software Export Board. Before the budget, that row gave 0.25% "for tax years 2024 up to tax year 2026". The Finance Act, 2026 substituted "2029" for "2026". So the 0.25% rate now covers tax years 2027, 2028 and 2029. Tax year 2029 ends on 30 June 2029. The law as it stands does not say what rate will apply to PSEB-registered exporters after that. Any change would need a later amendment. The condition for the lower rate did not change. Section 154A(1)(a) still applies only "where the exporter is registered with and duly certified by the Pakistan Software Export Board (PSEB)". Freelancers without that registration stay on the 1% row. ### What is the new tax on social media income? Section 154B, inserted by the Finance Act, 2026, requires every banking and non-banking financial institution to deduct tax when an amount is credited to a person's account, where that amount represents revenues received from social media platforms. Division IIIAB sets the rate at 5%. Section 154B(2) describes digital content creators and social media influencers as those earning from content on platforms including YouTube, Facebook, Instagram and TikTok. It also defines "payment" to include credits received through intermediaries such as online payment service providers. Section 154B(3) makes the tax a minimum tax for a resident person and a final tax for a non-resident person without a permanent establishment in Pakistan. This is a separate regime from section 154A, with a rate twenty times the 0.25% PSEB rate. ### What changed for paying foreign suppliers by card? Section 236Y requires the bank to collect advance tax when a person completes a credit, debit or prepaid card transaction with a person outside Pakistan. Freelancers meet this when paying for foreign software subscriptions, hosting or advertising by card. The Finance Act, 2026 cut the Division XXVII rate from 5% to 0.5% of the gross amount remitted. Section 236Y(2) keeps the tax adjustable. ### Worked example (illustrative figures) Usman runs a small web development practice in Rawalpindi. The amounts are invented. The rates are the ones in the Ordinance for tax year 2027. **Export proceeds.** His clients pay him Rs. 6,000,000 during the year. 1. If he is registered with and certified by PSEB: Rs. 6,000,000 x 0.25% = Rs. 15,000 2. If he is not: Rs. 6,000,000 x 1% = Rs. 60,000 **Card payments abroad.** He pays Rs. 200,000 by debit card for foreign hosting and design software. 1. Tax year 2027 rate: Rs. 200,000 x 0.5% = Rs. 1,000 2. At the old 5% rate the same payments would have carried Rs. 200,000 x 5% = Rs. 10,000 **YouTube channel.** He also runs a tutorial channel, and Rs. 400,000 of platform revenue is credited to his account. 1. Section 154B at 5%: Rs. 400,000 x 5% = Rs. 20,000 ### What if my income is only from client work? Then section 154B does not touch you. It applies to revenues from social media platforms. Payment for client projects through Upwork, Fiverr or direct contracts continues to fall under section 154A and Division IVA. ### Common mistakes - **Thinking the 0.25% rate now applies to everyone.** The Finance Act, 2026 only extended the time window of the PSEB row. Non-registered exporters remain at 1%. - **Treating YouTube revenue as ordinary export of services.** Section 154B was added specifically for revenue from social media platforms, at 5%. - **Assuming the card tax is a tax on income.** Section 236Y collects advance tax on money sent abroad through card transactions, and that tax is adjustable. ### What to check in the official text Read section 5 of the Finance Act, 2026 for the exact amendments, then Division IVA and Division IIIAB of Part III and Division XXVII of Part IV of the First Schedule in the Ordinance as amended to 30 June 2026. Section 154B(4) lets the Board prescribe rules for identification and reporting. No such rules are held in this corpus. The same Finance Act also revised the rates on payments made by Pakistani clients for services, which is covered on the page about local clients. ### Frequently asked #### Until when does the 0.25% PSEB rate apply? Division IVA now reads 0.25% of proceeds for tax years 2024 up to tax year 2029. Tax year 2029 is the twelve months ending 30 June 2029. The Ordinance as amended to 30 June 2026 says nothing about the rate after that year. #### Did the 1% rate for non-PSEB freelancers change? No. The 'any other case' row of Division IVA still reads 1% of proceeds. The Finance Act, 2026 amendment to Division IVA only replaced the figure 2026 with 2029 in the first row. #### Is the 0.5% card tax a final tax? No. Section 236Y(2) says the advance tax collected under the section is adjustable. It is collected on the amount sent abroad through the card transaction, not on your income. ### Citations - [Finance Act, 2026, section 5 (Amendments of the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2026#5-amendments-of-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2026: "(vi) in Division IVA, in the Table, in column (1), in S. No. (1), in the entry in column (3), for the figure “2026”, the figure “2029” shall be substituted" Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154B (Withholding tax on revenues received from social media platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154b-withholding-tax-on-revenues-received-from-social-media-platforms), as amended to 2026-06-30: "at the time of credit or receipt of any amount in an account of a person, deduct tax at the rate specified in Division IIIAB of Part III of the First Schedule, where such amount represents revenues received from social media platforms" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IIIAB (Withholding Tax on Revenues Received from Social Media Platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236Y (Advance tax on persons remitting amounts abroad through credit or debit or prepaid cards)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236y-advance-tax-on-persons-remitting-amounts-abroad-through-credit-or-debit-or-prepaid-cards), as amended to 2026-06-30: "collect advance tax, at the time of transfer of any sum remitted outside Pakistan, on behalf of any person who has completed a credit card or debit card or prepaid card transaction with a person outside Pakistan" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XXVII (Advance tax on amount remitted abroad through credit, debit or prepaid cards)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can FBR ask me to explain foreign money coming into my account, and what does the section 111(4) limit protect? Source: https://qanoondigest.com/faq/freelancers-it-exporters/fbr-question-foreign-remittances-section-111 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 111 lets the Commissioner add money, investments or expenditure you cannot satisfactorily explain to your income. Section 111(4) takes foreign exchange remitted through normal banking channels, up to five million rupees in a tax year, out of that rule, if a scheduled bank encashed it into rupees and you produce the bank's certificate. **Applies to:** Resident freelancers and remote workers in Pakistan who receive foreign currency into Pakistani bank accounts. Section 111 is the Ordinance's rule for money whose source a person cannot explain. For a freelancer, the practical question is what happens when FBR notices foreign money arriving in a Pakistani account and asks where it came from. The answer depends on whether the money is already explained by declared income, and on the narrow protection in section 111(4). ### What does section 111 say? Section 111(1) applies where an amount is credited in a person's books, where a person has made an investment or owns money or a valuable article, where a person has incurred expenditure, or where a person has concealed income or furnished inaccurate particulars. If the person "offers no explanation about the nature and source" of the amount, or the explanation is not, in the Commissioner's opinion, satisfactory, the amount is included in income chargeable to tax under the head "Income from Other Sources" to the extent it is not adequately explained. Suppressed receipts go under "Income from Business" instead. Section 111(2) sets the year. An amount situated or incurred in Pakistan is taxed in the year it relates to. An asset or expenditure outside Pakistan, or foreign-source concealed income, is taxed in the tax year immediately before the year of discovery. Section 111(2A) defines the year of discovery as the year the Commissioner issues a notice asking the person to explain. ### What does the section 111(4) limit protect? Section 111(4) says sub-section (1) does not apply to foreign exchange remitted from outside Pakistan through normal banking channels, not exceeding five million rupees in a tax year, that a scheduled bank encashed into rupees, where a certificate from the bank is produced. Four conditions come out of that wording: | Condition | What the text requires | |---|---| | Channel | Remitted from outside Pakistan through normal banking channels | | Amount | Not exceeding five million rupees in a tax year | | Conversion | Encashed into rupees by a scheduled bank | | Evidence | A certificate from that bank is produced | The Explanation to sub-section (4) adds that remittances through "money service bureaus, exchange companies or money transfer operators" are deemed to be through normal banking channels. Two limits of the text are worth reading closely. First, sub-section (4) speaks of amounts "en-cashed into rupees". It does not say how money held in a foreign currency account and never converted is treated. Second, it does not distinguish between a gift from a relative abroad and export proceeds for services. The text does not address either point further, and this page does not resolve them. ### How does FBR learn about the money? Section 165A requires every banking company to provide the Board with listed information, including cash withdrawals exceeding fifty thousand rupees in a day aggregating one million rupees or more in a month, deposits aggregating ten million rupees or more in the preceding calendar month, credit card bill payments of two hundred thousand rupees or more in a month, profit on debt, and business accounts opened or re-designated. Section 165AB, inserted by the Finance Act, 2026, requires banks and electronic money institutions to upload to a Central Data Hub information on account holders whose deposits or withdrawals exceed one hundred million rupees in a six-month reporting period. It describes the purpose as "algorithmic cross-matching of tax and bank information". Gross mismatches are fed into the Board's compliance risk management system. ### Worked example (illustrative figures) Usman, a graphic designer in Faisalabad, receives foreign payments in tax year 2027. 1. Freelance proceeds realised through his bank: Rs. 4,500,000. The bank deducted tax under section 154A, and he declares these receipts in his return. 2. A separate transfer from his brother in Dubai, received through an exchange company and encashed into rupees: Rs. 800,000, with a bank certificate. 3. Total foreign exchange received: Rs. 4,500,000 + Rs. 800,000 = Rs. 5,300,000. The Rs. 4,500,000 is explained by declared income taxed under section 154A. The Rs. 800,000 is within the five million rupee limit on its own, so if Usman produces the certificate, section 111(1) does not apply to it. How the five million rupee cap is counted when export proceeds and a family remittance arrive in the same year is not spelled out in sub-section (4). ### What if ...? **What if the foreign money is more than five million rupees in the year?** The protection covers only amounts "not exceeding five million Rupees in a tax year". Anything above that has to be explained in the ordinary way, for example as declared income. **What if I rely on final-tax export income to explain assets?** Section 111(4A) limits that credit to imputable income unless conditions are met. See the related page on explaining assets with final-taxed income. ### Common mistakes - **Reading section 111(4) as an exemption.** It removes the unexplained-income rule for qualifying remittances. It does not make the income tax-free. - **Skipping the bank certificate.** The protection applies only where "a certificate from such bank is produced". - **Leaving foreign assets out of the wealth statement.** Section 116(1)(a) asks for assets including foreign assets. A mismatch between declared wealth and bank data is what section 111 is used to question. ### What to check in the official text Read section 111 in full, including sub-sections (2), (2A), (4) and (4A) and the Explanations, in the source PDF. Read sections 165A and 165AB for what banks report. The form of the bank certificate and any State Bank of Pakistan procedure are not held in this corpus. ### Frequently asked #### Does the Rs. 5 million limit mean foreign freelance income is tax-free up to that amount? No. Section 111(4) only switches off the unexplained-income rule in section 111(1) for qualifying remittances. It does not exempt income. Freelance export receipts are still taxed under section 154A and declared in the return. #### Do remittances through an exchange company count as normal banking channels? Yes, for section 111(4). Its Explanation says remittances through money service bureaus, exchange companies or money transfer operators are deemed to be foreign exchange remitted through normal banking channels. #### Does my bank report my foreign receipts to FBR? Section 165A requires banks to report listed items, including deposits aggregating Rs. 10 million or more in a calendar month. Section 165AB requires reporting of accounts with deposits or withdrawals over Rs. 100 million in a six-month period. Neither section names foreign remittances as a separate item. ### Citations - [Income Tax Ordinance, 2001, section 111 (Unexplained income or assets)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#111-unexplained-income-or-assets), as amended to 2026-06-30: "Sub-section (1) does not apply to any amount of foreign exchange remitted from outside Pakistan through normal banking channels not exceeding five million Rupees in a tax year that is en-cashed into rupees by a scheduled bank and a certificate from such bank is produced to that effect." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 165A (Furnishing of information by banks)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#165a-furnishing-of-information-by-banks), as amended to 2026-06-30: "every banking company shall make arrangements to provide to the Board in the prescribed form and manner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 165AB (Reporting of financial transaction data by banking companies and financial institutions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#165ab-reporting-of-financial-transaction-data-by-banking-companies-and-financial-institutions), as amended to 2026-06-30: "for algorithmic cross-matching of tax and bank information." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "The tax deductible under this section shall be a final tax on the income arising from the transactions referred to in this section, upon fulfilment of the following conditions" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 116 (Wealth statement)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#116-wealth-statement), as amended to 2026-06-30: "assets including foreign assets and liabilities including foreign liabilities" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can I choose normal tax slabs instead of final tax on my export income, and what happens if I do not qualify? Source: https://qanoondigest.com/faq/freelancers-it-exporters/opt-out-final-tax-freelance-normal-slabs Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 154A(3) says the final-tax rule does not apply to a person who opts out, or who does not meet the conditions such as filing a return. The option is exercised every year when filing under section 114. Your income is then taxed under the normal rules, for tax year 2027 at the non-salaried slab rates in Division I. **Applies to:** Individual freelancers and IT or IT-enabled service exporters in Pakistan whose foreign receipts are taxed under section 154A, for tax year 2027. ### What does the law say? Section 154A(2) of the Income Tax Ordinance, 2001 makes the tax a bank deducts from your export proceeds a final tax, once four conditions are met: a return has been filed, required withholding statements have been filed, required sales tax returns have been filed (not needed for a PSEB-registered IT exporter), and no foreign tax credit is claimed. Section 154A(3) then gives two ways out of that treatment: 1. **You do not meet the conditions.** Sub-section (2) "shall not apply to a person who does not fulfill the specified conditions". 2. **You choose not to be in it.** The same words cover a person "who opts not to be subject to final taxation". The proviso fixes the timing: "the option shall be exercised every year at the time of filing of return under section 114." It is a yearly choice made in the return, not a one-off election. ### What does "normal rules" mean for a freelancer? Final tax works through section 169(2). The income is kept out of taxable income, no deduction is allowed for expenditure incurred in deriving it, and the tax deducted is not reduced by any tax credit. Once section 154A(2) no longer applies, those consequences fall away and the income is taxed like other income, at the rates in Division I of Part I of the First Schedule. For an individual who is not a salaried individual, clause (1) of Division I sets these rates for tax year 2027: | Taxable income | Rate of tax | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,001 to Rs. 1,200,000 | 15% of the amount exceeding Rs. 600,000 | | Rs. 1,200,001 to Rs. 1,600,000 | Rs. 90,000 + 20% of the amount exceeding Rs. 1,200,000 | | Rs. 1,600,001 to Rs. 3,200,000 | Rs. 170,000 + 30% of the amount exceeding Rs. 1,600,000 | | Rs. 3,200,001 to Rs. 5,600,000 | Rs. 650,000 + 40% of the amount exceeding Rs. 3,200,000 | | Above Rs. 5,600,000 | Rs. 1,610,000 + 45% of the amount exceeding Rs. 5,600,000 | Clause (2) of Division I, with a lower table, applies instead only where income under the head "salary" exceeds seventy-five per cent of taxable income. How freelance income is computed under the normal rules, and which expenses may be deducted, is covered on a separate page. ### What happens to the tax the bank already deducted? Section 168(3)(ea) bars a tax credit for tax that is "a final tax under" sub-section (2) of section 154A. Section 168(2) otherwise allows a credit for tax deducted from a payment in computing the tax due for the year. Where you are outside section 154A(2), the reading that follows is that the deducted tax becomes a credit against the slab tax. Section 154A(3) does not say so in terms, so this is a reading of the text rather than an express rule. ### Worked example (illustrative figures) **Bilal, a PSEB-registered developer in Islamabad.** Export proceeds in tax year 2027: Rs. 2,000,000. Assume his taxable income under the normal rules works out at Rs. 1,500,000. Under final tax: 1. Division IVA rate for PSEB-registered IT exporters: 0.25%. 2. Rs. 2,000,000 x 0.25% = **Rs. 5,000**, final. If he opts out: 1. Taxable income Rs. 1,500,000 falls in the Rs. 1,200,001 to Rs. 1,600,000 band. 2. Rs. 1,500,000 - Rs. 1,200,000 = Rs. 300,000. 3. Rs. 300,000 x 20% = Rs. 60,000. 4. Rs. 90,000 + Rs. 60,000 = **Rs. 150,000** on the slab table. 5. On the reading above, the Rs. 5,000 already deducted is credited, leaving Rs. 145,000. **Sana, a translator in Multan, not PSEB-registered.** Export proceeds: Rs. 500,000. Assume taxable income under the normal rules of Rs. 450,000. 1. Division IVA "any other case": 1%, so Rs. 5,000 is deducted. 2. Under the slab table, taxable income up to Rs. 600,000 is taxed at 0%. 3. If she opts out, slab tax is nil, and on the reading above the Rs. 5,000 becomes a credit. Section 168(5) says a credit that cannot be set off for the year "shall be refunded to the taxpayer". ### What if I simply did not file on time? Section 154A(3) treats a person who fails the conditions the same way as a person who opts out: sub-section (2) does not apply. A missed return is not a way to "stay" on final tax. ### Common mistakes - **Treating the option as permanent.** It is exercised every year. - **Expecting the slab table to be cheaper for most exporters.** Above the Rs. 600,000 nil band, the lowest slab rate is 15% of taxable income, while Division IVA charges 0.25% or 1% of gross proceeds. The result depends on your own figures. - **Using the salaried table.** A freelancer is on clause (1) unless salary is more than seventy-five per cent of taxable income. ### What to check in the official text Read section 154A(2) and (3), section 169(2), and section 168(2), (3)(ea) and (5). Division I of Part I and Division IVA of Part III of the First Schedule are in the official PDF; our site copy leaves out tables. How the option is marked in the IRIS return form is outside this corpus. ### Frequently asked #### Do I opt out once, or every year? Every year. The proviso to section 154A(3) says the option shall be exercised every year at the time of filing of return under section 114. #### If I opt out, is the tax my bank deducted lost? Section 168(3)(ea) bars a credit only for tax that is a final tax under section 154A(2). Where sub-section (2) does not apply, the general credit in section 168(2) is the natural reading, but section 154A(3) itself does not spell out the status of the deducted tax. #### Which slab table applies to a freelancer who opts out? Clause (1) of Division I of Part I of the First Schedule, which covers individuals other than salaried individuals. Clause (2) applies instead where salary exceeds seventy-five per cent of taxable income. ### Citations - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "The provisions of sub-section (2) shall not apply to a person who does not fulfill the specified conditions or who opts not to be subject to final taxation" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1), rates of tax for individuals and association of persons except a salaried individual](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "the income shall not be chargeable to tax under any head of income in computing the taxable income of the person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "No tax credit shall be allowed for any tax collected or deducted that is a final tax under" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "every person whose income for the year is subject to final taxation under any provision of this Ordinance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## My foreign client withheld tax on my payment. Can I claim credit for it in Pakistan? Source: https://qanoondigest.com/faq/freelancers-it-exporters/foreign-tax-withheld-by-client-credit Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Not while you use the final-tax route. Section 154A(2)(d) says no credit for foreign taxes paid shall be allowed. Outside that route, section 103 gives a resident a credit for foreign income tax, including foreign withholding tax, capped at the Pakistan tax on the foreign-source income. Section 101(2) may make a Pakistan-based freelancer's income Pakistan-source instead. **Applies to:** Freelancers and IT service exporters resident in Pakistan whose foreign client deducted tax in its own country before paying them. Some foreign clients, usually companies following their own country's rules, deduct tax before paying a Pakistani freelancer. The natural question is whether that deduction counts in Pakistan. The Income Tax Ordinance gives a clear answer for the usual final-tax route and a conditional answer for everyone else. ### What does the law say? **Final-tax route: no credit.** Section 154A(2) makes the tax an authorised dealer deducts from your export proceeds a final tax "upon fulfilment of the following conditions". The list ends with clause (d): "no credit for foreign taxes paid shall be allowed." For tax year 2027, the deduction is 0.25% of proceeds for PSEB-registered software, IT and IT-enabled services exporters and 1% in any other case, under Division IVA of Part III of the First Schedule. **Normal rules: section 103.** Section 103(1) allows a resident taxpayer who "derives foreign source income chargeable to tax under this Ordinance in respect of which the taxpayer has paid foreign income tax" a credit equal to the lesser of: - the foreign income tax paid; or - the Pakistan tax payable in respect of that income. Section 103(2) works out the Pakistan tax on the foreign income by applying your average rate of Pakistan tax to your net foreign-source income. Section 103(8) defines "foreign income tax" to include "a foreign withholding tax", and the average rate as Pakistan tax before this credit as a percentage of taxable income. **Limits.** Section 103(3) applies the credit separately to each head of income. Section 103(6) says unused credit is not refunded, carried back or carried forward. Section 103(7) allows the credit only if the foreign tax is paid within two years after the end of the tax year in which the income was derived. ### Is my freelance income foreign-source at all? This is the step many people skip. Section 103 only applies to foreign-source income. Section 101(2) says business income of a resident "shall be Pakistan-source income to the extent to which the income is derived from any business carried on in Pakistan." A freelancer who does the work from Sialkot or Hyderabad for a client in Germany appears, on that text, to be carrying on the business in Pakistan. If so, the income is Pakistan-source and section 103 would not reach it. The Ordinance does not deal with freelancers specifically on this point, and this page does not settle it. ### Worked example (illustrative figures) Adeel builds mobile apps from Hyderabad. A client abroad paid him the equivalent of Rs. 1,500,000 in tax year 2027 after deducting foreign withholding tax of Rs. 225,000. He is not PSEB-registered. **On the final-tax route (section 154A):** 1. Division IVA rate, any other case: 1% 2. Tax deducted by his bank: Rs. 1,500,000 x 1% = Rs. 15,000, final if the conditions are met. 3. Foreign tax credit: nil, under section 154A(2)(d). **Under normal rules, assuming the income were foreign-source** (both the Pakistan tax figure and the source assumption are illustrative): 1. Taxable income: Rs. 4,000,000. Pakistan tax before credit, assumed: Rs. 400,000. 2. Average rate under section 103(8): Rs. 400,000 / Rs. 4,000,000 = 10%. 3. Pakistan tax on the foreign income under section 103(2): Rs. 1,500,000 x 10% = Rs. 150,000. 4. Credit: lesser of Rs. 225,000 and Rs. 150,000 = Rs. 150,000. 5. Unused Rs. 75,000 is lost under section 103(6). If the income is Pakistan-source under section 101(2), step 4 does not happen at all. ### What if ...? **What if I opt out of final tax to claim the credit?** Section 154A(3) lets a person opt out of final taxation, exercised every year when filing the return. That moves you to the normal rules, but the credit still depends on the income being foreign-source under section 103(1). **What if the client can refund its own withholding?** Whether a foreign country refunds or reduces its withholding is a matter of that country's law or a tax treaty, neither of which is held in this corpus. **What if I claim the credit while also treating the tax as final?** Clause (d) is one of the listed conditions in section 154A(2). Claiming foreign tax credit sits against that condition. ### Common mistakes - **Deducting the foreign tax from the 1% bank deduction.** Section 154A(2)(d) rules this out on the final-tax route. - **Assuming any income from a foreign client is foreign-source.** Section 101(2) looks at where the business is carried on. - **Claiming more than the Pakistan tax on the income.** Section 103(1) caps the credit at the lesser figure, and the excess cannot be carried forward. ### What to check in the official text Read section 154A(2) and (3), and section 103 in full, including the definitions in sub-section (8). Read section 101(2) on source. Check Division IVA of Part III of the First Schedule for the rates. Tax treaties and the foreign country's own withholding rules are not in this corpus. ### Frequently asked #### Does section 103 count a foreign withholding tax? Yes. Section 103(8) says foreign income tax includes a foreign withholding tax. The credit is the lesser of the foreign tax paid or the Pakistan tax payable on the income, worked out at your average rate of Pakistan tax. #### Can unused foreign tax credit be carried forward? No. Section 103(6) says any credit not used for the tax year shall not be refunded, carried back or carried forward. Section 103(7) also requires the foreign tax to be paid within two years after the end of the tax year in which the income was derived. #### Can a tax treaty help? The Ordinance allows for tax treaties, but the treaties themselves are not part of this corpus. This page does not say what any treaty provides for freelance or service income. ### Citations - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "(d) no credit for foreign taxes paid shall be allowed." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 103 (Foreign tax credit)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#103-foreign-tax-credit), as amended to 2026-06-30: "Where a resident taxpayer derives foreign source income chargeable to tax under this Ordinance in respect of which the taxpayer has paid foreign income tax, the taxpayer shall be allowed a tax credit of an amount equal to the lesser of -" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 101 (Geographical source of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#101-geographical-source-of-income), as amended to 2026-06-30: "(2) Business income of a resident person shall be Pakistan-source income to the extent to which the income is derived from any business carried on in Pakistan." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Does my freelance export tax double if I am not on the Active Taxpayers List? Source: https://qanoondigest.com/faq/freelancers-it-exporters/freelancer-not-on-active-taxpayers-list Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No. The Tenth Schedule's 100% increase does not reach tax deducted under section 154A, because rule 10(ca) excludes it. Your bank still deducts 0.25% or 1% of the proceeds. The real cost of not filing is different: section 154A(2) makes that tax final only once a return has been filed. **Applies to:** Freelancers and IT or IT-enabled service exporters in Pakistan who receive foreign exchange proceeds through a bank and are not on the Active Taxpayers List, for tax year 2027. ### What does the law say? Section 100BA of the Income Tax Ordinance, 2001 says that the deduction of advance tax, the computation of income and the tax payable of a person not appearing on the active taxpayers' list "shall be determined in accordance with the rules in the Tenth Schedule". The same treatment reaches a person who is on the list but has not filed a return by the due date, or by an extended due date. Rule 1 of the Tenth Schedule is the source of the "double tax" idea. Where tax is to be deducted or collected from a person not on the list, the rate "shall be increased by hundred percent of the rate specified in this Ordinance". Rule 10 then lists taxes to which the whole Schedule does not apply. Clause (ca), inserted by the Finance Act, 2022, reads: "tax collected or deducted under section 154A". Section 154A is the section under which a bank deducts tax when it realises foreign exchange proceeds from exported services, including computer software, IT and IT-enabled services. So the rate on your export proceeds is the ordinary rate in Division IVA of Part III of the First Schedule, whether or not your name is on the list. ### What rate does the bank deduct, then? Division IVA sets two rates for tax year 2027: | Type of receipt | Rate under Division IVA | |---|---| | Export proceeds of computer software, IT services or IT-enabled services by persons registered with the Pakistan Software Export Board | 0.25% of proceeds, for tax years 2024 up to tax year 2029 | | Any other case | 1% of proceeds | Section 154A(1)(a) covers software, IT and IT-enabled exports only "where the exporter is registered with and duly certified by the Pakistan Software Export Board (PSEB)". A freelancer without that registration falls in the "any other case" row. Being off the active taxpayers' list does not move you between these rows. ### What does being off the list actually cost? The cost sits in section 154A(2), not in the rate. That sub-section makes the deducted tax "a final tax on the income arising from the transactions referred to in this section" only when conditions are met: 1. a return has been filed; 2. withholding tax statements for the year have been filed, if the Ordinance requires them from you; 3. federal or provincial sales tax returns have been filed if required by law, a condition that the proviso switches off for a PSEB-registered exporter under clause (a); and 4. no credit for foreign taxes is claimed. Section 154A(3) says the final-tax treatment in sub-section (2) "shall not apply to a person who does not fulfill the specified conditions". A freelancer who has not filed a return fails condition 1. The tax deducted at 0.25% or 1% is still deducted, but it no longer settles the liability on that income on its own terms. ### Worked example (illustrative figures) **Ayesha, a graphic designer in Lahore.** She is not registered with the PSEB and is not on the active taxpayers' list. Her clients abroad pay her Rs. 3,000,000 during tax year 2027, realised through her bank. 1. Section 154A(1)(b) applies to services rendered outside Pakistan or exported from Pakistan. Her case is "any other case" in Division IVA: 1%. 2. Tax deducted: Rs. 3,000,000 x 1% = Rs. 30,000. 3. The claimed "doubled" rate would be 2%, or Rs. 60,000. Rule 10(ca) of the Tenth Schedule rules that out. 4. If she files her return for tax year 2027 and meets the other conditions, the Rs. 30,000 is a final tax under section 154A(2). If she does not, section 154A(3) takes her outside the final-tax treatment. **Hamza, a software developer in Karachi, PSEB-registered.** He receives Rs. 3,000,000 in the same year. 1. Division IVA row 1 applies: 0.25%. 2. Tax deducted: Rs. 3,000,000 x 0.25% = Rs. 7,500. 3. His ATL status does not change this figure. ### What if I am on the list but file late? Section 100BA(1) brings in the Tenth Schedule for a person on the list who has not filed by the due date. Rule 10(ca) still keeps section 154A tax outside the Schedule, so the rate on export proceeds does not rise. The late or missing return remains a problem under section 154A(2)(a) for final-tax status. ### Common mistakes - **Assuming every withholding tax doubles for non-filers.** Rule 1 is general, but rule 10 carves out named sections. Section 154A is one of them. - **Assuming the exclusion means filing does not matter.** The final-tax status in section 154A(2) depends on a filed return. - **Mixing up exports of goods and exports of services.** Rule 10 excludes the tax on each in a separate clause, (c) for goods and (ca) for services, and the rates and conditions differ. - **Treating "not doubled" as "no other effect".** Other taxes deducted or collected from you, if not listed in rule 10, can still be increased under rule 1 while you are off the list. ### What to check in the official text Read section 100BA and the Tenth Schedule, rules 1 and 10, in the official PDF, since our site copy of the Ordinance leaves out schedules. Read section 154A in full, and Division IVA of Part III of the First Schedule for the rates. Section 181A says only that the Board may institute the active taxpayers' list and that it "shall be regulated as may be prescribed"; the rules that run the list, and any bank-level practice, are outside this page. ### Frequently asked #### My bank deducted 2% instead of 1% on my export proceeds because I am not on the ATL. Is that correct under the Ordinance? Not on the text of the Ordinance. Rule 10(ca) of the Tenth Schedule says the Schedule does not apply to tax deducted under section 154A, so the rate stays at the Division IVA rate of 0.25% or 1%. The bank's own reasoning and any notification it relies on are outside this corpus. #### If the rate does not double, does it matter whether I file a return? Yes. Section 154A(2) makes the deducted tax a final tax only where a return has been filed and the other conditions are met. Under section 154A(3), a person who does not meet the conditions is outside that final-tax treatment. #### Does rule 10(ca) protect my other transactions too? No. Rule 10 lists specific sections, and clause (ca) covers section 154A only. Tax on other transactions that is not listed in rule 10 remains subject to the 100% increase in rule 1 while you are off the list. ### Citations - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "shall be determined in accordance with the rules in the Tenth Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (rate of deduction or collection of tax) and rule 10, clause (ca)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "The tax deductible under this section shall be a final tax on the income arising from the transactions referred to in this section, upon fulfilment of the following conditions" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 181A (Active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181a-active-taxpayers-list), as amended to 2026-06-30: "The Board shall have the power to institute active taxpayers’ list." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is PSEB registration mandatory for freelancers, and does it really cut the rate from 1% to 0.25%? Source: https://qanoondigest.com/faq/freelancers-it-exporters/pseb-registration-freelancer-tax-rate Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, for tax year 2027 the rate drops from 1% to 0.25% of proceeds, but only for exports of computer software, IT services or IT-enabled services by an exporter registered with and certified by PSEB, under section 154A(1)(a) and Division IVA. Section 154A does not itself make registration compulsory. Without it, the 1% any-other-case rate applies. **Applies to:** Freelancers and small IT service exporters in Pakistan deciding whether PSEB registration changes their tax on foreign receipts. PSEB registration does change the rate, and by a large margin: from 1% to 0.25% of proceeds, a quarter of the tax. The link is written directly into the Income Tax Ordinance. What the Ordinance does not do is require a freelancer to register; it rewards registration rather than mandating it. ### What does the law say? **The registered category.** Section 154A(1)(a) covers "exports of computer software or IT services or IT enabled services where the exporter is registered with and duly certified by the Pakistan Software Export Board (PSEB)." The words "registered with and duly certified" are both part of the test. **The rate table.** Division IVA of Part III of the First Schedule sets the rate to be deducted under section 154A: | S. No. | Types of receipts | Rate of tax | |---|---|---| | 1 | Export proceeds of computer software or IT services or IT-enabled services by persons registered with Pakistan Software Export Board | 0.25% of proceeds for tax years 2024 up to tax year 2029 | | 2 | Any other case | 1% of proceeds | A footnote records that the Finance Act, 2026 changed the end year from 2026 to 2029, so the 0.25% rate covers tax year 2027. **What counts as IT and IT-enabled services.** Section 2(30AD) says IT services include "but not limited to" software development, software maintenance, system integration, web design, web development, web hosting and network design. Section 2(30AE) says IT-enabled services include call centres, medical transcription, remote monitoring, graphics design, accounting services, HR services, telemedicine, data entry, cloud computing, data storage, locally produced television programmes and insurance claims processing. **Final tax, with one relaxation.** Under section 154A(2), the deduction is final once the return is filed, required withholding statements are filed and required sales tax returns are filed. The proviso to clause (c) says the sales tax return condition "shall not apply in case of an exporter mentioned in clause (a)", which is the PSEB-registered group. ### Is registration mandatory? Nothing in section 154A or Division IVA says a freelancer must register with PSEB. The structure is conditional: if you are registered and certified, the 0.25% row and the sales tax proviso apply; if not, the any-other-case row applies. PSEB's own registration requirements, fees and procedure are not part of this corpus, so this page cannot say what registration involves or whether any other law requires it. For an unregistered IT freelancer, the Ordinance does not say in so many words which clause of section 154A(1) the receipt falls under. Clause (b), "services or technical services rendered outside Pakistan or exported from Pakistan", is the natural reading, and the rate for anything outside row 1 is the 1% in row 2. ### Worked example (illustrative figures) Fatima runs a one-person app development practice from Islamabad. Her foreign proceeds realised in tax year 2027 are Rs. 6,000,000. **Not registered with PSEB:** 1. Rate: 1% (row 2) 2. Tax: Rs. 6,000,000 x 1% = Rs. 60,000 **Registered with and certified by PSEB:** 1. Rate: 0.25% (row 1) 2. Tax: Rs. 6,000,000 x 0.25% = Rs. 15,000 **Difference:** Rs. 60,000 minus Rs. 15,000 = Rs. 45,000 less tax deducted in the year. Any cost of registering is outside this corpus and not included. ### What if ...? **What if my work is not on the IT lists?** A translator or content writer, for example, is not named in section 2(30AD) or (30AE). Both lists are open-ended, but the Ordinance does not confirm either way whether those services are IT-enabled. If they are not, row 1 cannot apply and the rate is 1%. **What if I register partway through the year?** Division IVA ties row 1 to persons registered with PSEB, and the deduction happens at realisation. The Ordinance does not say how a mid-year registration is treated for proceeds realised before it. That is not resolved here. **What about Islamabad sales tax on services?** Sales tax on IT services exported from Islamabad is dealt with under a separate law and is covered on a separate page. ### Common mistakes - **Thinking the 0.25% rate applies to all freelancers.** Row 1 needs registration with PSEB and, under section 154A(1)(a), certification too. - **Assuming the rate expired in 2026.** Division IVA now runs the 0.25% rate up to tax year 2029. - **Treating registration as a legal duty under the Ordinance.** Section 154A offers a lower rate for registration; it does not impose a penalty for not registering. ### What to check in the official text Read section 154A(1)(a) and the proviso to section 154A(2)(c), and Division IVA of Part III of the First Schedule in the source PDF, including its footnotes on the tax-year window. Check section 2(30AD) and (30AE) for the service definitions. PSEB's registration rules and any Board notification under section 154A(6) are not held in this corpus. ### Frequently asked #### Does the Ordinance require freelancers to register with PSEB? Section 154A and Division IVA do not impose a registration duty. They attach a lower rate and a relaxed filing condition to registration. PSEB's own rules are not in this corpus. #### How long does the 0.25% rate last? Division IVA applies 0.25% of proceeds to PSEB-registered exporters for tax years 2024 up to tax year 2029. The Finance Act, 2026 extended the end year from 2026 to 2029. #### Is there any benefit besides the rate? Yes. The proviso to section 154A(2)(c) says the sales tax return condition for final tax does not apply to an exporter under clause (a), which is the PSEB-registered category. The return and withholding statement conditions still apply. ### Citations - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "where the exporter is registered with and duly certified by the Pakistan Software Export Board (PSEB)." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "software development, software maintenance, system integration, web design, web development, web hosting and network design" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can I use my final-taxed export income to explain the assets I have bought? Source: https://qanoondigest.com/faq/freelancers-it-exporters/final-tax-export-income-explain-assets Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Only partly, by default. Section 111(4A) says that when you explain assets or spending with income taxed as a final tax, such as section 154A export proceeds, credit is limited to imputable income. More is allowed only if the excess is reasonably attributed to the final-tax business and you furnish accounts audited by a chartered accountant. **Applies to:** Resident freelancers and IT exporters whose foreign receipts are taxed as a final tax under section 154A and who buy property, vehicles or other assets. A freelancer taxed under section 154A often pays a very small final tax on large receipts. When that person buys a plot or a car, the wealth statement has to show where the money came from. Section 111(4A) decides how much of the final-taxed income counts toward that explanation. ### What does the law say? **Section 111(1)** lets the Commissioner treat as income any amount credited, investment, money, valuable article or expenditure whose nature and source is not satisfactorily explained. **Section 111(4A)** deals with a specific kind of explanation. Where a taxpayer, while explaining an amount under sub-section (1), "takes into account any source of income which is subject to final tax under any provision of the Ordinance", the taxpayer is not entitled to credit of any sum in excess of imputable income. The exception is where "the excess amount is reasonably attributed to the business activities subject to final tax and the taxpayer furnishes financial statements and accounts duly audited by a chartered accountant." **Section 2(28A)** defines imputable income, in relation to an amount subject to final tax, as "the income which would have resulted in the same tax, had this amount not been subject to final tax". **Section 154A(2)** makes the tax deducted from export proceeds a final tax once its conditions are met: a return has been filed, withholding statements have been filed if required, sales tax returns have been filed if required (not a condition for PSEB-registered exporters under clause (a)), and no credit is claimed for foreign taxes. A footnote to section 154A records that its own former sub-section (4), which limited credit under section 111 for section 154A income, was omitted by the Finance Act, 2022. The same Act inserted section 111(4A), which now applies to all final-tax sources. ### How does it work in practice? Section 116(2) requires every resident individual filing a return to file a wealth statement and a wealth reconciliation statement. The reconciliation shows how opening wealth plus income, less expenses, becomes closing wealth. If a large part of the increase is funded by section 154A receipts, section 111(4A) limits the amount those receipts can explain to imputable income, unless the audited-accounts route is used. Imputable income works backwards from the tax. You take the final tax paid and find the income that would have produced the same tax under the normal rates. ### Worked example (illustrative figures) Sana, a software developer in Islamabad, receives Rs. 9,000,000 of export proceeds in tax year 2027. She has no salary. The rates below are the Division IVA rates and the paragraph (1) rates for individuals in Division I of Part I of the First Schedule, as amended to 30 June 2026. The paragraph (1) table charges 0% up to Rs. 600,000, 15% of the amount between Rs. 600,000 and Rs. 1,200,000, and Rs. 90,000 plus 20% of the amount between Rs. 1,200,000 and Rs. 1,600,000. **Case 1: not registered with PSEB (1% under Division IVA)** 1. Final tax: Rs. 9,000,000 x 1% = Rs. 90,000 2. Income that produces Rs. 90,000 under paragraph (1): at Rs. 1,200,000, tax = 15% x (Rs. 1,200,000 - Rs. 600,000) = Rs. 90,000 3. Imputable income: Rs. 1,200,000 **Case 2: registered with PSEB (0.25% under Division IVA)** 1. Final tax: Rs. 9,000,000 x 0.25% = Rs. 22,500 2. Income above Rs. 600,000 needed at 15%: Rs. 22,500 / 15% = Rs. 150,000 3. Imputable income: Rs. 600,000 + Rs. 150,000 = Rs. 750,000 Sana buys a car for Rs. 5,000,000. On this reading, without audited accounts, her export receipts would explain only Rs. 1,200,000 (Case 1) or Rs. 750,000 (Case 2) of it. Section 2(28A) does not name the rate table used to work back from the tax. This example uses the paragraph (1) table for an individual without salary as an illustration, not as a ruling on that point. ### What if ...? **What if I have audited accounts?** Section 111(4A) then allows credit for the excess over imputable income, provided the excess is "reasonably attributed to the business activities subject to final tax". The accounts must be audited by a chartered accountant. **What if I opt out of final tax?** Section 154A(3) lets a person opt out each year when filing the return. The income is then not subject to final tax, so section 111(4A), which is about final-tax sources, would not be the provision in play. See the related page on opting out. **What if part of my money came from a remittance?** Section 111(4) separately protects qualifying remittances up to five million rupees a year. See the related page on section 111. ### Common mistakes - **Treating gross receipts as fully available to explain assets.** Under section 111(4A) the default credit is imputable income, not the gross amount. - **Assuming a small final tax means a small problem.** The lower the final tax, the lower the imputable income worked back from it. - **Relying on the old section 154A(4).** It was omitted in 2022; the rule now sits in section 111(4A). ### What to check in the official text Read section 111(1) and (4A), section 2(28A), and section 154A(2) and (3). Check Division IVA of Part III and paragraph (1) of Division I of Part I of the First Schedule in the source PDF for the exact rate tables. The wealth statement form and reconciliation layout are prescribed separately and are not reproduced here. ### Frequently asked #### What is imputable income? Section 2(28A) defines it as the income which would have resulted in the same tax had the amount not been subject to final tax. In effect, the final tax you paid is converted back into the income that would produce that tax under the normal rates. #### How can I get credit for more than imputable income? Section 111(4A) allows it if the excess is reasonably attributed to the business activities subject to final tax and you furnish financial statements and accounts audited by a chartered accountant. Both conditions are in the text. #### Does this rule apply only to freelancers? No. Section 111(4A) applies to any source of income subject to final tax under any provision of the Ordinance. Section 154A export proceeds are one such source when the section 154A(2) conditions are met. ### Citations - [Income Tax Ordinance, 2001, section 111 (Unexplained income or assets)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#111-unexplained-income-or-assets), as amended to 2026-06-30: "shall not be entitled to take credit of any sum as is in excess of imputable income, unless the excess amount is reasonably attributed to the business activities subject to final tax and the taxpayer furnishes financial statements and accounts duly audited by a chartered accountant." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "in relation to an amount subject to final tax means the income which would have resulted in the same tax, had this amount not been subject to final tax" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "The tax deductible under this section shall be a final tax on the income arising from the transactions referred to in this section, upon fulfilment of the following conditions" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 116 (Wealth statement)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#116-wealth-statement), as amended to 2026-06-30: "assets including foreign assets and liabilities including foreign liabilities" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, paragraph (1) (Rates of Tax for Individuals and Association of Persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How do I show freelance earnings and Payoneer, Wise or foreign account balances in my wealth statement? Source: https://qanoondigest.com/faq/freelancers-it-exporters/freelancer-wealth-statement-payoneer-balances Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 116(2) requires every resident individual who files a return to attach a wealth statement and a wealth reconciliation. Section 116(1) asks for assets including foreign assets, so balances held abroad belong in it. Section 116A adds a separate foreign income and assets statement where foreign income is at least USD 10,000 or foreign assets are at least USD 100,000. **Applies to:** Resident individual freelancers in Pakistan who file a return and hold earnings in Pakistani bank accounts or with foreign payment platforms or banks. Freelancers often hold money in three places at once: a Pakistani bank account, a balance with a foreign payment platform, and sometimes a bank account abroad. The Ordinance does not mention any platform by name. It uses two broad requirements: a wealth statement under section 116 that covers foreign assets, and a separate foreign income and assets statement under section 116A once thresholds are crossed. ### What does section 116 require? Section 116(2) says every resident taxpayer being an individual who files a return of income "shall furnish a wealth statement" and a wealth reconciliation statement for that year along with the return. Section 116(1) lists what the statement contains: - (a) your total "assets including foreign assets and liabilities including foreign liabilities" on the specified date; - (b) the same for your spouse, minor children and other dependants, with an Explanation that a spouse's assets are included only if the spouse is dependent; - (c) assets including foreign assets transferred to others, and the consideration; - (d) total expenditure by you and your family; - (e) the reconciliation statement of wealth. The words "including foreign assets" and "including foreign liabilities" were inserted by the Finance Act, 2024, according to the footnotes. Section 116(3) allows a revised wealth statement, with a revised reconciliation and reasons, before the receipt of the amendment notice that section 116(3) refers to for that year, and not after five years from the due date of the return. ### When is a separate section 116A statement needed? Section 116A(1) requires a resident individual "having foreign income of not less than ten thousand United States dollars or having foreign assets with a value of not less than one hundred thousand United States dollars" to file a foreign income and assets statement. It shows: - (a) total foreign assets and liabilities on the last day of the tax year; - (b) foreign assets transferred to others during the year, and the consideration; - (c) particulars of foreign income and the expenditure incurred wholly and necessarily to derive it. Section 114 says the return is to be accompanied by this statement "as required under section 116A". Under section 116A(2), the Commissioner can issue a notice to someone who should have filed it and did not. **Is freelance income "foreign income"?** Section 116A does not define the term. Section 101(2) says business income of a resident is Pakistan-source income to the extent it is derived from a business carried on in Pakistan, and section 101(16) says an amount is foreign-source income only to the extent it is not Pakistan-source. The Ordinance does not say directly whether receipts for work done from Pakistan for foreign clients count toward the USD 10,000 foreign income test. This page does not resolve that. The foreign assets test, based on value held abroad, is the clearer trigger for freelancers with large balances. Section 116A also does not state an exchange rate for converting rupee values to dollars. ### How is it filed and when? Section 118(1) says the return, the wealth statement and, if applicable, the foreign income and assets statement are furnished in the prescribed manner. Section 118(4) makes the wealth statement due by the due date for the return where section 116(2) applies. Section 118(3)(b) sets 30 September following the end of the tax year for a person other than a company. ### Worked example (illustrative figures) Bilal, a video editor in Karachi, prepares his tax year 2027 wealth statement. He is not PSEB-registered, so the Division IVA rate is 1%. **Flows during the year** 1. Opening net assets on 30 June 2026: Rs. 1,500,000 2. Freelance receipts earned: Rs. 4,000,000, of which Rs. 3,600,000 was withdrawn to his Pakistani bank and Rs. 400,000 is still held with a foreign payment platform 3. Section 154A tax on the Rs. 3,600,000 realised: Rs. 3,600,000 x 1% = Rs. 36,000 4. Personal and household expenditure: Rs. 1,800,000 5. Closing net assets: Rs. 1,500,000 + Rs. 4,000,000 - Rs. 36,000 - Rs. 1,800,000 = Rs. 3,664,000 **Closing assets on 30 June 2027** | Asset | Amount | |---|---| | Pakistani bank account | Rs. 2,914,000 | | Balance with foreign payment platform (foreign asset) | Rs. 400,000 | | Laptop bought during the year | Rs. 350,000 | | **Total** | **Rs. 3,664,000** | The closing assets match the reconciliation. Section 154A deducts tax when a bank realises proceeds, so the Rs. 400,000 still held abroad has not yet been taxed at source. How receipts held abroad at the year end are treated in that year's return is not spelled out in section 154A. ### Common mistakes - **Leaving out balances held abroad.** Section 116(1)(a) covers assets including foreign assets. - **Assuming a final-tax filer needs no wealth statement.** Section 116(2) applies to every resident individual filing a return. - **Using gross receipts to explain every purchase.** Where income is final tax, the unexplained-income rules limit how much of it can explain assets. See the related page on explaining assets with final-taxed income. ### What to check in the official text Read sections 116, 116A, 118 and 114(2) in full with their footnotes, and section 101(2) and (16) on source of income. The prescribed forms for the wealth statement and the foreign income and assets statement, and IRIS portal steps, are not held in this corpus. ### Frequently asked #### Does a Payoneer or Wise balance go in the wealth statement? The Ordinance does not name any platform or define foreign assets. Section 116(1)(a) asks for total assets including foreign assets as on the specified date, so a balance you hold outside Pakistan falls within that wording on a plain reading. #### When do I need the separate foreign income and assets statement? Section 116A(1) requires it from a resident individual with foreign income of not less than USD 10,000 or foreign assets worth not less than USD 100,000. Section 114 says the return is to be accompanied by it where required. #### When is the wealth statement due? Section 118(4) says a wealth statement required under section 116(2) is due by the due date for the return of income. For an individual who is not a company, section 118(3) sets 30 September after the end of the tax year. ### Citations - [Income Tax Ordinance, 2001, section 116 (Wealth statement)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#116-wealth-statement), as amended to 2026-06-30: "assets including foreign assets and liabilities including foreign liabilities" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 116A (Foreign income and assets statement)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#116a-foreign-income-and-assets-statement), as amended to 2026-06-30: "Every resident taxpayer being an individual having foreign income of not less than ten thousand United States dollars or having foreign assets with a value of not less than one hundred thousand United States dollars shall furnish a statement" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 118 (Method of furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#118-method-of-furnishing-returns-and-other-documents), as amended to 2026-06-30: "A wealth statement shall be furnished by the due date specified in the notice requiring the person to furnish such statement" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "shall be accompanied with a foreign income and assets statement as required under section 116A." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 101 (Geographical source of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#101-geographical-source-of-income), as amended to 2026-06-30: "An amount shall be foreign-source income to the extent to which it is not Pakistan-source income." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "Every authorized dealer in foreign exchange shall, at the time of realization of foreign exchange proceeds" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What if my client pays in USDT or through a friend abroad instead of a bank? Source: https://qanoondigest.com/faq/freelancers-it-exporters/freelance-payment-crypto-or-via-relative Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 154A works only when an authorised dealer in foreign exchange realises your export proceeds, so a USDT payment or cash handed over by a friend falls outside its deduction and final-tax route. Section 111(4) protects only remittances through normal banking channels, including exchange companies. The Ordinance does not mention crypto receipts at all. **Applies to:** Freelancers in Pakistan whose foreign clients pay in cryptocurrency, or through a friend or relative abroad, instead of through a bank or payment account. Some foreign clients prefer to pay in USDT, and some freelancers ask a cousin in Dubai or a friend in London to receive the money and pass it on. It can look like a way around the bank. In the Income Tax Ordinance it mostly removes protections: the low final-tax route under section 154A and the safe harbour for remittances in section 111(4) are both tied to the banking system. ### What does the law say? **Section 154A depends on an authorised dealer.** Section 154A(1) says: "Every authorized dealer in foreign exchange shall, at the time of realization of foreign exchange proceeds on account of the following, deduct tax from the proceeds" at the rates in Division IVA of Part III of the First Schedule. The listed receipts include exports of software, IT and IT-enabled services by PSEB-registered exporters and "services or technical services rendered outside Pakistan or exported from Pakistan". Section 154A(2) then makes "the tax deductible under this section" a final tax once its conditions are met. Both steps start with a realisation by an authorised dealer. **Section 111(4) depends on banking channels.** Section 111(1) lets the Commissioner add to income any amount, investment, money or expenditure whose nature and source is not satisfactorily explained. Section 111(4) switches that off for "foreign exchange remitted from outside Pakistan through normal banking channels not exceeding five million Rupees in a tax year that is en-cashed into rupees by a scheduled bank" where the bank's certificate is produced. Its Explanation says remittances through "money service bureaus, exchange companies or money transfer operators" count as normal banking channels. **The income itself is still business income.** Section 101(2) says business income of a resident is Pakistan-source income to the extent it is derived from a business carried on in Pakistan. The way the client pays does not change where the work is done. **Crypto is not addressed.** The Ordinance amended to 30 June 2026 does not use the words cryptocurrency, virtual asset or digital currency. It gives no rule on when a USDT payment is income, how it is valued in rupees, or how a later sale of the USDT is treated. This page does not fill that gap. ### How does it work in practice? | How you are paid | Section 154A deduction and final-tax route | Section 111(4) protection | |---|---|---| | Client pays to your bank or payment account, converted by an authorised dealer | Applies, at the Division IVA rate | Can apply, up to Rs. 5,000,000 a tax year, with bank certificate | | Friend abroad remits to you through a bank or exchange company | The Ordinance does not say whether proceeds sent as a personal remittance are "on account of" your export | Can apply, as the Explanation covers exchange companies and money transfer operators | | Friend or courier hands you cash in Pakistan | No authorised dealer realises proceeds | Not described in section 111(4) | | Client pays USDT to your wallet | No authorised dealer realises proceeds; crypto not addressed | Not described in section 111(4) | Where section 154A does not apply, the text read for this page gives no other final-tax route for these receipts. On that reading the income would fall to be taxed under the normal rules for business income, which is a heavier outcome than the Division IVA rate for many freelancers. ### Worked example (illustrative figures) Hira writes content from Peshawar for clients abroad. She is not PSEB-registered. In tax year 2027: 1. Rs. 1,000,000 arrives in her bank account from her clients through a payment account and is converted by the bank. Section 154A applies. Division IVA "any other case" rate: 1%. Tax deducted: Rs. 1,000,000 x 1% = Rs. 10,000, final if the section 154A(2) conditions are met. 2. Rs. 600,000 is sent by her brother in Dubai through an exchange company after one client paid him. Section 111(4) can cover this against the unexplained income rule, since it is under Rs. 5,000,000 and came through a channel the Explanation names, if she has the bank certificate. The Ordinance does not say whether section 154A applies to it. 3. Rs. 400,000 worth of USDT is paid to her wallet. Section 154A does not operate because no authorised dealer realised foreign exchange proceeds, and section 111(4) does not describe it. If all Rs. 2,000,000 had come through the bank like item 1, the section 154A deduction would have been Rs. 2,000,000 x 1% = Rs. 20,000, final if the conditions are met. ### What if ...? **What if FBR asks where my USDT or cash came from?** Section 111(1) puts the burden on the person to explain the nature and source. Section 111(4) does not cover these receipts, so the protection that bank remittances get is missing. How to document crypto receipts is not covered in this corpus. **What if I later sell the USDT for rupees to a local buyer?** The rupees come from a person in Pakistan, not from an authorised dealer realising export proceeds. The Ordinance does not say section 154A reaches that sale. **What if my remittances pass five million rupees in the year?** Section 111(4) protects only amounts "not exceeding five million Rupees in a tax year". Anything above that must be explained in the ordinary way. ### Common mistakes - **Thinking a relative's remittance is "just family money".** Section 111(4) protects the remittance from the unexplained income rule. It does not say the money stops being income from your work. - **Assuming crypto is outside tax.** The Ordinance is silent on crypto. Silence is not an exemption, and section 101(2) still treats the business as carried on in Pakistan. - **Expecting the 1% final tax without a bank.** Section 154A deduction happens only at realisation by an authorised dealer. ### What to check in the official text Read section 154A(1) and (2) and Division IVA of Part III of the First Schedule for the deduction and its conditions. Read section 111(1), (4) and the Explanation after (4) for the remittance protection. Section 101(2) sets the source rule. State Bank of Pakistan rules on foreign exchange and any official position on cryptocurrency are outside this corpus. ### Frequently asked #### Is freelance income received in USDT tax free? Nothing in the Ordinance says so. Section 101(2) treats business income from a business carried on in Pakistan as Pakistan-source, whatever form the payment takes. The Ordinance does not mention cryptocurrency, so it does not set out a special rule for these receipts. #### Does section 111(4) protect money a relative sends me from abroad? It covers foreign exchange remitted through normal banking channels, up to five million rupees in a tax year, encashed into rupees by a scheduled bank, with the bank's certificate. Its Explanation treats money service bureaus, exchange companies and money transfer operators as normal banking channels. Cash carried by hand is not described. #### Can I get the 1% final tax if my client pays through a friend? Section 154A applies to proceeds realised by an authorised dealer on account of the listed exports. If the money reaches you as a family remittance or in cash, the Ordinance does not say that section 154A applies to it, and this page does not assume it does. ### Citations - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "Every authorized dealer in foreign exchange shall, at the time of realization of foreign exchange proceeds on account of the following, deduct tax from the proceeds" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 111 (Unexplained income or assets)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#111-unexplained-income-or-assets), as amended to 2026-06-30: "(4) Sub-section (1) does not apply to any amount of foreign exchange remitted from outside Pakistan through normal banking channels not exceeding five million Rupees in a tax year that is en-cashed into rupees by a scheduled bank and a certificate from such bank is produced to that effect." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 101 (Geographical source of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#101-geographical-source-of-income), as amended to 2026-06-30: "(2) Business income of a resident person shall be Pakistan-source income to the extent to which the income is derived from any business carried on in Pakistan." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is freelance income from foreign clients taxable in Pakistan, or is it exempt? Source: https://qanoondigest.com/faq/freelancers-it-exporters/is-foreign-freelance-income-taxable-pakistan Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It is taxable. Section 11(5) taxes a resident on Pakistan-source and foreign-source income, and section 101(2) treats business income from a business carried on in Pakistan as Pakistan-source. The IT export exemption in clause (133) of the Second Schedule has been omitted. Section 154A now deducts 0.25% or 1% from the foreign proceeds. **Applies to:** Individuals living in Pakistan who work for foreign clients as freelancers and receive payment from abroad. Freelance income from foreign clients is not exempt for someone who lives and works in Pakistan. The Income Tax Ordinance taxes a resident on income from all sources, treats a business carried on in Pakistan as Pakistan-source, and no longer contains the IT export exemption many people still remember. What makes freelance income different is how the tax is collected: a deduction by the bank under section 154A. ### What does the law say? **Residence.** Section 82 makes an individual resident for a tax year if, among other tests, they are present in Pakistan for 183 days or more in the year. Clause (d) also covers a citizen of Pakistan who "is not present in any other country for more than one hundred and eighty-two days during the tax year or who is not a resident taxpayer of any other country." A freelancer who lives in Karachi or Peshawar and works from home will normally meet at least one of these tests. **Residents are taxed on everything.** Section 11(5) says a resident's income under each head is computed "by taking into account amounts that are Pakistan-source income and amounts that are foreign-source income." Non-residents, by contrast, are taxed only on Pakistan-source income under section 11(6). **Where the work is done decides the source.** Section 101(2) says business income of a resident "shall be Pakistan-source income to the extent to which the income is derived from any business carried on in Pakistan." The client's location is not the test. A developer in Multan writing code for a client in Germany is carrying on the business in Multan. **The exemption is gone.** Part I of the Second Schedule once had clause (133), which exempted income from exports of computer software, IT services or IT-enabled services. The text amended to 30 June 2026 shows clause (133) as omitted. Its footnote records the old wording, including the condition that 80% of export proceeds be brought into Pakistan through normal banking channels. The footnote's amendment history is compressed and hard to follow, but the operative point is clear: there is no clause (133) exemption in the current text. **What replaced it.** Section 154A requires the bank to deduct tax when it realises foreign exchange proceeds from, among others, exports of software, IT and IT-enabled services by PSEB-registered exporters (clause (a)) and "services or technical services rendered outside Pakistan or exported from Pakistan" (clause (b)). ### How does it work in practice? When your foreign payment is converted by an authorised dealer in foreign exchange, the dealer deducts tax at the rate in Division IVA of Part III of the First Schedule. For tax year 2027 that is 0.25% of proceeds for PSEB-registered exporters of software, IT or IT-enabled services, and 1% in any other case. Under section 154A(2), that deduction becomes a final tax on the income if you file your return, file any withholding statements the Ordinance requires of you, and, unless you are a PSEB-registered exporter, file any sales tax returns required under federal or provincial law. Section 154A(3) removes the final-tax treatment if the conditions are not met or if you opt out when filing. ### Worked example (illustrative figures) Usman lives in Rawalpindi all year and builds websites for clients in Canada. In tax year 2027 his bank realises Rs. 2,000,000 of foreign proceeds. He is not registered with PSEB. 1. Residence: present in Pakistan all year, so resident under section 82. 2. Source: the business is carried on in Rawalpindi, so Pakistan-source under section 101(2). 3. Exemption: none, clause (133) is omitted. 4. Deduction at the bank: Rs. 2,000,000 x 1% = Rs. 20,000. 5. If he files his return and meets the section 154A(2) conditions, Rs. 20,000 is his final income tax on these receipts. Had he been registered with and certified by PSEB, the deduction would have been Rs. 2,000,000 x 0.25% = Rs. 5,000. ### What if ...? **What if I live abroad for most of the year?** Residence is decided year by year under section 82. A non-resident is taxed only on Pakistan-source income under section 11(6). Whether a particular pattern of travel makes you non-resident depends on the day counts and clause (d), and is not settled here. **What if the money comes as a gift from a relative instead of from the client?** The label on the transfer does not change what the income is. Payments routed in unusual ways are covered on a separate page. ### Common mistakes - **"Foreign remittances are tax free."** The Ordinance has no general exemption for income simply because it arrives from abroad. For a resident, section 11(5) brings foreign-source income in as well. - **Relying on clause (133).** It is omitted. Articles written before the omission describe a regime that no longer exists. - **Thinking the 1% is optional.** The bank's duty to deduct comes from section 154A(1). What you can choose, under section 154A(3), is whether to be taxed under the final-tax regime. ### What to check in the official text Read sections 11, 82 and 101(2) for residence and source, and section 154A for the collection mechanism. Check the footnotes to clause (133) in Part I of the Second Schedule for the old exemption's wording. Division IVA of Part III of the First Schedule holds the current rates. Board notifications under section 154A(1)(e) and (6), which can add or exclude services, are not held in this corpus. ### Frequently asked #### Was freelance IT income ever exempt? Clause (133) of Part I of the Second Schedule once exempted income from exports of computer software, IT services and IT-enabled services, subject to conditions such as bringing 80% of proceeds into Pakistan. The clause is shown as omitted in the Ordinance amended to 30 June 2026, so it gives no exemption now. #### Does it matter that my client is abroad? Not for residents. Section 101(2) looks at where the business is carried on, and section 11(5) taxes a resident's foreign-source income too. The foreign client decides that section 154A applies to the proceeds, not whether the income is taxable. #### How is the tax actually collected? The bank deducts it when the foreign exchange is realised, under section 154A, at the Division IVA rate: 0.25% for PSEB-registered IT exporters, 1% in any other case, for tax year 2027. ### Citations - [Income Tax Ordinance, 2001, section 82 (Resident individual)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#82-resident-individual), as amended to 2026-06-30: "being a citizen of Pakistan is not present in any other country for more than one hundred and eighty-two days during the tax year or who is not a resident taxpayer of any other country." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 11 (Heads of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#11-heads-of-income), as amended to 2026-06-30: "(5) The income of a resident person under a head of income shall be computed by taking into account amounts that are Pakistan-source income and amounts that are foreign-source income." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 101 (Geographical source of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#101-geographical-source-of-income), as amended to 2026-06-30: "(2) Business income of a resident person shall be Pakistan-source income to the extent to which the income is derived from any business carried on in Pakistan." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "(b) services or technical services rendered outside Pakistan or" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (133) (omitted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is the 0.25% charged on gross receipts or profit, and can I deduct platform fees, laptop and internet costs? Source: https://qanoondigest.com/faq/freelancers-it-exporters/freelance-tax-gross-receipts-expenses Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It is charged on proceeds, not profit. Division IVA sets 0.25% or 1% of the export proceeds the bank realises, and while the section 154A(2) tax is final, section 169(2)(b) allows no deduction for expenditure incurred in earning that income. Expenses such as internet or laptop costs matter only if you fall outside final tax under section 154A(3). **Applies to:** Resident freelancers and IT service exporters whose foreign receipts are taxed under section 154A. Freelancers often assume the tax on foreign earnings is charged on what they keep after costs. Under section 154A it is not. The rate applies to proceeds, and as long as the tax is final, the Ordinance does not let you subtract what you spent to earn them. ### What is the tax charged on? Section 154A(1) requires every authorised dealer in foreign exchange, when it realises foreign exchange proceeds for exported services, to "deduct tax from the proceeds" at the rates in Division IVA of Part III of the First Schedule. For tax year 2027, Division IVA reads: | Type of receipt | Rate | |---|---| | Export proceeds of computer software, IT services or IT enabled services by persons registered with the Pakistan Software Export Board (for tax years 2024 up to tax year 2029) | 0.25% of proceeds | | Any other case | 1% of proceeds | Both rates are a percentage "of proceeds". Nothing in section 154A or Division IVA refers to profit, net income or costs. **Platform fees.** The Ordinance does not define "proceeds" for section 154A and does not mention fees that a foreign platform keeps before paying you. The text taxes what the bank realises. It does not say more about fees deducted abroad, and this page does not resolve that point. ### Why can I not deduct expenses? Section 154A(2) makes the tax a final tax on the income from these transactions once four conditions are met: a return has been filed, withholding statements have been filed if required, sales tax returns have been filed if required (not a condition for PSEB-registered exporters), and no credit is claimed for foreign taxes paid. Section 169(1)(b) lists sub-section (2) of section 154A among the final-tax provisions. Section 169(2) then sets out what "final" means: - (a) the income is not chargeable under any head of income in computing taxable income; - (b) "no deduction shall be allowable under this Ordinance for any expenditure incurred in deriving the income"; - (c) the income is not reduced by deductible allowances or by setting off a loss; - (d) the tax is not reduced by any tax credit. Section 168(3)(ea) adds that no tax credit is allowed for tax that is final under section 154A(2). So platform fees, internet bills, software subscriptions, a laptop or a co-working desk do not reduce the final tax. ### When do expenses count? Section 154A(3) says sub-section (2) does not apply to a person who does not fulfil the conditions "or who opts not to be subject to final taxation", and the option is exercised every year when the return is filed. The income is then computed under normal rules as business income. Section 20(1) allows a deduction for expenditure incurred in the year "wholly and exclusively for the purposes of business". Section 20(2) says expenditure on a depreciable asset with a useful life of more than one year, such as a laptop, is depreciated or amortised rather than deducted in one go. Tax is worked out at the individual rates, and section 168(2) allows credit for the tax the bank deducted. ### Worked example (illustrative figures) Kamran, a content writer in Multan, is not PSEB-registered. In tax year 2027 his bank realises Rs. 3,000,000 of export proceeds. He spends Rs. 60,000 on internet and Rs. 240,000 on a co-working desk, and buys a laptop for Rs. 300,000. **Under final tax (section 154A(2) conditions met)** 1. Tax: Rs. 3,000,000 x 1% = Rs. 30,000 2. Expenses allowed: none, under section 169(2)(b) 3. Final tax for this income: Rs. 30,000 **If he opts out under section 154A(3)** 1. Receipts: Rs. 3,000,000 2. Revenue expenses under section 20(1): Rs. 60,000 + Rs. 240,000 = Rs. 300,000 3. Taxable income before depreciation: Rs. 3,000,000 - Rs. 300,000 = Rs. 2,700,000 (laptop depreciation is left out here for simplicity) 4. Tax under paragraph (1) of Division I of Part I: Rs. 170,000 + 30% x (Rs. 2,700,000 - Rs. 1,600,000) = Rs. 170,000 + Rs. 330,000 = Rs. 500,000 5. Less credit for tax deducted by the bank: Rs. 500,000 - Rs. 30,000 = Rs. 470,000 In this illustration, deducting expenses does not reduce the tax below the final-tax figure, because the normal rates are much higher than 1% of receipts. The result depends on the actual figures. ### What if ...? **What if I am PSEB-registered?** The rate is 0.25% of proceeds for tax years 2024 up to 2029 under Division IVA. The no-deduction rule in section 169(2) still applies while the tax is final. **What if I miss one of the section 154A(2) conditions?** Section 154A(3) says sub-section (2) does not apply to a person who does not fulfil the conditions. The income is then taxed under normal rules. ### Common mistakes - **Applying 0.25% or 1% to profit.** Division IVA applies the rate to proceeds. - **Claiming a laptop or internet costs against final-taxed income.** Section 169(2)(b) bars it. - **Assuming opting out always lowers tax.** Under normal rules, the individual slab rates apply to net income, which can exceed the final tax, as the example shows. ### What to check in the official text Read section 154A in full, section 169(1)(b) and (2), section 168(2) and (3), and section 20. Check Division IVA of Part III and paragraph (1) of Division I of Part I of the First Schedule in the source PDF. Board rules on the mode and procedure of payment under section 154A(5) are not held in this corpus. ### Frequently asked #### Can I deduct my laptop and internet bills from final-taxed freelance income? No. While the section 154A tax is final, section 169(2)(b) says no deduction is allowable for any expenditure incurred in deriving the income. Business expenses come into play only when the income is computed under normal rules. #### Is the tax charged before or after the platform's fee? Division IVA charges a percentage of the proceeds, and section 154A(1) has the bank deduct it when it realises foreign exchange proceeds. The Ordinance does not define proceeds or mention fees kept by a platform abroad, so this page does not say how such fees are treated. #### If I opt out of final tax, what happens to the tax the bank already deducted? Section 168(3) bars credit only for tax that is final under section 154A(2). If section 154A(3) takes you out of final tax, section 168(2) allows credit for tax deducted under Division III of Part V of Chapter X, which includes section 154A. ### Citations - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "The provisions of sub-section (2) shall not apply to a person who does not fulfill the specified conditions or who opts not to be subject to final taxation:" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "under this Ordinance for any expenditure incurred in deriving the income;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 20 (Deductions in computing income chargeable under the head “Income from Business”)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#20-deductions-in-computing-income-chargeable-under-the-head-income-from-business), as amended to 2026-06-30: "a deduction shall be allowed for any expenditure incurred by the person in the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "No tax credit shall be allowed for any tax collected or deducted that is a final tax under-" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, paragraph (1) (Rates of Tax for Individuals and Association of Persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is the 100% tax credit on IT exports and its 80% remittance rule still available? Source: https://qanoondigest.com/faq/freelancers-it-exporters/it-export-tax-credit-65f-80-percent-rule Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No. The 100% tax credit for income from exports of software, IT and IT-enabled services sat in clause (c) of section 65F(1), with a proviso that eighty percent of proceeds be remitted through normal banking channels. The Finance Act, 2022 omitted that clause. IT export proceeds are now taxed under section 154A instead. **Applies to:** Freelancers and IT or IT-enabled service exporters in Pakistan relying on older guidance about a full tax credit on export income, for tax year 2027. ### What does the law say now? Section 65F of the Income Tax Ordinance, 2001, as amended to 30 June 2026, gives a tax credit equal to one hundred per cent of tax payable to only two categories in sub-section (1): - **Clause (a):** persons engaged in coal mining projects in Sindh, to the extent the income is derived from supplying coal to power generation projects. - **Clause (b):** "a startup as defined in clause (62A) of section 2 for the tax year in which the startup is certified by the Pakistan Software Export Board" and the next two tax years. There is no clause for income from IT exports. A freelancer or software house exporting services is not in section 65F(1) unless it qualifies as a certified startup under clause (b). ### What happened to the IT export clause? The footnotes to section 65F in the consolidated Ordinance record that "Clause (c) omitted by the Finance Act, 2022", and reproduce the omitted text: > "(c) Income from exports of computer software or IT services or IT enabled services as defined in clause (30AD) and (30AE) of section 2 upto the period ending on the 30th day of June, 2025: Provided that eighty percent of the export proceeds is brought into Pakistan in foreign exchange remitted from outside Pakistan through normal banking channels." That is the "80% rule" still repeated in older guides. Section 5 of the Finance Act, 2022, which amends the Ordinance, says in terms: "in section 65F, in sub-section (1), clause (c) shall be omitted". The same Act changed section 154A at the same time. Note also that the omitted clause carried its own end date of 30 June 2025. Even on its original wording, it did not reach tax year 2027. ### How were the two sections linked? When section 154A was inserted by the Finance Act, 2021, clause (a) of section 154A(1) covered IT exports "in case tax credit under section 65F is not available". The Finance Act, 2022 replaced that expression with the current wording, so clause (a) now reads: "exports of computer software or IT services or IT enabled services where the exporter is registered with and duly certified by the Pakistan Software Export Board (PSEB)." In plain words: before 2022, section 154A picked up IT exporters who did not get the section 65F credit. After 2022, the credit is gone and section 154A is the rule, with the rate depending on PSEB registration. ### What applies to IT export income in tax year 2027? Division IVA of Part III of the First Schedule sets the section 154A rates: | Type of receipt | Rate | |---|---| | Export proceeds of computer software, IT services or IT-enabled services by persons registered with the Pakistan Software Export Board | 0.25% of proceeds, for tax years 2024 up to tax year 2029 | | Any other case | 1% of proceeds | Under section 154A(2), the tax deducted is a final tax on the income once a return has been filed and the other conditions in that sub-section are met. ### Worked example (illustrative figures) **Farah, who runs a two-person software business from Rawalpindi.** She is registered with the PSEB and receives Rs. 6,000,000 in export proceeds in tax year 2027. An old blog post tells her she owes nothing because of a 100% credit. 1. Section 65F(1) has no clause for IT export income after the Finance Act, 2022. The old blog post describes clause (c), which no longer exists. 2. Section 154A(1)(a) applies because she is PSEB-registered. 3. Division IVA rate: 0.25%. 4. Tax deducted: Rs. 6,000,000 x 0.25% = Rs. 15,000. 5. If she files her return and meets the other conditions in section 154A(2), Rs. 15,000 is her final tax on that income. If Farah were not PSEB-registered, the "any other case" row would apply: Rs. 6,000,000 x 1% = Rs. 60,000. ### What if I am a certified startup? Section 65F(1)(b) is still in force. It needs a startup "as defined in clause (62A) of section 2" and certification by the Pakistan Software Export Board, and it lasts for the year of certification and the next two tax years. Section 65F(2) adds conditions: a return has been filed, withholding statements have been filed where you are a withholding agent, and sales tax returns have been filed if required. The definition of startup has its own conditions, covered on a separate page. ### Common mistakes - **Relying on a guide written before the Finance Act, 2022.** The 100% IT export credit and its 80% remittance proviso were both in clause (c), and the whole clause was omitted. - **Treating the 80% rule as a condition of section 154A.** Neither section 154A nor Division IVA contains it. - **Confusing the startup credit with a general exporter credit.** Clause (b) is limited to certified startups and to three tax years. ### What to check in the official text Read section 65F with its footnotes, section 154A(1) and (2), and Division IVA of Part III of the First Schedule in the official PDF of the Ordinance amended to 30 June 2026. For the history, read section 5 of the Finance Act, 2022, which omitted clause (c) and amended section 154A(1)(a). The PSEB's own registration and certification procedure is outside this corpus. ### Frequently asked #### Where can I read the wording of the omitted clause? The consolidated Ordinance keeps it in a footnote to section 65F. It covered income from exports of computer software or IT services or IT-enabled services up to 30 June 2025, provided eighty percent of the export proceeds was brought into Pakistan in foreign exchange through normal banking channels. #### Is any 100% credit left for IT businesses in section 65F? Section 65F(1)(b) still gives a credit to a startup as defined in clause (62A) of section 2, for the tax year it is certified by the Pakistan Software Export Board and the next two tax years. It is subject to the conditions in section 65F(2), including a filed return. #### Does the 80% remittance condition apply to the section 154A rate? Section 154A and Division IVA do not contain an 80% remittance condition. Section 154A applies to foreign exchange proceeds that an authorised dealer realises, and the rate depends on the type of export and PSEB registration. ### Citations - [Income Tax Ordinance, 2001, section 65F (Tax credit for certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#65f-tax-credit-for-certain-persons), as amended to 2026-06-30: "a startup as defined in clause (62A) of section 2 for the tax year in which the startup is certified by the Pakistan Software Export Board" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2022, section 5 (Amendments of Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2022#5-amendments-of-income-tax-ordinance-2001-xlix-of-2001), as amended to 2022: "in section 65F, in sub-section (1), clause (c) shall be omitted;" Official source: https://download1.fbr.gov.pk/Docs/2022711571639532FinanceAct2022.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "exports of computer software or IT services or IT enabled services" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "(62A) “startup” means,-" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do freelancers in Islamabad pay sales tax on IT services exported to foreign clients? Source: https://qanoondigest.com/faq/freelancers-it-exporters/islamabad-sales-tax-exported-it-services Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No sales tax is payable on the export itself. Section 3(1A) of the Islamabad Capital Territory (Tax on Services) Ordinance, 2001 says the export of services shall be charged at the rate of zero per cent, overriding the Schedule rates. IT services provided to clients inside Islamabad are different: Table-1 lists IT and IT-enabled services at fifteen percent. **Applies to:** Freelancers and IT service providers based in Islamabad Capital Territory who serve foreign clients, and sometimes local ones. An Islamabad freelancer billing a client in Dubai or Toronto sits under two tax laws at once: the Income Tax Ordinance, which taxes the income, and the Islamabad Capital Territory (Tax on Services) Ordinance, 2001, which charges sales tax on services. On the sales tax side, the export is charged at zero. The text used here is the ICT Ordinance as amended to 30 June 2025, the latest edition in this corpus. ### What does the law say? **The general charge.** Section 3(1) of the ICT Ordinance charges sales tax "at rates specified in column (4) of Table-1 of the Schedule" on the value of taxable services "rendered or provided in the Islamabad Capital Territory". A proviso applies the separate rates and conditions of Table-2 to the services listed there. **The export rule.** Section 3(1A), inserted by the Finance Act, 2021, reads: "Notwithstanding the provision of sub-section (1), the export of services shall be charged at the rate of zero per cent." Because it starts with "notwithstanding", it overrides the Schedule rate for any service that is an export of services. **IT services in the Schedule.** Table-1, serial number 11 lists "IT services and IT-enabled services" at fifteen percent. Its explanation says IT services include "but not limited to" software development, software maintenance, system integration, web design, web development, web hosting and network design. IT-enabled services include call centres, medical transcription, remote monitoring, graphics design, accounting services, HR services, telemedicine centres, data entry operations, cloud computing services, data storage services, locally produced television programs and insurance claims processing. Table-2, serial number 11 separately lists "Services provided by software or IT-based system development consultants" at five percent, subject to the condition that no input tax adjustment or refund shall be admissible. **Definitions borrowed from the Sales Tax Act.** Section 2 says words used but not defined in the ICT Ordinance have the meaning given in the Sales Tax Act, 1990. The ICT Ordinance itself does not define "export of services", and this page does not settle exactly where the line falls between an export and a local service. ### How does it work in practice? For a freelancer based in Islamabad, the practical split is by client: | Client | ICT sales tax rate | |---|---| | Foreign client, service exported | Zero per cent, section 3(1A) | | Client in Islamabad, IT or IT-enabled service | Fifteen percent under Table-1, serial 11, or five percent under Table-2, serial 11 where that entry applies | Section 3(3) applies the Sales Tax Act, 1990 provisions on registration, records, returns, payment and penalties to tax under the ICT Ordinance. A zero rate is still a rate of tax, not an exemption, but the ICT text does not itself say whether a person making only zero-rated exports must register. That question is not resolved here. **Why this matters for income tax.** Section 154A(2)(c) of the Income Tax Ordinance lists, among the conditions for final tax on export proceeds, that "sales tax returns under Federal or Provincial laws have been filed, if required under the law". Its proviso says this condition does not apply to an exporter under section 154A(1)(a), the PSEB-registered software, IT and IT-enabled services category. For other exporters, whether ICT sales tax returns are required feeds into the final-tax question. ### Worked example (illustrative figures) Saad is a web developer working from G-11, Islamabad. In one month he bills: 1. A client in the United States, work exported: Rs. 900,000. Sales tax at zero per cent: Rs. 900,000 x 0% = Rs. 0. 2. A company in Blue Area, Islamabad, for a website: Rs. 200,000. - If Table-1, serial 11 applies at fifteen percent: Rs. 200,000 x 15% = Rs. 30,000. - If Table-2, serial 11 applies at five percent: Rs. 200,000 x 5% = Rs. 10,000, with no input tax adjustment or refund. The export carries no ICT sales tax. The local job does, at one of the two Schedule rates. The Ordinance text in this corpus does not say which of the two entries covers a web developer like Saad. ### What if ...? **What if I live in Rawalpindi, Lahore or Karachi?** The ICT Ordinance states that it "extends to whole of Islamabad Capital Territory". Services provided from the provinces fall under provincial sales tax on services laws. Those laws are outside this corpus, so their rates and export rules are not stated here. **What if the Board adds IT services to a negative list?** Section 3(4), added by the Finance Act, 2025, lets the Board specify a negative list of exempt services in Table-3 by notification. No Table-3 entries appear in the text held here. **What if I am PSEB-registered?** The ICT rate on the export is still zero. The PSEB point matters on the income tax side, through the proviso to section 154A(2)(c). ### Common mistakes - **Applying the fifteen percent rate to foreign clients.** Section 3(1A) overrides the Schedule for the export of services. - **Assuming the ICT Ordinance covers all of Pakistan.** It covers Islamabad Capital Territory only. - **Treating zero-rated as the same as outside the law.** Section 3(3) still brings in the Sales Tax Act rules on registration and returns, as far as they apply. ### What to check in the official text Read section 3 of the ICT (Tax on Services) Ordinance, 2001 in full, including sub-sections (1A), (3) and (4), and Table-1 and Table-2, serial number 11, in the source PDF. For the income tax side, read section 154A(2)(c) of the Income Tax Ordinance and its proviso. Board general orders under the second proviso to section 3(1), any Table-3 notification, and the provincial services laws are not held in this corpus. ### Frequently asked #### What is the Islamabad sales tax rate on exported IT services? Zero per cent. Section 3(1A) of the ICT (Tax on Services) Ordinance, 2001 charges the export of services at zero per cent, notwithstanding the rates in sub-section (1) and the Schedule. #### What rate applies if my client is in Islamabad? Table-1, serial number 11 of the Schedule lists IT services and IT-enabled services at fifteen percent. Table-2, serial number 11 separately lists services of software or IT-based system development consultants at five percent with no input tax adjustment or refund. This page does not decide which entry fits a given freelancer. #### I live in Lahore or Karachi. Does this apply to me? No. The ICT Ordinance extends to the Islamabad Capital Territory. Sales tax on services in the provinces is charged under provincial laws that are not part of this corpus. ### Citations - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, section 3 (Scope of tax)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30#3-scope-of-tax), as amended to 2025-06-30: "(1A) Notwithstanding the provision of sub-section (1), the export of services shall be charged at the rate of zero per cent." Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, section 2 (Interpretation)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30#2-interpretation), as amended to 2025-06-30: "the words and expression used but not defined shall have the same meaning as in the Sales Tax Act, 1990." Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, Schedule, Table-1, serial number 11 (IT services and IT-enabled services)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, Schedule, Table-2, serial number 11 (Services provided by software or IT-based system development consultants)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "Provided that this condition shall not apply in case of an exporter mentioned in clause (a) of sub-section (1) of this section." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do I still need to file an income tax return if the bank already deducted final tax on my remittances? Source: https://qanoondigest.com/faq/freelancers-it-exporters/must-freelancers-file-return-final-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. The bank's deduction under section 154A is a final tax only if a return has been filed, plus any required withholding and sales tax statements. Section 114 separately requires a return from every person whose income is subject to final taxation, and section 118 sets 30 September after the tax year as the due date. **Applies to:** Individual freelancers and IT or IT-enabled service exporters in Pakistan whose foreign receipts are taxed by their bank under section 154A, for tax year 2027. ### What does the law say? Two separate parts of the Income Tax Ordinance, 2001 point the same way. **Section 154A(2)** is the reason the bank's deduction can be final at all. It says the tax deducted on export proceeds "shall be a final tax on the income arising from the transactions referred to in this section, upon fulfilment of the following conditions": | Clause | Condition | Applies to a PSEB-registered IT exporter? | |---|---|---| | (a) | "return has been filed" | Yes | | (b) | withholding tax statements for the relevant tax year have been filed, if required under the Ordinance | Yes, if you are required to file them | | (c) | sales tax returns under federal or provincial laws have been filed, if required under the law | No: the proviso says this condition "shall not apply" to an exporter under clause (a) of section 154A(1) | | (d) | "no credit for foreign taxes paid shall be allowed" | Yes | **Section 114(1)** lists who must file a return. Clause (ae) covers "every person whose income for the year is subject to final taxation under any provision of this Ordinance". Clause (b)(vii) covers any person who "has obtained National Tax Number". Clause (ab) covers any person whose taxable income exceeds the amount not chargeable to tax. So a filed return is both a condition of the final-tax treatment and, in most cases, a direct requirement. ### How does it work in practice? Section 154A(1) requires the authorised dealer in foreign exchange, meaning your bank, to deduct tax "at the time of realization of foreign exchange proceeds". For tax year 2027, Division IVA of Part III of the First Schedule sets the rate at 0.25% of proceeds for software, IT and IT-enabled exports by PSEB-registered persons, and 1% in any other case. Where the conditions in section 154A(2) are met, section 169 applies. Under section 169(2), that income "shall not be chargeable to tax under any head of income in computing the taxable income of the person", no deduction is allowed for expenses incurred to earn it, and there is no refund of the tax deducted unless it exceeds the amount for which you are chargeable. You still report the income and the tax in the return, but the deduction settles the liability on it. **When to file.** Section 118(3)(b) says a return for a person other than a company is due "on or before the 30th day of September next following the end of the tax year to which the return relates". For tax year 2027 (1 July 2026 to 30 June 2027) that is 30 September 2027. **NTN.** Section 118(6) adds a trap for first-time filers: where a taxpayer "is not borne on the National Tax Number Register and fails to file an application in the prescribed form and manner" with the return, the return "shall not be treated as a return furnished under this section". ### Worked example (illustrative figures) **Usman, a PSEB-registered web developer in Peshawar.** His clients abroad pay him Rs. 4,800,000 during tax year 2027, realised through his bank. 1. Rate under Division IVA: 0.25%. 2. Tax deducted: Rs. 4,800,000 x 0.25% = Rs. 12,000. 3. He files his return by 30 September 2027. He has no employees and is not required to file withholding statements. The sales tax return condition does not apply to him under the proviso to section 154A(2)(c). He claims no foreign tax credit. 4. All conditions are met. The Rs. 12,000 is his final tax on that income under section 154A(2). **Mehwish, a copywriter in Hyderabad, not PSEB-registered.** She receives Rs. 1,500,000 for writing services supplied to clients abroad. 1. Division IVA "any other case": 1%, so Rs. 15,000 is deducted. 2. She does not file a return. Condition (a) in section 154A(2) fails. 3. Section 154A(3) says sub-section (2) "shall not apply to a person who does not fulfill the specified conditions". The Rs. 15,000 was deducted, but it is not final tax on her income by operation of section 154A(2). ### What if all my income is under final tax? Section 169(3) says that where all the income a person derives in a tax year is subject to final taxation, an assessment "shall be treated to have been made". That rule works on a return: the Explanation says the tax due is taken as "those respective amounts specified in the return". Before the Finance Act, 2020, section 169(3) also said such a person was not required to furnish a return; that wording was omitted, according to the footnote in the consolidated text. ### Common mistakes - **"The bank took final tax, so I am done."** Final status is conditional under section 154A(2), and a filed return is the first condition. - **Filing without an NTN application.** Section 118(6) treats such a return as not furnished. - **Claiming credit for tax a foreign client withheld.** Section 154A(2)(d) rules out foreign tax credit where the final-tax route is used. - **Assuming the sales tax condition is waived for everyone.** The proviso covers exporters under clause (a) of section 154A(1), which means PSEB-registered IT exporters. Other exporters must meet clause (c) where a sales tax law requires returns. ### What to check in the official text Read section 154A(2) and (3), section 114(1) including clauses (ab), (ae) and (b)(vii), and section 118(3) and (6). Read section 169(2) and (3) for how final tax is treated in the return. Division IVA of Part III of the First Schedule has the rates; our site copy leaves out tables, so use the official PDF. Whether you must file federal or provincial sales tax returns, and the IRIS filing steps, are outside this corpus. ### Frequently asked #### When is the return for tax year 2027 due? Tax year 2027 runs from 1 July 2026 to 30 June 2027. Section 118(3)(b) says a return for a person other than a company is due on or before the 30th day of September next following the end of the tax year, which is 30 September 2027. #### I am a PSEB-registered IT exporter. Do I need to file sales tax returns to keep final-tax status? Not for section 154A purposes. The proviso to section 154A(2)(c) says the sales tax return condition does not apply to an exporter under clause (a) of section 154A(1). Whether a provincial sales tax law requires you to register or file is a separate question outside this corpus. #### What happens if I never file? Section 154A(3) says the final-tax rule in sub-section (2) does not apply to a person who does not fulfil its conditions. Section 114(4) also lets the Commissioner require, by notice, a return from a person who was required to file and did not. ### Citations - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "The tax deductible under this section shall be a final tax on the income arising from the transactions referred to in this section, upon fulfilment of the following conditions" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "every person whose income for the year is subject to final taxation under any provision of this Ordinance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 118 (Method of furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#118-method-of-furnishing-returns-and-other-documents), as amended to 2026-06-30: "on or before the 30th day of September next following the end of the tax year to which the return relates" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "the income shall not be chargeable to tax under any head of income in computing the taxable income of the person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can a PSEB-certified freelancer or startup get a 100% tax credit? Source: https://qanoondigest.com/faq/freelancers-it-exporters/pseb-startup-tax-credit-65f Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, if the business is a startup under section 2(62A): begun on or after 1 July 2012, offering technology driven products or services, certified by PSEB, with turnover under one hundred million in each of the last five tax years. Section 65F(1)(b) then gives a 100% tax credit for the certification year and the next two tax years. **Applies to:** Freelancers, partnerships and small companies in Pakistan offering technology driven products or services who hold, or are considering, PSEB certification as a startup. A full tax credit sounds too generous to be real, but section 65F of the Income Tax Ordinance does give one to a technology startup certified by the Pakistan Software Export Board (PSEB). It is time-limited to three tax years and tied to a narrow definition. It is also separate from the older 100% credit for IT export income, which was removed in 2022. ### What does the law say? **The credit.** Section 65F(1) allows listed persons "a tax credit equal to one hundred per cent of the tax payable under any provisions of this Ordinance including minimum, alternate corporate tax and final taxes for the period, to the extent, upon fulfillment of conditions and subject to limitations detailed as under". Clause (b) covers "a startup as defined in clause (62A) of section 2 for the tax year in which the startup is certified by the Pakistan Software Export Board and the next following two tax years". **Who is a startup.** Section 2(62A)(i) defines a startup as a business of a resident individual, AOP or company that: | Test | Wording in section 2(62A)(i) | |---|---| | Start date | commenced on or after first day of July, 2012 | | Activity | engaged in or intends to offer technology driven products or services to any sector of the economy | | Certification | registered with and duly certified by the Pakistan Software Export Board (PSEB) | | Size | turnover of less than one hundred million in each of the last five tax years | Clause (ii) adds any business the Board, with the approval of the Federal Minister-in-charge, specifies by notification. No such notification is held in this corpus. **Conditions.** Section 65F(2) makes the credit available, "where applicable", only if: 1. the return has been filed; 2. withholding tax statements for the relevant tax year have been filed, where the person is a withholding agent; and 3. sales tax returns for the matching tax periods have been filed, if the person is required to file them under any federal or provincial sales tax law. **Another startup relief.** Clause (43F) of Part IV of the Second Schedule switches off the Ordinance's withholding on payments for goods, services and contracts "in the case of a start-up, being recipient of payment, as defined in clause (62A) of section 2". That matters if a startup also serves Pakistani clients who would otherwise deduct tax from their payments. ### How does it work in practice? The three-year window runs from the tax year of PSEB certification, not from when the business began. A business certified in tax year 2027 gets the credit for tax years 2027, 2028 and 2029, provided it still meets the definition and the section 65F(2) conditions each year. For export receipts, section 154A contains no exception for startups, so the authorised dealer still deducts tax when the foreign proceeds are realised. A PSEB-registered software, IT or IT-enabled services exporter is deducted at 0.25% of proceeds under Division IVA of Part III of the First Schedule for tax year 2027. Section 65F(1) then gives a credit against tax payable "including ... final taxes". The Ordinance text read for this page does not spell out how a deduction already made is given back, so that is not covered here. ### Worked example (illustrative figures) Maryam started a one-person SaaS business in Lahore in September 2023. PSEB registers and certifies her as a startup in tax year 2027. 1. Start date: after 1 July 2012. Met. 2. Activity: technology driven services. Met. 3. Turnover in earlier tax years: Rs. 2,000,000 (2024), Rs. 6,500,000 (2025) and Rs. 11,000,000 (2026). Each is under one hundred million. 4. Foreign proceeds realised in tax year 2027: Rs. 10,000,000. Section 154A deduction at 0.25%: Rs. 10,000,000 x 0.25% = Rs. 25,000. 5. Tax payable for tax year 2027, all final tax: Rs. 25,000. 6. Section 65F credit at 100%: Rs. 25,000 x 100% = Rs. 25,000. 7. Net tax payable: Rs. 25,000 minus Rs. 25,000 = Rs. 0, if she files her return and any other returns and statements section 65F(2) requires. Maryam's business is only three tax years old at certification. The definition asks about turnover "in each of the last five tax years" and does not say how a younger business is treated. This page does not resolve that. ### What if ...? **What if my turnover crosses one hundred million?** The definition requires turnover below that figure in each of the last five tax years. A year at or above it takes the business outside section 2(62A)(i). The definition does not say "rupees" after "one hundred million", though the Ordinance generally works in rupees. **What if I am PSEB-registered as an exporter but not certified as a startup?** Section 154A(1)(a) and the 0.25% rate depend on PSEB registration and certification as an exporter. Section 65F(1)(b) depends on meeting the startup definition and being certified as a startup. They are separate tests. **What if I miss the return deadline?** Section 65F(2)(a) makes a filed return a condition. The Ordinance text here does not say whether a late return still satisfies it. ### Common mistakes - **Relying on the old IT export credit.** Clause (c) of section 65F(1), which covered IT export income, was omitted by the Finance Act, 2022. Only clause (b) for startups remains relevant to IT businesses. - **Counting three years from the start of the business.** The window starts with the tax year of PSEB certification. - **Ignoring the filing conditions.** Section 65F(2) applies them each year of the credit. ### What to check in the official text Read section 65F with its footnotes, section 2(62A), and clause (43F) of Part IV of the Second Schedule. Check section 154A and Division IVA of Part III of the First Schedule for the export deduction. PSEB's certification rules and any Board notification under section 2(62A)(ii) are not held in this corpus. ### Frequently asked #### Can an individual freelancer be a startup under section 2(62A)? The definition covers a business of a resident individual, an AOP or a company, so an individual is not excluded. The business must have commenced on or after 1 July 2012, offer technology driven products or services, be registered with and certified by PSEB, and have turnover under one hundred million in each of the last five tax years. #### Does the credit cover the tax deducted on my export proceeds? Section 65F(1) gives a credit equal to 100% of tax payable under any provision of the Ordinance, including minimum and final taxes. The section 154A deduction is a final tax once its conditions are met, so it falls within the words of section 65F(1). This page does not cover how an amount already deducted is returned. #### Is PSEB registration as an IT exporter the same as startup certification? The Ordinance ties section 154A(1)(a) to an exporter registered with and certified by PSEB, and section 65F(1)(b) to a startup certified by PSEB. It does not describe PSEB's own categories, which are outside this corpus. ### Citations - [Income Tax Ordinance, 2001, section 65F (Tax credit for certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#65f-tax-credit-for-certain-persons), as amended to 2026-06-30: "a startup as defined in clause (62A) of section 2 for the tax year in which the startup is certified by the Pakistan Software Export Board and the" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "is engaged in or intends to offer technology driven products or services to any sector of the economy provided that the person is registered with and duly certified by the Pakistan Software" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "where the exporter is registered with and duly certified by the Pakistan Software Export Board (PSEB)." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clause (43F)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## I work full time remotely for a foreign company. Am I a freelancer exporting IT services or a salaried employee for tax? Source: https://qanoondigest.com/faq/freelancers-it-exporters/remote-employee-foreign-company-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer The Income Tax Ordinance does not expressly classify a person in Pakistan who is employed by a foreign company. Section 12 taxes amounts received by an employee from employment as salary, and section 101 makes salary Pakistan-source where the employment is exercised in Pakistan. Section 154A covers export proceeds of services. The Ordinance does not say which applies to you. **Applies to:** Individuals living in Pakistan who work under an employment arrangement for a company abroad and are paid from abroad. Whether a remote worker is taxed as an employee or as an exporter of services decides whether the salary slabs apply or a flat rate on proceeds. The Income Tax Ordinance, as amended to 30 June 2026, gives rules for each, but it contains no provision that says which one covers a person in Pakistan employed by a foreign company. This page sets out what each rule says so you can see where the gap is. ### What does the law say about salary? Section 12(2) defines salary as "any amount received by an employee from any employment, whether of a revenue or capital nature". It lists pay, wages, bonus, allowances, perquisites and similar amounts. Section 12(1) charges salary under the head "Salary". Section 2 supplies the building blocks: - **Employee** (clause 20): any individual engaged in employment. - **Employer** (clause 21): any person who engages and remunerates an employee. - **Employment** (clause 22): includes a directorship, the holding of public office, and "a position entitling the holder to a fixed or ascertainable remuneration". None of these clauses requires the employer to be in Pakistan. A person who holds a position with a fixed monthly remuneration fits the words of clause (22)(b), whoever pays it. ### Where is the salary sourced? Section 101(1)(a) makes salary Pakistan-source income to the extent it "is received from any employment exercised in Pakistan, wherever paid". If you sit in Lahore or Peshawar and do the work there, the employment is exercised in Pakistan on the plain words of that clause, even though the money comes from abroad. This matters for section 102. Section 102(1) exempts foreign-source salary of a resident individual where foreign income tax has been paid on it. Section 101(16) says an amount is foreign-source only to the extent it is not Pakistan-source. Salary from work done in Pakistan is Pakistan-source, so the section 102 exemption does not reach it on the face of the text. ### What does the law say about exporting services? Section 154A(1) requires the authorised dealer in foreign exchange to deduct tax from foreign exchange proceeds realised on account of, among other things: - (a) exports of computer software, IT services or IT-enabled services by a PSEB-registered and certified exporter; and - (b) services or technical services rendered outside Pakistan or exported from Pakistan. Division IVA sets 0.25% for the first category (for tax years 2024 up to 2029) and 1% in any other case. Section 154A(2) makes the deduction final tax once the return and other conditions are met. ### Where is the gap? Section 154A speaks of export proceeds and exporters. Section 12 speaks of employees and employment. The Ordinance does not say whether salary paid by a foreign employer to someone working in Pakistan is export proceeds under section 154A, and it does not say that section 154A excludes it. Neither section refers to the other. This page does not resolve that question. Features that point one way or the other, such as an employment contract, fixed monthly pay, paid leave or invoices, are facts the Ordinance does not rank. ### Worked example (illustrative figures) Hamza lives in Islamabad and works full time for a company in Germany. The figures are invented. The rates are those in the First Schedule for tax year 2027. He receives Rs. 4,800,000 in the year and has no other income. **If the amount is salary.** Salary is all of his taxable income, so clause (2) of Division I of Part I of the First Schedule applies. The slab for taxable income above Rs. 4,100,000 and up to Rs. 5,600,000 is Rs. 541,000 plus 29% of the amount above Rs. 4,100,000. 1. Amount above Rs. 4,100,000: Rs. 4,800,000 minus Rs. 4,100,000 = Rs. 700,000 2. 29% of Rs. 700,000 = Rs. 203,000 3. Tax: Rs. 541,000 + Rs. 203,000 = Rs. 744,000 **If the amount were export proceeds under section 154A(1)(b).** Not PSEB-registered, 1% row: Rs. 4,800,000 x 1% = Rs. 48,000. The difference shows why the classification matters. The example does not say which one is correct. The Ordinance does not settle it. ### What if I am a contractor, not an employee? If you invoice the foreign company for work and hold no position with fixed remuneration, the facts sit closer to section 154A(1)(b), services exported from Pakistan. The Ordinance still does not give a test for telling a contractor from an employee beyond the section 2 definitions. ### Common mistakes - **Assuming a foreign employer means foreign income.** Section 101(1)(a) looks at where the employment is exercised, not where the employer is. - **Claiming the section 102 exemption.** It applies to foreign-source salary, and salary for work done in Pakistan is Pakistan-source. - **Assuming the bank's deduction settles the question.** Whether section 154A applies depends on the nature of the receipt, which is the very point the Ordinance leaves open. ### What to check in the official text Read sections 2(20) to (22), 12, 101 and 102 together, then section 154A and Division IVA of Part III of the First Schedule. Section 154A(6) lets the Board include or exclude services. Any notification or ruling from the Board on remote employment is not held in this corpus. ### Frequently asked #### Does the Ordinance define who is an employee? Section 2 defines an employee as any individual engaged in employment, and an employer as any person who engages and remunerates an employee. Employment includes a position entitling the holder to a fixed or ascertainable remuneration. None of these definitions mentions where the employer is based. #### Is my salary foreign income because the company is abroad? Section 101(1)(a) makes salary Pakistan-source income to the extent it is received from employment exercised in Pakistan, wherever paid. The location of the employer or the bank account abroad does not change that test. #### Can I use the section 102 exemption for foreign salary? Section 102 exempts foreign-source salary of a resident individual where foreign income tax has been paid on it. Salary from employment exercised in Pakistan is Pakistan-source under section 101, so section 102 does not reach it on the face of the text. ### Citations - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "Salary means any amount received by an employee from any employment, whether of a revenue or capital nature" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "a position entitling the holder to a fixed or ascertainable remuneration" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 101 (Geographical source of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#101-geographical-source-of-income), as amended to 2026-06-30: "is received from any employment exercised in Pakistan, wherever paid" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 102 (Foreign source salary of resident individuals)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#102-foreign-source-salary-of-resident-individuals), as amended to 2026-06-30: "Any foreign-source salary received by a resident individual shall be exempt from tax if the individual has paid foreign income tax in respect of the salary." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "deduct tax from the proceeds at the rates specified in Division IVA of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2) (rates for salaried individuals)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What is the difference between section 154 and section 154A for freelancers receiving foreign payments? Source: https://qanoondigest.com/faq/freelancers-it-exporters/section-154-vs-154a-freelancers Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 154 covers export of goods: for tax year 2027 the bank deducts 1.25% of proceeds under Division IV, as a minimum tax. Section 154A covers export of services: 0.25% for PSEB-registered IT exporters or 1% otherwise under Division IVA, final once its conditions are met. Freelance service income falls under section 154A. **Applies to:** Freelancers and small exporters in Pakistan who want to know which export withholding section governs their foreign receipts. The two sections sit next to each other and both tax foreign earnings at the bank, which is why they are often mixed up. The dividing line is simple: section 154 is about goods, section 154A is about services. They also differ in rate and in whether the tax is final. ### What does the law say? **Section 154: exports of goods.** Section 154(1) requires every authorised dealer in foreign exchange, when it realises foreign exchange proceeds "on account of the export of goods" by an exporter, to deduct tax at the rate in Division IV of Part III of the First Schedule. The section goes on to cover sales of goods to exporters under inland back-to-back letters of credit (sub-section (3)), exports by units in Export Processing Zones (3A), payments by direct exporters to indirect exporters (3B), and collection by the Collector of Customs when exported goods are cleared (3C). Section 154(4) says the tax is a "minimum" tax on the income from these transactions. A footnote records that the word "final" was replaced by "minimum" by the Finance Act, 2024. **Section 154A: exports of services.** Section 154A(1) requires the authorised dealer to deduct tax from foreign exchange proceeds on account of, among others, exports of software, IT services or IT-enabled services by PSEB-registered exporters (clause (a)), services or technical services rendered outside Pakistan or exported from Pakistan (clause (b)), construction contracts executed abroad (clause (d)) and foreign commission of indenting agents (clause (da)). The rate is in Division IVA. Section 154A(2) makes the tax final on conditions. ### How do the two compare? | Point | Section 154 | Section 154A | |---|---|---| | What it covers | Export of goods and related transactions | Export of services, including software, IT and IT-enabled services | | Rate schedule | Division IV of Part III, First Schedule | Division IVA of Part III, First Schedule | | Rate for tax year 2027 | 1.25% of export proceeds | 0.25% of proceeds (PSEB-registered IT exporters); 1% in any other case | | Nature of the tax | Minimum tax (section 154(4)) | Final tax if section 154A(2) conditions are met | | Opt-out | Not applicable | Option each year under section 154A(3) | The 1.25% in Division IV was substituted for 1% by the Finance Act, 2026, according to the footnote in the source text. **Why "final" matters.** Section 169(1)(b) lists sub-section (2) of section 154A among the final-tax provisions, and section 169(2) then keeps that income out of the taxable income computation entirely. A footnote to section 169 records that the reference to sub-section (4) of section 154 was omitted by the Finance Act, 2024. So goods-export tax is no longer in the final-tax list. ### Worked example (illustrative figures) Hamza runs a small sports goods workshop in Sialkot and also does freelance web development for a client in the UK. In tax year 2027: **Goods side (section 154):** 1. Export proceeds realised for footballs: Rs. 10,000,000 2. Division IV rate: 1.25% 3. Tax deducted: Rs. 10,000,000 x 1.25% = Rs. 125,000, a minimum tax. **Services side (section 154A, not PSEB-registered):** 1. Foreign proceeds for web development: Rs. 1,500,000 2. Division IVA rate, any other case: 1% 3. Tax deducted: Rs. 1,500,000 x 1% = Rs. 15,000, final if the section 154A(2) conditions are met. The same person can be under both sections for different receipts. Each receipt is governed by what was exported. ### What if ...? **What if I sell digital products, like templates or stock images?** The Ordinance does not use the words "digital products" in either section. Section 2(30AD) and (30AE) list examples of IT and IT-enabled services, and both lists say "include but not limited to". Whether a particular digital sale is a service export under section 154A is not spelled out, so this page does not resolve it. **What if I sell goods through a foreign online store?** That is an export of goods, and section 154 is the relevant section, not 154A. ### Common mistakes - **Quoting the 1% goods-export rate.** For tax year 2027, Division IV sets 1.25%, not 1%. - **Calling section 154 tax final.** Since the Finance Act, 2024, section 154(4) says minimum. - **Applying the goods rules to freelance services.** Service receipts from abroad are governed by section 154A and Division IVA. ### What to check in the official text Read section 154 in full with its footnotes, then section 154A. Compare Division IV and Division IVA of Part III of the First Schedule in the source PDF, since the site text does not reproduce the tables. Check section 169(1)(b) for the current list of final-tax provisions. Board notifications under section 154A(1)(e) and (6), which can include or exclude services, are not held in this corpus. ### Frequently asked #### I design logos for foreign clients. Which section applies? Section 154A. It covers software, IT and IT-enabled services and services exported from Pakistan, and graphics design is listed as an IT-enabled service in section 2(30AE). Section 154 is about the export of goods. #### Is section 154 tax final like section 154A? No. Section 154(4) now calls it a minimum tax; the Finance Act, 2024 replaced the word final. Section 154A(2) is still listed in section 169 as a final tax, subject to its conditions. #### What are the tax year 2027 rates? Division IV sets 1.25% of export proceeds for section 154, raised from 1% by the Finance Act, 2026. Division IVA sets 0.25% of proceeds for PSEB-registered IT exporters and 1% in any other case for section 154A. ### Citations - [Income Tax Ordinance, 2001, section 154 (Exports)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154-exports), as amended to 2026-06-30: "The Collector of Customs at the time of clearing of goods exported shall collect tax from the gross value of such goods at the rate specified in Division IV of Part III of the First Schedule." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "(b) services or technical services rendered outside Pakistan or" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IV (Exports), clause (1)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "software development, software maintenance, system integration, web design, web development, web hosting and network design" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "(a) the income shall not be chargeable to tax under any head of income in computing the taxable income of the person;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## A Pakistani company deducted tax from my freelance invoice. What rate applies? Source: https://qanoondigest.com/faq/freelancers-it-exporters/freelancing-for-pakistani-clients-withholding Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer A payment from a Pakistani company for your services falls under section 153(1)(b), not the export rule in section 154A. For tax year 2027, Division III of Part III of the First Schedule sets 4% for IT and IT-enabled services, 7% for other listed services and 14% for unlisted ones. Section 153(3) makes this a minimum tax. **Applies to:** Resident freelancers and self-employed individuals in Pakistan who invoice Pakistani companies or other prescribed persons for services. Many freelancers earn from foreign platforms and from local clients at the same time. The two streams are taxed under different sections. Money from abroad is realised by a bank and taxed under section 154A. Money paid by a Pakistani company for your services is taxed at source under section 153, at a different rate and with different consequences. ### What does the law say? **Section 153(1)(b).** Every "prescribed person" making a payment to a resident person "for the rendering of or providing of services" must deduct tax from the gross amount payable at the rate in Division III of Part III of the First Schedule. Clause (b) carries its own threshold: it does not apply "where payment is less than thirty thousand Rupees in aggregate, during a financial year". **Who is a prescribed person.** Section 153(7) lists them. For a freelancer the most relevant are the Federal Government, a company, an association of persons constituted by or under law, a non-profit organization, and an individual or association of persons with turnover of one hundred million rupees or more in any of the preceding tax years. A small shop or an ordinary individual client below that turnover is not on the list, so section 153 does not require them to deduct. **Why section 154A does not apply.** Section 154A(1) is addressed to an authorised dealer in foreign exchange at the time it realises foreign exchange proceeds on account of exported services. A rupee payment from a Pakistani company is not export proceeds realised by a bank, so the local invoice is governed by section 153. ### What rate applies in tax year 2027? Paragraph (2) of Division III sets the rates for payments under section 153(1)(b). As amended to 30 June 2026, it reads: | Sub-paragraph | Services covered | Rate | |---|---|---| | (i) | A listed group including software development services, IT services and IT enabled services as defined in section 2, advertising (other than print or electronic media), courier, car rental and others | 7% of the gross amount payable | | (i), proviso | IT services and IT enabled services as defined in section 2 | 4% | | (ii) | "independent professional services such as doctors, lawyers, architects, accountants, software engineers or developers, working independently" | 15% | | (iii) | Electronic and print media, advertising services | 1.5% | | (iv) | Terminal and port operating services, paid to companies | 12% | | (v) | Services not covered in (i) to (iv) | 14% | Footnotes in the source text record that the Finance Act, 2026 raised the general sub-paragraph (i) rate from 6% to 7% and substituted the new sub-paragraphs (ii) to (v). The 4% proviso for IT services and IT enabled services dates from the Finance Act, 2023. An Explanation under sub-paragraph (i) says its rates apply "only to a service provider whose services are subjected to withholding tax on gross receipts and the service provider has not agitated taxation of gross receipts before any court of law". **What counts as IT and IT-enabled services.** Section 2(30AD) lists IT services as including "software development, software maintenance, system integration, web design, web development, web hosting and network design". Section 2(30AE) lists IT enabled services, including graphics design, data entry operations, accounting services, medical transcription and call centres. Both lists say "include but not limited to". ### Worked example (illustrative figures) Ayesha, a web developer in Lahore, invoices a private limited company in Karachi Rs. 200,000 for building its website in tax year 2027. The company is a prescribed person and the payment is above the Rs. 30,000 threshold. 1. Gross amount payable: Rs. 200,000 2. If the company applies the 4% proviso for IT services: Rs. 200,000 x 4% = Rs. 8,000 3. Amount Ayesha receives: Rs. 200,000 - Rs. 8,000 = Rs. 192,000 If the company instead applies sub-paragraph (ii) at 15%, the deduction is Rs. 200,000 x 15% = Rs. 30,000 and Ayesha receives Rs. 170,000. Why that can happen is explained below. ### What if ...? **What if I am a software developer working on my own?** Here the text is not clear. Sub-paragraph (i) and its proviso give 4% for IT services "as defined in section 2", and section 2(30AD) names software development. Sub-paragraph (ii), inserted by the Finance Act, 2026, gives 15% for independent professional services by "software engineers or developers, working independently". The Division does not say which one prevails when an individual developer supplies software development services. This page does not resolve that overlap. A Board clarification, if one exists, is not held in this corpus. **What if the client is an individual or a small business?** If the client is not a prescribed person under section 153(7), section 153 does not require a deduction. Your income is still taxable and goes into your return under normal rules. **What if I am not on the active taxpayers' list?** Higher rates for persons not on the list are set in the Tenth Schedule, which this page does not cover. See the related page on the active taxpayers' list. ### What happens to the tax deducted? Section 153(3) says the tax deductible under sub-section (1) "shall be minimum tax" on the income of a resident person. It is not in the section 169 final-tax list, so the payment is part of your taxable income in the return. Section 168(1)(b) treats the amount deducted as tax paid by you, and section 168(2) allows it as a credit against the tax due for the year in which it was deducted. ### Common mistakes - **Expecting the 0.25% or 1% export rate on a local invoice.** Division IVA rates apply only to foreign exchange proceeds under section 154A. - **Treating the local deduction as final.** Section 153(3) calls it minimum tax, so the income is declared and computed in the return. - **Assuming every client must deduct.** Only prescribed persons under section 153(7) are required to, and clause (b) excludes aggregate payments under Rs. 30,000 in a financial year. ### What to check in the official text Read section 153(1), (3) and (7), then paragraph (2) of Division III of Part III of the First Schedule in the source PDF, since the site text does not reproduce the table and its footnotes. Read section 2(30AD) and (30AE) for the service definitions. Sales tax on services charged by a province or under the Islamabad Capital Territory law is a separate tax and is not covered here. ### Frequently asked #### Why was more tax deducted on my local invoice than on my Upwork payments? They fall under different sections. Foreign proceeds are taxed under section 154A at 0.25% or 1% under Division IVA, while a Pakistani company's payment for services falls under section 153(1)(b), where Division III sets 4% for IT and IT-enabled services and higher rates for other services. #### Is the tax a Pakistani company deducts from me final? No. Section 153(3) says the tax deductible under sub-section (1) is a minimum tax, and section 153 is not in the final-tax list in section 169. The income goes into your return, and section 168 treats the deducted amount as tax you have paid. #### Does every client have to deduct tax? Only a prescribed person listed in section 153(7), such as a company, the Federal Government or an individual with turnover of one hundred million rupees or more in a preceding tax year. Service payments below Rs. 30,000 in aggregate during a financial year are also outside section 153(1)(b). ### Citations - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "except where payment is less than thirty thousand Rupees in aggregate, during a financial year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), paragraph (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "software development, software maintenance, system integration, web design, web development, web hosting and network design" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "Every authorized dealer in foreign exchange shall, at the time of realization of foreign exchange proceeds" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "shall be treated as tax paid by the person from whom the tax was collected or deducted." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "(a) the income shall not be chargeable to tax under any head of income in computing the taxable income of the person;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How is tax worked out if I have a local salaried job and also freelance on the side? Source: https://qanoondigest.com/faq/freelancers-it-exporters/salaried-job-plus-freelancing-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Where the bank's section 154A deduction on your freelance proceeds is final tax, section 169(2)(a) keeps that income out of your taxable income. Your salary is then taxed on its own under the salaried slabs for tax year 2027. If you opt out of final tax, the freelance income joins your taxable income and the slab test changes. **Applies to:** Individuals employed in Pakistan who also earn from foreign clients for services on the side, received through a Pakistani bank. A salaried job and foreign freelance work are taxed on two separate tracks, as long as the freelance deduction stays a final tax. The salary goes through the slab table. The freelance proceeds carry the flat rate the bank deducts. The two meet only if you opt out of final taxation or fail its conditions. ### What does the law say? **Salary.** Section 12 charges amounts received by an employee from employment under the head "Salary". Rates are in Division I of Part I of the First Schedule. Clause (2) of that Division applies where "the income of an individual chargeable under the head 'salary' exceeds seventy-five per cent of his taxable income". Clause (1) sets a separate, steeper table for other individuals. **Freelance proceeds.** Section 154A requires the bank to deduct tax when it realises foreign exchange proceeds from exported services. Division IVA sets 0.25% of proceeds for PSEB-registered IT and IT-enabled exporters (tax years 2024 up to 2029) and 1% in any other case. Section 154A(2) makes that deduction final tax once the return is filed and the other conditions are met. **How the two interact.** Section 169(2) sets out what final tax means. The income "shall not be chargeable to tax under any head of income in computing the taxable income of the person". No expenditure is deducted against it, and the tax is not reduced by credits. The result: freelance proceeds taxed as final are not part of taxable income. Your taxable income is your salary, and salary is 100% of it. Clause (2) applies. ### What are the salaried rates for tax year 2027? Clause (2) of Division I, as substituted by the Finance Act, 2026: | Taxable income | Tax | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,001 to Rs. 1,200,000 | 1% of the amount above Rs. 600,000 | | Rs. 1,200,001 to Rs. 2,200,000 | Rs. 6,000 + 11% of the amount above Rs. 1,200,000 | | Rs. 2,200,001 to Rs. 3,200,000 | Rs. 116,000 + 20% of the amount above Rs. 2,200,000 | | Rs. 3,200,001 to Rs. 4,100,000 | Rs. 316,000 + 25% of the amount above Rs. 3,200,000 | | Rs. 4,100,001 to Rs. 5,600,000 | Rs. 541,000 + 29% of the amount above Rs. 4,100,000 | | Rs. 5,600,001 to Rs. 7,000,000 | Rs. 976,000 + 32% of the amount above Rs. 5,600,000 | | Above Rs. 7,000,000 | Rs. 1,424,000 + 35% of the amount above Rs. 7,000,000 | ### Worked example (illustrative figures) Fatima is an accounts officer at a Multan textile firm earning a salary of Rs. 1,800,000 in tax year 2027. In the evenings she designs logos for clients abroad and receives Rs. 2,400,000 through her bank. She is not registered with PSEB. All amounts are invented. The rates are the ones cited on this page. **While the freelance deduction is final tax:** 1. Tax deducted on freelance proceeds: Rs. 2,400,000 x 1% = Rs. 24,000 2. Taxable income: salary only, Rs. 1,800,000 3. Salary tax: Rs. 6,000 + 11% x (Rs. 1,800,000 minus Rs. 1,200,000) = Rs. 6,000 + Rs. 66,000 = Rs. 72,000 4. Total income tax: Rs. 72,000 + Rs. 24,000 = Rs. 96,000 **If she opts out and her freelance profit is Rs. 2,200,000** (Rs. 200,000 of invented expenses): 1. Taxable income: Rs. 1,800,000 + Rs. 2,200,000 = Rs. 4,000,000 2. Salary share: Rs. 1,800,000 / Rs. 4,000,000 = 45%, which does not exceed 75%, so clause (2) does not apply 3. Clause (1) slab for Rs. 3,200,001 to Rs. 5,600,000: Rs. 650,000 + 40% of the amount above Rs. 3,200,000 4. Tax: Rs. 650,000 + 40% x Rs. 800,000 = Rs. 650,000 + Rs. 320,000 = Rs. 970,000 The Rs. 24,000 already deducted by the bank still exists in this second case. Section 154A(3) does not say in its own words how that deduction is treated once final taxation is switched off, so this example does not subtract it. ### What if ...? **What if my salary is small and my freelance income is large?** While the freelance tax is final, the size of the freelance income does not matter for the slab test, because section 169(2)(a) keeps it out of taxable income. **What if I do not file a return?** Filing the return is the first condition in section 154A(2). Section 154A(3) says the final-tax treatment does not apply to a person who does not fulfil the conditions. **What if my freelance clients are in Pakistan?** Section 154A covers foreign exchange proceeds. Payments from Pakistani clients fall under other provisions and are covered on a separate page. ### Common mistakes - **Adding freelance receipts to salary to find the slab.** Section 169(2)(a) excludes final-tax income from taxable income. - **Expecting the employer to deduct tax on freelance income.** The freelance deduction is made by the bank under section 154A. Your employer deals with your salary. - **Assuming the clause (1) table never applies to an employee.** It applies whenever salary is 75% or less of taxable income, which can happen after opting out. ### What to check in the official text Read sections 154A and 169, then Division I of Part I and Division IVA of Part III of the First Schedule in the Ordinance as amended to 30 June 2026. Clause (1) refers to individuals "except a salaried individual", a term the Division does not define separately from the 75% test in clause (2). Clause (1) is used in the second example on the reading that it covers individuals to whom clause (2) does not apply. ### Frequently asked #### Does my freelance income push my salary into a higher slab? Not while the section 154A deduction is final tax. Section 169(2)(a) says such income is not chargeable under any head in computing taxable income, so only the salary is measured against the slabs. #### Which rate table applies to my salary? Clause (2) of Division I applies where salary exceeds 75% of taxable income. With freelance income kept out as final tax, a person with no other income has salary equal to all of their taxable income, so clause (2) applies. #### What happens if I opt out of final tax? Section 154A(3) switches off the final-tax treatment for that year. The freelance profit then counts in taxable income alongside salary, and if salary falls to 75% or less of taxable income, clause (2) no longer applies. ### Citations - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "(a) the income shall not be chargeable to tax under any head of income in computing the taxable income of the person;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "who does not fulfill the specified conditions or who opts not to be subject to final taxation" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "Salary means any amount received by an employee from any employment, whether of a revenue or capital nature" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clauses (1) and (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much tax do I pay on my Fiverr or Upwork earnings in Pakistan? Source: https://qanoondigest.com/faq/freelancers-it-exporters/tax-on-fiverr-upwork-income-pakistan Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 154A, the bank that converts your foreign payment deducts tax from the proceeds. For tax year 2027, Division IVA sets 0.25% for PSEB-registered software, IT or IT-enabled exporters and 1% in any other case. That deduction is your final tax once you file your return and meet the other section 154A(2) conditions. **Applies to:** Individuals in Pakistan who sell services to foreign clients through platforms such as Fiverr or Upwork and receive the money through a bank. For most freelancers the tax is a flat percentage of what arrives from abroad, taken by the bank at the moment the foreign currency is converted. Section 154A of the Income Tax Ordinance sets up that deduction, and Division IVA of Part III of the First Schedule sets the rate. For tax year 2027 (1 July 2026 to 30 June 2027) the rate is 0.25% or 1% of the proceeds, depending on whether you are registered with the Pakistan Software Export Board (PSEB). ### What does the law say? Section 154A(1) requires every authorised dealer in foreign exchange, meaning the bank, to deduct tax "at the time of realization of foreign exchange proceeds" on account of the items it lists. Two of those items matter to freelancers: - **Clause (a):** exports of computer software, IT services or IT-enabled services "where the exporter is registered with and duly certified by the Pakistan Software Export Board (PSEB)." - **Clause (b):** "services or technical services rendered outside Pakistan or exported from Pakistan". Section 2 defines IT services, in clause (30AD), to include software development, maintenance, system integration, web design, web development, web hosting and network design. Clause (30AE) defines IT-enabled services to include call centres, medical transcription, remote monitoring, graphics design, accounting services, HR services, data entry, cloud computing and data storage, among others. Both lists say "include but not limited to". The rates are in Division IVA of Part III of the First Schedule: | Type of receipt | Rate for tax year 2027 | |---|---| | Export proceeds of computer software, IT services or IT-enabled services by persons registered with PSEB | 0.25% of proceeds (the schedule applies this rate for tax years 2024 up to 2029) | | Any other case | 1% of proceeds | ### When does the deduction become the final tax? Section 154A(2) makes the deduction a final tax on the income from these transactions once these conditions are met: 1. the return has been filed; 2. withholding tax statements for the year have been filed, if the Ordinance requires them from you; 3. sales tax returns under federal or provincial law have been filed, if required. The proviso says this condition does not apply to a PSEB-registered exporter under clause (a). Section 154A(2)(d) adds that no credit for foreign taxes paid is allowed. Where the tax is final, section 169(2) applies: the income is not charged under any head of income, no expenses are deducted from it, and the tax deducted is not reduced by any tax credit. In plain terms, the bank's deduction is the whole income tax on that income. Section 154A(3) turns the final-tax treatment off for a person who does not meet the conditions, or who opts out at the time of filing the return. That option is exercised every year. ### Worked example (illustrative figures) Sana is a graphic designer in Lahore. In tax year 2027 her Upwork earnings reach her Pakistani bank account and are converted to rupees totalling Rs. 3,600,000. The figures are invented; the rates are the Division IVA rates. **If she is not registered with PSEB (1% row):** 1. Proceeds realised: Rs. 3,600,000 2. Rate: 1% 3. Tax deducted: Rs. 3,600,000 x 1% = Rs. 36,000 **If she is registered with and certified by PSEB (0.25% row):** 1. Proceeds realised: Rs. 3,600,000 2. Rate: 0.25% 3. Tax deducted: Rs. 3,600,000 x 0.25% = Rs. 9,000 Graphics design appears in the section 2(30AE) list of IT-enabled services, so the 0.25% row is available to her only if she holds PSEB registration and certification. If she files her return and meets the other section 154A(2) conditions, Rs. 36,000 or Rs. 9,000 is her final income tax on those receipts. ### What if ...? **What if I am not on the active taxpayers' list?** The Tenth Schedule, which raises many withholding rates for persons not appearing on the active taxpayers' list, says in rule 10, clause (ca) that it does not apply to tax collected or deducted under section 154A. The Division IVA rates stay as they are. Filing a return is still a condition for final tax. **What if my payment reaches me through a payment service before the bank?** Section 154A attaches the deduction to realisation by an authorised dealer in foreign exchange. The Ordinance does not name individual platforms or wallet services, so it does not say at which step a particular provider's transfer counts as realised. **What if I earn from YouTube or social media rather than client work?** The Finance Act, 2026 added a separate withholding provision for revenue from social media platforms, with its own rate. It is a different regime and is covered on a separate page. ### Common mistakes - **Treating 1% as a fee rather than tax.** Section 154A calls it tax deducted, and under section 154A(2) it is the final tax only when the conditions are met. - **Assuming the lower rate applies to all IT work.** The 0.25% row depends on PSEB registration, not just on the type of work. - **Deducting expenses first.** Both rates apply to proceeds. Where the tax is final, section 169(2)(b) allows no deduction for expenditure incurred in deriving the income. ### What to check in the official text Read section 154A in full, including sub-sections (5) and (6): the Board, in consultation with the State Bank of Pakistan, prescribes the mode and procedure of payment, and the Board may include or exclude services. Any such notification is not held in this corpus. Check Division IVA of Part III of the First Schedule for the rates and the tax-year window of the 0.25% row. Provincial sales tax on services, which affects the sales tax return condition for non-PSEB exporters, is outside this corpus. ### Frequently asked #### What rate applies if I am not registered with PSEB? The 1% row of Division IVA, which covers any case other than PSEB-registered exporters of computer software, IT services or IT-enabled services. On Rs. 1,000,000 of proceeds that is Rs. 10,000. #### Is the tax charged on my profit or on the full amount received? On the proceeds. Section 154A requires the authorised dealer to deduct tax from the proceeds, and Division IVA expresses both rates as a percentage of proceeds. Platform fees or your own expenses are not deducted first. #### Do I still need to file a return if the bank already took the tax? Filing the return is the first condition in section 154A(2) for the deduction to be final tax. If the conditions are not met, section 154A(3) switches off the final-tax treatment, so the income is dealt with under the normal rules. ### Citations - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "deduct tax from the proceeds at the rates specified in Division IVA of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "software development, software maintenance, system integration, web design, web development, web hosting and network design" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "(a) the income shall not be chargeable to tax under any head of income in computing the taxable income of the person;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 10, clause (ca)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much tax is charged when I pay for foreign software or subscriptions with my Pakistani card, and can I adjust it? Source: https://qanoondigest.com/faq/freelancers-it-exporters/tax-on-foreign-card-payments-236y Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Your bank collects advance tax of 0.5% of the gross amount remitted abroad when you pay a foreign seller by credit, debit or prepaid card, under section 236Y and Division XXVII of Part IV of the First Schedule. The Finance Act, 2026 cut the rate from 5%. Section 236Y(2) makes this tax adjustable against your tax liability. **Applies to:** Freelancers and others in Pakistan who pay foreign sellers for software, subscriptions or tools with a Pakistani credit, debit or prepaid card. Most freelancers pay for something abroad: a design tool, a cloud server, a domain, a stock image plan. When that payment goes through a Pakistani card, the Income Tax Ordinance adds a small advance tax on top. For tax year 2027 the rate is far lower than it was, and the tax counts toward your own liability rather than being lost. ### What does the law say? **The charge.** Section 236Y(1) requires every banking company to collect advance tax "at the time of transfer of any sum remitted outside Pakistan" on behalf of any person who has completed a credit card, debit card or prepaid card transaction with a person outside Pakistan. The rate is the one in Division XXVII of Part IV of the First Schedule. **The rate.** Division XXVII says: "The rate of tax to be deducted under section 236Y shall be 0.5% of the gross amount remitted abroad." Its footnotes record two changes. The Finance Act, 2023 substituted the expression "1%", and the Finance Act, 2026 substituted "0.5%" for "5%". The Finance Act, 2026 in this corpus contains the matching amendment: in Division XXVII, for "5%", "0.5%" is substituted. **Adjustable, not final.** Section 236Y(2) says: "The advance tax collected under this section shall be adjustable." Section 168(1)(b) treats tax collected under Chapter XII, which is where section 236Y sits, as tax paid by the person from whom it was collected. Section 168(2) then allows a tax credit for it in computing the tax due on that person's taxable income for the tax year in which it was collected. ### How does it work in practice? The tax is collected by your bank, not by the foreign seller. It is worked out on the gross amount remitted abroad for the card transaction, so a Rs. 10,000 subscription attracts Rs. 50 at 0.5%. The bank collects it at the time the sum is transferred abroad. Because it is adjustable, the amount collected in a tax year is a credit when you file your return for that year. That works cleanly when you have tax due on taxable income, for example from a salary or from freelance income taxed under the normal rules after opting out of final tax. There is a catch for freelancers on the final-tax route. When section 154A(2) makes the bank deduction on your export proceeds a final tax, section 169(2)(a) says that income "shall not be chargeable to tax under any head of income in computing the taxable income of the person". Section 168(2) gives the credit against tax due on taxable income. If all your income is final-tax income, there may be little or no tax due on taxable income for the credit to be set against. This page does not go into whether, or how, the unused amount can be refunded. ### Worked example (illustrative figures) Bilal is a video editor in Faisalabad. In tax year 2027 he pays these foreign sellers with his Pakistani debit card: | Payment | Amount | |---|---| | Editing software, annual plan | Rs. 90,000 | | Stock footage subscription | Rs. 60,000 | | Cloud storage | Rs. 30,000 | | Total remitted abroad | Rs. 180,000 | 1. Rate under Division XXVII: 0.5% 2. Tax collected: Rs. 180,000 x 0.5% = Rs. 900 3. If Bilal is not on the active taxpayers' list, rule 1 of the Tenth Schedule increases the rate by one hundred percent: 0.5% x 2 = 1%, so Rs. 180,000 x 1% = Rs. 1,800. 4. Before the Finance Act, 2026, the same payments at 5% would have meant Rs. 180,000 x 5% = Rs. 9,000. When Bilal files his return for tax year 2027, the Rs. 900 is a credit against the tax due on his taxable income under section 168(2). ### What if ...? **What if I am not on the active taxpayers' list?** Rule 1 of the Tenth Schedule increases any deduction or collection rate by one hundred percent for a person not appearing in the active taxpayers' list. Rule 10 lists the sections excluded from this, among them section 154A for export of services. Section 236Y is not in that list, so the text points to a rate of 1% for a person not on the list. **What if I pay through a foreign payment account rather than a Pakistani card?** Section 236Y is about card transactions where a banking company transfers the sum abroad. The section does not mention foreign wallets or accounts held outside Pakistan, and this page does not extend it to them. **What if the purchase is a business expense?** The tax collected is a credit, not an expense. Whether the subscription itself is deductible from freelance income depends on how your income is taxed. Under the final-tax route, section 169(2)(b) allows no deduction for expenditure incurred in deriving that income. ### Common mistakes - **Quoting the 5% rate.** That was the rate before the Finance Act, 2026. For tax year 2027, Division XXVII sets 0.5%. - **Treating the tax as lost.** Section 236Y(2) makes it adjustable, and section 168 turns it into a credit in your return. - **Assuming the credit always produces a refund.** The credit is set against tax due on taxable income. Final-tax income is outside taxable income under section 169(2). ### What to check in the official text Read section 236Y and Division XXVII of Part IV of the First Schedule in the source PDF, including both footnotes on the rate. Check sections 168 and 169 for how the credit interacts with final-tax income, and rules 1 and 10 of the Tenth Schedule if you are not on the active taxpayers' list. How your bank shows the deduction on your statement is a banking matter and not covered in this corpus. ### Frequently asked #### What is the section 236Y rate for tax year 2027? Division XXVII of Part IV of the First Schedule sets the rate at 0.5% of the gross amount remitted abroad. A footnote records that the Finance Act, 2026 substituted 0.5% for 5%. #### Is the tax higher if I am not on the active taxpayers' list? Rule 1 of the Tenth Schedule increases the rate by one hundred percent for a person not appearing in the active taxpayers' list. Section 236Y is not in the list of exclusions in rule 10, so on that text the rate would be 1% instead of 0.5%. #### Can I get back the section 236Y tax if my freelance income is taxed as final tax? Section 236Y(2) makes the tax adjustable, and section 168(2) allows the credit against tax due on taxable income. Final-tax income under section 154A(2) is kept out of taxable income by section 169(2). This page does not cover how any excess credit is refunded. ### Citations - [Income Tax Ordinance, 2001, section 236Y (Advance tax on persons remitting amounts abroad through credit or debit or prepaid cards)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236y-advance-tax-on-persons-remitting-amounts-abroad-through-credit-or-debit-or-prepaid-cards), as amended to 2026-06-30: "The advance tax collected under this section shall be adjustable." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XXVII (Advance tax on amount remitted abroad through credit, debit or prepaid cards)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "The tax deductible under this section shall be a final tax on the income arising from the transactions referred to in this section" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 and rule 10](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "(a) the income shall not be chargeable to tax under any head of income in computing the taxable income of the person;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do I pay tax if my yearly freelance income is under Rs. 600,000? Source: https://qanoondigest.com/faq/freelancers-it-exporters/freelance-income-under-600000-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Usually yes. The 0% band up to Rs. 600,000 is in the slab table in Division I of the First Schedule. Section 154A tax is different: your bank deducts 0.25% or 1% of every rupee of export proceeds, with no threshold. Section 114 can still require a return, for example because that income is under final taxation. **Applies to:** Individual freelancers in Pakistan with small foreign earnings received through a bank, including students and part-time workers, for tax year 2027. ### What does the law say? Two different parts of the Income Tax Ordinance, 2001 are in play, and the Rs. 600,000 figure belongs to only one of them. **The slab table.** Clause (1) of Division I of Part I of the First Schedule sets the rates for individuals other than salaried individuals. Its first row, for tax year 2027, is: where taxable income does not exceed Rs. 600,000, the rate is 0%. Above that, the next row charges 15% of the amount exceeding Rs. 600,000, up to Rs. 1,200,000. **The export deduction.** Section 154A(1) requires every authorised dealer in foreign exchange, at the time of realising foreign exchange proceeds from exported services, to "deduct tax from the proceeds at the rates specified in Division IVA of Part III of the First Schedule". Division IVA gives two rates: | Type of receipt | Rate | |---|---| | Computer software, IT services or IT-enabled services exported by persons registered with the Pakistan Software Export Board | 0.25% of proceeds, for tax years 2024 up to tax year 2029 | | Any other case | 1% of proceeds | Division IVA has no nil band and no minimum amount. The deduction is a percentage of every payment realised. ### Why does the Rs. 600,000 band not protect export proceeds? Because of the way final tax works. Once the conditions in section 154A(2) are met, starting with a filed return, the deducted tax is a final tax. Section 169(2) then says the income "shall not be chargeable to tax under any head of income in computing the taxable income of the person". The slab table applies to taxable income. Income taxed under section 154A as final tax is kept out of it, so the 0% row never reaches it. Section 169(2)(e) adds that "there shall be no refund of the tax collected or deducted" unless it is more than the amount for which you are chargeable. For final tax, that amount is the final tax itself. ### Worked example (illustrative figures) **Hina, a university student in Faisalabad.** She writes articles for clients abroad and is not PSEB-registered. Her export proceeds for tax year 2027 are Rs. 480,000. 1. Division IVA "any other case": 1%. 2. Tax deducted: Rs. 480,000 x 1% = Rs. 4,800. 3. If she files her return and meets the other conditions in section 154A(2), the Rs. 4,800 is her final tax on that income. 4. The fact that Rs. 480,000 is below Rs. 600,000 does not change step 2. **Zain, a PSEB-registered app developer in Quetta.** Export proceeds: Rs. 540,000. 1. Division IVA row 1: 0.25%. 2. Tax deducted: Rs. 540,000 x 0.25% = Rs. 1,350. ### Do I still have to file a return? In most cases the text points to yes. Section 114(1) requires a return from: - **clause (ae):** "every person whose income for the year is subject to final taxation under any provision of this Ordinance"; - **clause (b)(vii):** any person who "has obtained National Tax Number"; - **clause (ab):** any person whose taxable income exceeds the maximum amount not chargeable to tax. A freelancer with only small export receipts may be under the threshold in clause (ab), but clause (ae) is written around final taxation, not income size. There is a loop in the text worth knowing: section 154A(2) makes the tax final only once a return has been filed. The Ordinance does not say how clause (ae) applies to someone who has not yet filed. On either reading, a person who does not file is outside the final-tax treatment under section 154A(3). ### What if I opt out of final tax? Section 154A(3) lets a person opt out every year when filing. The income is then taxed on the slab table, where taxable income up to Rs. 600,000 is at 0%. What then happens to the tax the bank deducted is a question of reading sections 154A and 168 together, covered on the opt-out page. For very small earners, this is the one route by which the Rs. 600,000 band can matter. ### Common mistakes - **"I am under Rs. 600,000, so no tax."** The nil band is for taxable income on the slab table. The bank's section 154A deduction applies from the first rupee. - **"Small income means no return."** Clauses (ae) and (b)(vii) of section 114(1) do not depend on the amount of income. - **Mixing up salary and freelance tables.** A freelancer with no salary uses clause (1) of Division I. The salaried table in clause (2) applies only where salary exceeds seventy-five per cent of taxable income. ### What to check in the official text Read section 154A(1) to (3), section 169(2) and section 114(1). The rate tables in Division I of Part I and Division IVA of Part III of the First Schedule are in the official PDF; our site copy of the Ordinance leaves out tables. Provincial sales tax on services, which some freelancers may face, is outside this corpus. ### Frequently asked #### My total foreign earnings for the year were Rs. 400,000. Why did the bank still deduct tax? Section 154A(1) requires the bank to deduct tax when it realises foreign exchange proceeds, at the rates in Division IVA. Division IVA has no minimum amount: it charges 0.25% of proceeds for PSEB-registered IT exporters and 1% in any other case. #### Can I get the deducted tax back because I am under Rs. 600,000? Not while the tax is final. Section 169(2)(e) says there is no refund of final tax unless it exceeds the amount for which you are chargeable. Section 154A(3) lets you opt out of final tax each year, and the effect of that on the deducted tax is discussed on the opt-out page. #### Do I need to file a return if I earned very little? Section 114(1)(ae) covers every person whose income is subject to final taxation, and section 114(1)(b)(vii) covers anyone who has obtained an NTN. Low earnings do not take you out of either clause. ### Citations - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1), rates of tax for individuals and association of persons except a salaried individual](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "deduct tax from the proceeds at the rates specified in Division IVA of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "there shall be no refund of the tax collected or deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "every person whose income for the year is subject to final taxation under any provision of this Ordinance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "No tax credit shall be allowed for any tax collected or deducted that is a final tax under" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is YouTube or Google AdSense income taxed like freelancing at the export rate? Source: https://qanoondigest.com/faq/freelancers-it-exporters/youtube-adsense-income-tax-pakistan Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No. From tax year 2027, section 154B, added by the Finance Act, 2026, requires banks and other financial institutions to deduct tax when revenue from social media platforms is credited to an account. Division IIIAB sets the rate at 5%. For a resident it is a minimum tax, not the final tax that section 154A gives exported services. **Applies to:** YouTubers, influencers and other content creators whose platform revenue is credited to an account with a bank or financial institution, from tax year 2027. From tax year 2027 (1 July 2026 to 30 June 2027), revenue from YouTube and similar platforms has its own withholding rule. The Finance Act, 2026 inserted section 154B into the Income Tax Ordinance, and it works differently from the export-of-services rule that covers client work on Fiverr or Upwork. ### What does the law say? Section 154B(1) requires "every banking and non-banking financial institution", at the time an amount is credited to or received in a person's account, to deduct tax at the rate in Division IIIAB of Part III of the First Schedule, "where such amount represents revenues received from social media platforms". Division IIIAB reads: "The rate of tax to be deducted under section 154B shall be 5%." Section 154B(2) gives two definitions: - A **digital content creator** or **social media influencer** is any individual or entity earning from creating, publishing or monetising content on digital platforms "including but not limited to YouTube, Facebook, Instagram, Tik Tok or such other similar platforms". - **Payment** includes any inward remittance, transfer or credit through banking channels, including through intermediaries such as online payment service providers or digital financial platforms. Section 154B(3) sets the status of the tax: - (a) **minimum** tax for a resident person; and - (b) **final** tax for a non-resident person without a permanent establishment in Pakistan. Section 154B(4) lets the Board prescribe rules for implementation, including identification and reporting. ### How is this different from section 154A? | Point | Section 154B (social media revenue) | Section 154A (export of services) | |---|---|---| | Who deducts | Every banking and non-banking financial institution | Authorised dealer in foreign exchange | | When | On credit or receipt of the amount in the account | On realisation of foreign exchange proceeds | | Rate for tax year 2027 | 5% (Division IIIAB) | 0.25% for PSEB-registered IT exporters, 1% otherwise (Division IVA) | | Status for a resident | Minimum tax | Final tax once section 154A(2) conditions are met | | Limited to foreign money? | The section does not say so | Yes, foreign exchange proceeds | Section 169(1)(b) lists the provisions whose deductions are final tax. It names section 154A(2) and "clause (b) of sub-section (3) of section 154B", which is the non-resident case only. For a resident creator, then, section 169(2)(a) does not take the platform revenue out of taxable income. The income stays in the return under the normal rules, with the 5% deduction as a minimum. Section 154B does not itself spell out how the minimum is compared with tax computed on the normal basis. This page does not fill that in. ### Worked example (illustrative figures) Ayesha lives in Karachi and runs a cooking channel. In tax year 2027, Rs. 1,200,000 of platform revenue is credited to her bank account. She also designs menus for a restaurant in Dubai and receives Rs. 500,000 for that work. She is not registered with PSEB. The amounts are invented. The rates are the ones cited above. 1. Platform revenue under section 154B: Rs. 1,200,000 x 5% = Rs. 60,000, a minimum tax 2. Design fees under section 154A, 1% row: Rs. 500,000 x 1% = Rs. 5,000, final tax if the section 154A(2) conditions are met 3. Total deducted at source: Rs. 60,000 + Rs. 5,000 = Rs. 65,000 Had the platform revenue been taxed at the 1% export rate, the deduction would have been Rs. 12,000. It is not, because section 154B applies specifically to revenues from social media platforms. ### What if ...? **What if I am not resident in Pakistan?** Under section 154B(3)(b), the 5% is final tax for a non-resident person who has no permanent establishment in Pakistan. **What if the revenue arrives through a payment service before reaching my bank?** The definition of payment in section 154B(2)(b) covers credits received through intermediaries such as online payment service providers. **What if some of my income is sponsorship from a brand, not platform revenue?** Section 154B applies to "revenues received from social media platforms". The Ordinance does not say whether a direct payment from a brand to a creator falls within those words. Section 154B(4) leaves identification to rules, which are not held in this corpus. ### Common mistakes - **Treating AdSense or YouTube payouts as ordinary IT export at 1% or 0.25%.** From tax year 2027 section 154B has its own 5% rate. - **Assuming 5% is the whole tax for a resident.** Section 154B(3)(a) calls it a minimum tax, and section 169 lists only the non-resident case as final. - **Assuming the rule only covers YouTube.** The definition names YouTube, Facebook, Instagram and TikTok and says "including but not limited to". ### What to check in the official text Read section 154B in full, Division IIIAB of Part III of the First Schedule, and section 169(1)(b) in the Ordinance as amended to 30 June 2026. Check for any rules the Board issues under section 154B(4), which may settle how platform revenue is identified. Those rules are not held in this corpus. ### Frequently asked #### What rate applies to YouTube income from tax year 2027? Division IIIAB of Part III of the First Schedule sets the section 154B rate at 5%. It is deducted when the revenue is credited to your account with a bank or non-banking financial institution. #### Is the 5% the end of my tax on that income? For a resident person, section 154B(3)(a) makes it a minimum tax, not a final tax. Only the non-resident case in section 154B(3)(b) is listed in section 169 as final tax, so a resident's platform revenue is not taken out of taxable income by section 169. #### Does it matter if the money comes through a payment service first? Section 154B(2)(b) defines payment to include any inward remittance, transfer or credit received through banking channels, including through online payment service providers or digital financial platforms. ### Citations - [Income Tax Ordinance, 2001, section 154B (Withholding tax on revenues received from social media platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154b-withholding-tax-on-revenues-received-from-social-media-platforms), as amended to 2026-06-30: "at the time of credit or receipt of any amount in an account of a person, deduct tax at the rate specified in Division IIIAB of Part III of the First Schedule, where such amount represents revenues received from social media platforms" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IIIAB (Withholding Tax on Revenues Received from Social Media Platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "deduct tax from the proceeds at the rates specified in Division IVA of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "(a) the income shall not be chargeable to tax under any head of income in computing the taxable income of the person;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Which kinds of work count as IT or IT-enabled services: graphic design, writing, virtual assistance, data entry? Source: https://qanoondigest.com/faq/freelancers-it-exporters/which-services-count-it-enabled-services Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 2(30AE) of the Income Tax Ordinance names graphics design, data entry, call centres, accounting and HR services among IT-enabled services, and section 2(30AD) names software and web work as IT services. Writing and virtual assistance are not named. Services outside those lists can still fall under section 154A(1)(b) at the 1% rate for tax year 2027. **Applies to:** Freelancers in Pakistan who export services other than programming, such as design, writing, admin support or data work. The label matters because it decides which row of the rate table a freelancer can reach. Only exports of computer software, IT services or IT-enabled services by a PSEB-registered exporter can use the 0.25% rate. Everything else exported from Pakistan sits on the 1% row, which is still a flat rate on proceeds. ### What does the law say? Section 2 of the Income Tax Ordinance defines both terms. **IT services, clause (30AD):** "include but not limited to software development, software maintenance, system integration, web design, web development, web hosting and network design". **IT-enabled services, clause (30AE):** include but not limited to inbound or outbound call centres, medical transcription, remote monitoring, graphics design, accounting services, Human Resource (HR) services, telemedicine centers, data entry operations, cloud computing services, data storage services, locally produced television programs and insurance claims processing. Section 154A(1) then requires the bank to deduct tax from foreign exchange proceeds on account of several kinds of receipt, including: - **(a)** exports of computer software, IT services or IT-enabled services "where the exporter is registered with and duly certified by the Pakistan Software Export Board (PSEB)"; - **(b)** "services or technical services rendered outside Pakistan or exported from Pakistan"; - **(e)** other services rendered outside Pakistan as notified by the Board. Division IVA of Part III of the First Schedule sets the rates for tax year 2027: | Row | Receipt | Rate | |---|---|---| | 1 | Export proceeds of computer software, IT services or IT-enabled services by persons registered with PSEB | 0.25% of proceeds, for tax years 2024 up to 2029 | | 2 | Any other case | 1% of proceeds | ### Where does common freelance work fit? | Work | Named in section 2? | Reading of the text | |---|---|---| | Web design or development, app or software work | Yes, clause (30AD) | IT services | | Graphic or logo design | Yes, "graphics design" in clause (30AE) | IT-enabled services | | Data entry | Yes, "data entry operations" in clause (30AE) | IT-enabled services | | Bookkeeping or accounting | Yes, "accounting services" in clause (30AE) | IT-enabled services | | Recruitment or HR support | Yes, "Human Resource (HR) services" in clause (30AE) | IT-enabled services | | Customer support calls | Yes, "inbound or outbound call centres" in clause (30AE) | IT-enabled services | | Content or copy writing, translation | No | Not settled by the text; exported services under section 154A(1)(b) | | Virtual assistance, general admin | No | Not settled by the text, unless the tasks match a named item such as data entry | | Video editing, voice-over | No | Not settled by the text; exported services under section 154A(1)(b) | Both clauses say "include but not limited to", so the lists are not closed. The Ordinance does not give a test for deciding whether an unnamed activity is an IT-enabled service. This page does not supply one. For unnamed work, the practical point is narrower than it looks. If the work is not IT or IT-enabled, clause (a) is out of reach, and the receipt still falls within clause (b) as a service rendered outside Pakistan or exported from Pakistan. Row 2 of Division IVA gives 1%. Section 154A(2) makes that deduction final tax once the return and other conditions are met, the same as for IT work. ### Worked example (illustrative figures) Three freelancers in Hyderabad each receive Rs. 1,500,000 from foreign clients in tax year 2027. The amounts are invented. The rates are from Division IVA. **Bilal, logo designer, registered with and certified by PSEB.** Graphics design is named in clause (30AE), so row 1 can apply: 1. Rs. 1,500,000 x 0.25% = Rs. 3,750 **Sadia, logo designer, not registered with PSEB.** Same work, but clause (a) needs PSEB registration, so row 2 applies: 1. Rs. 1,500,000 x 1% = Rs. 15,000 **Kamran, blog writer.** Writing is not named in either list. His receipts are services exported from Pakistan under clause (b), row 2: 1. Rs. 1,500,000 x 1% = Rs. 15,000 For Sadia and Kamran the result is the same, because without PSEB registration the IT label changes nothing in the rate. ### What if ...? **What if my work mixes named and unnamed tasks?** A virtual assistant who does data entry and also handles email is doing one named task and one unnamed one. The Ordinance does not say how a mixed engagement is classified. **What if PSEB will not register my kind of work?** Who PSEB registers is outside this corpus. The Ordinance only says the 0.25% row needs registration with and certification by PSEB. **What if my client is in Pakistan?** Section 154A deals with foreign exchange proceeds. Payments from Pakistani clients are covered by other provisions on a separate page. ### Common mistakes - **Assuming the IT label alone gives 0.25%.** Clause (a) and row 1 both require PSEB registration. - **Assuming non-IT freelancing is outside section 154A.** Clause (b) covers services rendered outside Pakistan or exported from Pakistan, whatever the type. - **Reading the lists as closed.** Both definitions say "include but not limited to", which leaves room without deciding any particular case. ### What to check in the official text Read section 2(30AD) and (30AE), section 154A in full, and Division IVA of Part III of the First Schedule in the Ordinance as amended to 30 June 2026. Section 154A(6) lets the Board include or exclude services, and section 154A(1)(e) covers services the Board notifies. Check for any such notification, which is not held in this corpus. ### Frequently asked #### Is graphic design an IT-enabled service? Yes. Section 2(30AE) names graphics design in its list of IT-enabled services. The 0.25% rate still depends on PSEB registration under section 154A(1)(a); without it, the 1% row of Division IVA applies. #### Is content writing an IT-enabled service? The Ordinance does not name writing in section 2(30AD) or (30AE). Both lists say they include but are not limited to the items named, and the Ordinance does not say whether writing falls within them. Writing exported to foreign clients is still a service covered by section 154A(1)(b). #### Can the Board add or remove services? Section 154A(6) gives the Board power to include or exclude certain services for the purposes of the section, and section 154A(1)(e) covers other services rendered outside Pakistan as notified by the Board. Any such notification is not held in this corpus. ### Citations - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "graphics design, accounting services, Human Resource (HR) services, telemedicine centers, data entry operations, cloud computing services, data storage services" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "where the exporter is registered with and duly certified by the Pakistan Software Export Board (PSEB)." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- # Software houses and IT companies Tax on IT exports and local IT services, sales tax on services and company obligations. ## Has the 0.25% tax on IT export proceeds been extended after Budget 2026-27, and until when? Source: https://qanoondigest.com/faq/software-houses/it-export-reduced-rate-extended-to-2029 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 5 of the Finance Act, 2026 substituted the figure 2029 for 2026 in row 1 of Division IVA. The 0.25% rate on export proceeds of PSEB-registered software, IT and IT-enabled exporters now runs for tax years 2024 up to tax year 2029, which under section 74 ends on 30 June 2029. **Applies to:** Software houses and IT companies registered with the Pakistan Software Export Board that receive foreign exchange proceeds for software, IT or IT-enabled services. The reduced rate for registered IT exporters did not expire with tax year 2026. The Finance Act, 2026, which gave legal effect to the 2026-27 budget, amended one figure in the First Schedule to the Income Tax Ordinance, 2001, and that change carries the 0.25% rate forward three more tax years. ### What does the law say? Section 154A(1) of the Ordinance requires the bank that realises foreign exchange proceeds to deduct tax at the rates in Division IVA of Part III of the First Schedule. Before the Finance Act, 2026, row 1 of that table gave 0.25% of proceeds to software, IT and IT-enabled exporters registered with the Pakistan Software Export Board (PSEB) "for tax years 2024 up to tax year 2026". Section 5 of the Finance Act, 2026 amends the Ordinance. In its First Schedule amendments, under Part III, it provides: "in Division IVA, in the Table, in column (1), in S. No. (1), in the entry in column (3), for the figure “2026”, the figure “2029” shall be substituted". The consolidated Ordinance, as amended up to 30 June 2026, now reads: | S. No. | Type of receipt | Rate of tax | |---|---|---| | 1 | Export proceeds of computer software or IT services or IT enabled services by persons registered with Pakistan Software Export Board | 0.25% of proceeds for tax years 2024 up to tax year 2029 | | 2 | Any other case | 1% of proceeds | The footnotes to that table in the official Ordinance record that the time-limited expression was added by the Finance Act, 2023, and that the figure "2026" was substituted by the Finance Act, 2026. Section 1(2) of the Finance Act, 2026 says the Act comes into force on the first day of July 2026, unless otherwise provided. ### Which income periods does that cover? Section 74(1) defines the normal tax year as twelve months ending on 30 June, named by the calendar year in which that date falls. Applied to row 1: | Tax year | Period | |---|---| | 2024 | 1 July 2023 to 30 June 2024 | | 2025 | 1 July 2024 to 30 June 2025 | | 2026 | 1 July 2025 to 30 June 2026 | | 2027 | 1 July 2026 to 30 June 2027 | | 2028 | 1 July 2027 to 30 June 2028 | | 2029 | 1 July 2028 to 30 June 2029 | The last three rows are the ones added by the Finance Act, 2026. A company that has been granted a special tax year under section 74(2) will need to map its own year onto these tax years. ### How does it work in practice? Nothing changes in how the tax is collected. The bank still deducts at the time of realisation. What the amendment secures is that a PSEB-registered exporter's proceeds realised after 1 July 2026 continue to attract 0.25% rather than falling to the 1% "any other case" row. ### Worked example (illustrative figures) Indus Stack (Pvt) Ltd, a PSEB-registered software house in Karachi, realises foreign proceeds of Rs. 32,000,000 in tax year 2027. 1. Tax year 2027 is within "tax years 2024 up to tax year 2029", so row 1 applies. 2. Tax deducted: Rs. 32,000,000 x 0.25% = Rs. 80,000. 3. Without the extension, row 1 would have ended with tax year 2026, and the same proceeds under row 2 would have given Rs. 32,000,000 x 1% = Rs. 320,000. 4. Difference: Rs. 320,000 - Rs. 80,000 = Rs. 240,000. ### What if we are not registered with PSEB? The extension does not help. It changes only the period in row 1, which applies to persons registered with PSEB. Section 154A(1)(a) also requires the exporter to be registered with and duly certified by PSEB. Other exporters remain at 1% of proceeds under row 2. ### What if we are looking at tax year 2030? The table as currently printed stops at tax year 2029. It does not provide a 0.25% rate beyond that. Any further change would need a later amendment, and none is in this corpus. ### Common mistakes - **Reading "2029" as the calendar year 2029.** It is tax year 2029, which ends on 30 June 2029. - **Assuming the rate for everyone changed.** Only the period in row 1 was amended. The 1% rate in row 2 is untouched by this amendment. - **Assuming the extension changes the final-tax conditions.** Those are in section 154A(2) and (3), which this amendment does not touch. ### What to check in the official text Read section 5 of the Finance Act, 2026, in the part amending Part III of the First Schedule, and compare it against the Division IVA table in the official PDF of the Ordinance amended up to 30 June 2026. The Finance Act text on this site was transcribed from scanned page images, so check the figures against the official PDF before relying on them. ### Frequently asked #### Until when does the 0.25% rate on IT export proceeds apply? Row 1 of Division IVA now reads for tax years 2024 up to tax year 2029. Tax year 2029 is the twelve months ending on 30 June 2029, so proceeds realised up to that date are within the period. #### Did the Finance Act 2026 change the 1% rate? The amendment in section 5 of the Finance Act, 2026 to Division IVA changes only the figure in row 1. Row 2, any other case, remains at 1% of proceeds in the Ordinance as amended up to 30 June 2026. #### What happens after tax year 2029? The Ordinance as it stands gives no 0.25% rate beyond tax year 2029. Whether the period is extended again depends on a future Finance Act, which this page cannot predict. ### Citations - [Finance Act, 2026, section 5 (Amendments of the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2026#5-amendments-of-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2026: "in Division IVA, in the Table, in column (1), in S. No. (1), in the entry in column (3), for the figure “2026”, the figure “2029” shall be substituted" Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Finance Act, 2026, section 1 (Short title and commencement)](https://qanoondigest.com/acts/finance-act/finance-act-2026#1-short-title-and-commencement), as amended to 2026: "It shall, unless otherwise provided, come into force on the first day of July, 2026." Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "deduct tax from the proceeds at the rates specified in Division IVA of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 74 (Tax year)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#74-tax-year), as amended to 2026-06-30: "be denoted by the calendar year in which the said date falls" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is export of IT services from Islamabad zero-rated under the ICT tax, and what follows from that? Source: https://qanoondigest.com/faq/software-houses/ict-tax-export-it-services-zero-rated Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 3(1A) of the Islamabad Capital Territory (Tax on Services) Ordinance charges the export of services at zero per cent, overriding the Table-1 rates. Zero-rating is still a charge at a nil rate, and section 3(3) applies the Sales Tax Act rules on registration, payment, records, audit and penalties to tax under the Ordinance. **Applies to:** Islamabad software houses and IT companies that provide IT or IT-enabled services to clients outside Pakistan. An Islamabad software house that bills a client in London or Dubai charges no ICT sales tax on that invoice. Section 3(1A) of the Islamabad Capital Territory (Tax on Services) Ordinance, 2001 sets a zero per cent rate for exported services. That is a nil rate inside the tax, not a release from it, and the compliance rules borrowed from the Sales Tax Act still attach. ### What does the law say? Section 3(1) charges sales tax on the value of taxable services rendered or provided in the Islamabad Capital Territory at the rates in Table-1 of the Schedule. IT services and IT-enabled services are serial 11 of Table-1, at fifteen percent. Section 3(1A), inserted by the Finance Act, 2021, reads: "Notwithstanding the provision of sub-section (1), the export of services shall be charged at the rate of zero per cent." The words "notwithstanding" and "charged" matter. The export rate overrides the Table-1 rate, and exported services are still charged, at nil. Section 3(3) then says that all the provisions of the Sales Tax Act, 1990, with its rules, notifications, orders and instructions, apply "mutatis mutandis" to the collection and payment of tax under the Ordinance, in so far as they relate to: - manner, time and mode of payment; - registration and de-registration; - keeping of records and audit; - enforcement and adjudication; - penalties and prosecution; and - all other allied and ancillary matters. ### What follows for an Islamabad IT exporter? **Registration.** Registration under the Ordinance runs through the Sales Tax Act. Section 14(1)(f) of that Act lists "a person who is required, under any other Federal law or Provincial law, to be registered for the purpose of any duty or tax collected or paid as if it were a levy of sales tax". Section 3(2) of the ICT Ordinance levies its tax as if it were a sales tax under the Sales Tax Act. A business whose only services are exported still makes services charged under section 3, at zero per cent. **Returns.** Section 26(1) of the Sales Tax Act requires every registered person to furnish a return by the due date "indicating the purchases and the supplies made during a tax period, the tax due and paid". Exported services appear in that return as supplies charged at nil. **Records.** Section 22(1) of the Sales Tax Act lists the records a registered person keeps, including "records of zero-rated and exempt supplies", invoices, bank statements and double entry sales tax accounts. For an exporter, the invoices to foreign clients and the bank records of the payments received are the evidence that a service was exported. **Real-time reporting.** The second proviso to section 3(1), added by the Finance Act, 2025, says any service provider mentioned in Table-1 and Table-2 shall integrate with the Board's computerized system for real-time reporting, from such date and in such manner as the Board prescribes by general order. Whether and when a general order applies to IT exporters is outside this corpus. ### Worked example (illustrative figures) Maryam's company in I-8, Islamabad builds mobile apps. In one month it invoices a client in Toronto Rs. 3,500,000 and a local Islamabad client Rs. 500,000. The amounts are invented. 1. Toronto invoice: export of services, charged under section 3(1A) at 0%. Tax: Rs. 3,500,000 x 0% = Rs. 0. 2. Islamabad invoice: IT services under Table-1 serial 11 at 15%. Tax: Rs. 500,000 x 15% = Rs. 75,000. 3. Tax declared for the month: Rs. 0 + Rs. 75,000 = Rs. 75,000. 4. Records kept under section 22: both invoices, the foreign remittance record and the purchase records for the month. ### What if the exporter wants input tax back? Zero-rating often matters because of input tax. The Sales Tax Act has its own refund provision for input tax against zero-rated supplies and exports, and section 14(1)(d) of that Act lists "an exporter who intends to obtain sales tax refund against his zero-rated supplies". The ICT Ordinance names specific Sales Tax Act provisions that apply, and section 3(3) covers payment, registration and records. It does not expressly name the refund provision. Whether an Islamabad services exporter can obtain a refund of input tax is not clearly answered by the text in this corpus, and this page does not resolve it. ### What counts as an export of services? The Ordinance does not define "export of services". The Ordinance says undefined words take their meaning from the Sales Tax Act. Section 2(48) of that Act defines a zero-rated supply as "a taxable supply which is charged to tax at the rate of zero per cent under section 4", and section 4 deals with goods. Neither text sets a test for when an IT service is exported, for example where the client is foreign but the work is used in Pakistan. The corpus is silent on that point. ### Common mistakes - **Treating zero-rated as outside the law.** Section 3(1A) is a charge at nil. The Sales Tax Act provisions on registration, records and penalties apply through section 3(3). - **Charging 15% on a foreign invoice.** Section 3(1A) overrides the Table-1 rate for exported services. - **Mixing up sales tax and income tax.** Zero-rating under the ICT Ordinance says nothing about income tax on export receipts. - **Assuming provincial rules match.** Services from Lahore, Karachi or Peshawar are taxed under provincial laws outside this corpus. ### What to check in the official text Read section 3 of the ICT Ordinance in the official PDF, including sub-sections (1A), (2A) and (3), and the Schedule tables. Read sections 2, 14, 22 and 26 of the Sales Tax Act, 1990, and its refund provisions. Check for any Board general order on real-time reporting and any notification on refunds for exported services, since those are not held in this corpus. ### Frequently asked #### Does zero-rating mean an Islamabad IT exporter can ignore the ICT Ordinance? No. Section 3(1A) charges exported services at zero per cent, which is still a charge under the Ordinance. Section 3(3) applies the Sales Tax Act provisions on registration, payment, records, audit, enforcement and penalties to tax under the Ordinance. #### What counts as an export of services? The ICT Ordinance does not define it. It borrows undefined words from the Sales Tax Act, 1990, whose definition of zero-rated supply refers to goods zero-rated under its section 4. The corpus does not settle which IT services count as exported. #### Is export income also free of income tax? No. The ICT Ordinance covers only sales tax on services. Income tax on IT export proceeds is charged separately under the Income Tax Ordinance, 2001. ### Citations - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, section 3 (Scope of tax)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30#3-scope-of-tax), as amended to 2025-06-30: "the export of services shall be charged at the rate of zero per cent" Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, Schedule, Table-1, serial 11 (IT services and IT-enabled services, respective headings), Fifteen percent](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "a taxable supply which is charged to tax at the rate of zero per cent under section 4" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "a person who is required, under any other Federal law or Provincial law, to be registered for the purpose of any duty or tax collected or paid as if it were a levy of sales tax" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 22 (Records. ............................................................................ ……....58 23. Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#22-records-58-23-tax-invoices), as amended to 2026-06-30: "records of zero-rated and exempt supplies" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 26 (* Return)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#26-return), as amended to 2026-06-30: "indicating the purchases and the supplies made during a tax period, the tax due and paid" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Why did the bank deduct 1% instead of 0.25% from our IT export remittance, and can we get it back? Source: https://qanoondigest.com/faq/software-houses/bank-deducted-1-percent-on-it-export Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Division IVA of the First Schedule allows 0.25% only for IT export proceeds of persons registered with the Pakistan Software Export Board, for tax years 2024 to 2029. Every other case is 1%. Where the tax is final, section 169(2)(e) allows a refund only of tax exceeding the amount chargeable, claimed under section 170 within three years. **Applies to:** Software houses and IT exporters in Pakistan whose foreign export proceeds had tax deducted by the bank under section 154A. Software houses often see two different figures on their inward remittance advices: 0.25% on some and 1% on others. The difference comes from a single line in the First Schedule to the Income Tax Ordinance, 2001, and whether the difference can be recovered depends on how final taxation and the refund sections interact. ### What does the law say about the rate? Section 154A(1) requires every authorized dealer in foreign exchange, at the time of realization of foreign exchange proceeds, to deduct tax at the rates in Division IVA of Part III of the First Schedule. Clause (a) covers exports of computer software or IT services or IT enabled services "where the exporter is registered with and duly certified by the Pakistan Software Export Board (PSEB)". Clause (b) covers services or technical services rendered outside Pakistan or exported from Pakistan. Division IVA then sets: | S. No. | Type of receipt | Rate | |---|---|---| | 1 | Export proceeds of computer software or IT services or IT enabled services by persons registered with Pakistan Software Export Board | 0.25% of proceeds, for tax years 2024 up to tax year 2029 | | 2 | Any other case | 1% of proceeds | The end year was changed from 2026 to 2029 by the Finance Act, 2026, so 0.25% is available for tax year 2027. ### Why would a bank apply 1%? On the wording of the law, 1% applies whenever the receipt is not within entry 1. That covers: - an exporter that is not registered with PSEB, or is registered but not "duly certified" as clause (a) requires; - proceeds that are not for software, IT services or IT enabled services, such as other services falling under clause (b). How the bank verifies PSEB status is not in the Ordinance. Section 154A(5) says the Board, in consultation with the State Bank of Pakistan, prescribes the mode, manner and procedure of payment of tax under the section. Those instructions are not in this corpus. ### Can the difference be recovered? **If the 1% was the correct rate** because the company was not registered and certified, there is no excess to recover. The 1% is the rate the law sets. **If the company qualified for 0.25%** and the tax is final under section 154A(2), section 169(2)(e) says there is no refund "unless the tax so collected or deducted is in excess of the amount for which the taxpayer is chargeable under this Ordinance". The Ordinance does not deal specifically with a bank applying the wrong entry, so whether the extra deduction is an excess under that clause is a question for the Commissioner on the facts. **The refund process.** Section 170(1) lets a taxpayer that has paid tax above the amount it is properly chargeable apply to the Commissioner. Under section 170(2) the application is in the prescribed form, verified, and made within three years of the later of the assessment order for the year and the date the tax was paid. Section 170(4) requires a written order within sixty days, after a hearing, and section 170(5) allows an appeal. Section 170(3) first applies any excess against other tax the company owes. Section 170A also lets the Board issue refunds verified by its computerised system without an application, from tax year 2021. **If the company opts out of final taxation.** Section 154A(3) lets a person opt out each year when filing its return. The deduction is then a credit under section 168(2) against tax on taxable income for the year it was deducted, and any overall excess is dealt with under section 170. ### Worked example (illustrative figures) Sialkot Softworks (Pvt) Ltd, registered and certified with PSEB, realizes Rs. 20,000,000 of software export proceeds in tax year 2027. Its bank applies the 1% rate. 1. Deducted by the bank: Rs. 20,000,000 x 1% = Rs. 200,000. 2. Rate under Division IVA entry 1: Rs. 20,000,000 x 0.25% = Rs. 50,000. 3. Difference: Rs. 200,000 - Rs. 50,000 = Rs. 150,000. The Rs. 150,000 is the amount that would be put forward as an excess under section 169(2)(e) and claimed under section 170. Had the company not been registered and certified, the Rs. 200,000 would be the correct tax and there would be nothing to claim. ### Common mistakes - **Treating registration alone as enough.** Clause (a) of section 154A(1) says "registered with and duly certified by" PSEB. - **Assuming the reduced rate runs forever.** Division IVA limits 0.25% to tax years 2024 to 2029. - **Missing the three-year window.** Section 170(2)(c) sets the time limit for a refund application. - **Expecting a platform name in the law.** Section 154A does not mention Payoneer or any other service. It turns on realization of foreign exchange proceeds by an authorized dealer. ### What to check in the official text Read section 154A(1) to (5), section 169(2), section 170 and section 170A, and section 168(2) if the company opts out. Check Division IVA of Part III of the First Schedule in the official PDF. PSEB registration rules, State Bank instructions to banks and any FBR procedure for correcting a bank's deduction are outside this corpus. ### Frequently asked #### Why does PSEB registration change the rate? Section 154A(1)(a) covers exports of software, IT services and IT enabled services where the exporter is registered with and duly certified by the Pakistan Software Export Board. Division IVA gives 0.25% only to proceeds of persons registered with the Board, and 1% in any other case. #### Can the extra 0.75% be refunded? If the company qualified for 0.25% and the tax is final, section 169(2)(e) allows a refund only where the tax deducted exceeds the amount chargeable. Whether a wrong-rate deduction meets that test is for the Commissioner on the facts; the Ordinance has no provision aimed at this case. A claim is made under section 170. #### Does it matter if the money came through Payoneer or another platform? Section 154A does not name any payment channel. It applies to an authorized dealer in foreign exchange at the time of realization of foreign exchange proceeds. How a particular platform's transfers are realized and reported is outside this corpus. ### Citations - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "where the exporter is registered with and duly certified by the Pakistan Software Export Board (PSEB)." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "there shall be no refund of the tax collected or deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 170 (Refunds)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#170-refunds), as amended to 2026-06-30: "A taxpayer who has paid tax in excess of the amount which the taxpayer is properly chargeable under this Ordinance may apply to the Commissioner for a refund of the excess." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 170A (Electronic processing and electronic issuance of Refunds by the Board)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#170a-electronic-processing-and-electronic-issuance-of-refunds-by-the-board), as amended to 2026-06-30: "the Board may process and issue refund to the taxpayer who has filed the return of income without requiring refund application by the taxpayer" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can FBR audit a software house under the IT export final tax regime, and what records must it keep? Source: https://qanoondigest.com/faq/software-houses/fbr-audit-and-records-it-export-company Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 177 lets the Commissioner call for records and audit a person's income tax affairs, with no exclusion for final tax income. Section 174 requires every taxpayer to keep prescribed accounts and records for six years, and rule 29 lists them: receipts and payments, services provided and obtained, assets and liabilities. **Applies to:** Software houses and IT companies in Pakistan whose export proceeds are taxed under section 154A, including those with some local income. A software house whose export proceeds are taxed at 0.25% by the bank may think its income tax affairs are closed once the return is filed. The Income Tax Ordinance, 2001 does not work that way. Final taxation settles the tax on the export income, but it does not remove the Commissioner's power to examine the company's records, and it does not remove the duty to keep them. ### Can FBR audit a company under final tax? Section 177(1) lets the Commissioner call for any record or documents, including books of accounts maintained under the Ordinance or any other law, "for conducting audit of the income tax affairs of the person". Where records are kept electronically, the company must allow access to the machine and software holding them. The proviso requires reasons to be recorded and communicated to the taxpayer, and bars calling for records after six years from the end of the tax year to which they relate. Nothing in section 177 excludes income taxed under section 154A. The section does not mention final taxation at all. What an audit can examine in a final tax case follows from the conditions in section 154A(2): the return was filed, withholding tax statements were filed where required, and no foreign tax credit was claimed. If a condition fails, section 154A(3) says final taxation does not apply. After the audit, section 177(6) requires an audit report once the taxpayer's explanation is obtained, and section 177(6A) allows the assessment to be amended after a hearing. ### How does section 169(3) treat the return? Section 169(3) applies where all the income a person derives in a tax year is subject to final taxation. An assessment is then treated as made, meaning the Commissioner is taken to have assessed the income and tax at the amounts in the return, and the return is taken for all purposes of the Ordinance to be an assessment order. A software house that also earns local income taxed under the normal rules is outside this sub-section for that year, and its return is dealt with in the ordinary way. ### Which records must a software house keep? Section 174(1) requires every taxpayer to maintain in Pakistan the accounts, documents and records that are prescribed. Section 174(3) sets the period at six years after the end of the tax year, longer if proceedings are pending. Rule 29(1) of the Income Tax Rules, 2002 applies to every taxpayer deriving income chargeable under the head "Income from Business". It requires proper books of account, documents and records of: - all sums received and spent, and what they were for; - all sales and purchases of goods and all services provided and obtained; - all assets; - all liabilities. Rule 29(2) allows invoices generated by computerised accounting software, and rule 29(3) makes the retained copies and electronic records part of the records. Rule 29(4) repeats the six-year period. **A point the law leaves open.** Section 169(2)(a) says final tax income is not chargeable "under any head of income". Rule 29 is written for income chargeable under the head "Income from Business". The rules do not say in terms how rule 29 applies to a company whose only income is final-tax export income. Section 174(1), which applies to every taxpayer, and section 177(1), which reaches records kept under any other law, are not limited in that way. ### Worked example (illustrative figures) Chenab Digital (Pvt) Ltd in Multan realizes Rs. 60,000,000 of software export proceeds and earns Rs. 5,000,000 from a Pakistani client in tax year 2027. Because it has local income, section 169(3) does not apply to it. It receives a section 177 notice in 2029. | What the notice might ask for | Where the duty comes from | |---|---| | Foreign client invoices and bank realization advices for the Rs. 60,000,000 | Rule 29(1)(a) and (b), services provided and sums received | | Invoices to the Pakistani client for the Rs. 5,000,000 | Rule 29(1)(b) and (3) | | Payroll and contractor payment records | Rule 29(1)(a), sums expended | | Proof that withholding statements were filed | Section 154A(2)(b), condition for final tax | | Fixed asset and loan records | Rule 29(1)(c) and (d) | Records for tax year 2027 must be kept until at least 30 June 2033, six years after the tax year ends on 30 June 2027. ### What if the records are not produced? Section 177(2AA) says that where records are not furnished, are incomplete, or defects are not explained, taxable income is taken as not correctly declared and is determined using sectoral benchmark ratios prescribed by the Board. Section 177(10) allows a best judgment assessment where required records are not produced. The section 182 Table adds penalties. Entry 7 sets Rs. 10,000 or "five per cent of the amount of tax on this income", whichever is higher, for failing to maintain required records. Entry 8 sets Rs. 100,000, Rs. 200,000 and Rs. 300,000 for failing, without reasonable cause, to produce records on the first, second and third notice under section 177. ### Common mistakes - **Discarding records because the tax is final.** Section 174(3) sets six years regardless. - **Assuming the return is automatically an assessment.** Section 169(3) applies only if all income for the year is final-tax income. - **Treating one audit as the last.** Section 177(7) allows audits in following years where there are reasonable grounds. ### What to check in the official text Read section 177(1), (2AA), (6), (6A), (7) and (10), section 174, section 169(2) and (3), section 154A(2) and (3), and rule 29 of the Income Tax Rules, 2002. Check entries 7 and 8 of the section 182 Table in the official PDF. Record-keeping duties under company law are outside this corpus. ### Frequently asked #### Does final tax on IT exports mean FBR cannot audit the company? No. Section 177 allows the Commissioner to call for records and audit the income tax affairs of a person, and it has no exclusion for income taxed under section 154A. An audit can test whether the section 154A(2) conditions for final taxation were actually met. #### How long must a software house keep its records? Section 174(3) and rule 29(4) require six years after the end of the tax year. Where a proceeding is pending before any authority or court, the records are kept until it is finally decided. #### What is the penalty for not producing records in an audit? Entry 8 of the section 182 Table sets Rs. 100,000 for failing to produce records on the first notice, Rs. 200,000 on the second and Rs. 300,000 on the third, where the failure is without reasonable cause. ### Citations - [Income Tax Ordinance, 2001, section 177 (Audit)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#177-audit), as amended to 2026-06-30: "for conducting audit of the income tax affairs of the person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 174 (Records)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#174-records), as amended to 2026-06-30: "every taxpayer shall maintain in Pakistan such accounts, documents and records as may be prescribed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "the Commissioner shall be taken to have made an assessment of income for that tax year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "The tax deductible under this section shall be a final tax on the income arising from the transactions referred to in this section, upon fulfilment of the following conditions" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 29 (Books of account, documents and records to be maintained)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#29-books-of-account-documents-and-records-to-be-maintained), as amended to 2023-11-24: "shall maintain proper books of account, documents and records with respect to-" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Ordinance, 2001, section 182 (Offences and penalties)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182-offences-and-penalties), as amended to 2026-06-30: "in addition to and not in derogation of any punishment to which he may be liable under this Ordinance or any other law" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can FBR audit a software house under the IT export regime, and what records must it keep? Source: https://qanoondigest.com/faq/software-houses/audit-records-software-house-exports Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 177 lets the Commissioner call for records and audit a person's income tax affairs, and it contains no exclusion for export income taxed under section 154A. Section 174 requires every taxpayer to keep prescribed accounts and records for six years after the tax year, and rule 29 lists them. **Applies to:** Software houses and IT companies in Pakistan whose export proceeds are taxed under section 154A, including those that also earn local income. A software house whose export proceeds are taxed by the bank at realization can assume its income tax affairs are closed once the return is in. The Income Tax Ordinance, 2001 does not work that way. Final taxation settles the tax on the export income. It does not remove the Commissioner's power to examine the company's records, and it does not remove the duty to keep them. ### Can FBR audit a company under final tax? Yes. Section 177(1) lets the Commissioner call for any record or documents, including books of accounts kept under the Ordinance or any other law, "for conducting audit of the income tax affairs of the person". Where records are held electronically, the company must allow access to the machine and software holding them. The proviso requires the Commissioner to record reasons in writing and communicate them to the taxpayer, and bars calling for records after six years from the end of the tax year to which they relate. Section 177 does not mention final taxation at all, so nothing in it excludes income taxed under section 154A. What an audit can usefully examine follows from section 154A(2). The export deduction is final only if the return was filed, withholding tax statements for the year were filed where required, and no credit for foreign taxes was claimed. Section 154A(3) says final taxation does not apply to a person who does not meet those conditions. After the audit, section 177(6) requires an audit report once the taxpayer's explanation is obtained. Section 177(6A) allows the assessment to be amended after a hearing. Section 177(7) says being audited in one year does not prevent audits in later years where there are reasonable grounds. ### Is the return treated as an assessment? Only in one situation. Section 169(3) applies where all the income a person derives in a tax year is subject to final taxation. An assessment is then treated as made: the Commissioner "shall be taken to have made an assessment of income for that tax year" at the amounts in the return, and the return is taken as the assessment order. A software house that also earns income from Pakistani clients, taxed under the normal rules, is outside section 169(3) for that year. Neither section 169(3) nor section 177 says that a deemed assessment shields the person from audit. ### Which records must a software house keep? Section 174(1) requires every taxpayer to maintain in Pakistan the accounts, documents and records that are prescribed, unless the Commissioner authorises otherwise. Section 174(3) sets the period at six years after the end of the tax year, longer if proceedings are pending. Section 174(2) lets the Commissioner disallow or reduce a deduction the taxpayer cannot support with a receipt or other record. Rule 29(1) of the Income Tax Rules, 2002 applies to every taxpayer deriving income chargeable under the head "Income from Business". It requires proper books of account, documents and records of: - all sums received and spent, and what they were for; - all sales and purchases of goods, and all services provided and obtained; - all assets; - all liabilities. Rule 29(2) allows invoices generated by computerised accounting software. Rule 29(3) makes retained copies and electronic records part of the records. Rule 29(4) repeats the six-year period. **A point the law leaves open.** Section 169(2)(a) says final tax income is not chargeable "under any head of income". Rule 29 is written for income chargeable under the head "Income from Business". The rules do not say in terms how rule 29 applies to a company whose only income is final tax export income. Section 174(1), which applies to every taxpayer, is not limited in that way. ### Worked example (illustrative figures) Chenab Digital (Pvt) Ltd in Multan realizes Rs. 75,000,000 of software export proceeds and earns Rs. 6,000,000 from a Pakistani bank client in tax year 2027. Because part of its income is not final tax income, section 169(3) does not apply. In 2029 it receives a notice under section 177. | What the notice might ask for | Where the duty comes from | |---|---| | Foreign invoices and bank realization records for the Rs. 75,000,000 | Rule 29(1)(a) and (b): sums received, services provided | | Invoices to the Pakistani client for the Rs. 6,000,000 | Rule 29(1)(b) and (3) | | Payroll and contractor payment records | Rule 29(1)(a): sums expended | | Proof that withholding statements were filed | Section 154A(2)(b) | | Fixed asset and loan records | Rule 29(1)(c) and (d) | Tax year 2027 ends on 30 June 2027. Six years after that is 30 June 2033, the earliest date the records for that year may be discarded if no proceeding is pending. ### What if the records are not produced? Section 177(2AA) says that where records are not furnished, are incomplete, or defects are not explained, taxable income is taken as not correctly declared and is determined using sectoral benchmark ratios prescribed by the Board. Section 177(10) allows a best judgment assessment where required records are not produced. The section 182 Table adds penalties. Entry 7 sets Rs. 10,000 or five per cent of the amount of tax on the income, whichever is higher, for failing to maintain required records. Entry 8 sets Rs. 100,000, Rs. 200,000 and Rs. 300,000 for failing, without reasonable cause, to produce records on the first, second and third notice under section 177. ### Common mistakes - **Discarding records because the tax is final.** Section 174(3) sets six years regardless. - **Assuming the return is automatically an assessment.** Section 169(3) applies only if all income for the year is final tax income. - **Treating one audit as the last.** Section 177(7) allows further audits on reasonable grounds. ### What to check in the official text Read section 177(1), (2AA), (6), (6A), (7) and (10), section 174, section 169(2) and (3), section 154A(2) and (3), and rule 29 of the Income Tax Rules, 2002. Check entries 7 and 8 of the section 182 Table in the official PDF, because the Table's columns do not survive text extraction cleanly. Record-keeping duties under company law are outside this corpus. ### Frequently asked #### Does final tax on IT exports stop FBR from auditing the company? No. Section 177(1) lets the Commissioner call for records to audit the income tax affairs of a person, and it does not exclude final tax income. An audit can test whether the section 154A(2) conditions for final taxation were actually met. #### How long must a software house keep its records? Section 174(3) and rule 29(4) set six years after the end of the tax year. Where a proceeding is pending before any authority or court, the records are kept until it is finally decided. #### What is the penalty for not producing records in an audit? Entry 8 of the section 182 Table sets Rs. 100,000 for failing without reasonable cause to produce records on the first notice under section 177, Rs. 200,000 on the second and Rs. 300,000 on the third. These figures were raised by the Finance Act, 2026. ### Citations - [Income Tax Ordinance, 2001, section 177 (Audit)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#177-audit), as amended to 2026-06-30: "for conducting audit of the income tax affairs of the person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 174 (Records)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#174-records), as amended to 2026-06-30: "every taxpayer shall maintain in Pakistan such accounts, documents and records as may be prescribed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "the Commissioner shall be taken to have made an assessment of income for that tax year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "withholding tax statements for the relevant tax year have been filed if required under the Ordinance;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 29 (Books of account, documents and records to be maintained)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#29-books-of-account-documents-and-records-to-be-maintained), as amended to 2023-11-24: "shall maintain proper books of account, documents and records with respect to-" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Ordinance, 2001, section 182 (Offences and penalties)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182-offences-and-penalties), as amended to 2026-06-30: "in addition to and not in derogation of any punishment to which he may be liable under this Ordinance or any other law" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What conditions must a software house meet to keep IT export income under the final tax regime, and does it still have to file returns? Source: https://qanoondigest.com/faq/software-houses/conditions-for-it-export-final-tax-regime Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 154A(2) lists the conditions: the return has been filed, withholding tax statements have been filed if required, sales tax returns have been filed if required, and no foreign tax credit is claimed. The sales tax condition does not apply to a PSEB-registered IT exporter. Section 114 separately requires every company to file a return. **Applies to:** Software houses and IT companies in Pakistan whose foreign export proceeds are taxed by bank deduction under section 154A and which want that tax treated as final. Final taxation of IT export income is not automatic. The bank deducts the tax either way, but whether that deduction closes the matter depends on what the software house itself has filed. The same filings are also separate legal obligations, so a company under the final tax regime is not excused from compliance. ### What does the law say? Section 154A(2) says the tax deducted "shall be a final tax on the income arising from the transactions referred to in this section, upon fulfilment of the following conditions": | Clause | Condition | Who it applies to | |---|---|---| | (a) | Return has been filed | Everyone | | (b) | Withholding tax statements for the relevant tax year have been filed, if required under the Ordinance | Everyone required to file them | | (c) | Sales tax returns under federal or provincial laws have been filed, if required under the law | Not an exporter under section 154A(1)(a), that is a PSEB-registered and certified software, IT or IT-enabled exporter | | (d) | No credit for foreign taxes paid shall be allowed | Everyone under final taxation | Section 154A(3) says sub-section (2) does not apply to a person who does not fulfil these conditions or who opts not to be subject to final taxation. ### Does the company still have to file a return? Yes, on two separate grounds in section 114(1): - clause (a): "every company"; - clause (ae): every person whose income for the year is subject to final taxation under any provision of the Ordinance. Section 118(2)(a) sets the due date for a company whose tax year ends between 1 January and 30 June: on or before 31 December following the end of the tax year. For a company on the normal tax year ending 30 June 2027 (tax year 2027), that is 31 December 2027. ### Which withholding statements are involved? A software house usually deducts tax from others: from staff salaries, from payments to local vendors and freelancers, from rent. Section 165(1) requires every person deducting tax under Division III of Part V of Chapter X to furnish quarterly statements, and its proviso says the statement must be filed "even where no withholding tax is collected or deducted during the period". Section 165(2) sets the due dates: | Quarter ending | Statement due | |---|---| | 30 September | 20 October | | 31 December | 20 January | | 31 March | 20 April | | 30 June | 20 July | Section 165(6) adds an annual statement for tax deducted from salaries, and section 165(7) an annual statement within thirty days of the end of the tax year. Section 165(8) requires a reconciliation statement by the return due date. ### How does it work in practice? When the company files its return for the year, it has either met the section 154A(2) conditions or it has not. If it has, and it does not opt out, section 169(2)(a) keeps the export income out of taxable income and the bank's deduction is the tax on it. If a condition is missing, section 154A(3) takes the income out of the final tax regime, and it is taxed under the normal rules. ### Worked example (illustrative figures) Chenab Digital (Pvt) Ltd, a PSEB-registered software house in Multan, realises export proceeds of Rs. 24,000,000 in tax year 2027. The bank deducts Rs. 24,000,000 x 0.25% = Rs. 60,000. The company employs 15 developers and deducts tax from their salaries. 1. Return for tax year 2027 filed by 31 December 2027: condition (a) met. 2. Four quarterly withholding statements filed, and the annual statements: condition (b) met. 3. Sales tax returns: condition (c) does not apply, because the company is an exporter under section 154A(1)(a). 4. No credit claimed for foreign tax: condition (d) met. 5. Result: the Rs. 60,000 is a final tax on the Rs. 24,000,000 of export income. Now suppose the company had skipped the quarterly statements because it believed its final tax status excused them. Condition (b) would not be met, and section 154A(3) would disapply final taxation for that year. ### What if the company is not registered with PSEB? The proviso to clause (c) does not help it. If a sales tax return is required of it under federal or provincial law, that return must also be filed. Provincial sales tax on services and its return requirements are outside this corpus. ### What if a statement or return is filed late? Section 154A(2) says the return and statements must "have been filed". It does not say by what date for this purpose, or how late filing affects final-tax status. The law is silent, and this page does not resolve it. ### Common mistakes - **Believing final tax means no return.** Section 114(1)(a) and (ae) both require one. - **Skipping nil withholding statements.** The proviso to section 165(1) requires a statement even where nothing was deducted. - **Claiming foreign tax credit alongside final taxation.** Clause (d) of section 154A(2) rules it out. ### What to check in the official text Read section 154A(2) and (3), section 114(1), section 118(2) and section 165 in full. The prescribed forms and e-filing steps for returns and statements are not in this corpus. ### Frequently asked #### Does a software house under the final tax regime still have to file an income tax return? Yes. Section 114(1)(a) requires every company to file a return, and clause (ae) separately covers every person whose income is subject to final taxation. Filing the return is also the first condition in section 154A(2). #### Which withholding statements count for the section 154A condition? Section 154A(2)(b) refers to withholding tax statements for the relevant tax year filed if required under the Ordinance. Section 165 requires quarterly statements from every person deducting tax under Division III of Part V of Chapter X, even where nothing was deducted in the period, plus annual statements. #### Do PSEB-registered IT exporters need to file sales tax returns to keep final taxation? Not for this purpose. The proviso to section 154A(2)(c) says the sales tax return condition does not apply to an exporter mentioned in clause (a) of sub-section (1), which covers software, IT and IT-enabled exporters registered with and certified by PSEB. ### Citations - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "Provided that this condition shall not apply in case of an exporter mentioned in clause (a) of sub-section (1) of this section." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "every person whose income for the year is subject to final taxation under any provision of this Ordinance;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 165 (Statements)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#165-statements), as amended to 2026-06-30: "shall be required to file withholding statement even where no withholding tax is collected or deducted during the period" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 118 (Method of furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#118-method-of-furnishing-returns-and-other-documents), as amended to 2026-06-30: "on or before the thirty-first day of December next following the end of the tax year to which the return relates" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "(a) the income shall not be chargeable to tax under any head of income in computing the taxable income of the person;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Does minimum tax on turnover under section 113 apply to a software house? Source: https://qanoondigest.com/faq/software-houses/minimum-tax-section-113-software-house Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 113 applies to every resident company, including a software house. If tax payable is below the Division IX percentage of turnover, 1.25% for businesses not listed separately, that amount is payable instead. Export receipts taxed as final under section 154A are left out of turnover, and their final tax does not count as tax paid. **Applies to:** Software houses and IT companies in Pakistan, and individuals or associations of persons running one with turnover of Rs. 100 million or more, for tax year 2027. ### What does section 113 say? Section 113(1) opens: "This section shall apply to a resident company". It also covers a permanent establishment of a non-resident company, and individuals and associations of persons with turnover of Rs. 100 million or more in tax year 2017 or any later year. Nothing in the section treats IT businesses differently. A software house registered as a company in Pakistan is inside section 113 from its first tax year. The section bites when, because of a loss, a brought forward loss, an exemption, credits or rebates, or allowances and deductions (including depreciation), the tax payable or paid for the year is less than the percentage in Division IX of Part I of the First Schedule applied to "turnover from all sources". In that case section 113(2) treats turnover as income and the person pays minimum tax at the Division IX rate instead of the actual tax. ### What rate applies to a software house? Division IX sets rates by sector: 0.75% for the two named gas companies and a few other listed cases, 0.5% for oil refineries, motorcycle dealers and oil marketing companies, 0.25% for listed trades such as rice mills, flour mills and e-commerce supplies, and **1.25% "In all other cases"**. Software development and IT services are not named in any row, so the 1.25% row is the one that fits a software house for tax year 2027. ### Why is export income left out? Two parts of section 113 keep final-tax income out of the calculation. - **Turnover.** Section 113(3)(b) defines turnover from services as "the gross fees for the rendering of services", "except covered by final discharge of tax liability for which tax is separately paid or payable". Export proceeds on which section 154A tax is final under section 154A(2) are covered by that exception. - **Tax payable.** The Explanation to section 113(1) says "tax payable or paid" does not include "tax already paid or payable in respect of deemed income which is assessed as final discharge of the tax liability under section 169", or tax under section 4B or 4C. This fits section 169(2)(a): income under a final tax "shall not be chargeable to tax under any head of income in computing the taxable income of the person". In practice, section 113 looks only at the software house's local business: local turnover against the tax computed on local taxable income. ### How does section 153 fit in? Local clients who are prescribed persons deduct tax under section 153(1)(b) when they pay for services. Section 153(3) says tax deductible under sub-section (1) on the income of a resident person "shall be minimum tax", and its Explanation says that income "means the amount on which tax is deductible". The exceptions in the proviso cover goods sold by manufacturers or listed companies and contracts of listed companies, not services. So for a software house's local services there are two floors: the section 153 deduction on each payment, and section 113 on total local turnover. The Ordinance does not set out, in section 113 or section 153, how these two minimum taxes are combined. The Explanation to section 113(1) excludes only final taxes and tax under sections 4B and 4C from "tax payable or paid", and says nothing specific about section 153 minimum tax. This page does not resolve that point. ### Worked example (illustrative figures) **A software company in Karachi**, PSEB-registered, for tax year 2027: - Export proceeds: Rs. 200,000,000, taxed as final under section 154A at 0.25% = Rs. 500,000. - Local service receipts: Rs. 60,000,000. - Taxable income from local business after apportioned expenses and depreciation: Rs. 2,000,000. 1. Normal tax on local taxable income at 29% (Division II, "any other company"): Rs. 2,000,000 x 29% = Rs. 580,000. 2. Turnover for section 113 leaves out the final-tax export proceeds: Rs. 60,000,000. 3. Minimum tax: Rs. 60,000,000 x 1.25% = Rs. 750,000. 4. The Rs. 500,000 export tax is excluded from "tax payable or paid" by the Explanation. 5. Rs. 580,000 is less than Rs. 750,000, so section 113 applies and the company pays Rs. 750,000 on its local business. 6. The excess of Rs. 170,000 (Rs. 750,000 minus Rs. 580,000) is carried forward under section 113(2)(c) for up to two tax years. The section 153 point above still applies: if local clients deducted tax at 4% on the Rs. 60,000,000, that would be Rs. 2,400,000 of minimum tax under section 153(3), and the law does not spell out how that interacts with this calculation. ### What if ...? **The company opts out of final taxation on exports.** Section 154A(3) lets a person opt out each year when filing the return. The export proceeds are then no longer "covered by final discharge of tax liability", so they would fall within section 113 turnover. **The business is run by an individual or AOP.** Section 113 applies only if turnover is Rs. 100 million or more in tax year 2017 or any later year. **The company is a certified startup.** Section 65F(1)(b) gives a 100% credit on tax payable "including minimum" tax, for the certification year and two following years, subject to section 65F(2). ### Common mistakes - **Counting export proceeds in turnover** when the section 154A tax on them is final. - **Counting the export tax as tax paid** when comparing with minimum tax. The Explanation to section 113(1) excludes it. - **Assuming an IT exemption from section 113.** The footnotes show an old clause (22) of Part IV of the Second Schedule that switched off section 113 for clause (133) exporters; it was omitted by the Finance Act, 2005. ### What to check in the official text Read section 113(1) to (3) and the Division IX table in the Ordinance amended to 30 June 2026, together with sections 153(3), 154A(2) and 169(2). The carry-forward period in section 113(2)(c) has been changed several times; the footnotes record five, then three, then two years. ### Frequently asked #### What minimum tax rate applies to a software house for tax year 2027? The Division IX table lists named sectors such as oil refineries, rice mills and motorcycle dealers. Software and IT services are not among them, so the row 'In all other cases' applies, which is 1.25% of turnover. #### Are export proceeds part of turnover for section 113? Not where they are covered by final discharge of tax liability. Section 113(3)(b) defines turnover from services as gross fees 'except covered by final discharge of tax liability for which tax is separately paid or payable'. Export proceeds taxed as final under section 154A(2) fall within that exclusion. #### What happens to minimum tax paid above the normal tax? Section 113(2)(c) carries the excess forward for adjustment against tax payable under Division II of Part I of the First Schedule. As amended to 30 June 2026, it can be carried forward for two tax years immediately after the year it was paid. ### Citations - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "tax already paid or payable in respect of deemed income which is assessed as final discharge of the tax liability under section 169" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IX (Minimum tax under section 113), S. No. 4](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "the income shall not be chargeable to tax under any head of income in computing the taxable income of the person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "it is explained that the income of resident person referred to in sub-section (3) means the amount on which tax is deductible under sub-section (1) or" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "exports of computer software or IT services or IT enabled services" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Why is withholding on our IT services doubled when our company is not on the Active Taxpayers List? Source: https://qanoondigest.com/faq/software-houses/higher-withholding-not-on-active-taxpayers-list Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Through section 100BA, rule 1 of the Tenth Schedule increases a withholding rate by one hundred percent for a person not on the Active Taxpayers List. Section 153 is not excluded, so 4% on IT services becomes 8%. Bank deductions under section 154A are excluded. The extra tax is adjustable if the return is filed in time. **Applies to:** Software houses and IT companies not appearing on the Active Taxpayers List, including new companies and late filers, that are paid by local clients. The doubling comes from the Tenth Schedule to the Income Tax Ordinance. Section 100BA says that deduction of tax from a person not appearing on the active taxpayers' list is determined under the Tenth Schedule, and rule 1 of that Schedule raises the rate by one hundred percent. On IT services in tax year 2027, a client deducts 8% instead of 4%. ### What does the law say? Section 100BA(1) says the collection or deduction of advance income tax, and the computation of income and tax, for a person not appearing on the active taxpayers' list "shall be determined in accordance with the rules in the Tenth Schedule". Section 100BA(2) gives the Tenth Schedule effect notwithstanding anything to the contrary in the Ordinance. Rule 1 of the Tenth Schedule reads, in part: where tax is to be deducted or collected under any provision of the Ordinance from persons not appearing in the active taxpayers' list, the rate "shall be increased by hundred percent of the rate specified in this Ordinance". The provisos set different figures for certain advance taxes on property transactions and on sales to distributors and retailers. None of them concerns section 153. Rule 10 lists sections to which the Schedule does not apply. The list includes tax deducted from salary, some payments to non-residents, tax on exports of goods and, in clause (ca), tax under section 154A on exports of services. Section 153 is not on the list, so rule 1 applies to deductions from payments for services. ### How does it work in practice? The prescribed person paying your invoice applies the Division III rate and then increases it under rule 1. For IT services and IT-enabled services as defined in section 2, the Division III proviso sets 4%, so the increased rate is 8%. For services in the 7% list, the increased rate is 14%. Export proceeds are treated differently. Section 154A requires the bank to deduct tax on proceeds from "exports of computer software or IT services or IT enabled services" and other exported services. Clause (ca) of rule 10 says the Tenth Schedule does not apply to tax collected or deducted under section 154A, so the export rate is not doubled. ### Worked example (illustrative figures) Cloudnine Labs (Pvt) Ltd in Islamabad was incorporated recently and did not appear on the active taxpayers' list when a Rawalpindi company paid it Rs. 1,500,000 for web development in tax year 2027. 1. Division III rate for IT services: 4%. 2. Increase under rule 1: 4% + (100% x 4%) = 8%. 3. Tax deducted: Rs. 1,500,000 x 8% = Rs. 120,000. 4. At the normal rate the deduction would have been Rs. 1,500,000 x 4% = Rs. 60,000. 5. Extra tax because of the list status: Rs. 120,000 - Rs. 60,000 = Rs. 60,000. If Cloudnine also realised Rs. 4,000,000 of export proceeds through a bank that month, the section 154A deduction on those proceeds would be at the normal rate, because rule 10(ca) excludes section 154A. ### What happens to the extra tax once we file? Rule 3 says that where tax was deducted under rule 1 and the person does not file a return by the due date (or as extended by the Board), the Commissioner makes a provisional assessment within sixty days, imputing income from the tax deducted. Rule 4(1) says that provisional assessment becomes final forty-five days after it is served. Rule 4(2) says the provisional assessment abates if the returns and wealth statement for that year and the preceding year are filed within forty-five days of receiving the order. Rule 4(3) then provides that where returns have been filed before a provisional assessment, or under rule 4(2), the tax deducted under rule 1 "shall be adjustable against the tax payable in the return filed for the relevant tax year". Section 169(4) says the same for final taxes: the final tax is the First Schedule rate, and the excess collected under the Tenth Schedule is adjustable if the return is filed before finalization of assessment under rule 4. Section 153(3) makes the deduction on services a minimum tax rather than a final tax, so for IT services the adjustment runs through rule 4(3). ### What if our company was not required to file a return? Rule 2 lets the withholding agent, if satisfied that the person was not required to file a return of income, give the Commissioner an electronic notice before deducting. The Commissioner has thirty days to accept the contention or direct deduction under rule 1. If no order is passed in thirty days, the contention is treated as accepted. ### What if we are on the list but filed late? Section 100BA(1) still refers to persons on the list who have not filed by the due date. The rule in the Tenth Schedule that set rates for them, rule 1A, was omitted by the Finance Act, 2026. The Schedule held in this corpus now contains no separate rate for that group. ### Common mistakes - **Assuming export proceeds are doubled too.** Rule 10(ca) excludes section 154A. - **Treating the extra tax as lost.** Rule 4(3) makes it adjustable when the return is filed in time. - **Ignoring the deadline.** A provisional assessment becomes final forty-five days after service if returns are not filed. ### What to check in the official text Read section 100BA, then rules 1, 2, 3, 4 and 10 of the Tenth Schedule in the official PDF. Read section 169(4) for final taxes. The rules that decide who appears on the active taxpayers' list are outside the scope of this page. ### Frequently asked #### How much is deducted from IT services invoices if we are not on the Active Taxpayers List? The normal section 153 rate for IT services and IT-enabled services in tax year 2027 is 4%. Rule 1 of the Tenth Schedule increases it by one hundred percent of that rate, giving 8% of the gross amount payable. #### Does the higher rate also apply to our IT export proceeds? No. Rule 10 of the Tenth Schedule says the Schedule does not apply to tax collected or deducted under section 154A, which is the section under which banks deduct tax on export proceeds of software and IT services. #### Do we get the extra tax back? Rule 4(3) of the Tenth Schedule says tax deducted under rule 1 is adjustable against the tax payable in the return for the relevant year, where the return is filed before a provisional assessment or within forty-five days of receiving one. The rules do not use the word refund. ### Citations - [Income Tax Ordinance, 2001, Tenth Schedule, rules 1, 2, 3, 4 and 10 (Rules for persons not appearing in the active taxpayers' list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "shall be determined in accordance with the rules in the Tenth Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "for the rendering of or providing of services" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "exports of computer software or IT services or IT enabled services" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "the excess tax collected under the Tenth Schedule specified for persons not appearing in the active taxpayers’ list shall be adjustable" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), paragraph (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How are employee stock options taxed for employees of a Pakistani tech company? Source: https://qanoondigest.com/faq/software-houses/esop-tax-tech-company-employees Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 14 of the Income Tax Ordinance, granting a share option is not taxed. When shares are issued, their fair market value less what the employee paid is salary for that tax year. Restricted shares are taxed when they become freely transferable or are sold. The amount joins the salary estimate on which the employer withholds under section 149. **Applies to:** Employees of Pakistani software houses, startups and tech companies who hold share options or receive shares under an employee share scheme, and the employers running payroll for them. Share options are a common part of pay at Pakistani tech startups, particularly those with foreign investors. The Income Tax Ordinance, 2001 deals with them in section 14, which treats the benefit as salary but fixes the timing at the issue of shares rather than at the grant of the option. ### What does the law say? Section 14 sets out when an employee share scheme produces salary income, and how much: | Event | Rule in section 14 | Salary amount | |---|---|---| | Option granted | Section 14(1): not chargeable to tax | Nil | | Shares issued, no restriction | Section 14(2) | Fair market value at the date of issue, less consideration paid for the shares and for the option | | Shares issued with a transfer restriction | Section 14(3) | Nothing until the earlier of a free right to transfer or disposal; then fair market value at that time, less consideration paid | | Option sold or otherwise disposed of | Section 14(5) | Consideration received less the employee's cost of the option | Section 12(2)(g) confirms that salary includes "any amount chargeable to tax as “Salary” under section 14". Section 14(4) sets the employee's cost of the shares as the consideration paid for the shares, plus any consideration paid for the option, plus the amount taxed as salary. ### How is fair market value measured? Section 68(1) defines fair market value as the price the asset would ordinarily fetch on sale in the open market at that time. Section 68(2) says it is determined "without regard to any restriction on transfer or to the fact that it is not otherwise convertible to cash". Under section 68(3), where the price is not ordinarily ascertainable, the Commissioner may determine it. Shares in an unlisted startup often have no open market price, so this matters. Section 14(3) and section 68(2) are not easy to read together. Section 14(3) delays the charge for restricted shares, while section 68(2) says value ignores restrictions on transfer. The Ordinance does not explain the interaction for any particular lock-in, and this page does not resolve it. ### How does the employer withhold? Section 149(1) requires the employer to deduct tax at each payment of salary, at the average rate on the employee's estimated salary income for the year. The section 14 amount is salary, so it goes into that estimate. Section 149(1) applies the average rate to "the amount paid". A share issue is not a cash payment, and section 149 does not describe how to withhold on it directly. What the section does allow is adjustment for "any excess deduction or deficiency arising out of any previous deduction", which lets the remaining cash salary payments in the year carry the extra tax. ### Worked example (illustrative figures) Sana is a product manager at an Islamabad SaaS startup, paid Rs. 250,000 a month in tax year 2027 with no other income. In January 2027 she exercises options over 5,000 shares at Rs. 50 a share. She paid nothing for the grant. The shares are issued with no restriction and the fair market value at issue is Rs. 250 a share. All amounts are invented. The rates are the clause (2) rates for tax year 2027. **Before the share issue:** 1. Estimated annual salary: Rs. 250,000 x 12 = Rs. 3,000,000. 2. Tax: Rs. 116,000 + 20% x (Rs. 3,000,000 - Rs. 2,200,000) = Rs. 276,000. 3. Monthly deduction: Rs. 276,000 / 12 = Rs. 23,000. July to December: 6 x Rs. 23,000 = Rs. 138,000. **After the share issue:** 1. Section 14(2) amount: (5,000 x Rs. 250) - (5,000 x Rs. 50) = Rs. 1,250,000 - Rs. 250,000 = Rs. 1,000,000. 2. Revised estimated salary: Rs. 3,000,000 + Rs. 1,000,000 = Rs. 4,000,000. 3. Tax: Rs. 316,000 + 25% x (Rs. 4,000,000 - Rs. 3,200,000) = Rs. 316,000 + Rs. 200,000 = Rs. 516,000. 4. Still to deduct: Rs. 516,000 - Rs. 138,000 = Rs. 378,000. 5. Spread over January to June: Rs. 378,000 / 6 = Rs. 63,000 a month. 6. Sana's cost of the shares under section 14(4): Rs. 250,000 + Rs. 0 + Rs. 1,000,000 = Rs. 1,250,000. Even spreading is one way of making the section 149 adjustment. The section does not prescribe it. ### What if the shares are locked in? Take the same facts, but the shares cannot be transferred until a date in tax year 2029, when the fair market value is Rs. 300. Section 14(3) means nothing is taxed in tax year 2027. In tax year 2029 the salary amount is (5,000 x Rs. 300) - Rs. 250,000 = Rs. 1,250,000. If Sana sold the shares before the lock-in ended, the charge would arise at the sale. ### What if she sells the option instead? Suppose Sana sells her option back under the scheme for Rs. 400,000, having paid nothing for it. Section 14(5) gives a gain of Rs. 400,000 - Rs. 0 = Rs. 400,000, which is salary for that tax year. ### Common mistakes - **Taxing at grant.** Section 14(1) expressly excludes the option's value at grant. - **Ignoring the exercise price.** Section 14(2) deducts what the employee paid, including anything paid for the option. - **Forgetting the cost base.** The salary amount is added to the cost of the shares under section 14(4), which reduces any later gain on sale. - **Leaving payroll unchanged.** The section 14 amount raises the employee's estimated salary and average rate under section 149. ### What to check in the official text Read sections 12, 14, 68 and 149, and the clause (2) table of Division I of Part I of the First Schedule in the official PDF. Tax on a later sale of the shares falls under capital gains provisions not covered on this page, and any valuation determined by the Commissioner under section 68(3) is case specific. ### Frequently asked #### Is anything taxed when options vest but are not exercised? Section 14 does not use the word vesting. Section 14(1) says the value of an option granted to an employee is not chargeable to tax, and the charge under section 14(2) arises when shares are issued, including on exercise. Holding an unexercised option does not trigger salary tax under section 14. #### What if the employee sells the option instead of exercising it? Section 14(5) treats the gain on disposing of the option as salary for that year: the consideration received less the employee's cost of the option. #### Do options over shares of a foreign parent company count? Section 14(6) defines an employee share scheme as an arrangement under which a company may issue its shares to an employee of the company or of an associated company, including through a trustee. The definition does not restrict the issuing company to a Pakistani company. ### Citations - [Income Tax Ordinance, 2001, section 14 (Employee share schemes)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#14-employee-share-schemes), as amended to 2026-06-30: "The value of a right or option to acquire shares under an employee share scheme granted to an employee shall not be chargeable to tax" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "any amount chargeable to tax as “Salary” under section 14" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 68 (Fair market value)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#68-fair-market-value), as amended to 2026-06-30: "without regard to any restriction on transfer or to the fact that it is not otherwise convertible to cash" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "any excess deduction or deficiency arising out of any previous deduction" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2) (salary exceeding seventy-five per cent of taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can a software house get an exemption or lower rate certificate so local clients do not deduct section 153 tax? Source: https://qanoondigest.com/faq/software-houses/exemption-certificate-section-153-software Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Sometimes. Section 159 lets the Commissioner issue an exemption or lower rate certificate where the amount is exempt, taxed at a lower rate, or covered by a 100% tax credit, and a company's certificate is deemed issued after fifteen days. Section 153(4) is narrower: it covers only deductions that are not minimum tax, and deductions on services are minimum tax. **Applies to:** Software houses and IT companies, including exporters with some local clients and PSEB-certified startups, whose local receipts suffer section 153 deduction. A software house can obtain a certificate only where the Ordinance itself treats the income as exempt, lower-taxed or fully credited. Section 159 is the general route and has a fifteen-day deemed issue rule for companies. Section 153(4) is a second route, but its wording limits it to deductions that are not minimum tax, which rules out ordinary IT services receipts. ### What does section 159 say? Section 159(1) applies where the Commissioner is satisfied that an amount to which Division II or III of "this Part" (the Part of Chapter X that contains the withholding sections) applies is: - (a) exempt from tax under the Ordinance; - (b) subject to tax at a rate lower than that specified in the First Schedule; or - (c) subject to hundred percent tax credit under the Ordinance. Section 153 sits in Division III, so a client's deduction from a payment for services is within reach. On a written application in the prescribed form, the Commissioner "shall" issue an exemption or lower rate certificate. Three provisos apply to companies: 1. The Commissioner shall issue the certificate within fifteen days of the company filing its application. 2. If that does not happen, the certificate is deemed issued on expiry of the fifteen days and is "automatically processed and issued by Iris". 3. The Commissioner may modify or cancel an Iris certificate, recording reasons in writing, after giving an opportunity of being heard. Section 159(2) is the instruction to the client. A person required to deduct under Division III must deduct the full amount "unless there is in force a certificate issued under sub-section (1)", in which case it must comply with the certificate. ### Why does section 153(4) rarely help a software house? Section 153(4) lets the Commissioner, on the recipient's application, allow a payment after deduction at a reduced rate, but only "in cases where tax deductible under sub-section (1) is not minimum". The reduction "shall not exceed eighty percent of the rate specified in the said Division", except for public limited companies, where the Commissioner may allow payment without deduction. For a company that has discharged its advance tax liability, the certificate is due within fifteen days and is deemed issued by Iris afterwards. Section 153(3) says tax deductible under sub-section (1) is minimum tax. Its provisos take out goods sold by manufacturers or listed companies and contracts executed by listed companies. Nothing takes out services. On that wording, IT services receipts fall outside section 153(4). The text does not say clearly whether the public limited company exception escapes the "not minimum" condition, and this page does not resolve that. ### Which software houses have a clear ground under section 159? **PSEB-certified startups.** Section 65F(1)(b) gives a startup, as defined in clause (62A) of section 2, a tax credit of one hundred per cent of tax payable for the tax year in which it is certified by the Pakistan Software Export Board and the next two tax years. That matches ground (c) of section 159(1). Separately, clause (43F) of Part IV of the Second Schedule says section 153 "shall not apply in the case of a start-up, being recipient of payment". The Ordinance does not say how a paying client is to verify startup status. A certificate is one documented way to show it. **Exporters with local clients.** The Ordinance in this corpus does not give local IT services receipts of an exporter any exemption or lower rate. Being an exporter is not, by itself, one of the three grounds in section 159(1). The corpus contains no provision saying otherwise. **Everyone else.** For an ordinary software house, local receipts bear the Division III rate, 4% for IT services and IT enabled services in tax year 2027. The Ordinance does not list what would make that income "subject to tax at a rate lower" than the First Schedule. Without such a ground, section 159 gives the Commissioner nothing to certify. ### Worked example (illustrative figures) Qalam Labs (Pvt) Ltd in Islamabad was certified as a startup by PSEB in tax year 2027 and files a section 159 application on 4 August 2026. 1. Fifteen days from filing end on 19 August 2026. 2. No decision issues by then, so the certificate is deemed issued and Iris issues it. 3. On 25 August a Rawalpindi client pays Qalam Rs. 1,800,000 for a web portal. 4. Without a certificate, the client would deduct Rs. 1,800,000 x 4% = Rs. 72,000. 5. With the certificate in force, section 159(2) requires the client to follow it, and Qalam receives the full Rs. 1,800,000. ### What if the Commissioner later cancels the certificate? The third proviso to section 159(1) allows cancellation or modification after a hearing. The section does not say what happens to payments made while the certificate was in force. ### Common mistakes - **Expecting a client to stop deducting on a letter or email.** Section 159(2) requires full deduction unless a certificate is in force. - **Using section 153(4) for services.** It is limited to deductions that are not minimum tax. - **Assuming exporters qualify automatically.** None of the section 159(1) grounds refers to export status. - **Assuming the fifteen-day rule covers everyone.** The deemed issue provisos refer to a company. ### What to check in the official text Read section 159(1) and (2), section 153(3) and (4), section 65F, clause (62A) of section 2 and clause (43F) of Part IV of the Second Schedule in the Ordinance amended to 30 June 2026. The prescribed application form and Iris filing steps are not part of this corpus. ### Frequently asked #### On what grounds can the Commissioner issue a section 159 certificate? Section 159(1) requires the Commissioner to be satisfied that the amount is exempt from tax under the Ordinance, is subject to tax at a rate lower than the First Schedule rate, or is subject to a hundred percent tax credit under the Ordinance. The application is made in writing in the prescribed form. #### What if the Commissioner does not decide our company's application within fifteen days? The second proviso to section 159(1) says the Commissioner is deemed to have issued the certificate on expiry of fifteen days from filing, and Iris processes and issues it automatically. The third proviso lets the Commissioner modify or cancel it later, with written reasons and after a hearing. #### Does a section 153(4) reduced rate certificate work for IT services receipts? On its wording, section 153(4) applies only where the tax deductible under section 153(1) is not minimum tax. Section 153(3) makes that tax minimum tax, and its provisos do not take services out, so the sub-section does not appear to reach payments for IT services. ### Citations - [Income Tax Ordinance, 2001, section 159 (Exemption or lower rate certificate)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#159-exemption-or-lower-rate-certificate), as amended to 2026-06-30: "shall be deemed to have issued the exemption certificate upon the expiry of fifteen days from filing of application by the aforesaid company" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "such reduction shall not exceed eighty percent of the rate specified in the said Division" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), paragraph (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 65F (Tax credit for certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#65f-tax-credit-for-certain-persons), as amended to 2026-06-30: "a startup as defined in clause (62A) of section 2 for the tax year in which the startup is certified by the Pakistan Software Export Board" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV (Exemption from specific provisions), clause (43F)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "is engaged in or intends to offer technology driven products or services to any sector of the economy" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How are employee stock options taxed for employees of Pakistani tech companies, and must the company withhold tax? Source: https://qanoondigest.com/faq/software-houses/esop-tax-for-tech-company-employees Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 14 of the Income Tax Ordinance does not tax a share option at grant. When shares are issued, their fair market value less what the employee paid is salary for that year, and restricted shares are taxed when they become freely transferable or are sold. That amount forms part of the employer's section 149 salary estimate. **Applies to:** Employees of Pakistani startups, software houses and tech companies who receive share options or shares under an employee share scheme, and the employers that run them. Stock options are common pay in Pakistani tech startups, and the Income Tax Ordinance, 2001 has a dedicated section for them. Section 14 separates three moments: the grant of the option, the issue of shares, and any disposal of the option itself. Only the second and third create salary income. ### What does the law say? **At grant.** Section 14(1) says the value of a right or option to acquire shares under an employee share scheme "granted to an employee shall not be chargeable to tax". **At issue of shares.** Section 14(2) says that where an employee is issued shares under the scheme in a tax year, including by exercising an option, the employee's salary for that year includes "the fair market value of the shares determined at the date of issue, as reduced by any consideration given by the employee for the shares", including anything paid for the grant of the option. **Restricted shares.** Section 14(3) applies where issued shares are subject to a restriction on transfer. No amount is taxed as salary until the earlier of the time the employee has a free right to transfer the shares, or the time the employee disposes of them. The amount taxed is the fair market value at that time, less the consideration the employee gave. **Selling the option instead.** Section 14(5) says that if the employee disposes of the option itself, the gain (consideration received less the employee's cost of the option) is salary for that year. **Cost for later sale.** Section 14(4) sets the employee's cost of the shares as the consideration paid for the shares, plus any consideration paid for the option, plus the amount taxed as salary under sub-section (2) or (3). Section 12(2)(b) confirms that salary includes "any perquisite, whether convertible to money or not". ### How is fair market value set? Section 68(1) defines fair market value as the price the asset would ordinarily fetch on sale in the open market at that time. Section 68(2) says it is determined "without regard to any restriction on transfer". Section 68(3) lets the Commissioner determine the price where it is not ordinarily ascertainable, which matters for an unlisted startup whose shares have no market. Section 14(3) and section 68(2) read differently on restrictions. Section 14(3) defers the timing of the charge for restricted shares, while section 68(2) sets how value is measured once it is measured. The Ordinance does not spell out how the two interact for a particular lock-in, and this page does not resolve that. ### Must the employer withhold tax? Section 149(1) requires the person paying salary to deduct tax at the employee's average rate, computed on the employee's estimated income under the head "Salary" for the tax year. The amount taxed under section 14 is salary income, so it forms part of that estimate and raises the average rate. Section 149(1) applies that rate to "the amount paid". Shares issued under a scheme are not a cash payment, and section 149 does not say how an employer withholds on a share issue with no accompanying cash. The Ordinance is silent on that mechanism. Section 149(1) does allow the employer to adjust for a deficiency arising out of previous deductions, which is one way the text lets later cash payments carry a shortfall. ### Worked example (illustrative figures) Hamza is an engineer at a Karachi startup, paid Rs. 200,000 a month in cash. In tax year 2026 he was granted options over 10,000 shares at an exercise price of Rs. 20 each. He paid nothing for the grant. In tax year 2027 he exercises and the shares are issued, with no restriction on transfer. The fair market value at issue is Rs. 150 a share. 1. Tax at grant, tax year 2026: nil, under section 14(1). 2. Fair market value at issue: 10,000 x Rs. 150 = Rs. 1,500,000. 3. Consideration paid: 10,000 x Rs. 20 = Rs. 200,000. 4. Salary under section 14(2): Rs. 1,500,000 - Rs. 200,000 = Rs. 1,300,000. 5. Total estimated salary for tax year 2027: Rs. 2,400,000 + Rs. 1,300,000 = Rs. 3,700,000. 6. Tax under clause (2) of Division I: Rs. 316,000 + 25% x (Rs. 3,700,000 - Rs. 3,200,000) = Rs. 316,000 + Rs. 125,000 = Rs. 441,000. 7. Tax on cash salary alone would have been Rs. 116,000 + 20% x (Rs. 2,400,000 - Rs. 2,200,000) = Rs. 156,000. 8. Extra tax from the share issue: Rs. 441,000 - Rs. 156,000 = Rs. 285,000. 9. Hamza's cost of the shares under section 14(4): Rs. 200,000 + Rs. 0 + Rs. 1,300,000 = Rs. 1,500,000. ### What if the shares had a two-year lock-in? Using the same figures, suppose the shares cannot be transferred until a date in tax year 2029, when the fair market value is Rs. 180. Nothing is taxed at issue. In tax year 2029 the salary amount is (10,000 x Rs. 180) - Rs. 200,000 = Rs. 1,600,000. If Hamza sold the shares before the lock-in ended, the charge would arise at the sale instead. ### Common mistakes - **Taxing at vesting or grant.** Section 14 has no charge at grant. The charge is at issue, or later for restricted shares. - **Ignoring the exercise price.** Section 14(2) reduces fair market value by what the employee paid. - **Forgetting the cost base.** The amount taxed as salary is added to the cost of the shares under section 14(4), which matters when the shares are sold. ### What to check in the official text Read sections 12, 14, 68 and 149, and the clause (2) table of Division I of Part I of the First Schedule in the official PDF. Tax on a later sale of the shares is a capital gains question under other provisions not covered on this page. ### Frequently asked #### Is an employee taxed when the company grants stock options? No. Section 14(1) says the value of a right or option to acquire shares under an employee share scheme granted to an employee shall not be chargeable to tax. The charge arises later, when shares are issued or the option is disposed of. #### What if the shares are locked in after exercise? Section 14(3) defers the charge where issued shares are subject to a restriction on transfer. Nothing is taxed until the earlier of the time the employee has a free right to transfer the shares or the time the employee disposes of them, and the value is measured at that point. #### Does this apply to options in a foreign parent company? Section 14(6) defines an employee share scheme as an arrangement under which a company may issue its shares to an employee of the company or of an associated company, including through a trustee. The definition does not limit the issuing company to a Pakistani company. ### Citations - [Income Tax Ordinance, 2001, section 14 (Employee share schemes)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#14-employee-share-schemes), as amended to 2026-06-30: "The value of a right or option to acquire shares under an employee share scheme granted to an employee shall not be chargeable to tax" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "any perquisite, whether convertible to money or not" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 68 (Fair market value)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#68-fair-market-value), as amended to 2026-06-30: "shall be determined without regard to any restriction on transfer" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2) (salary exceeding seventy-five per cent of taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is export of IT services from Islamabad zero-rated for ICT sales tax, and can an IT exporter reclaim input tax? Source: https://qanoondigest.com/faq/software-houses/ict-sales-tax-on-it-exports-and-refunds Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 3(1A) of the Islamabad Capital Territory (Tax on Services) Ordinance charges the export of services at zero per cent, so no ICT sales tax is due on exported IT services. The Ordinance does not expressly apply the Sales Tax Act refund section to exported services, so an input tax refund is not clearly provided for. **Applies to:** Islamabad software houses and IT companies that export IT or IT-enabled services to foreign clients and pay sales tax on their own purchases. Exported services are zero-rated under the ICT Ordinance, so an Islamabad software house does not add sales tax to invoices for foreign clients. The harder question is what happens to the sales tax it pays on its own purchases. The Sales Tax Act has a refund mechanism for exporters, but it is written for goods, and the ICT Ordinance does not say in terms that it applies to exported services. ### What does the law say? Section 3(1A) of the Islamabad Capital Territory (Tax on Services) Ordinance, 2001 reads: "Notwithstanding the provision of sub-section (1), the export of services shall be charged at the rate of zero per cent." Sub-section (1) is the provision that charges Table-1 services, including serial 11 IT services and IT-enabled services at fifteen percent. Sub-section (1A) overrides it for exports. In the Sales Tax Act, 1990, the zero-rating provision is section 4. It charges "goods exported, or the goods specified in the Fifth Schedule" and some other goods at zero per cent. Section 4 refers to goods. It does not mention services. Section 10(1) of the Sales Tax Act deals with refunds. If a registered person's input tax on taxable purchases in a tax period "exceeds the output tax on account of zero rated local supplies or export made during that tax period", the excess "shall be refunded to the registered person not later than forty-five days of filing of refund claim", in the manner and subject to conditions the Board specifies by notification. ### How does it work in practice? The zero rate itself is clear. For an IT service exported from Islamabad, the ICT sales tax on the invoice is zero. The refund position is less clear, and this page does not resolve it. Three points in the text pull in different directions: 1. **What the Ordinance expressly borrows.** Section 3(2A) of the ICT Ordinance lists specific Sales Tax Act provisions that apply to services mutatis mutandis: some sub-sections on the scope of tax, two Fifth Schedule entries read with section 4, some sub-sections on exemption, and three Sixth Schedule entries. Section 10 is not on that list. 2. **What the Ordinance borrows in general terms.** Section 3(3) applies the Sales Tax Act to collection and payment of the ICT tax "in so far as they relate to" payment, registration, records and audit, enforcement, penalties "and all other allied and ancillary matters". The Ordinance does not say whether refunds fall within that phrase. 3. **Registration for refund.** Section 14(1)(d) of the Sales Tax Act requires registration of "an exporter who intends to obtain sales tax refund against his zero-rated supplies". It does not say whether that includes a zero-rated supply of services under the ICT Ordinance. The second proviso to section 10(1) also lets the Board direct that refunds against exports be paid at fixed rates and in a manner notified by it. No such notification is held in this corpus. ### Worked example (illustrative figures) Margalla Stack (Pvt) Ltd, an Islamabad IT company, has the following in one tax period: - Services exported to a client in Toronto: Rs. 9,000,000. - IT services to a bank in Islamabad under Table-1 serial 11: Rs. 1,000,000. - Sales tax paid on purchases of equipment and services (input tax): Rs. 220,000. **Step 1: ICT sales tax on each supply.** - Export: Rs. 9,000,000 x 0% = Rs. 0. - Local: Rs. 1,000,000 x 15% = Rs. 150,000. - Total output tax: Rs. 150,000. **Step 2: compare input tax with output tax.** - Input tax Rs. 220,000 - output tax Rs. 150,000 = Rs. 70,000 excess. **Step 3: what happens to the Rs. 70,000.** If section 10(1) of the Sales Tax Act were applied to this exporter, the excess arising "on account of" the export would be refundable within forty-five days of a refund claim, subject to the Board's conditions. The Ordinance does not expressly say that section 10 applies to an exported service. The example therefore shows the arithmetic only. It is not a statement that a refund of Rs. 70,000 is payable. ### What if all our revenue is from exports? Then output tax is zero in every period and every rupee of input tax is excess. The question of whether section 10 reaches exported services becomes the whole question. The text held here does not answer it. ### What if we use the 5% Table-2 entry for local work? Serial 11 of Table-2 charges services by software or IT-based system development consultants at five percent "subject to the conditions that no input tax adjustment or refund shall be admissible". That condition sits on the Table-2 entry, and the Ordinance does not say how it interacts with exports made by the same business in the same period. ### Common mistakes - **Treating zero-rated as exempt.** Section 3(1A) charges exports at a rate of zero per cent. Section 3(4) separately allows the Board to list exempt services in a Negative List in Table-3. The two are different mechanisms. - **Assuming section 4 of the Sales Tax Act zero-rates services.** Section 4 speaks of goods. The zero rate for exported services comes from section 3(1A) of the ICT Ordinance. - **Assuming a refund route exists because one exists for goods.** For services under the ICT Ordinance, the refund route is not stated in terms. - **Forgetting provincial law.** An IT company outside Islamabad is subject to provincial sales tax on services, which is outside this corpus. ### What to check in the official text Read section 3 of the ICT Ordinance, especially sub-sections (1A), (2A) and (3), and the Table-1 entries in the official PDF. The edition held here is amended to 30 June 2025. Then read sections 4, 10 and 14 of the Sales Tax Act, 1990. Check for any Board notification under section 10 on refunds, or any rules on refunds for exporters of services; none is held in this corpus. ### Frequently asked #### Do we charge ICT sales tax on an invoice to a client in Dubai? Section 3(1A) of the ICT Ordinance says the export of services shall be charged at the rate of zero per cent, notwithstanding the Table-1 rates. The Ordinance does not itself define what counts as an export of services. #### Can we get a refund of sales tax we paid on laptops and office fit-out? The law does not answer this directly for services. Section 10 of the Sales Tax Act refunds excess input tax against zero-rated local supplies or exports, and section 4 zero-rates goods. The ICT Ordinance applies selected Sales Tax Act provisions, and section 10 is not among those it names. #### Does zero-rating for sales tax mean our export income is also free of income tax? No. The ICT Ordinance deals only with sales tax on services. Income tax on IT export proceeds is a separate charge under the Income Tax Ordinance, 2001. ### Citations - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, section 3 (Scope of tax)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30#3-scope-of-tax), as amended to 2025-06-30: "the export of services shall be charged at the rate of zero per cent" Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Sales Tax Act, 1990, section 4 (Zero rating)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#4-zero-rating), as amended to 2026-06-30: "goods exported, or the goods specified in the Fifth Schedule" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 10 (Refund of input tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#10-refund-of-input-tax), as amended to 2026-06-30: "the excess amount of input tax shall be refunded to the registered person not later than forty-five days of filing of refund claim" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "an exporter who intends to obtain sales tax refund against his zero-rated supplies" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, Schedule, Table-1, serial 11 (IT services and IT-enabled services), Fifteen percent](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf --- ## Must a software house in Islamabad charge ICT sales tax on IT services it provides to local clients? Source: https://qanoondigest.com/faq/software-houses/ict-sales-tax-it-services-islamabad Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, for services rendered or provided in the Islamabad Capital Territory. Section 3 of the ICT (Tax on Services) Ordinance, 2001 charges sales tax on taxable services at the Table-1 rate, and serial 11 of Table-1 lists IT services and IT-enabled services at fifteen percent. Exports of services are charged at zero per cent. **Applies to:** Software houses and IT companies rendering or providing services in the Islamabad Capital Territory to clients in Pakistan. A software house rendering IT services in Islamabad is within the Islamabad Capital Territory (Tax on Services) Ordinance, 2001. Section 3 charges sales tax on the value of taxable services rendered or provided in the Territory, and serial 11 of Table-1 of the Schedule puts IT services and IT-enabled services at fifteen percent. This page uses the Ordinance as amended to 30 June 2025, the latest edition held here. ### What does the law say? Section 3(1) says there shall be charged, levied and paid a tax known as sales tax, at the rates in column (4) of Table-1 of the Schedule, "of the value of the taxable services rendered or provided in the Islamabad Capital Territory". Its first proviso says services in Table-2 are charged at the rates, and under the conditions, set out in Table-2. Serial 11 of Table-1 reads "IT services and IT-enabled services", with the rate "Fifteen percent". Its explanation says: - "IT services" include but are not limited to software development, software maintenance, system integration, web design, web development, web hosting and network design; and - "IT enabled services" include but are not limited to inbound or outbound call centres, medical transcription, remote monitoring, graphics design, accounting services, human resources (HR) services, telemedicine centres, data entry operations, cloud computing services, data storage services, locally produced television programs and insurance claims processing. The entry was substituted by the Finance Act, 2023, according to the footnote. ### How is the tax administered? The Ordinance borrows the machinery of the Sales Tax Act, 1990. Section 2 gives undefined words the meaning they have in that Act. Section 3(2) says the tax is charged and levied as if it were a sales tax under that Act. Section 3(3) applies the Act's provisions, rules and notifications, mutatis mutandis, to: - manner, time and mode of payment; - registration and de-registration; - keeping of records and audit; - enforcement and adjudication; and - penalties and prosecution, and allied matters. A second proviso to section 3(1), added by the Finance Act, 2025, says a service provider in Table-1 or Table-2 shall integrate its business with the Board's computerized system for real-time reporting, from a date and in a manner the Board prescribes by general order. No such general order is held in this corpus. ### Is there a lower rate for some software work? Table-2 serial 11 covers "Services provided by software or IT-based system development consultants" at five percent, "subject to the conditions that no input tax adjustment or refund shall be admissible". The Ordinance does not say how to choose between Table-1 serial 11 and Table-2 serial 11 for a particular engagement. The related page on the reduced five percent rate looks at that entry. ### Worked example (illustrative figures) Margalla Code (Pvt) Ltd, in Islamabad's I-9 sector, builds a website for a Blue Area law firm for a fee of Rs. 800,000, and applies Table-1 serial 11. 1. ICT sales tax: Rs. 800,000 x 15% = Rs. 120,000. 2. Invoice total: Rs. 800,000 + Rs. 120,000 = Rs. 920,000. If the law firm is a prescribed person under section 153 of the Income Tax Ordinance, it also deducts income tax from the gross amount payable, "including sales tax, if any". At the 4% rate for IT services in tax year 2027: 3. Income tax deducted: Rs. 920,000 x 4% = Rs. 36,800. 4. Amount paid to Margalla Code: Rs. 920,000 - Rs. 36,800 = Rs. 883,200. The sales tax of Rs. 120,000 is then paid over under the Sales Tax Act machinery applied by section 3(3). Whether any part of it is withheld by the client under the Sales Tax Act's withholding provisions is not covered on this page. ### What if the client is outside Islamabad? Section 3(1) turns on services "rendered or provided in the Islamabad Capital Territory". The Ordinance does not define where a service delivered remotely is rendered. Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan each tax services under their own laws, which are outside this corpus. This page does not state their rates or rules. ### What if the service is exported? Section 3(1A) says, notwithstanding sub-section (1), "the export of services shall be charged at the rate of zero per cent". The related page on zero-rated IT exports covers this. ### Common mistakes - **Treating income tax withholding as the only tax on IT services.** The ICT Ordinance is a separate sales tax on services. - **Using a stale rate.** Serial 11 was substituted by the Finance Act, 2023, and the rate in the 30 June 2025 edition is fifteen percent. - **Applying the ICT Ordinance to services rendered in a province.** Its charge is limited to services rendered or provided in the Islamabad Capital Territory. ### What to check in the official text Read sections 2 and 3 and serial 11 of Table-1 and Table-2 of the Schedule in the ICT (Tax on Services) Ordinance, 2001 amended to 30 June 2025. Any amendment made by the Finance Act, 2026 to this Ordinance is not reflected in the edition held here. Check Table-3 for any Negative List notified by the Board under section 3(4), and the Sales Tax Act, 1990 for registration and return procedure. ### Frequently asked #### What is the ICT sales tax rate on IT services? Serial 11 of Table-1 of the Schedule to the ICT (Tax on Services) Ordinance, 2001 sets fifteen percent for IT services and IT-enabled services, in the edition amended to 30 June 2025. Section 3(1) charges the tax on the value of the taxable services. #### Does ICT sales tax apply to software we export to a foreign client? Section 3(1A) says that, notwithstanding sub-section (1), the export of services shall be charged at the rate of zero per cent. The Ordinance does not itself define an export of services. #### Our office is in Lahore but the client is in Islamabad. Does the ICT Ordinance apply? Section 3(1) charges tax on services rendered or provided in the Islamabad Capital Territory. The Ordinance does not spell out how to locate a service delivered from one place to a client in another, and Punjab's own services tax law is outside this corpus. ### Citations - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, section 3 (Scope of tax)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30#3-scope-of-tax), as amended to 2025-06-30: "of the value of the taxable services rendered or provided in the Islamabad Capital Territory" Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, Schedule, Table-1, serial 11 (IT services and IT-enabled services)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, Schedule, Table-2, serial 11 (Services provided by software or IT-based system development consultants)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, section 2 (Interpretation)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30#2-interpretation), as amended to 2025-06-30: "the words and expression used but not defined shall have the same meaning as in the Sales Tax Act, 1990" Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "deduct tax from the gross amount payable (including sales tax, if any) at the rate specified in Division III of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Must an Islamabad software house charge ICT sales tax on IT services to local clients, and is the rate 15% or 5%? Source: https://qanoondigest.com/faq/software-houses/ict-sales-tax-on-it-services-islamabad Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 3 of the Islamabad Capital Territory (Tax on Services) Ordinance charges sales tax on taxable services provided in Islamabad, and serial 11 of Table-1 taxes IT services and IT-enabled services at fifteen percent. Serial 11 of Table-2 sets five percent for software or IT-based system development consultants, with no input tax adjustment or refund. **Applies to:** Software houses and IT companies providing IT or IT-enabled services to clients inside the Islamabad Capital Territory. A software house that provides IT services to clients in Islamabad is inside the charge of the Islamabad Capital Territory (Tax on Services) Ordinance, 2001. The standard entry for IT work carries fifteen percent. A separate five percent entry exists for software or IT-based system development consultants, but it comes with a condition that no input tax can be adjusted or refunded. ### What does the law say? Section 3(1) of the Ordinance charges "a tax known as sales tax" at the rates in column (4) of Table-1 of the Schedule on "the value of the taxable services rendered or provided in the Islamabad Capital Territory". A proviso adds that services specified in Table-2 are charged at the rates and subject to the conditions set out in Table-2. The two entries that matter for IT companies are: | Table | Serial | Description as printed | Rate | |---|---|---|---| | Table-1 | 11 | IT services and IT-enabled services | Fifteen percent | | Table-2 | 11 | Services provided by software or IT-based system development consultants (heading 9815.6000) | Five percent, subject to the conditions that no input tax adjustment or refund shall be admissible | The explanation to Table-1 serial 11 says "IT services" include, but are not limited to, software development, software maintenance, system integration, web design, web development, web hosting and network design. "IT enabled services" include call centres, medical transcription, remote monitoring, graphics design, accounting services, HR services, telemedicine centres, data entry, cloud computing, data storage, locally produced television programs and insurance claims processing. ### How does it work in practice? Section 3(2) says the tax is charged "in the same manner and at the same time" as if it were sales tax under the Sales Tax Act, 1990. Section 3(3) then applies the Sales Tax Act, its rules and notifications to collection and payment of the ICT tax "in so far as they relate to" the manner, time and mode of payment, registration and de-registration, records and audit, enforcement, penalties and other allied matters. On registration, section 14(1) of the Sales Tax Act lists the persons who must register. Clause (f) covers "a person who is required, under any other Federal law or Provincial law, to be registered for the purpose of any duty or tax collected or paid as if it were a levy of sales tax". The ICT tax is charged in that way, so the registration rules of the Sales Tax Act are the ones the Ordinance points to. Section 14(2A) also lets the Commissioner compulsorily register a person who should be registered but has not applied. Section 2(20)(c) of the Sales Tax Act includes in "output tax" the sales tax levied on services rendered or provided under the ICT Ordinance. So the tax a software house charges its Islamabad clients is treated as its output tax for Sales Tax Act purposes. The second proviso to section 3(1), added by the Finance Act, 2025, also lets the Board require any service provider in Table-1 or Table-2 to integrate with the Board's computerised system for real-time reporting, from a date and in a manner the Board prescribes by general order. No such general order is held in this corpus. ### Worked example (illustrative figures) Blue Area Code Works (Pvt) Ltd, an Islamabad software house, bills a hospital in F-8 for a patient management system. The agreed value of the service is Rs. 2,400,000. **If the service falls under Table-1, serial 11:** 1. Tax: Rs. 2,400,000 x 15% = Rs. 360,000. 2. Amount invoiced to the hospital including tax: Rs. 2,400,000 + Rs. 360,000 = Rs. 2,760,000. 3. Table-1 does not attach a "no input tax" condition to this entry. **If the service falls under Table-2, serial 11:** 1. Tax: Rs. 2,400,000 x 5% = Rs. 120,000. 2. Amount invoiced including tax: Rs. 2,400,000 + Rs. 120,000 = Rs. 2,520,000. 3. No input tax adjustment or refund is admissible against this output tax. The difference in tax on the same contract is Rs. 360,000 - Rs. 120,000 = Rs. 240,000. Whether the lower entry is worth it depends on how much input tax the business would otherwise have been able to claim, which the Table-2 condition removes. ### What if our clients are outside Islamabad? Section 1(2) says the Ordinance extends to the whole of the Islamabad Capital Territory, and section 3(1) charges services "rendered or provided in the Islamabad Capital Territory". Services taxed by Punjab, Sindh, Khyber Pakhtunkhwa or Balochistan fall under provincial sales tax laws. Those laws, their rates and their place-of-supply rules are outside this corpus. ### What if the client is abroad? Section 3(1A) charges the export of services at zero per cent. That is covered on a separate page about ICT sales tax on IT exports and refunds. ### Common mistakes - **Treating 5% as a free choice.** The proviso to section 3(1) says Table-2 services "shall be charged" at the Table-2 rates and conditions. It is framed as a rule for the services listed, not an election. - **Assuming the 5% entry covers all IT work.** Table-2 serial 11 is worded for "software or IT-based system development consultants". Table-1 serial 11 names software development itself as an IT service. The Ordinance does not define the boundary between the two entries, and this page does not resolve it. - **Claiming input tax under the 5% entry.** Table-2 serial 11 bars input tax adjustment and refund. - **Confusing ICT sales tax with income tax withholding.** Income tax a client withholds from payments under the Income Tax Ordinance is a separate charge under a different law. ### What to check in the official text Read section 3 of the ICT Ordinance and the Table-1 and Table-2 entries in the official PDF, since the site text drops tables. The edition held here is amended to 30 June 2025; any amendment made by a later Finance Act is not reflected. Check section 3(4), which lets the Board specify a Negative List of exempt services in Table-3 by notification, and whether any such notification or a real-time integration order covers IT services. Section 14 of the Sales Tax Act sets the registration categories that section 3(3) applies. ### Frequently asked #### What sales tax rate applies to software development services in Islamabad? Serial 11 of Table-1 to the ICT Tax on Services Ordinance taxes IT services and IT-enabled services at fifteen percent, and its explanation lists software development, software maintenance, system integration, web design, web development, web hosting and network design as IT services. #### Can a software house simply choose the 5% rate? The Ordinance does not describe Table-2 as an option. The proviso to section 3(1) says the services specified in Table-2 shall be charged at the rates and conditions set there, and serial 11 of Table-2 covers services provided by software or IT-based system development consultants. The Ordinance does not define where that category ends and the Table-1 IT services entry begins. #### Does ICT sales tax cover clients in Lahore or Karachi? The ICT Ordinance extends to the Islamabad Capital Territory and charges services rendered or provided there. Sales tax on services in Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan is levied under provincial laws that are outside this corpus. ### Citations - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, section 3 (Scope of tax)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30#3-scope-of-tax), as amended to 2025-06-30: "the services specified in Table-2 of the Schedule shall be charged to tax at such rates and subject to such conditions and limitations as specified therein" Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, Schedule, Table-1, serial 11 (IT services and IT-enabled services), Fifteen percent](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, Schedule, Table-2, serial 11 (Services provided by software or IT-based system development consultants, 9815.6000), Five percent](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, section 1 (Short title, extent and commencement)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30#1-short-title-extent-and-commencement), as amended to 2025-06-30: "It extends to whole of Islamabad Capital Territory." Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "a person who is required, under any other Federal law or Provincial law, to be registered for the purpose of any duty or tax collected or paid as if it were a levy of sales tax" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "sales tax levied on the services rendered or provided by the person under Islamabad Capital Territory (Tax on Services) Ordinance, 2001" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Can an Islamabad software house charge the reduced 5% ICT tax instead of 15%, and what does it give up? Source: https://qanoondigest.com/faq/software-houses/ict-reduced-5-percent-it-services Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer The ICT Tax on Services Ordinance does not present 5% as an option. Serial 11 of Table-2 charges software or IT-based system development consultants at five percent, on condition that no input tax adjustment or refund is admissible. Serial 11 of Table-1 charges IT services at fifteen percent. The lower rate costs the right to offset input tax. **Applies to:** Software houses, IT companies and independent software consultants providing services to clients inside the Islamabad Capital Territory. Islamabad software businesses see two rates in the ICT Tax on Services Ordinance, 2001: fifteen percent for IT services in Table-1 and five percent for software or IT-based system development consultants in Table-2. The five percent entry is not a discount on the fifteen percent one. It is a separate entry with its own condition, and that condition removes the ability to offset input tax. ### What does the law say? Section 3(1) of the Ordinance charges sales tax at the rates in column (4) of Table-1 of the Schedule on the value of taxable services rendered or provided in the Islamabad Capital Territory. Its first proviso says that the services specified in Table-2 "shall be charged to tax at such rates and subject to such conditions and limitations as specified therein". The two entries that matter for IT businesses are: | Entry | Description in the Schedule | Heading | Rate | |---|---|---|---| | Table-1, serial 11 | IT services and IT-enabled services | Respective headings | Fifteen percent | | Table-2, serial 11 | Services provided by software or IT-based system development consultants | 9815.6000 | Five percent, subject to the conditions that no input tax adjustment or refund shall be admissible | The explanation to Table-1 serial 11 says IT services include, but are not limited to, software development, software maintenance, system integration, web design, web development, web hosting and network design. IT-enabled services include items such as call centres, graphics design, data entry operations and cloud computing services. ### Is the 5% rate a choice? The Ordinance does not frame it as one. Nothing in section 3 or the Schedule lets a service provider elect between Table-1 and Table-2. The proviso applies Table-2 to "the services specified in Table-2", which means the question is which description a particular service fits. That is where the text runs out. Software development appears in the Table-1 explanation as an IT service. Table-2 serial 11 covers services provided by "software or IT-based system development consultants". The Ordinance does not define "consultant" for this entry and does not say how to separate a software house developing a system from a consultant developing one. Section 2 of the Ordinance gives undefined words the meaning they carry in the Sales Tax Act, 1990, but that Act does not define this phrase either. This page does not resolve the overlap. ### What does the 5% entry give up? The condition attached to Table-2 serial 11 is that "no input tax adjustment or refund shall be admissible". Under the Sales Tax Act, section 2(20)(c) treats "sales tax levied on the services rendered or provided by the person under Islamabad Capital Territory (Tax on Services) Ordinance, 2001" as output tax. Section 7(1) says a registered person shall be entitled to deduct input tax paid on purchases for taxable supplies from the output tax due for the period. On the 5% entry, the Table-2 condition takes that deduction away, and no refund is available either. Sales tax paid on laptops, servers, office fit-out and other business purchases then stays as a cost. The Ordinance does not set out, in its own words, how far section 7 of the Sales Tax Act operates for Table-1 services. The Table-2 condition assumes an input tax adjustment would otherwise exist, but the reader should confirm the mechanism in the official text. ### Worked example (illustrative figures) Faisal runs a small development firm in Blue Area, Islamabad. In one month he bills local clients Rs. 2,000,000 before tax and pays Rs. 90,000 of sales tax on purchases used in the business. The amounts are invented. The rates are the Schedule rates. **If the services fall under Table-1 serial 11 (15%), with input tax deducted:** 1. Output tax: Rs. 2,000,000 x 15% = Rs. 300,000. 2. Less input tax: Rs. 300,000 - Rs. 90,000 = Rs. 210,000 deposited. 3. Clients are invoiced Rs. 2,300,000. **If the services fall under Table-2 serial 11 (5%):** 1. Output tax: Rs. 2,000,000 x 5% = Rs. 100,000 deposited. 2. Input tax of Rs. 90,000 cannot be adjusted or refunded, so it stays a cost. 3. Clients are invoiced Rs. 2,100,000. The deposit is lower on the 5% entry in this example. The arithmetic turns the other way only when input tax exceeds 10% of the value of services, because 15% of value less input tax equals 5% of value at that point. That is a calculation, not a rule in the law. ### What if the business also exports? Section 3(1A) says that, notwithstanding sub-section (1), "the export of services shall be charged at the rate of zero per cent". That provision sits above both tables. The 5% entry and its input tax condition concern services rendered or provided in Islamabad. The Ordinance does not say how the Table-2 condition interacts with purchases used for exported services, and this page does not resolve it. ### What if clients are in Lahore or Karachi? The Ordinance extends only to the Islamabad Capital Territory. Sales tax on services in Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan is levied under provincial laws that are outside this corpus. ### Common mistakes - **Treating 5% as a registration option.** Section 3 applies Table-2 to the services it describes. It does not offer a switch. - **Claiming input tax on the 5% entry.** Serial 11 of Table-2 bars both input tax adjustment and refund. - **Assuming 5% is always cheaper.** Whether it is depends on how much input tax the business pays, and on clients who may themselves be able to use the tax charged to them. ### What to check in the official text Read sections 2 and 3 of the ICT Ordinance and the Schedule in the official PDF, since the tables are not reproduced on the section page. Check the wording of Table-1 serial 11 and its explanation against Table-2 serial 11 for the specific service. Read sections 2 and 7 of the Sales Tax Act, 1990 for the input tax mechanism, and check for any notification or general order under section 3 that affects IT services. ### Frequently asked #### Can any Islamabad IT company pick the 5% rate? The Ordinance does not describe Table-2 as an election. The proviso to section 3(1) says the services specified in Table-2 shall be charged at the rates and conditions set there, and serial 11 of Table-2 covers services provided by software or IT-based system development consultants under heading 9815.6000. #### What exactly is lost at 5%? Serial 11 of Table-2 carries the condition that no input tax adjustment or refund shall be admissible. Sales tax paid on purchases used in the business cannot be set off against the 5% output tax or refunded, so it becomes a cost. #### Where does software development fall if not under Table-2? The explanation to serial 11 of Table-1 lists software development, software maintenance, system integration, web design, web development, web hosting and network design as IT services, taxed at fifteen percent. The Ordinance does not define where that entry ends and the Table-2 consultants entry begins. ### Citations - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, section 3 (Scope of tax)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30#3-scope-of-tax), as amended to 2025-06-30: "the services specified in Table-2 of the Schedule shall be charged to tax at such rates and subject to such conditions and limitations as specified therein" Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, Schedule, Table-2, serial 11 (Services provided by software or IT-based system development consultants, 9815.6000), Five percent subject to the conditions that no input tax adjustment or refund shall be admissible](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, Schedule, Table-1, serial 11 (IT services and IT-enabled services, respective headings), Fifteen percent](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "sales tax levied on the services rendered or provided by the person under Islamabad Capital Territory (Tax on Services) Ordinance, 2001" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 7 (Determination of tax liability)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#7-determination-of-tax-liability), as amended to 2026-06-30: "be entitled to deduct input tax" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, section 2 (Interpretation)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30#2-interpretation), as amended to 2025-06-30: "the words and expression used but not defined shall have the same meaning as in the Sales Tax Act, 1990" Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf --- ## How much income tax does a software house pay on IT export revenue in Pakistan? Source: https://qanoondigest.com/faq/software-houses/software-house-tax-on-it-export-revenue Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 154A, the bank that converts your foreign proceeds deducts the tax. Division IVA of the First Schedule sets 0.25% of proceeds for software, IT and IT-enabled exports by PSEB-registered exporters for tax years 2024 to 2029, and 1% in any other case. For tax year 2027 those are the rates that apply. **Applies to:** Software houses and IT companies in Pakistan that receive payment in foreign exchange for software, IT or IT-enabled services delivered to clients abroad. A software house that exports its work does not normally pay tax on that revenue by writing a cheque to FBR. The Income Tax Ordinance, 2001 makes the bank collect it. When foreign proceeds are converted, the bank deducts a percentage of the gross proceeds under section 154A, and the rate depends on whether the company is registered with the Pakistan Software Export Board (PSEB). ### What does the law say? Section 154A(1) requires every authorised dealer in foreign exchange, at the time it realises foreign exchange proceeds, to "deduct tax from the proceeds at the rates specified in Division IVA of Part III of the First Schedule". The proceeds covered include, in clause (a), "exports of computer software or IT services or IT enabled services" where the exporter is registered with and duly certified by PSEB, and in clause (b), services or technical services rendered outside Pakistan or exported from Pakistan. Division IVA of Part III of the First Schedule, as amended up to 30 June 2026, sets two rates: | S. No. | Type of receipt | Rate of tax | |---|---|---| | 1 | Export proceeds of computer software or IT services or IT enabled services by persons registered with Pakistan Software Export Board | 0.25% of proceeds for tax years 2024 up to tax year 2029 | | 2 | Any other case | 1% of proceeds | ### What counts as IT services and IT-enabled services? Section 2 defines both terms, and both definitions are open lists ("include but not limited to"). - **IT services**, clause (30AD): software development, software maintenance, system integration, web design, web development, web hosting and network design. - **IT-enabled services**, clause (30AE): inbound or outbound call centres, medical transcription, remote monitoring, graphics design, accounting services, HR services, telemedicine centres, data entry operations, cloud computing services, data storage services, locally produced television programs and insurance claims processing. A software house building apps for a client in Dubai, a web agency hosting sites for UK clients, or a BPO firm in Karachi running an outbound call centre for a US company all fall within these words. ### Which tax year does the rate apply to? Section 74(1) makes the normal tax year the twelve months ending on 30 June, and says it shall be denoted by the calendar year in which that 30 June falls. Proceeds realised between 1 July 2026 and 30 June 2027 therefore fall in tax year 2027. Row 1 of Division IVA covers tax years 2024 up to 2029, so the 0.25% rate is available for tax year 2027 to a PSEB-registered exporter. ### How does it work in practice? The bank deducts the tax when the foreign payment is realised, so the company receives the net amount. Section 154A(2) then makes that deduction a final tax on the export income, provided the conditions listed there are met: the return has been filed, withholding statements have been filed if required, sales tax returns have been filed if required (a condition that does not apply to a PSEB-registered IT exporter under clause (a)), and no foreign tax credit is claimed. Where the tax is final, section 169(2)(a) says the income is not chargeable to tax under any head of income in computing taxable income. The export revenue sits outside the normal corporate computation. A company can also opt out of final taxation each year under section 154A(3). The consequences of each route are set out on the related pages. ### Worked example (illustrative figures) Nexa Code (Pvt) Ltd, a software house in Lahore, realises foreign proceeds equal to Rs. 50,000,000 from US clients during tax year 2027 for custom software development. **If it is registered with PSEB (row 1):** 1. Rate: 0.25% of proceeds. 2. Tax deducted by the bank: Rs. 50,000,000 x 0.25% = Rs. 125,000. 3. Amount credited to the company: Rs. 50,000,000 - Rs. 125,000 = Rs. 49,875,000. **If it is not registered with PSEB (row 2, any other case):** 1. Rate: 1% of proceeds. 2. Tax deducted by the bank: Rs. 50,000,000 x 1% = Rs. 500,000. 3. Amount credited to the company: Rs. 50,000,000 - Rs. 500,000 = Rs. 49,500,000. The difference between the two rows on this revenue is Rs. 500,000 - Rs. 125,000 = Rs. 375,000. ### What if the company also earns local revenue? Section 154A deals only with foreign exchange proceeds realised through an authorised dealer. Revenue from Pakistani clients is outside Division IVA. It is dealt with under other provisions, including withholding by the paying client, which this page does not cover. ### Common mistakes - **Treating 0.25% as available to every IT company.** Row 1 of Division IVA refers to persons registered with PSEB, and section 154A(1)(a) requires the exporter to be registered with and duly certified by PSEB. - **Applying the rate to profit.** Division IVA expresses both rates as a percentage "of proceeds", meaning the gross foreign exchange realised, not profit after costs. - **Assuming the deduction is automatically the last word.** Final-tax status depends on the section 154A(2) conditions and on not opting out under section 154A(3). - **Reading "IT-enabled services" narrowly.** Clause (30AE) of section 2 names cloud computing, data storage and accounting services among others, and the list is not closed. ### What to check in the official text Read section 154A in full, then the Division IVA table in Part III of the First Schedule in the official PDF, since the site text of the Ordinance does not reproduce tables. Check clauses (30AD) and (30AE) of section 2 for the definitions. Section 154A(5) says the Board, in consultation with the State Bank of Pakistan, prescribes the mode, manner and procedure of payment, and section 154A(6) lets the Board include or exclude services. Any such notification is not held in this corpus. ### Frequently asked #### Who deducts the tax on IT export proceeds? Section 154A(1) places the duty on every authorised dealer in foreign exchange, which in practice is the bank that realises the foreign proceeds. The deduction is made at the time of realisation, from the proceeds themselves. #### Does the 0.25% rate apply to every IT company? No. Row 1 of Division IVA applies to export proceeds of computer software, IT services or IT-enabled services by persons registered with the Pakistan Software Export Board. Every other case under section 154A is taxed at 1% of proceeds. #### Is cloud computing an IT-enabled service? Yes. Clause (30AE) of section 2 lists cloud computing services and data storage services among IT-enabled services, together with call centres, medical transcription, graphics design, accounting and HR services, and others. The list is open, because it says the services include but are not limited to those named. ### Citations - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "deduct tax from the proceeds at the rates specified in Division IVA of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "software development, software maintenance, system integration, web design, web development, web hosting and network design" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 74 (Tax year)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#74-tax-year), as amended to 2026-06-30: "be denoted by the calendar year in which the said date falls" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "(a) the income shall not be chargeable to tax under any head of income in computing the taxable income of the person;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is the tax deducted on our IT export remittances a final tax, and what conditions must the company meet to keep it final? Source: https://qanoondigest.com/faq/software-houses/it-export-final-tax-conditions Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, if conditions are met. Section 154A(2) makes the deduction a final tax on the export income once the return is filed and any required withholding statements are filed. The sales tax return condition does not apply to PSEB-registered IT exporters, and no foreign tax credit is allowed under final tax. **Applies to:** Software houses and IT companies whose foreign exchange proceeds for software, IT or IT-enabled services are subject to deduction under section 154A. The tax a bank deducts on IT export proceeds can be the whole of a software house's income tax on that income, but only if the company keeps to the conditions written into section 154A. Miss one, and the export income goes back into the normal computation. ### What does the law say? Section 154A(2) of the Income Tax Ordinance, 2001 states that the tax deductible under the section "shall be a final tax on the income arising from the transactions referred to in this section, upon fulfilment of the following conditions": | Clause | Condition | Applies to a PSEB-registered IT exporter? | |---|---|---| | (a) | Return has been filed | Yes | | (b) | Withholding tax statements for the relevant tax year have been filed, if required under the Ordinance | Yes | | (c) | Sales tax returns under Federal or Provincial laws have been filed, if required under the law | No. The proviso says this condition does not apply to an exporter mentioned in clause (a) of sub-section (1) | | (d) | No credit for foreign taxes paid shall be allowed | Yes | Clause (a) of sub-section (1) is the one for exports of computer software, IT services or IT-enabled services where the exporter is registered with and duly certified by the Pakistan Software Export Board (PSEB). The sales tax proviso was added by the Finance Act, 2023, according to the section's footnotes. Section 154A(3) then says sub-section (2) does not apply to a person "who does not fulfill the specified conditions or who opts not to be subject to final taxation". ### What does "final" mean for the company? Section 169 applies where tax deducted is a final tax under sub-section (2) of section 154A. Under section 169(2): - the income is not chargeable to tax under any head of income in computing taxable income; - no deduction is allowed for any expenditure incurred in deriving the income; - the income is not reduced by any deductible allowance under Part IX of Chapter III, or by the set off of any loss; - the tax deducted is not reduced by any tax credit; - there is no refund of the tax, unless it exceeds the amount for which the taxpayer is chargeable. Section 168(3) adds that no tax credit is allowed for tax that is final under sub-section (2) of section 154A. In short, the deduction is the tax, and nothing is added to it or taken off it. ### How do the filing conditions work in practice? **The return.** Section 114(1)(a) requires every company to file a return, and clause (ae) separately covers every person whose income is subject to final taxation. A software house cannot rely on final tax as a reason not to file. Filing the return is itself condition (a). **Withholding statements.** A software house is usually a withholding agent: it deducts tax from employee salaries, from payments to contractors and on rent. Section 165 requires quarterly statements from persons deducting tax, and its proviso says every such person "shall be required to file withholding statement even where no withholding tax is collected or deducted during the period". Section 165(6) adds an annual statement for tax deducted from salary payments. Condition (b) refers to the statements "required under the Ordinance", so those are the ones that matter. ### Worked example (illustrative figures) Margalla Apps (Pvt) Ltd in Islamabad is PSEB-registered and realises export proceeds of Rs. 60,000,000 in tax year 2027. The bank deducts 0.25% under Division IVA. 1. Tax deducted: Rs. 60,000,000 x 0.25% = Rs. 150,000. 2. The company files its return and all four quarterly withholding statements. 3. Conditions met: Rs. 150,000 is the final tax on the export income. Its salary bill, office rent and cloud costs are not deducted from that income. Now suppose the company skipped the quarterly statement for one quarter. Condition (b) is not met, so section 154A(3) takes the export income out of final tax. The income is then computed under the normal rules, and section 168(2) allows the Rs. 150,000 as a tax credit against the tax due. The Ordinance does not give a figure for the result, because it depends on the company's actual profit. ### What if our foreign client already withheld tax abroad? Under final tax, section 154A(2)(d) is plain: "no credit for foreign taxes paid shall be allowed." Foreign tax withheld by a client does not reduce the 0.25% or 1% deduction. ### Common mistakes - **Thinking final tax means no return.** Section 114(1)(ae) requires a return where income is subject to final taxation, and section 154A(2)(a) makes the return a condition. - **Ignoring nil withholding statements.** The proviso to section 165(1) requires a statement even where no tax was deducted in the period. - **Assuming the sales tax waiver covers every exporter.** It covers only the exporter in clause (a) of section 154A(1). An exporter outside that clause must meet condition (c) where a sales tax return is required. ### What to check in the official text Read section 154A(2) and (3), section 169 and section 168(3) in the Ordinance amended up to 30 June 2026. Check section 165 for the statement due dates. Provincial sales tax on services, which may affect whether a sales tax return is required, is outside this corpus. ### Frequently asked #### Does a PSEB-registered software house need to file sales tax returns to keep the final tax? Not for this purpose. Section 154A(2)(c) lists filing of sales tax returns as a condition, but its proviso says the condition does not apply to an exporter mentioned in clause (a) of sub-section (1), which is the PSEB-registered IT exporter. Whether a sales tax return is required under other laws is a separate question. #### What happens if we miss the withholding statements? Section 154A(3) says the final tax provision does not apply to a person who does not fulfil the specified conditions. The export income is then outside final tax, and section 168 treats the tax deducted as a credit against tax computed on taxable income. #### Can we claim credit for tax our foreign client withheld? Not under final tax. Section 154A(2)(d) states that no credit for foreign taxes paid shall be allowed. ### Citations - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "The tax deductible under this section shall be a final tax on the income arising from the transactions referred to in this section, upon fulfilment of the following conditions" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "the tax deducted shall not be reduced by any tax credit allowed under this Ordinance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "every person whose income for the year is subject to final taxation under any provision of this Ordinance;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 165 (Statements)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#165-statements), as amended to 2026-06-30: "shall be required to file withholding statement even where no withholding tax is collected or deducted during the period" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is the tax the bank deducts on our IT export remittance a final tax, or do we still pay corporate tax on the profit? Source: https://qanoondigest.com/faq/software-houses/is-it-export-tax-final-or-adjustable Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It is a final tax once the section 154A(2) conditions are met. Section 169 then keeps the export income out of taxable income: no further tax on it, no deduction for expenses and no refund unless the deduction exceeds the tax chargeable. Under section 154A(3), a company can instead opt out of final taxation each year when filing its return. **Applies to:** Software houses and IT companies in Pakistan whose foreign export proceeds have had tax deducted by the bank under section 154A. For most software houses, the bank's deduction on export proceeds is meant to be the whole of the income tax on that revenue. The Income Tax Ordinance, 2001 makes that the default outcome, but only when certain conditions are met, and it lets a company choose the normal corporate route instead. ### What does the law say? **The deduction is final on conditions.** Section 154A(2) says the tax deducted under the section "shall be a final tax on the income arising from the transactions referred to in this section, upon fulfilment of the following conditions". The conditions are that the return has been filed, withholding tax statements have been filed if required, sales tax returns have been filed if required (not a condition for a PSEB-registered IT exporter under clause (a)), and that no credit for foreign taxes paid is allowed. **Final tax income sits outside taxable income.** Section 4(4)(b) allows certain classes of income to be subject to "deduction of tax under Division III of Part V of Chapter X as a final tax on the income". Section 4(5) says such income is not included in the computation of taxable income. Section 154A sits in that Division. **What section 169 does.** Section 169(1)(b) lists sub-section (2) of section 154A among the provisions under which tax is a final tax. Section 169(2) then provides: - (a) the income is not chargeable to tax under any head of income; - (b) no deduction is allowable for expenditure incurred in deriving the income; - (c) the income is not reduced by deductible allowances under Part IX of Chapter III or by setting off losses; - (d) the tax deducted is not reduced by any tax credit; - (e) there is no refund unless the tax deducted exceeds the amount for which the taxpayer is chargeable under the Ordinance. Section 168(3)(ea) confirms that no tax credit is allowed for tax that is final under section 154A(2). **The opt-out.** Section 154A(3) says sub-section (2) "shall not apply to a person who does not fulfill the specified conditions or who opts not to be subject to final taxation". The proviso says the option is exercised every year at the time of filing the return. ### How does it work in practice? **Route 1, final taxation.** The company meets the conditions and does not opt out. Its export revenue, and the costs of earning it, stay out of the corporate tax computation. The Division IVA deduction (0.25% for PSEB-registered exporters in tax year 2027, 1% otherwise) is the tax on that income. Any other income, such as fees from Pakistani clients, is dealt with separately under the normal rules. **Route 2, normal taxation.** The company opts out, or misses a condition. The export income is then computed with its expenses under the normal rules and taxed at the rate that applies to the company under section 4. Section 168(2) allows the tax the bank deducted as a credit against tax due for the tax year in which it was deducted. Whether that leaves more to pay, or an excess that can be refunded, depends on the full computation. ### Worked example (illustrative figures) Ravi Soft (Pvt) Ltd, a PSEB-registered software house in Faisalabad, realises export proceeds of Rs. 40,000,000 in tax year 2027. It spends Rs. 30,000,000 on salaries, rent and cloud hosting to earn them. **Route 1, final taxation:** 1. Bank deduction: Rs. 40,000,000 x 0.25% = Rs. 100,000. 2. Section 169(2)(a): the Rs. 40,000,000 is not part of taxable income. 3. Section 169(2)(b): the Rs. 30,000,000 of costs is not deductible against it. 4. Tax on this income: Rs. 100,000, already deducted. Nothing more is payable on it. **Route 2, opt out:** 1. Bank deduction: Rs. 100,000, as before. 2. Business profit computed under the normal rules, starting from Rs. 40,000,000 - Rs. 30,000,000 = Rs. 10,000,000 before any other adjustments. 3. Tax on that profit at the company rate, with the Rs. 100,000 allowed as a credit under section 168(2). This page does not work out the route 2 figure, because the company rate and adjustments depend on provisions not covered here. The comparison shows the structure, not which route is cheaper. ### What if we have a loss on exports? Under final taxation, section 169(2)(c) says the income is not reduced by setting off any loss, and the deduction stands. A company with a loss would be looking at the opt-out under section 154A(3), whose consequences follow from the normal rules. ### What if we paid tax abroad too? Section 154A(2)(d) says no credit for foreign taxes paid is allowed where the section 154A tax is final. ### Common mistakes - **Adding export revenue to taxable income while also treating the deduction as final.** Section 169(2)(a) keeps final-tax income out of taxable income. - **Claiming export-related costs under final taxation.** Section 169(2)(b) disallows them. - **Treating the opt-out as permanent.** The proviso to section 154A(3) requires the option to be exercised every year. - **Assuming final tax removes the need to file.** Filing the return is the first condition in section 154A(2). ### What to check in the official text Read section 154A(2) and (3), then section 169(1)(b) and (2), section 168(2) and (3), and section 4(4) and (5). Check the Division IVA rate in the official PDF of the Ordinance. The history notes to section 154A show that earlier wording tied the regime to the availability of a separate tax credit, which is covered on its own page. ### Frequently asked #### If the section 154A tax is final, can the software house deduct salaries and rent against export income? No. Section 169(2)(b) says no deduction is allowable for any expenditure incurred in deriving income that is subject to final tax. The deduction by the bank is the whole tax on that income. #### Can a company get a refund of the tax deducted on export proceeds? Where the tax is final, section 169(2)(e) allows no refund unless the tax deducted exceeds the amount for which the taxpayer is chargeable under the Ordinance. Where the company is outside final taxation, section 168 treats the deduction as a tax credit against tax due on its taxable income. #### How does a software house opt out of final taxation? Section 154A(3) disapplies final taxation for a person who opts not to be subject to it, and its proviso says the option is exercised every year at the time of filing the return. The form and portal steps for exercising the option are not in this corpus. ### Citations - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "shall not apply to a person who does not fulfill the specified conditions or who opts not to be subject to final taxation" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "(a) the income shall not be chargeable to tax under any head of income in computing the taxable income of the person;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 4 (Tax on taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4-tax-on-taxable-income), as amended to 2026-06-30: "deduction of tax under Division III of Part V of Chapter X as a final tax on the income" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is the 0.25% tax on IT exports only for PSEB-registered companies, and what is the rate if we are not registered or our registration lapses? Source: https://qanoondigest.com/faq/software-houses/it-export-rate-without-pseb-registration Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Row 1 of Division IVA gives 0.25% of proceeds only to software, IT and IT-enabled exporters registered with the Pakistan Software Export Board, and section 154A(1)(a) requires registration and certification. Every other case under section 154A, including other services, royalties and fees, is 1% of proceeds. The Ordinance does not say how a mid-year lapse is handled. **Applies to:** IT companies and software houses in Pakistan exporting software, IT or IT-enabled services that are not registered with PSEB, or whose registration has expired. Registration with the Pakistan Software Export Board (PSEB) is what separates the two rates in Division IVA. A software house that is registered can have 0.25% deducted from its IT export proceeds. One that is not falls into the "any other case" row, where the rate is 1%, four times the registered rate. ### What does the law say? Section 154A(1) lists the foreign exchange proceeds from which a bank must deduct tax. Clause (a) covers "exports of computer software or IT services or IT enabled services" where the exporter is "registered with and duly certified by the Pakistan Software Export Board (PSEB)". The other clauses cover: - (b) services or technical services rendered outside Pakistan or exported from Pakistan; - (c) royalty, commission or fees derived by a resident company from a foreign enterprise for the use outside Pakistan of patents, designs, secret processes, know-how and similar rights; - (d) construction contracts executed outside Pakistan; - (da) foreign commission due to an indenting commission agent; - (e) other services rendered outside Pakistan as notified by the Board. Division IVA of Part III of the First Schedule then sets the rates: | S. No. | Type of receipt | Rate of tax | |---|---|---| | 1 | Export proceeds of computer software or IT services or IT enabled services by persons registered with Pakistan Software Export Board | 0.25% of proceeds for tax years 2024 up to tax year 2029 | | 2 | Any other case | 1% of proceeds | ### How does it work in practice? The 0.25% row has two requirements built into it: the proceeds must be for software, IT services or IT-enabled services, and the exporter must be registered with PSEB. Section 154A(1)(a) adds that the exporter must be "duly certified" as well as registered. If either requirement is missing, the receipt falls into row 2. Row 2 is a catch-all. It applies at 1% to everything else section 154A reaches: an IT exporter without PSEB registration, a consulting firm exporting technical services, a company receiving royalties or fees from a foreign enterprise, and the other clauses listed above. The Ordinance does not create a separate clause for an unregistered IT exporter. Clause (a) is limited to registered exporters, and clause (b) covers services exported from Pakistan in general terms. Whichever clause a reader places the receipt under, the rate that results from Division IVA for an unregistered exporter is the row 2 rate of 1%. ### Worked example (illustrative figures) Two Islamabad companies each realise foreign proceeds of Rs. 18,000,000 in tax year 2027 for web development work for clients in Canada. **Pixelgrid (Pvt) Ltd, registered and certified with PSEB:** 1. Row 1 applies: 0.25% of proceeds. 2. Tax deducted: Rs. 18,000,000 x 0.25% = Rs. 45,000. **Margalla Web (Pvt) Ltd, not registered with PSEB:** 1. Row 2 applies: 1% of proceeds. 2. Tax deducted: Rs. 18,000,000 x 1% = Rs. 180,000. The unregistered company bears Rs. 180,000 - Rs. 45,000 = Rs. 135,000 more on the same revenue. ### What if our registration lapses partway through the year? The law is silent on this. Section 154A(1) ties the deduction to "the time of realization of foreign exchange proceeds", and clause (a) describes an exporter who is registered and certified. Neither section 154A nor Division IVA says whether status is tested payment by payment, at the start of the tax year, or otherwise, and neither says what happens to proceeds realised after a lapse. This page does not resolve that question. The PSEB's own renewal rules and any bank procedure prescribed under section 154A(5) are outside this corpus. ### What if we register partway through the year? The same silence applies in reverse. The text does not say whether proceeds realised before registration can later be treated under row 1. Nothing in section 154A or Division IVA provides for that. ### What if we export services that are not IT or IT-enabled? Row 1 is limited to computer software, IT services and IT-enabled services, as defined in clauses (30AD) and (30AE) of section 2. Other exported services go to row 2 at 1%, even for a company that is registered with PSEB for its IT work. ### Common mistakes - **Treating PSEB registration as optional for the 0.25% rate.** Row 1 of Division IVA refers to persons registered with PSEB. Without registration, row 2 applies. - **Assuming registration alone is enough.** Section 154A(1)(a) says "registered with and duly certified by" PSEB. - **Assuming the lower rate is permanent.** Row 1 runs "for tax years 2024 up to tax year 2029". Section 74 counts a tax year as the twelve months to 30 June, named by the year in which that date falls. ### What to check in the official text Read section 154A(1) clause by clause, then the Division IVA table in the official PDF of the Ordinance. The site text leaves tables out. Check whether the Board has notified any service under section 154A(1)(e) or excluded any service under section 154A(6); no such notification is held in this corpus. PSEB's registration and certification rules are also outside this corpus. ### Frequently asked #### What rate applies if our software house is not registered with PSEB? Division IVA has only two rows. Row 1, at 0.25%, covers persons registered with the Pakistan Software Export Board. Row 2 covers any other case at 1% of proceeds, so an unregistered exporter falls under the 1% row. #### What happens if our PSEB registration lapses in the middle of the year? The Ordinance does not say. Section 154A requires the bank to deduct at the time of realisation of proceeds, and clause (a) refers to an exporter who is registered and certified, but no provision in this corpus deals with a registration that expires partway through a tax year. #### Does registration help with the sales tax return condition too? Yes. The proviso to section 154A(2)(c) says the sales tax return condition for final taxation does not apply to an exporter mentioned in clause (a) of sub-section (1), which is the PSEB-registered and certified IT exporter. ### Citations - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "registered with and duly certified by the Pakistan Software Export Board (PSEB)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "software development, software maintenance, system integration, web design, web development, web hosting and network design" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 74 (Tax year)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#74-tax-year), as amended to 2026-06-30: "be denoted by the calendar year in which the said date falls" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What happens to our IT export tax rate if the company is not PSEB-registered or its registration lapses, for example when the bank deducts 1% instead of 0.25%? Source: https://qanoondigest.com/faq/software-houses/pseb-registration-it-export-tax-rate Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 154A(1)(a) covers IT exports where the exporter is registered with and duly certified by PSEB, and Division IVA gives 0.25% only to persons registered with PSEB. Any other case attracts 1% of proceeds. A refund under section 170 needs tax paid in excess of the amount properly chargeable. **Applies to:** Software houses and IT companies whose PSEB registration is missing, pending or lapsed when foreign exchange proceeds for software, IT or IT-enabled services are realised. The difference between 0.25% and 1% on IT export proceeds is decided by one condition in the law: registration with the Pakistan Software Export Board (PSEB). If that condition is not met when the bank realises the proceeds, the Ordinance points to the higher rate. ### What does the law say? Section 154A(1) of the Income Tax Ordinance, 2001 requires every authorized dealer in foreign exchange to deduct tax from foreign exchange proceeds at the rates in Division IVA of Part III of the First Schedule. Clause (a) lists "exports of computer software or IT services or IT enabled services" and adds the words "where the exporter is registered with and duly certified by the Pakistan Software Export Board (PSEB)." That wording was put in by the Finance Act, 2022. It replaced the earlier expression "in case tax credit under section 65F is not available", as recorded in the footnotes to the section. Division IVA, as amended up to 30 June 2026, has two rows: | S. No. | Type of receipt | Rate of tax | |---|---|---| | 1 | Export proceeds of computer software or IT services or IT enabled services by persons registered with Pakistan Software Export Board | 0.25% of proceeds for tax years 2024 up to tax year 2029 | | 2 | Any other case | 1% of proceeds | An IT exporter that is not registered with PSEB does not fit row 1. Row 2, "any other case", applies 1% of proceeds. Section 154A(1) does not say in terms which clause then covers an unregistered IT exporter. Clause (b) covers "services or technical services rendered outside Pakistan or exported from Pakistan", and row 2 is the only rate the table gives for anything outside row 1. ### How does it work in practice? The rate is applied at the moment of realisation. If a Faisalabad software house's registration has lapsed, or its application is still pending, when a client's payment is realised, the proceeds do not meet the row 1 description at that time. The Ordinance contains no grace period and no provision for registration obtained later to reach back to earlier proceeds. The Ordinance is also silent on how an authorized dealer checks PSEB status. Section 154A(5) says the Board, in consultation with the State Bank of Pakistan, shall prescribe the mode, manner and procedure of payment. Those instructions are not part of this corpus. ### Worked example (illustrative figures) Chenab Softworks (Pvt) Ltd in Multan realises export proceeds of Rs. 18,000,000 in tax year 2027. Its PSEB registration lapsed on 31 October and was renewed on 15 January. Rs. 6,000,000 of the proceeds was realised between those dates, and Rs. 12,000,000 while it was registered. 1. Proceeds realised while registered: Rs. 12,000,000 x 0.25% = Rs. 30,000. 2. Proceeds realised during the gap: Rs. 6,000,000 x 1% = Rs. 60,000. 3. Total deducted for the year: Rs. 30,000 + Rs. 60,000 = Rs. 90,000. 4. Had it been registered all year: Rs. 18,000,000 x 0.25% = Rs. 45,000. 5. Cost of the gap: Rs. 90,000 - Rs. 45,000 = Rs. 45,000. This assumes each deduction was made at the rate matching the company's status on the day of realisation. ### What if the bank deducted 1% while we were registered? If the company was registered with and certified by PSEB at the time, the rate properly deductible was 0.25%, so part of the deduction was more than the law required. Section 170(1) allows a taxpayer who has paid tax in excess of the amount properly chargeable to apply to the Commissioner for a refund. Under section 170(2), the application must be in the prescribed form and made within three years of the later of the assessment order date or the date the tax was paid. Where the tax is final, section 169(2)(e) says there shall be no refund of the tax collected or deducted, unless it is in excess of the amount for which the taxpayer is chargeable. Excess deduction beyond the correct rate is that kind of excess. The Ordinance does not describe any separate procedure for the bank itself to reverse a deduction. ### What if we were not registered at all? Then 1% is the rate the Ordinance specifies, and there is no excess to refund. Registering later changes the rate only for proceeds realised after the exporter meets the row 1 description. ### Common mistakes - **Treating the 0.75% gap as automatically refundable.** A refund under section 170 needs tax paid in excess of the amount properly chargeable. A correct 1% deduction is not an excess. - **Assuming the 1% case cannot be final.** Section 154A(2) applies to tax deductible under the section generally. The difference is that exporters outside clause (a) must also meet the sales tax return condition in section 154A(2)(c), where a sales tax return is required. - **Assuming a PSEB application is enough.** The clause says "registered with and duly certified by" PSEB. The Ordinance does not treat a pending application as registration. ### What to check in the official text Read section 154A(1)(a), (2) and (5) and the Division IVA table in the official PDF of the Ordinance amended up to 30 June 2026. Read section 170 for the refund timeline and section 169(2)(e) for the limit on refunds of final tax. PSEB's own registration and certification rules are outside this corpus. ### Frequently asked #### Can we get the extra 0.75% back once PSEB registration comes through? The Ordinance does not say that registration obtained later applies back to proceeds already realised. Section 170 allows a refund only of tax paid in excess of the amount properly chargeable, and section 169(2)(e) bars refunds of final tax unless it exceeds the chargeable amount, so the question is whether 1% was the correct rate when the bank deducted it. #### Is the 1% rate for unregistered exporters also a final tax? Section 154A(2) makes the tax deductible under the section a final tax on fulfilment of its conditions. It does not limit final treatment to PSEB-registered exporters. However, the sales tax return condition is waived only for exporters under clause (a), which is the PSEB-registered category. #### Does the bank decide whether we are PSEB-registered? The Ordinance places the deduction duty on the authorized dealer in foreign exchange but does not set out how the bank verifies registration. Section 154A(5) leaves the mode and procedure to the Board in consultation with the State Bank of Pakistan, and those instructions are not in this corpus. ### Citations - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "where the exporter is registered with and duly certified by the Pakistan Software Export Board (PSEB)." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 170 (Refunds)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#170-refunds), as amended to 2026-06-30: "A taxpayer who has paid tax in excess of the amount which the taxpayer is properly chargeable under this Ordinance may apply to the Commissioner for a refund of the excess." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "there shall be no refund of the tax collected or deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can a software house opt out of the final tax regime on IT exports to claim losses, depreciation and expenses? Source: https://qanoondigest.com/faq/software-houses/opt-out-final-tax-it-exports Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 154A(3) says the final tax rule does not apply to a person who opts not to be subject to final taxation, and the option is exercised every year when filing the return under section 114. Outside final tax, section 169's bar on expenses, allowances, loss set-off and tax credits no longer applies to that income. **Applies to:** Software houses and IT companies whose export proceeds are taxed under section 154A and which have losses, heavy expenses or large capital spending on computers and equipment. A software house can step out of the final tax regime on its export income. The Ordinance gives that choice every year, and the reason to use it is usually a loss, a large equipment spend, or heavy costs that final tax ignores. ### What does the law say? Section 154A(2) of the Income Tax Ordinance, 2001 makes the tax deducted on export proceeds a final tax on that income when its conditions are met. Section 154A(3) then says sub-section (2) "shall not apply to a person who does not fulfill the specified conditions or who opts not to be subject to final taxation". Its proviso adds: "Provided that the option shall be exercised every year at the time of filing of return under section 114." So the choice is made through the return, year by year. The section does not describe a separate form or approval for the option. ### What does final tax take away? Section 169(2) sets out what happens to income under final tax. The income is not chargeable under any head of income. No deduction is allowed for expenditure incurred in deriving it. The income is not reduced by any deductible allowance under Part IX of Chapter III or by the set off of any loss. And "the tax deducted shall not be reduced by any tax credit allowed under this Ordinance". Section 168(3) also denies a tax credit for tax that is final under section 154A(2). For a software house, that means salaries of developers, office rent, internet and cloud bills, and depreciation on laptops and servers have no effect on the tax owed on export income. ### What changes if the company opts out? Once section 154A(2) does not apply, section 169 no longer governs that income. The export income is then computed with the rest of the business income under the normal rules of the Ordinance: - **Expenses.** Expenditure incurred in deriving the income can be claimed, subject to the general deduction rules. - **Depreciation.** Section 22 allows a deduction for depreciation of depreciable assets used in the business, computed at the rates in Part I of the Third Schedule on written down value. - **Losses.** Section 57 carries forward a business loss not set off in the year, but "no loss can be carried forward to more than six tax years immediately succeeding the tax year for which the loss was first computed". Under section 57(4), unabsorbed depreciation is set off against fifty percent of the balance business income in later years, or one hundred percent if taxable income for the year is less than ten million rupees. - **The bank's deduction.** Because it is not final, section 168(2) allows the tax deducted as a credit against the tax due for that tax year. The Ordinance does not treat opting out as free. The taxable income is then taxed at the ordinary rates for the company or firm, which are outside the scope of this page, and the minimum tax rules in the Ordinance may apply to a loss-making company. That is covered on a separate page. ### Worked example (illustrative figures) Sialkot Byte Works (Pvt) Ltd is PSEB-registered and realises export proceeds of Rs. 40,000,000 in tax year 2027. Its salaries, rent and running costs are Rs. 46,000,000, and depreciation on new workstations under section 22 is Rs. 3,000,000. **If it stays under final tax:** 1. Tax deducted by the bank: Rs. 40,000,000 x 0.25% = Rs. 100,000. 2. This is the final tax on the export income. The Rs. 49,000,000 of costs has no effect, and no loss is computed for the year. **If it opts out in its return:** 1. Business result: Rs. 40,000,000 - Rs. 46,000,000 - Rs. 3,000,000 = a loss of Rs. 9,000,000. 2. Section 57 allows that loss to be carried forward for up to six tax years, with the depreciation part subject to section 57(4). 3. The Rs. 100,000 deducted by the bank is a tax credit under section 168(2). Whether opting out produces lower tax overall depends on other provisions, including minimum tax, and on the company's future profits. The Ordinance does not do that comparison, and neither does this page. ### What if the company becomes profitable next year? Each year's choice stands alone. A company that opted out while it built losses can stay under final tax in a later year. The Ordinance does not say expressly how losses carried forward interact with a later year in which the export income is under final tax, other than that section 169(2) bars set off of any loss against final tax income. That point is not settled in the text. ### Common mistakes - **Treating the option as permanent.** The proviso requires it to be exercised every year. - **Assuming the bank will stop deducting.** Opting out is done through the return. Section 154A(1) still requires the authorized dealer to deduct at the time of realisation. What changes is how that deduction is treated. - **Opting out by accident.** Failing a condition in section 154A(2), such as missing a withholding statement, has the same effect under section 154A(3) as opting out. ### What to check in the official text Read section 154A(2) and (3), section 169(2), section 168(2) and (3), section 57 and section 22 in the Ordinance amended up to 30 June 2026. The return form and how the option is recorded on it are FBR portal matters outside this corpus. ### Frequently asked #### Is opting out a one-time choice? No. The proviso to section 154A(3) says the option shall be exercised every year at the time of filing of the return under section 114. A software house can make a different choice for each tax year. #### What happens to the tax the bank already deducted if we opt out? It is no longer final, so section 168(3) does not block it. Section 168(2) allows tax deducted under Division III as a tax credit in computing the tax due on taxable income for that tax year. #### Can a loss from a final tax year be carried forward? Section 169(2) says income under final tax is not chargeable under any head and is not reduced by the set off of any loss, so no business loss is computed on it for that year. A loss carried forward under section 57 comes from a year in which the business income was computed under the normal rules. ### Citations - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "Provided that the option shall be exercised every year at the time of filing of return under section 114." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "the tax deducted shall not be reduced by any tax credit allowed under this Ordinance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 57 (Carry forward of business losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#57-carry-forward-of-business-losses), as amended to 2026-06-30: "no loss can be carried forward to more than six tax years immediately succeeding the tax year for which the loss was first computed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 22 (Depreciation)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#22-depreciation), as amended to 2026-06-30: "the depreciation deduction for a tax year shall be computed by applying the rate specified in Part I of the Third Schedule against the written down value of the asset at the beginning of the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "every person whose income for the year is subject to final taxation under any provision of this Ordinance;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do PSEB-certified tech startups get a tax exemption, for how many years, and who counts as a startup? Source: https://qanoondigest.com/faq/software-houses/pseb-certified-startup-tax-credit Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 65F gives a startup a 100% credit on tax payable, covering minimum and final taxes, for its PSEB certification year and the next two tax years. Under clause (62A) of section 2, a startup is a technology-driven business begun on or after 1 July 2012, PSEB-certified, with turnover under one hundred million in each of the last five years. **Applies to:** Founders of technology startups in Pakistan (individuals, AOPs and companies) registered with or seeking certification from the Pakistan Software Export Board. A qualifying startup does not get a blanket exemption under the current Ordinance. It gets a tax credit under section 65F equal to one hundred per cent of its tax payable, which in effect cancels the tax for three tax years: the year the Pakistan Software Export Board (PSEB) certifies it and the next two. ### What does the law say? Section 65F(1) allows listed persons "a tax credit equal to one hundred per cent of the tax payable under any provisions of this Ordinance including minimum, alternate corporate tax and final taxes". Clause (b) names: > a startup as defined in clause (62A) of section 2 for the tax year in which the startup is certified by the Pakistan Software Export Board and the next following two tax years. Section 65F(2) sets conditions, "where applicable": - (a) the return has been filed; - (b) withholding tax statements for the relevant tax year have been filed, where the person is a withholding agent; and - (c) sales tax returns for the matching tax periods have been filed, if the person must file them under any federal or provincial sales tax law. ### Who counts as a startup? Clause (62A) of section 2 has two limbs. Under sub-clause (i), a startup is a business of a resident individual, AOP or company that: 1. commenced on or after the first day of July, 2012; 2. is engaged in, or intends to offer, technology driven products or services to any sector of the economy; 3. is registered with and duly certified by the Pakistan Software Export Board; and 4. has turnover of less than one hundred million in each of the last five tax years. Sub-clause (ii) adds any business of a person or class of persons meeting conditions that the Board, with the approval of the Federal Minister-in-charge, notifies in the official Gazette. No such notification is held in this corpus. All four tests in sub-clause (i) apply together. A company started in 2010, or one without PSEB certification, is outside sub-clause (i) however innovative its product. ### How does it work in practice? The credit is counted in tax years. Section 65F(1)(b) starts the clock in the tax year of PSEB certification, not the year the business began. A startup that was founded years earlier but certified later still gets its three years from certification, provided it meets every part of clause (62A). The credit reduces tax payable; it does not remove the duty to file. Condition (a) of section 65F(2) requires the return to be filed. If the startup employs staff and deducts tax from their pay, it is a withholding agent and must also have filed its withholding statements. Separately, clause (43F) of Part IV of the Second Schedule says section 153 does not apply where the recipient of the payment is a startup as defined in clause (62A). That is covered on the related page about minimum tax and withholding. ### Worked example (illustrative figures) Rahbar AI (Pvt) Ltd was incorporated in Lahore in 2021 to build software for clinics. It has had turnover below one hundred million in every tax year. PSEB certifies it in November 2026, which falls in tax year 2027 (1 July 2026 to 30 June 2027). 1. Credit years: tax year 2027 (certification), tax year 2028 and tax year 2029. 2. Suppose its tax payable for tax year 2027, including any minimum tax, is Rs. 1,200,000. 3. Credit under section 65F: 100% x Rs. 1,200,000 = Rs. 1,200,000. 4. Tax left to pay: Rs. 1,200,000 - Rs. 1,200,000 = Rs. 0, provided the return, withholding statements and any required sales tax returns are filed. 5. In tax year 2030 the credit under clause (b) no longer applies. ### What if the startup has been trading for less than five years? Clause (62A)(i) requires turnover under one hundred million "in each of the last five tax years". It does not say how the test applies to a business that has existed for fewer than five tax years. This page does not resolve that. ### What if turnover crosses one hundred million? The definition requires turnover below that figure in each of the last five tax years. Section 65F does not say whether a startup that crosses the figure during its three credit years loses the rest of the credit. The text is silent on that point. ### Common mistakes - **Counting the three years from incorporation.** Section 65F(1)(b) counts from the tax year of PSEB certification. - **Assuming registration alone is enough.** Clause (62A)(i) says "registered with and duly certified by" PSEB. - **Skipping the return because tax is nil.** Section 65F(2)(a) makes filing a condition of the credit. - **Reading "one hundred million" as rupees without checking.** The clause prints "one hundred million" without a currency word. Confirm the figure in the official text. ### What to check in the official text Read section 65F and clause (62A) of section 2 in the official PDF, and clause (43F) of Part IV of the Second Schedule. PSEB's own certification rules are outside this corpus, as are any Board notifications under clause (62A)(ii). ### Frequently asked #### Is it an exemption or a tax credit? Under the current Ordinance it is a tax credit. Section 65F(1)(b) allows a credit equal to one hundred per cent of the tax payable, including minimum, alternate corporate tax and final taxes. A footnote in the official text records that the earlier exemption for startup profits in clause (143) of Part I of the Second Schedule was omitted by the Finance Act, 2021. #### How many years does the startup tax credit last? Three tax years: the tax year in which the startup is certified by the Pakistan Software Export Board and the next following two tax years, as section 65F(1)(b) puts it. #### What must a startup do to claim the credit? Section 65F(2) requires, where applicable, that the return has been filed, that withholding tax statements have been filed if the startup is a withholding agent, and that sales tax returns have been filed if it is required to file them under federal or provincial sales tax law. ### Citations - [Income Tax Ordinance, 2001, section 65F (Tax credit for certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#65f-tax-credit-for-certain-persons), as amended to 2026-06-30: "a startup as defined in clause (62A) of section 2 for the tax year in which the startup is certified by the Pakistan Software Export Board" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "is engaged in or intends to offer technology driven products or services to any sector of the economy" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clause (43F)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "for the rendering of or providing of services" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do PSEB-certified tech startups get income tax relief, and what counts as a startup? Source: https://qanoondigest.com/faq/software-houses/pseb-startup-tax-credit Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 65F(1)(b) gives a startup a tax credit equal to one hundred per cent of tax payable for its Pakistan Software Export Board certification year and the next two tax years. Clause (62A) of section 2 defines a startup: technology driven, started on or after 1 July 2012, PSEB certified, turnover under one hundred million. **Applies to:** Resident individuals, AOPs and companies offering technology driven products or services that are, or plan to be, certified by the Pakistan Software Export Board. A startup certified by the Pakistan Software Export Board (PSEB) can have its whole income tax bill covered by a credit for three tax years. Section 65F of the Income Tax Ordinance grants the credit, and clause (62A) of section 2 decides who counts as a startup. Both have conditions that are easy to miss. ### What does section 65F give a startup? Section 65F(1) allows certain persons "a tax credit equal to one hundred per cent of the tax payable under any provisions of this Ordinance including minimum, alternate corporate tax and final taxes". Clause (b) names: > a startup as defined in clause (62A) of section 2 for the tax year in which the startup is certified by the Pakistan Software Export Board and the next following two tax years. So the credit runs for three tax years, counted from the year of PSEB certification, not the year the business began. ### What counts as a startup? Clause (62A)(i) of section 2 defines a startup as a business of a resident individual, AOP or company that meets every one of these tests: | Test | Wording of clause (62A)(i) | |---|---| | Start date | commenced on or after the first day of July, 2012 | | Activity | is engaged in or intends to offer technology driven products or services to any sector of the economy | | Certification | registered with and duly certified by the Pakistan Software Export Board (PSEB) | | Size | turnover of less than one hundred million in each of the last five tax years | Clause (62A)(ii) adds any other business or class of persons the Board, with the approval of the Federal Minister-in-charge, specifies by notification in the official Gazette. No such notification is held in this corpus. Two points in the wording deserve attention. The activity test says "intends to offer", so a business still building its product can qualify. The turnover test applies to "each of the last five tax years", so a single year at or above one hundred million fails it. The clause does not say "rupees" after "one hundred million". ### What conditions must be met to use the credit? Section 65F(2) makes the credit available only where these conditions, where applicable, are fulfilled: 1. the return has been filed; 2. withholding tax statements for the relevant tax year have been filed, where the person is a withholding agent; and 3. sales tax returns for the matching tax periods have been filed, if the person is required to file them under any Federal or Provincial sales tax law. A startup with even one employee on salary, or one contractor it pays, is likely to be a withholding agent, so condition 2 is the one most often missed. ### Worked example (illustrative figures) Sehat Stack (Pvt) Ltd, a Peshawar health-tech company, was incorporated in 2023 and certified by PSEB during tax year 2026. | Tax year | Covered by section 65F(1)(b)? | Reason | |---|---|---| | 2026 | Yes | Year of PSEB certification | | 2027 | Yes | First following year | | 2028 | Yes | Second following year | | 2029 | No | Outside the three-year window | Suppose its tax payable for tax year 2027, computed under the Ordinance, comes to Rs. 650,000, and it files its return, its withholding statements and any sales tax returns it is required to file. 1. Tax payable: Rs. 650,000. 2. Credit under section 65F: 100% x Rs. 650,000 = Rs. 650,000. 3. Tax left to pay: Rs. 650,000 - Rs. 650,000 = nil. If Sehat Stack had skipped its withholding statements for tax year 2027, section 65F(2) would deny the credit for that year and the Rs. 650,000 would be payable. ### Do local clients still deduct tax from a startup? Clause (43F) of Part IV of the Second Schedule says the provisions of section 153 "shall not apply in the case of a start-up, being recipient of payment, as defined in clause (62A) of section 2". Section 153 is the section that otherwise requires a paying company to deduct tax from a payment for services at the Division III rate. That clause is explained on the related page on minimum tax and withholding for startups. ### What if the startup grows past one hundred million? Clause (62A)(i) requires turnover below one hundred million in each of the last five tax years. Section 65F(1)(b) grants the credit to "a startup as defined in clause (62A)". The Ordinance does not say expressly whether a business that passes the turnover limit during its three-year window keeps the credit for the remaining years. This page does not resolve that question. ### Common mistakes - **Counting from incorporation.** The three years start with the tax year of PSEB certification. - **Treating certification as enough.** Section 65F(2) adds filing conditions. - **Assuming any IT business qualifies.** A business that commenced before 1 July 2012 falls outside clause (62A)(i). ### What to check in the official text Read section 65F and clause (62A) of section 2 in the Ordinance amended to 30 June 2026, and clause (43F) of Part IV of the Second Schedule. PSEB's own certification criteria and any Board notification under clause (62A)(ii) are not in this corpus. ### Frequently asked #### How many years does the startup tax credit last? Section 65F(1)(b) covers the tax year in which the startup is certified by the Pakistan Software Export Board and the next following two tax years, so three tax years in total. The section does not provide for any extension. #### Does the credit apply automatically once we are certified? No. Section 65F(2) makes it available only if the return has been filed, withholding tax statements for the year have been filed where the startup is a withholding agent, and sales tax returns have been filed where the startup is required to file them. #### Can a business that started in 2010 be a startup? Not under clause (62A)(i) of section 2, which requires the business to have commenced on or after the first day of July, 2012. Sub-clause (ii) lets the Board notify other businesses as startups, but no such notification is held in this corpus. ### Citations - [Income Tax Ordinance, 2001, section 65F (Tax credit for certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#65f-tax-credit-for-certain-persons), as amended to 2026-06-30: "a startup as defined in clause (62A) of section 2 for the tax year in which the startup is certified by the Pakistan Software Export Board" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "is engaged in or intends to offer technology driven products or services to any sector of the economy" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV (Exemption from specific provisions), clause (43F)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "deduct tax from the gross amount payable (including sales tax, if any) at the rate specified in Division III of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What sales tax and advance income tax apply when a software house imports laptops and computers? Source: https://qanoondigest.com/faq/software-houses/sales-tax-imported-laptops-it-company Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Imported personal computers and laptops under headings 8471.3010 and 8471.3020 are charged sales tax at a reduced 10% under serial 77 of the Eighth Schedule. Locally manufactured laptops and computers are exempt under serial 50 of Table-2 of the Sixth Schedule. Section 148 of the Income Tax Ordinance separately collects advance income tax at import. **Applies to:** Software houses and IT companies in Pakistan importing laptops, notebooks or personal computers, or buying locally manufactured ones, after 30 June 2026. A software house buying laptops for its developers can import them or buy units assembled in Pakistan. Two federal laws reach the purchase. The Sales Tax Act, 1990 decides the sales tax on the import or supply, and the Income Tax Ordinance, 2001 collects advance income tax when goods clear customs. Customs duty itself comes from the customs tariff, which is not in this corpus. ### What sales tax applies to imported laptops? Section 3(1) of the Sales Tax Act charges sales tax at eighteen per cent of the value of goods imported into Pakistan. Section 3(2)(aa) overrides that for goods in the Eighth Schedule, which "shall be charged to tax at such rates and subject to such conditions and limitations as specified therein". Serial 77 of Table-1 of the Eighth Schedule covers "Imported personal computers and Laptop computers, notebooks whether or not incorporating multimedia kit" under headings 8471.3020 and 8471.3010. The rate is 10%. The conditions column for serial 77 is blank in the text as extracted. A footnote records that serial 77 was substituted by the Finance Act, 2024. For imported goods, the value for sales tax under section 2 of the Act is the value determined under the Customs Act, including customs duties and federal excise duty levied on the goods. So the 10% is charged on the customs value plus customs duty and federal excise duty. ### What about laptops made in Pakistan? Section 13(1) exempts supplies or imports of goods specified in the Sixth Schedule, subject to conditions the Federal Government may specify. Table-2 of the Sixth Schedule is headed "Local Supplies only". Its serial 50 lists "Locally manufactured laptops, computers, notebooks whether or not incorporating multimedia kit and personal computers" under headings 8471.3010 and 8471.3020. A supply of such a locally manufactured laptop is therefore exempt from sales tax. Because Table-2 covers local supplies only, it does not exempt an import. ### How does advance income tax at import work? Section 148(1) of the Income Tax Ordinance requires the Collector of Customs to collect advance tax from every importer on the value of the goods, at the rate in Part II of the First Schedule, for goods classified in Parts I to III of the Twelfth Schedule. Section 148(5) says it is collected in the same manner and at the same time as customs duty. Part II sets three rates on the import value as increased by customs duty, sales tax and federal excise duty: | Goods | Rate | |---|---| | Part I of the Twelfth Schedule | 1% | | Part II of the Twelfth Schedule | 2%, or 3.5% for a commercial importer | | Part III of the Twelfth Schedule | 5.5%, or 6% for a commercial importer | Part III of the Twelfth Schedule covers "Goods not specifically mentioned in Part I or II". Heading 84.71, which contains laptops, did not appear in Part I or Part II of the Twelfth Schedule in the text we read. On that reading laptops fall in Part III. The Ordinance does not define "commercial importer" in the provisions read for this page. **Is it final or adjustable?** Section 148(7) makes the tax a minimum tax on the importer's income arising from the imports, and excludes goods imported by an industrial undertaking for its own use. The Ordinance does not say in terms how that applies to a service business importing equipment for its own use rather than for sale. This page does not resolve that. ### Worked example (illustrative figures) Margalla Apps (Pvt) Ltd in Islamabad imports 20 laptops under heading 8471.3010. Assume the customs value plus customs duty and federal excise duty comes to Rs. 6,000,000. The company is not treated as a commercial importer. 1. Sales tax at 10% under serial 77: Rs. 6,000,000 x 10% = Rs. 600,000. 2. Value for advance income tax, increased by sales tax: Rs. 6,000,000 + Rs. 600,000 = Rs. 6,600,000. 3. Advance income tax at the Part III rate of 5.5%: Rs. 6,600,000 x 5.5% = Rs. 363,000. 4. Sales tax and advance income tax together: Rs. 600,000 + Rs. 363,000 = Rs. 963,000. If the company instead buys 20 locally manufactured laptops from a Lahore assembler, serial 50 of Table-2 of the Sixth Schedule makes the supply exempt, so no sales tax is charged on it. ### What if the laptops are resold or leased to clients? Serial 77 and serial 50 describe goods and do not limit the rate by the buyer's trade. A software house that resells equipment raises separate questions about registration, output tax and the commercial importer rate that this page does not cover. Whether sales tax paid at import can be claimed as input tax depends on the Act's input tax rules, which are also outside this page. ### Common mistakes - **Applying 18% to imported laptops.** Serial 77 of the Eighth Schedule sets 10%. - **Assuming the Sixth Schedule exempts imports too.** Table-2 is for local supplies only. - **Computing advance tax on the customs value alone.** Part II uses the import value as increased by customs duty, sales tax and federal excise duty. - **Treating accessories as laptops.** Serial 77 and serial 50 list only headings 8471.3010 and 8471.3020. ### What to check in the official text Read sections 2, 3(1) and 3(2)(aa) and 13(1) of the Sales Tax Act, serial 77 of Table-1 of the Eighth Schedule and serial 50 of Table-2 of the Sixth Schedule. In the Income Tax Ordinance, read section 148, Part II of the First Schedule and all three Parts of the Twelfth Schedule. Confirm the tariff heading of each model, and check any SRO or notification issued under section 148 or section 13, which this corpus does not hold. Customs duty rates are outside this corpus. ### Frequently asked #### What sales tax rate applies to an imported laptop? Serial 77 of Table-1 of the Eighth Schedule sets 10% for imported personal computers and laptop computers, notebooks whether or not incorporating multimedia kit, under headings 8471.3020 and 8471.3010. Section 3(2)(aa) applies Eighth Schedule rates in place of the standard eighteen per cent. #### Is a laptop made in Pakistan taxed? Serial 50 of Table-2 of the Sixth Schedule lists locally manufactured laptops, computers, notebooks and personal computers under headings 8471.3010 and 8471.3020. Section 13(1) exempts goods in the Sixth Schedule, and Table-2 is headed Local Supplies only. #### What advance income tax rate applies at import? Section 148 applies the Part II rate for the Twelfth Schedule Part in which the goods fall. Heading 84.71 did not appear in Part I or Part II as extracted, and Part III covers goods not specifically mentioned in those Parts, at 5.5%, or 6% for a commercial importer. Confirm the classification in the official PDF. ### Citations - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "goods specified in the Eighth schedule shall be charged to tax at such rates and subject to such conditions and limitations as specified therein" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 13 (Exemption)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#13-exemption), as amended to 2026-06-30: "supply of goods or import of goods specified in the Sixth Schedule shall, subject to such conditions as may be specified by the" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "the value determined under section 25" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Eighth Schedule, Table-1, serial 77 (imported personal computers and laptop computers); Sixth Schedule, Table-2 (Local Supplies only), serial 50 (locally manufactured laptops and computers)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Income Tax Ordinance, 2001, section 148 (Imports)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#148-imports), as amended to 2026-06-30: "The Collector of Customs shall collect advance tax from every importer of goods on the value of the goods at the rate specified in Part II of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part II (rates of advance tax under section 148); Twelfth Schedule, Parts I to III](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Does minimum tax on turnover under section 113 apply to a software house? Source: https://qanoondigest.com/faq/software-houses/minimum-tax-software-house-section-113 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, for a software house run as a resident company. Section 113 applies whatever the reason tax is low, and Division IX sets 1.25% of turnover for businesses not named elsewhere. Export proceeds taxed as final under section 154A are excluded from turnover, and that final tax is not counted as tax paid. **Applies to:** Software houses and IT companies resident in Pakistan, and individuals or associations of persons running one with turnover of Rs. 100 million or more, for tax year 2027. ### 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. ### Frequently asked #### What minimum tax rate applies to a software house for tax year 2027? The Division IX table names specific trades such as oil refineries, rice mills, flour mills and motorcycle dealers. Software and IT services are not named, so the row for 'In all other cases' applies, which is 1.25% of turnover. #### Are IT export proceeds part of turnover for section 113? Not where the tax on them is final. Section 113(3)(b) defines turnover from services as gross fees except those covered by final discharge of tax liability for which tax is separately paid or payable. Proceeds on which section 154A tax is final fall within that exception. #### What happens to minimum tax paid above the normal company tax? Section 113(2)(c) carries the excess forward for adjustment against tax payable under Division II of Part I of the First Schedule. As amended to 30 June 2026, the excess can be carried forward for the two tax years immediately after the year it was paid. ### Citations - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "for any reason whatsoever allowed under this Ordinance, including any other law for the time being in force" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IX (Minimum tax under section 113), S. No. 4](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "the income shall not be chargeable to tax under any head of income in computing the taxable income of the person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "The tax deductible under this section shall be a final tax on the income arising from the transactions referred to in this section" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "it is explained that the income of resident person referred to in sub-section (3) means the amount on which tax is deductible under sub-section (1) or" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division II (Rates of Tax for Companies)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can a software house get an exemption or reduced-rate certificate so clients do not deduct section 153 tax? Source: https://qanoondigest.com/faq/software-houses/section-153-exemption-certificate-software-house Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 159 lets the Commissioner issue an exemption or lower rate certificate where the amount is exempt, taxed at a lower rate, or covered by a 100% tax credit. A company gets it within fifteen days, or it is deemed issued through Iris. Section 153(4) reduced-rate orders apply only where the deduction is not minimum tax, which services deductions are. **Applies to:** Software houses and IT companies in Pakistan whose local clients deduct tax under section 153 from payments for services. Yes, but only where the law supports it. Section 159 of the Income Tax Ordinance lets the Commissioner issue an exemption or lower rate certificate for an amount that would otherwise suffer deduction under section 153, provided the amount is exempt, taxed at a lower rate, or covered by a 100% tax credit. A separate power in section 153(4) is narrower and, on its text, does not reach payments for services. ### What does section 159 say? Section 159(1) applies where the Commissioner is satisfied that an amount to which Division II or III of Part V of Chapter X applies is: - (a) exempt from tax under the Ordinance; - (b) subject to tax at a rate lower than that specified in the First Schedule; or - (c) subject to hundred percent tax credit under the Ordinance. Section 153 is in Division III, so payments to a software house for services are covered. On an application in writing, in the prescribed form, the Commissioner "shall" issue an exemption or lower rate certificate. Three provisos were added for companies: 1. The Commissioner shall issue the certificate within fifteen days of the company filing its application. 2. If that does not happen, the Commissioner is deemed to have issued the certificate on expiry of fifteen days, and it is "automatically processed and issued by Iris". 3. The Commissioner may modify or cancel a certificate issued by Iris, with reasons recorded in writing, after giving an opportunity of being heard. Section 159(2) tells the client what to do. A person required to deduct under Division III must deduct the full amount unless a certificate under section 159(1) is in force for that deduction, in which case it must comply with the certificate. ### What does section 153(4) add? Section 153(4) is a separate power. On application by the recipient, the Commissioner may allow, by written order, payment after deduction at a reduced rate, "in cases where tax deductible under sub-section (1) is not minimum". The reduction "shall not exceed eighty percent of the rate specified in the said Division", except for public limited companies, where the Commissioner may allow payment without any deduction. For a company that has discharged its advance tax liability, the reduced rate certificate is due within fifteen days and is deemed issued by Iris after that. The limit matters for a software house. Section 153(3) says tax deductible under section 153(1) is minimum tax. Its provisos take out goods sold by manufacturers or listed companies and contracts executed by listed companies. Nothing takes out services. On the wording, IT services payments are minimum-tax payments, so section 153(4) does not appear to apply to them. Section 159 contains no similar "not minimum" limit. ### When would a software house qualify under section 159? The section turns on whether the amount is exempt, taxed at a lower rate, or covered by a full tax credit. One case the Ordinance spells out is a startup under section 65F, which receives a tax credit equal to one hundred percent of tax payable for the certification year and the next two tax years. That matches clause (c) of section 159(1). For an ordinary software house earning local income, the Ordinance does not list what makes that income "subject to tax at a rate lower" than the First Schedule rate. It also does not say how section 159 interacts with the minimum tax status given by section 153(3). This page does not resolve that question. ### Worked example (illustrative figures) Nexa Systems (Pvt) Ltd, a Karachi company, files an application under section 159(1) on 3 March 2027 with its Commissioner. 1. Fifteen days from filing expire on 18 March 2027. 2. If no certificate or refusal has issued by then, the Commissioner is deemed to have issued it, and Iris processes and issues it automatically. 3. On 25 March a client pays Nexa Rs. 2,000,000 for IT services. Without a certificate, the Division III rate for IT services in tax year 2027 is 4%, a deduction of Rs. 2,000,000 x 4% = Rs. 80,000. 4. With a certificate in force for that deduction, section 159(2) requires the client to comply with it: no deduction if it is an exemption certificate, or the lower rate stated in it. ### What if the Commissioner later cancels the certificate? The third proviso lets the Commissioner modify or cancel an Iris-issued certificate after recording reasons and giving a hearing. The section does not say what happens to payments already made while the certificate was in force. ### What if our company is not a public limited company? The "without deduction of any tax" option in section 153(4) is limited to public limited companies. For other companies, that sub-section allows only a reduced rate, and only where the deduction is not minimum tax. ### Common mistakes - **Treating sections 153(4) and 159 as the same.** They have different conditions. Section 153(4) is limited to deductions that are not minimum tax. - **Assuming the fifteen-day rule applies to everyone.** The deemed issue provisos in section 159(1) refer to a company. - **Expecting a client to stop deducting without a certificate.** Section 159(2) requires full deduction unless a certificate is in force. ### What to check in the official text Read section 159(1) and (2), and section 153(3) and (4), in the official PDF. The prescribed application form and the Iris steps are not covered by this corpus. If you rely on the startup credit, read section 65F and clause (62A) of section 2. ### Frequently asked #### On what grounds does section 159 allow an exemption or lower rate certificate? The Commissioner must be satisfied that the amount is exempt from tax, subject to tax at a rate lower than the First Schedule rate, or subject to a hundred percent tax credit under the Ordinance. The application is made in writing in the prescribed form. #### What happens if the Commissioner does not decide a company's application within fifteen days? Section 159(1) says the Commissioner is deemed to have issued the certificate when fifteen days expire after the company files the application, and the certificate is automatically processed and issued by Iris. The Commissioner may later modify or cancel it with written reasons after giving a hearing. #### Can a software house use section 153(4) instead? Section 153(4) covers cases where tax deductible under section 153(1) is not minimum tax. Section 153(3) makes the deduction on services minimum tax, so on the text of the section, services payments do not fall within section 153(4). ### Citations - [Income Tax Ordinance, 2001, section 159 (Exemption or lower rate certificate)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#159-exemption-or-lower-rate-certificate), as amended to 2026-06-30: "the Commissioner shall be deemed to have issued the exemption certificate upon the expiry of fifteen days from filing of application by the aforesaid company" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "such reduction shall not exceed eighty percent of the rate specified in the said Division" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), paragraph (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 65F (Tax credit for certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#65f-tax-credit-for-certain-persons), as amended to 2026-06-30: "a startup as defined in clause (62A) of section 2 for the tax year in which the startup is certified by the Pakistan Software Export Board" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "is engaged in or intends to offer technology driven products or services to any sector of the economy" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is the tax deducted from our local IT service invoices adjustable, or is it minimum tax for a company? Source: https://qanoondigest.com/faq/software-houses/section-153-tax-minimum-or-adjustable Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It is minimum tax, and that includes companies. Section 153(3) says tax deductible under section 153(1) is minimum tax, and its exceptions cover goods and contracts, not services. The deduction is still a credit under section 168 against the company's tax, but the tax on that income cannot fall below the amount deducted, so the minimum part is not refundable. **Applies to:** Software houses and IT companies in Pakistan whose local clients deduct tax under section 153 from payments for services, for tax year 2027. ### What does section 153(3) say? Section 153(3), as amended to 30 June 2026, says the tax deductible under section 153(1) and (2) "on the income of a resident person" shall be minimum tax. The provisos then take these receipts out of minimum tax: - tax on sale or supply of goods received by a company that manufactures those goods, or by a listed public company, which is "not minimum tax"; - tax on execution of contracts received by a listed public company, which is "adjustable". None of the provisos mentions services. A former clause (b), which spoke specifically of services, was omitted by the Finance Act, 2020, but the main sentence still covers everything deducted under section 153(1), including clause (b) payments for services. So for a software house, whether a company, a partnership or a sole proprietor, tax deducted from local IT service fees is **minimum tax**. The Explanation to section 153(3) adds that the income concerned "means the amount on which tax is deductible". In other words, the floor is measured against the gross receipts on which the client deducted. ### Where does the "companies are treated differently" idea come from? The consolidated text prints, as a footnote, the version of section 153 that the Finance Act, 2011 replaced. In that old text, section 153(6) made the deduction a final tax, with a proviso that sub-section (6) "shall not apply to companies" for services, and a further proviso that service deductions were minimum tax. That is superseded wording. The current section 153 has no separate rule for companies receiving payment for services. ### How does section 168 credit work alongside it? Section 168(1)(b) treats tax deducted under Division III of Part V of Chapter X, which includes section 153, as tax paid by the person from whom it was deducted. Section 168(2) allows a tax credit for it "in computing the tax due by the person on the taxable income". The footnotes show that section 153(3) was removed from the list of final taxes in section 168(3) by the Finance Act, 2019, so the credit is available. Put together: - If the company's normal tax is **higher** than the deductions, the deductions are credited and the company pays the balance. - If the company's normal tax is **lower** than the deductions, the tax on that income cannot fall below the amount deducted, because it is minimum tax. The shortfall is not refundable. Section 168(5) refunds credit that cannot be used, but it does not override the minimum set by section 153(3). The Ordinance does not lay out a step by step computation for combining section 153 minimum tax with section 113 minimum tax on turnover. The Explanation to section 113(1) excludes final taxes and the super taxes from "tax payable or paid", and says nothing specific about section 153. This page does not resolve that interaction. ### Worked example (illustrative figures) A software company in Peshawar (not a small company) earns Rs. 30,000,000 in tax year 2027 from local clients who are all prescribed persons. Each deducted 4% under paragraph (2)(i) of Division III: Rs. 30,000,000 x 4% = Rs. 1,200,000. **Case A: a profitable year.** Taxable income from the local business is Rs. 8,000,000. 1. Normal tax at 29%: Rs. 8,000,000 x 29% = Rs. 2,320,000. 2. Credit under section 168 for the deductions: Rs. 1,200,000. 3. Balance payable: Rs. 2,320,000 minus Rs. 1,200,000 = Rs. 1,120,000. 4. Section 113 check: Rs. 30,000,000 x 1.25% = Rs. 375,000, below Rs. 2,320,000, so it does not bite. **Case B: a thin year.** Taxable income is Rs. 2,000,000. 1. Normal tax at 29%: Rs. 2,000,000 x 29% = Rs. 580,000. 2. Deductions: Rs. 1,200,000, which is minimum tax on the Rs. 30,000,000 receipts. 3. Because Rs. 580,000 is less than Rs. 1,200,000, the tax on this income stays at Rs. 1,200,000. The difference of Rs. 620,000 is not refunded. 4. Section 113 on turnover would give Rs. 375,000, lower than both figures. ### What if ...? **The client deducted more than the correct rate.** Minimum tax is the tax "deductible", which is 4% for IT services. An amount deducted above that is not the minimum set by section 153(3); how it is recovered is a matter for the refund provisions. **The company wants a reduced rate certificate.** Section 153(4) allows one only where the deductible tax "is not minimum". Tax on services is minimum, so this route is not open on the wording of the section. ### Common mistakes - **Treating service withholding as fully adjustable and expecting a refund** in a loss year. Section 153(3) makes it a floor. - **Reading the old section 153(6) footnote as current law** and assuming companies are carved out. - **Treating it as final tax** and leaving the income out of the return. It is minimum tax, so the income is still computed normally and the deduction credited. ### What to check in the official text Read section 153(3) and (4) and section 168(1) to (5) of the Ordinance as amended to 30 June 2026, together with section 113 and the Division IX table if your turnover is large relative to profit. ### Frequently asked #### Is section 153 tax on services final tax for a company? No. Section 153(3), as amended to 30 June 2026, makes tax deductible under section 153(1) minimum tax. The version that made service withholding final for some persons and treated companies separately appears only in the footnotes as the text replaced by the Finance Act, 2011. #### Can a software house get a refund of section 153 tax if its actual tax is lower? Not of the part that is minimum tax. Section 168 allows the deduction as a credit and section 168(5) provides for refund of unused credit, but section 153(3) fixes the tax on the income concerned at no less than the amount deducted. Any deduction above the correct 4% is a separate matter. #### Can the Commissioner issue a reduced rate certificate for IT services? Section 153(4) allows a reduced rate certificate only 'in cases where tax deductible under sub-section (1) is not minimum'. Because tax on services is minimum tax, that route is not open for IT service receipts on the wording of section 153(4). ### Citations - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "it is explained that the income of resident person referred to in sub-section (3) means the amount on which tax is deductible under sub-section (1) or" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "tax already paid or payable in respect of deemed income which is assessed as final discharge of the tax liability under section 169" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), paragraph (2)(i)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division II (Rates of Tax for Companies)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IX (Minimum tax under section 113), S. No. 4](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much tax will a local client withhold under section 153 when it pays our software house for IT services? Source: https://qanoondigest.com/faq/software-houses/section-153-withholding-it-services-rate Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer For tax year 2027, a prescribed client withholds 4% of the gross amount payable, including any sales tax, when it pays a software house for IT services or IT enabled services. The rate comes from the proviso in Division III of Part III of the First Schedule. Section 153 excuses payments totalling under Rs. 30,000 in a financial year. **Applies to:** Software houses, IT companies and IT enabled service providers in Pakistan that are paid by local clients. ### What does the law say? Section 153(1)(b) requires every prescribed person that pays a resident person "for the rendering of or providing of services" to deduct tax at the time of payment, from the gross amount payable including sales tax, at the rate in Division III of Part III of the First Schedule. Advance payments are covered too. For tax year 2027, paragraph (2)(i) of Division III sets **7%** of the gross amount payable for a list of services that includes "software development services, IT services and IT enabled services as defined in section 2". A proviso to that sub-paragraph then says: "the rate of tax shall be 4% in case of IT services and IT enabled services as defined in section 2." So the working rate for a software house is **4%**. ### What counts as IT services and IT enabled services? Section 2 defines both terms, each as a list that is "not limited to" the items named: - **IT services** include software development, software maintenance, system integration, web design, web development, web hosting and network design. - **IT enabled services** include inbound or outbound call centres, medical transcription, remote monitoring, graphics design, accounting services, HR services, telemedicine centres, data entry, cloud computing services, data storage services, locally produced television programmes and insurance claims processing. Software development is named inside the section 2 definition of IT services, so it falls within the 4% proviso. ### Who has to deduct? Only a "prescribed person" under section 153(7). The list includes the Federal Government, a company, an association of persons constituted by or under law, a non-profit organization, a foreign contractor or consultant, a consortium or joint venture, an individual or association of persons with turnover of one hundred million rupees or more in any preceding tax year, a sales tax registered person above the same turnover, and builders and developers. A small sole trader client below that turnover is not a prescribed person and does not deduct. Section 153(1)(b) also excuses a payer whose payments for services to you are "less than thirty thousand Rupees in aggregate, during a financial year". ### Worked example (illustrative figures) A software house in Karachi builds an inventory app for a private limited company in Faisalabad. The invoice shows: - Development fee: Rs. 2,000,000. - Provincial sales tax: Rs. 300,000 (an invented figure; provincial sales tax rates are outside this site). - Gross amount payable: Rs. 2,300,000. 1. The client is a company, so it is a prescribed person. 2. Its payments for the year are well above Rs. 30,000, so the threshold does not help. 3. Tax to deduct: Rs. 2,300,000 x 4% = Rs. 92,000. 4. Amount actually received: Rs. 2,300,000 minus Rs. 92,000 = Rs. 2,208,000. When reconciling a short payment of Rs. 92,000 against this invoice, the gap matches a 4% deduction on the gross including sales tax, not on the fee alone (which would be Rs. 80,000). ### What if ...? **The client deducts 7% instead of 4%.** The 7% rate in paragraph (2)(i) is the general rate for the listed services. The 4% proviso applies to IT services and IT enabled services as defined in section 2. The Explanation to paragraph (2)(i) also limits that paragraph's rates to a service provider whose services are subject to withholding on gross receipts and who "has not agitated taxation of gross receipts before any court of law". **The service is not IT at all.** Services outside the paragraph (2)(i) list and outside the other named sub-paragraphs fall under paragraph (2)(v), at 14% of the gross amount. **The developer is an individual freelancer, not a company.** Paragraph (2)(ii) sets 15% for "independent professional services such as doctors, lawyers, architects, accountants, software engineers or developers, working independently". The Division does not state how that sub-paragraph interacts with the 4% proviso for an individual providing IT services. This page does not resolve that point. ### Common mistakes - **Applying the rate to the fee only.** Section 153(1) uses the gross amount payable including sales tax. - **Assuming every client deducts.** Only prescribed persons listed in section 153(7) do. - **Using the pre-2026 figures.** The Finance Act, 2026 raised the general paragraph (2)(i) rate from 6% to 7%. The footnotes show the IT proviso rate has been 4% since the Finance Act, 2023 replaced 3%. ### What to check in the official text Read section 153(1), (3) and (7), the definitions of IT services and IT enabled services in section 2, and paragraph (2) of Division III of Part III of the First Schedule, as amended to 30 June 2026. Whether the deduction is adjustable or minimum tax is covered on a separate page. ### Frequently asked #### What is the section 153 rate for IT services in tax year 2027? Paragraph (2)(i) of Division III lists software development, IT services and IT enabled services among services taxed at 7% of the gross amount payable. A proviso sets the rate at 4% for IT services and IT enabled services as defined in section 2. #### Is the 4% worked out before or after sales tax? After. Section 153(1) requires the deduction from the gross amount payable including sales tax, if any. On an invoice that carries provincial sales tax, the 4% applies to the total including that tax. #### Does every client have to deduct tax? No. Only a prescribed person listed in section 153(7) must deduct, such as the Federal Government, a company, a non-profit organization, or an individual or association of persons with turnover of one hundred million rupees or more in any preceding tax year. ### Citations - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "except where payment is less than thirty thousand Rupees in aggregate, during a financial year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), paragraph (2)(i)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), paragraph (2)(ii) and (v)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "software development, software maintenance, system integration, web design, web development, web hosting and network design" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much tax will a local client withhold under section 153 when it pays our software house for IT services? Source: https://qanoondigest.com/faq/software-houses/section-153-withholding-rate-it-services Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer For tax year 2027, Division III of Part III of the First Schedule sets section 153 withholding at 7% for listed services, with a proviso cutting it to 4% for IT and IT-enabled services. A prescribed person deducts it from the gross amount unless its payments to you total less than Rs. 30,000 in the financial year. **Applies to:** Software houses, IT companies and IT-enabled service providers in Pakistan paid by local clients for services. When a company or other prescribed person in Pakistan pays your software house for IT work, section 153 makes it deduct income tax from the payment before it pays you. For tax year 2027 the rate for IT services and IT-enabled services is 4% of the gross amount payable, under the proviso in Division III of Part III of the First Schedule. ### What does the law say? Section 153(1)(b) applies to a payment "for the rendering of or providing of services", made in full or in part, including an advance, to a resident person. The prescribed person making the payment must "deduct tax from the gross amount payable (including sales tax, if any) at the rate specified in Division III of Part III of the First Schedule". Clause (b) has a threshold built into it: no deduction is required where payment is less than thirty thousand rupees in aggregate during a financial year. Paragraph (2) of Division III sets the rates for services. Sub-paragraph (i) lists services taxed at 7% of the gross amount payable. The list includes "software development services, IT services and IT enabled services as defined in section 2", alongside transport, courier, security guard, engineering and other services. It then adds a proviso: "the rate of tax shall be 4% in case of IT services and IT enabled services as defined in section 2." Section 2 defines both terms. Clause (30AD) says IT services include, but are not limited to, software development, software maintenance, system integration, web design, web development, web hosting and network design. Clause (30AE) says IT-enabled services include call centres, medical transcription, remote monitoring, graphics design, accounting services, HR services, telemedicine centres, data entry, cloud computing, data storage, locally produced television programmes and insurance claims processing. | Service (Division III, paragraph (2)) | Rate, tax year 2027 | |---|---| | IT services and IT-enabled services as defined in section 2 (proviso to sub-paragraph (i)) | 4% of gross amount payable | | Other services named in sub-paragraph (i) | 7% of gross amount payable | | Independent professional services such as doctors, lawyers, architects, accountants, software engineers or developers, working independently (sub-paragraph (ii)) | 15% | | Services not covered by sub-paragraphs (i) to (iv) (sub-paragraph (v)) | 14% of the gross amount | ### Who has to deduct the tax? Only a "prescribed person" under section 153(7)(i). The list includes the Federal Government, a company, an association of persons constituted by or under law, a non-profit organization, a foreign contractor or consultant, a consortium or joint venture, an AOP or an individual with turnover of one hundred million rupees or more in any of the preceding tax years, a person registered under the Sales Tax Act, 1990 with turnover of one hundred million rupees or more in any preceding tax year, and builders and developers. A small sole trader who hires you to build a website, and who is not on that list, is not required to deduct. ### How does it work in practice? The client deducts at the time it makes the payment, whether the payment is the full invoice, a part payment or an advance. The base is the gross amount payable, which includes any sales tax on the invoice. Provincial sales tax on services is outside this corpus, so its rate is not covered here. Section 153(3) makes the tax deductible under sub-section (1) a minimum tax on the income of a resident person. The provisos to sub-section (3) cover goods sold by manufacturers or listed companies, and contracts by listed companies. They do not cover services, so the deduction on your IT invoices stays minimum tax. The Explanation under sub-paragraph (i) of Division III adds a condition. The listed rate applies "only to a service provider whose services are subjected to withholding tax on gross receipts and the service provider has not agitated taxation of gross receipts before any court of law". ### Worked example (illustrative figures) Bytecraft (Pvt) Ltd in Lahore maintains a payroll system for a Karachi company during tax year 2027. The client pays three invoices whose totals, including any sales tax charged, come to Rs. 2,500,000. 1. The client is a company, so it is a prescribed person under section 153(7)(i)(b). 2. Software maintenance is listed in clause (30AD), so the 4% proviso applies. 3. Tax deducted: Rs. 2,500,000 x 4% = Rs. 100,000. 4. Bytecraft receives Rs. 2,500,000 - Rs. 100,000 = Rs. 2,400,000. A second client, a small company, pays Bytecraft Rs. 25,000 in total during the financial year for a one-off fix. That is less than thirty thousand rupees in aggregate, so section 153(1)(b) does not require a deduction. ### What if we are not on the Active Taxpayers List? Rule 1 of the Tenth Schedule increases the rate of deduction by one hundred percent of the rate for persons not appearing in the active taxpayers' list. On IT services that turns 4% into 8%. Section 153 is not among the exclusions in rule 10. The related page on higher withholding covers this in detail. ### What if we bill "software development" rather than "IT services"? Sub-paragraph (i) names "software development services" separately in its 7% list, while the 4% proviso refers to "IT services and IT enabled services as defined in section 2". Clause (30AD) of section 2 includes software development within IT services. The Ordinance does not expressly say how these two references fit together, and this page does not resolve it. ### What if a developer works independently rather than through a company? Sub-paragraph (ii) of paragraph (2) sets 15% for independent professional services, naming "software engineers or developers, working independently". Which row applies to a particular individual depends on how their work is characterised, which the Schedule does not define further. ### Common mistakes - **Using 7% for all IT work.** The proviso sets 4% for IT services and IT-enabled services as defined in section 2. - **Deducting on the amount before sales tax.** Section 153(1) says "gross amount payable (including sales tax, if any)". - **Treating the deduction as final tax.** Section 153(3) makes it minimum tax for services. - **Assuming every client must deduct.** Only prescribed persons under section 153(7)(i) must. ### What to check in the official text Read section 153(1), (3) and (7), then paragraph (2) of Division III of Part III of the First Schedule in the official PDF, since the site text leaves out the rate tables. Read clauses (30AD) and (30AE) of section 2 to confirm your service is listed. Check rules 1 and 10 of the Tenth Schedule for the rate if your business is not on the Active Taxpayers List. ### Frequently asked #### What is the section 153 rate on IT services for tax year 2027? Paragraph (2)(i) of Division III sets 7% of the gross amount payable for a list of services that includes software development, IT and IT-enabled services. A proviso to that sub-paragraph sets the rate at 4% for IT services and IT-enabled services as defined in section 2. #### Does every client have to deduct tax from our invoices? No. Only a prescribed person listed in section 153(7) must deduct, such as a company, the Federal Government, a non-profit organization, or an individual or AOP with turnover of one hundred million rupees or more in any preceding tax year. A small individual client below that line is not a prescribed person. #### Is the tax withheld under section 153 on services adjustable against our final liability? Section 153(3) says the tax deductible under sub-section (1) is minimum tax. The provisos that take some payments out of minimum tax cover goods sold by manufacturers or listed companies and contracts by listed companies, not services. ### Citations - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "except where payment is less than thirty thousand Rupees in aggregate, during a financial year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), paragraph (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "software development, software maintenance, system integration, web design, web development, web hosting and network design" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (Rate of deduction or collection of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is the section 65F 100% tax credit and the 80% remittance condition still available to IT exporters? Source: https://qanoondigest.com/faq/software-houses/section-65f-it-export-tax-credit-status Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No. The 100% credit for IT export income sat in clause (c) of section 65F(1), and before that in clause (133) of the Second Schedule. Both carried the 80% remittance proviso and both have been omitted. Only the startup credit in section 65F(1)(b) remains. Software house export proceeds are now taxed under section 154A. **Applies to:** Software houses and IT or IT-enabled service companies in Pakistan that export services and are checking older guidance on a full tax credit, for tax year 2027. Many software houses still plan around a "100% tax credit on IT exports, as long as 80% of proceeds come home". That rule existed, in two different forms, but neither is in the Income Tax Ordinance, 2001 as amended to 30 June 2026. ### What does section 65F say now? Section 65F(1) gives a tax credit equal to one hundred per cent of tax payable "including minimum, alternate corporate tax and final taxes", but only to two categories: - **Clause (a):** persons engaged in coal mining projects in Sindh, for income from supplying coal to power generation projects. - **Clause (b):** "a startup as defined in clause (62A) of section 2 for the tax year in which the startup is certified by the Pakistan Software Export Board" and the next two tax years. There is no clause for IT export income. An established software house that exports services is outside section 65F unless it is a certified startup within clause (b). ### Where did the IT export credit and the 80% rule go? The history has two steps, both recorded in the footnotes of the consolidated Ordinance. **Step 1: the clause (133) exemption.** Part I of the Second Schedule used to exempt, in clause (133), "Income from exports of computer software or IT services or IT enabled services" up to 30 June 2025, with a proviso that "eighty per cent of the export proceeds is brought into Pakistan in foreign exchange remitted from outside Pakistan through normal banking channels." The footnote says clause (133) was omitted by the Finance Act, 2021, and earlier through the Tax Laws (Second Amendment) Ordinance, 2021. **Step 2: the section 65F(1)(c) credit.** Section 65F was inserted by the Finance Act, 2021. Its clause (c) gave the credit to "Income from exports of computer software or IT services or IT enabled services as defined in clause (30AD) and (30AE) of section 2 upto the period ending on the 30th day of June, 2025", with the same eighty per cent proviso. Section 5 of the Finance Act, 2022 then provided that "in section 65F, in sub-section (1), clause (c) shall be omitted". So the exemption became a credit in 2021, and the credit was removed in 2022. Both versions also carried an end date of 30 June 2025, so neither could reach tax year 2027 even on its own terms. ### What taxes a software house's export income instead? Section 154A(1) requires the authorised dealer in foreign exchange, when it realises export proceeds, to deduct tax at the rates in Division IVA of Part III of the First Schedule. Clause (a) covers "exports of computer software or IT services or IT enabled services" where the exporter is registered with and certified by the Pakistan Software Export Board (PSEB). Clause (b) covers other services rendered outside Pakistan or exported from Pakistan. | Type of receipt (Division IVA) | Rate | |---|---| | Export proceeds of computer software, IT services or IT-enabled services by persons registered with the PSEB | 0.25% of proceeds, for tax years 2024 up to tax year 2029 | | Any other case | 1% of proceeds | Under section 154A(2) the tax is final once the return is filed and the other listed conditions are met. Section 154A(3) allows a yearly option not to be subject to final taxation. ### Worked example (illustrative figures) **A 40-person software company in Lahore**, registered with the PSEB, realises Rs. 120,000,000 in export proceeds in tax year 2027. Its finance team is working from a 2020 checklist that says the company pays nothing if 80% of proceeds are remitted. 1. Clause (133) of the Second Schedule no longer exists. Section 65F(1) has no IT export clause. The checklist is out of date. 2. The company is not a certified startup, so section 65F(1)(b) does not apply. 3. Section 154A(1)(a) applies because the company is PSEB-registered. 4. Division IVA rate: 0.25%. 5. Tax deducted by the bank: Rs. 120,000,000 x 0.25% = Rs. 300,000. If the company were not PSEB-registered, the "any other case" row would apply: Rs. 120,000,000 x 1% = Rs. 1,200,000. ### What if the company is a certified startup? Section 65F(1)(b) still works, and its credit covers tax payable "including minimum, alternate corporate tax and final taxes". That wording reaches the section 154A tax as well. The credit lasts for the tax year of PSEB certification and the next two tax years. Section 65F(2) makes it conditional on a filed return, filed withholding statements where the company is a withholding agent, and filed sales tax returns where the company is required to file them. Whether a company is a "startup" depends on the definition in clause (62A) of section 2, covered on a separate page. ### Common mistakes - **Treating the 80% remittance rule as current law.** It was a proviso to clause (133) and to section 65F(1)(c). Both are omitted. - **Reading section 154A as if it had the same condition.** Section 154A and Division IVA contain no eighty per cent test. - **Assuming any software house qualifies for the startup credit.** Clause (b) is limited to startups certified by the PSEB, and only for three tax years. ### What to check in the official text Read section 65F and its footnotes, section 154A, and Division IVA of Part III of the First Schedule in the Ordinance amended to 30 June 2026. The footnote to clause (133) of Part I of the Second Schedule reproduces the omitted exemption. Section 5 of the Finance Act, 2022 contains the omission of section 65F(1)(c). The PSEB's registration procedure is outside this corpus. ### Frequently asked #### Where did the 80% remittance condition come from? It was a proviso in two places: clause (133) of Part I of the Second Schedule, which exempted IT export income, and later clause (c) of section 65F(1), which gave a 100% tax credit. The footnotes to the consolidated Ordinance record that clause (133) was omitted by the Finance Act, 2021 and clause (c) by the Finance Act, 2022. #### Can a software house still get a 100% tax credit under section 65F? Only if it is a startup as defined in clause (62A) of section 2 and certified by the Pakistan Software Export Board. The credit runs for the year of certification and the next two tax years, and section 65F(2) requires a filed return, filed withholding statements and filed sales tax returns where required. #### Does section 154A carry an 80% remittance condition? No. Section 154A and Division IVA do not contain one. The tax is deducted by the authorised dealer when foreign exchange proceeds are realised, at 0.25% for PSEB-registered IT exporters up to tax year 2029 and 1% in any other case. ### Citations - [Income Tax Ordinance, 2001, section 65F (Tax credit for certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#65f-tax-credit-for-certain-persons), as amended to 2026-06-30: "a startup as defined in clause (62A) of section 2 for the tax year in which the startup is certified by the Pakistan Software Export Board" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2022, section 5 (Amendments of Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2022#5-amendments-of-income-tax-ordinance-2001-xlix-of-2001), as amended to 2022: "in section 65F, in sub-section (1), clause (c) shall be omitted;" Official source: https://download1.fbr.gov.pk/Docs/2022711571639532FinanceAct2022.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (133) (omitted by the Finance Act, 2021)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "exports of computer software or IT services or IT enabled services" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is the section 65F 100% tax credit and its 80% remittance condition still available to IT exporters? Source: https://qanoondigest.com/faq/software-houses/section-65f-tax-credit-it-exports Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No. The Finance Act, 2022 omitted clause (c) of section 65F(1), the 100% tax credit for income from IT exports with its condition that 80% of proceeds be remitted through banking channels. Section 65F now covers only Sindh coal mining supplying power projects and PSEB-certified startups. IT exports are taxed under section 154A. **Applies to:** Software houses and IT exporters that have heard of a 100% tax credit on IT export income and want to know if it still applies. The 100% tax credit on IT export income under section 65F is not available to an ordinary software house in the Ordinance as it stands. The clause that gave it was removed by the Finance Act, 2022, and IT export income has since been taxed through the bank deduction under section 154A. ### What does the law say now? Section 65F(1) of the Income Tax Ordinance, 2001, as amended up to 30 June 2026, allows certain persons or incomes "a tax credit equal to one hundred per cent of the tax payable under any provisions of this Ordinance including minimum, alternate corporate tax and final taxes". Only two clauses remain: | Clause | Who gets the credit | |---|---| | (a) | Persons engaged in coal mining projects in Sindh, to the extent the income is derived from supplying coal to power generation projects | | (b) | A startup, for the tax year in which it is certified by the Pakistan Software Export Board and the next following two tax years | An Explanation to the section confirms that the credit under clause (a) is only for income from coal mining operations in Sindh supplying power projects. Neither clause mentions exports of software, IT services or IT-enabled services. Section 65F(2) adds conditions for the remaining clauses: the return has been filed, withholding tax statements have been filed where the person is a withholding agent, and sales tax returns have been filed where required. ### What happened to the IT export credit? Section 5 of the Finance Act, 2022 amended the Ordinance with the words: "in section 65F, in sub-section (1), clause (c) shall be omitted;". The footnote in the official consolidated Ordinance records what clause (c) said before it was omitted. It covered income from exports of computer software or IT services or IT-enabled services "upto the period ending on the 30th day of June, 2025", with a proviso that "eighty percent of the export proceeds is brought into Pakistan in foreign exchange remitted from outside Pakistan through normal banking channels." So the 80% remittance condition people still quote belonged to a clause that no longer exists. Its own end date, 30 June 2025, has also passed. ### How are IT exports taxed instead? The same section of the Finance Act, 2022 also changed section 154A. Clause (a) of section 154A(1) had applied to IT exports "in case tax credit under section 65F is not available". The Finance Act, 2022 replaced that expression with "where the exporter is registered with and duly certified by the Pakistan Software Export Board (PSEB)." Section 154A now requires the bank to deduct tax from IT export proceeds at the rates in Division IVA of Part III of the First Schedule: | Type of receipt | Rate of tax | |---|---| | Export proceeds of computer software, IT services or IT-enabled services by persons registered with PSEB | 0.25% of proceeds for tax years 2024 up to tax year 2029 | | Any other case | 1% of proceeds | ### Worked example (illustrative figures) Karakoram Cloud (Pvt) Ltd in Peshawar is PSEB-registered, was not certified as a startup, and realises export proceeds of Rs. 25,000,000 in tax year 2027. Its owner believes the company owes nothing because of a 100% credit. 1. Section 65F(1) has no clause covering IT export income, so no credit applies. 2. Section 154A applies instead. The company is PSEB-registered, so row 1 of Division IVA applies. 3. Tax deducted by the bank: Rs. 25,000,000 x 0.25% = Rs. 62,500. If the company were a PSEB-certified startup within its credit period under clause (b), the position would be different, and that credit is covered on a separate page. ### What if older guides still mention the 65F credit? Guides written before the Finance Act, 2022 may describe clause (c) correctly for its time. The consolidated Ordinance amended up to 30 June 2026 no longer contains it. For past tax years, the text in force for that year governs, and this page does not work through earlier years. ### Common mistakes - **Assuming the credit runs to June 2025 because the old clause said so.** The clause was omitted by the Finance Act, 2022 before that date arrived. - **Treating the 80% remittance rule as a current condition.** It was a proviso to the omitted clause (c). The current section 154A conditions are about filing the return and withholding statements. - **Confusing the startup credit with an IT export credit.** Clause (b) is limited to startups certified by PSEB, and only for three tax years in total. ### What to check in the official text Read section 65F and its footnotes in the official PDF of the Ordinance amended up to 30 June 2026, and section 5 of the Finance Act, 2022 for the omission of clause (c) and the change to section 154A. In the text on this site, the footnote quoting the omitted clause appears alongside section 65G because of how the PDF was laid out. ### Frequently asked #### Where did the 80% remittance rule come from? It was the proviso to clause (c) of section 65F(1), which required eighty percent of the export proceeds to be brought into Pakistan in foreign exchange through normal banking channels. The Finance Act, 2022 omitted clause (c), so the proviso went with it. #### Can a new software company still get a 100% credit under section 65F? Only if it is a startup as defined in the Ordinance and certified by the Pakistan Software Export Board. Clause (b) gives the credit for the tax year of certification and the next following two tax years, subject to the filing conditions in section 65F(2). #### What replaced the credit for ordinary IT exporters? IT export proceeds are taxed by deduction under section 154A at the Division IVA rates: 0.25% for PSEB-registered exporters for tax years 2024 up to 2029, and 1% in any other case. ### Citations - [Income Tax Ordinance, 2001, section 65F (Tax credit for certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#65f-tax-credit-for-certain-persons), as amended to 2026-06-30: "Following persons or incomes shall be allowed a tax credit equal to one hundred per cent of the tax payable under any provisions of this Ordinance including minimum, alternate corporate tax and final taxes" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2022, section 5 (Amendments of Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2022#5-amendments-of-income-tax-ordinance-2001-xlix-of-2001), as amended to 2022: "in section 65F, in sub-section (1), clause (c) shall be omitted;" Official source: https://download1.fbr.gov.pk/Docs/2022711571639532FinanceAct2022.pdf - [Finance Act, 2022, section 5 (Amendments of Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2022#5-amendments-of-income-tax-ordinance-2001-xlix-of-2001), as amended to 2022: "in clause (a), for the expression “in case tax credit under section 65F is not available”, the expression “where the exporter is registered with and duly certified by the Pakistan Software Export Board (PSEB).” shall be substituted;" Official source: https://download1.fbr.gov.pk/Docs/2022711571639532FinanceAct2022.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "deduct tax from the proceeds at the rates specified in Division IVA of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What happens if a software house fails to deduct or deposit withholding tax on salaries and contractor payments? Source: https://qanoondigest.com/faq/software-houses/failure-to-deduct-withholding-software-house Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 161 makes the software house personally liable for tax it failed to deduct, or deducted but did not pay over. Section 205(3) adds default surcharge at 12% a year. Section 182 penalises late withholding statements, and section 154A(2) makes filed statements a condition for final tax on IT export proceeds. **Applies to:** Software houses and IT companies in Pakistan that pay salaries, contractors or other amounts from which the Income Tax Ordinance requires tax to be deducted. A software house that pays salaries, freelancers, landlords or foreign vendors acts as a tax collector for the government. When it misses a deduction, or deducts and then keeps the money, the Income Tax Ordinance, 2001 shifts the tax onto the company itself and adds a time-based charge. For an IT exporter there is a second cost: the 0.25% final tax regime depends on withholding statements being filed. ### What does the law say about failing to deduct or deposit? Section 161(1) covers two failures. Clause (a) is a person who fails to deduct tax from a payment as required under Division III of Part V of Chapter X (the withholding provisions, which include salary and payments for services). Clause (b) is a person who deducted the tax but fails to pay it to the Commissioner. In both cases "the person shall be personally liable to pay the amount of tax to the Commissioner", who may pass an order and recover it. Three safeguards and follow-ons sit in the same section: - **Hearing first.** Section 161(1A) says no recovery is made unless the person has been given an opportunity of being heard. - **Recipient already paid.** Section 161(1B) says that if the tax has meanwhile been paid by the person who should have suffered the deduction, no recovery is made from the software house, but it pays default surcharge at 12% per annum from the date it failed to deduct to the date the tax was paid. - **Right to recover.** Section 161(2) entitles the software house to recover the tax from the employee or contractor from whom it should have been deducted. ### What does default surcharge cost? Section 205(3) applies to a person who fails to deduct tax as required under Division III of Part V of Chapter X, or fails to pay tax it deducted on or before the due date. The surcharge is 12% per annum on the amount unpaid, running from the date the amount was required to be deducted to the date it was paid to the Commissioner. Section 205(2) refunds surcharge to the extent the underlying tax is later held not payable. ### Which penalties can apply? Section 182 sets penalties in a Table, and says they apply in addition to any other punishment under the Ordinance or any other law. Two entries matter here: | Entry | Failure | Penalty as printed in the Table | |---|---|---| | 1A | Not filing a withholding statement under section 165 (or the related statement sections listed in the entry) by the due date | Rs. 50,000 if the tax withheld had already been paid by its due date and the statement is filed within ninety days of its due date; in all other cases Rs. 2,500 for each day of default, minimum Rs. 10,000 | | 5 | Failing to deposit tax due in the time or manner laid down | 5% of the tax in default, plus 25% more for a second default and 50% more for a third and later defaults | Entry 5 lists the section on the due date for payment of tax on taxable income in its reference column, not the withholding provisions. The Table does not say in terms whether it reaches withheld tax, so this page does not treat it as settled. Section 165 requires a quarterly withholding statement, due by 20 April, 20 July, 20 October and 20 January for the quarters ending March, June, September and December. Its proviso requires the statement even where no tax was deducted in the period. ### How does it hit the IT export regime? Section 154A(2) makes the bank's deduction on IT export proceeds a final tax only on conditions. Clause (b) is that "withholding tax statements for the relevant tax year have been filed if required under the Ordinance". Section 154A(3) says final taxation does not apply to a person who does not fulfil the conditions. A software house that skips its section 165 statements puts that treatment at risk for the year. ### Can the expense still be claimed? Section 21(c) disallows a deduction, in computing income from business, for expenditure from which tax had to be deducted unless the tax was deducted and paid. Its second proviso treats tax recovered under section 161 as tax paid. This matters for income taxed under the normal rules, such as fees from Pakistani clients. Expenses against export income under final tax are not deductible in any case. ### Worked example (illustrative figures) Kohsar Labs (Pvt) Ltd in Lahore pays a local UI contractor during tax year 2027. On 1 October 2026 it should have deducted Rs. 150,000 but deducted nothing. It notices the error and pays the Rs. 150,000 to the Commissioner on 1 April 2027. 1. Tax the company is personally liable for under section 161(1)(a): Rs. 150,000. 2. Period of default: 1 October 2026 to 1 April 2027, about six months. 3. Default surcharge under section 205(3): Rs. 150,000 x 12% x 6/12 = Rs. 9,000. 4. Total paid by the company: Rs. 150,000 + Rs. 9,000 = Rs. 159,000. 5. Under section 161(2) it is entitled to recover the Rs. 150,000 from the contractor. The months are rounded here to keep the arithmetic clear. Section 205(3) states the rate per annum and does not set a day-count method. If the September quarter statement had also been filed late, entry 1A of the section 182 Table would apply on top. ### Common mistakes - **Assuming the recipient carries the risk.** Section 161(1) places the liability on the payer. Recovery from the recipient is a right, not a defence. - **Skipping nil statements.** The proviso to section 165(1) requires the statement even for a quarter with no deductions. - **Treating the export deduction as automatically final.** Section 154A(2)(b) ties final taxation to filed withholding statements. - **Claiming the unpaid-withholding expense.** Section 21(c) blocks it until the tax is deducted and paid. ### What to check in the official text Read section 161(1) to (3), section 205(2) and (3), section 165(1) and (2), section 154A(2) and (3) and section 21(c). Check entries 1A and 5 of the section 182 Table in the official PDF, because the Table is laid out in columns that the parsed text does not keep. The entry 1A figure of Rs. 50,000 replaced Rs. 5,000 by the Finance Act, 2025, according to the footnote. ### Frequently asked #### Can the software house recover the missed tax from the employee or contractor? Yes. Section 161(2) says a person made personally liable for failing to deduct is entitled to recover the tax from the person from whom it should have been deducted. The Ordinance does not say how that recovery is arranged between the parties. #### What if the contractor has already paid the tax in their own return? Section 161(1B) says no recovery of the tax is then made from the software house. It is still liable for default surcharge at 12% a year from the date it failed to deduct to the date the tax was paid. #### Does missing a withholding statement affect the 0.25% IT export regime? It can. Section 154A(2)(b) makes the export deduction a final tax only if withholding tax statements for the tax year have been filed where required. Section 154A(3) says final taxation does not apply to a person who does not meet the conditions. ### Citations - [Income Tax Ordinance, 2001, section 161 (Failure to pay tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#161-failure-to-pay-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be personally liable to pay the amount of tax to the Commissioner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 205 (Default surcharge)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#205-default-surcharge), as amended to 2026-06-30: "on the amount unpaid computed for the period commencing on the date the amount was required to be collected or deducted and ending on the date on which it was paid to the Commissioner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 182 (Offences and penalties)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182-offences-and-penalties), as amended to 2026-06-30: "in addition to and not in derogation of any punishment to which he may be liable under this Ordinance or any other law" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "withholding tax statements for the relevant tax year have been filed if required under the Ordinance;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 165 (Statements)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#165-statements), as amended to 2026-06-30: "shall be required to file withholding statement even where no withholding tax is collected or deducted during the period" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "any expenditure from which the person is required to deduct or collect tax under Part V of Chapter X or Chapter XII, unless the person has paid or deducted and paid the tax as required by Division IV of Part V of Chapter X" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What happens if a software house fails to deduct or deposit withholding tax on salaries and contractor payments? Source: https://qanoondigest.com/faq/software-houses/failure-to-deduct-withholding-consequences Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 161 makes the software house personally liable for tax it failed to deduct, or deducted but did not pay over. Section 205(3) adds default surcharge at 12% a year, section 21(c) blocks the expense, and section 182 sets penalties. Section 154A(2)(b) also ties final tax on IT exports to filed withholding statements. **Applies to:** Software houses and IT companies in Pakistan that pay salaries, contractors or other amounts from which the Income Tax Ordinance requires tax to be deducted. A software house that pays staff, freelancers or vendors acts as a collector of tax for the government. When it misses a deduction, or deducts and then does not deposit the money, the Income Tax Ordinance, 2001 moves the tax onto the company, adds a time-based charge, blocks the related expense and sets penalties for late statements. The rules below apply to tax year 2027 under the Ordinance amended to 30 June 2026. ### Who pays when the deduction is missed? The software house does. Section 161(1) covers two failures. Clause (a) is failing to deduct tax from a payment as required under Division III of Part V of Chapter X, the Division that covers deductions from salary and from payments for services. Clause (b) is deducting the tax and then failing to pay it to the Commissioner. In both cases "the person shall be personally liable to pay the amount of tax to the Commissioner", who may pass an order and recover it. The same section adds three points: - **Hearing first.** Section 161(1A) bars recovery unless the person has had an opportunity of being heard. - **Recipient already paid.** Section 161(1B) says that if the employee or contractor has meanwhile paid the tax, nothing is recovered from the software house, but it pays default surcharge at twelve per cent per annum from the date it failed to deduct to the date the tax was paid. - **Right of recovery.** Section 161(2) entitles the software house to recover the tax from the person from whom it should have been deducted. ### How is default surcharge worked out? Section 205(3) applies to a person who fails to deduct tax as required under Division III of Part V of Chapter X, or fails to pay deducted tax on or before the due date. The surcharge is 12 per cent per annum on the amount unpaid, running from the date the amount was required to be deducted to the date it was paid to the Commissioner. Section 205(2) refunds surcharge to the extent the underlying amount is later held not payable. ### Can the expense still be claimed? Section 21(c) says no deduction is allowed, in computing income from business, for expenditure from which the person is required to deduct tax, unless the person has deducted and paid the tax as required. The second proviso says recovery of tax under section 161 counts as tax paid. This bites on income taxed under the normal rules, such as fees from Pakistani clients. ### Which penalties can apply? Section 182 sets penalties in a Table and says they apply "in addition to and not in derogation of" any other punishment. Two entries are relevant: | Entry | Failure | Penalty as printed | |---|---|---| | 1A | Not furnishing a statement under section 165 (and related sections) by the due date | Rs. 50,000 if the tax withheld was paid by its due date and the statement is filed within ninety days of its due date; otherwise Rs. 2,500 for each day of default, minimum Rs. 10,000 | | 5 | Failing to deposit tax due, or part of it, in the time or manner laid down | 5% of the tax in default, with an additional 25% for a second default and 50% for third and later defaults | The reference column for entry 5 does not list the withholding provisions. The Table does not state in terms whether entry 5 reaches withheld tax, so this page does not treat that as settled. Section 165(2) sets the statement due dates: 20 April, 20 July, 20 October and 20 January for quarters ending March, June, September and December. The proviso to section 165(1) requires a statement even when nothing was deducted. ### How does it affect the IT export regime? Section 154A(2) makes the bank's deduction on IT export proceeds a final tax only if listed conditions are met. Clause (b) is that "withholding tax statements for the relevant tax year have been filed if required under the Ordinance". Section 154A(3) says final taxation does not apply to a person who does not fulfil the conditions. Missing section 165 statements therefore puts final tax treatment of export income at risk for that year. ### Worked example (illustrative figures) Ravi Code (Pvt) Ltd in Lahore pays a contract QA engineer during tax year 2027. On 1 September 2026 it should have deducted Rs. 90,000 but deducted nothing. It pays the Rs. 90,000 to the Commissioner on 1 March 2027. 1. Tax the company is personally liable for under section 161(1)(a): Rs. 90,000. 2. Period of default: 1 September 2026 to 1 March 2027, six months. 3. Default surcharge under section 205(3): Rs. 90,000 x 12% x 6/12 = Rs. 5,400. 4. Total paid by the company: Rs. 90,000 + Rs. 5,400 = Rs. 95,400. 5. Under section 161(2), it may recover the Rs. 90,000 from the engineer. Months are used to keep the arithmetic simple. Section 205(3) states an annual rate and does not set a day-count method. If the September quarter statement was also filed late, and the tax had not been paid by its due date, entry 1A charges Rs. 2,500 a day with a Rs. 10,000 minimum. ### Common mistakes - **Assuming the payee carries the risk.** Section 161(1) puts the liability on the payer. Recovery from the payee is a right, not a defence. - **Skipping nil statements.** The proviso to section 165(1) requires them. - **Treating export tax as automatically final.** Section 154A(2)(b) ties final treatment to filed statements. - **Claiming the expense anyway.** Section 21(c) blocks it until the tax is deducted and paid. ### What to check in the official text Read section 161(1) to (3), section 205(2) and (3), section 21(c) with its provisos, section 165(1) and (2), and section 154A(2) and (3). Check entries 1A and 5 of the section 182 Table in the official PDF, because the Table's columns do not survive text extraction cleanly. A footnote records that the Rs. 50,000 figure in entry 1A replaced Rs. 5,000 through the Finance Act, 2025. ### Frequently asked #### Can the software house recover the missed tax from the employee or contractor? Yes. Section 161(2) entitles a person made liable for failing to deduct to recover the tax from the person from whom it should have been deducted. The Ordinance does not set out how that recovery is arranged between them. #### What if the contractor already paid the tax through their own return? Section 161(1B) says no recovery is then made from the software house. It still pays default surcharge at twelve per cent per annum from the date it failed to deduct to the date the tax was paid. #### Is the salary or contractor expense still deductible? Not until the tax is dealt with. Section 21(c) disallows expenditure from which tax had to be deducted unless it was deducted and paid. Its second proviso treats tax recovered under section 161 as tax paid. ### Citations - [Income Tax Ordinance, 2001, section 161 (Failure to pay tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#161-failure-to-pay-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be personally liable to pay the amount of tax to the Commissioner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 205 (Default surcharge)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#205-default-surcharge), as amended to 2026-06-30: "on the amount unpaid computed for the period commencing on the date the amount was required to be collected or deducted and ending on the date on which it was paid to the Commissioner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "unless the person has paid or deducted and paid the tax as required by Division IV of Part V of Chapter X" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 182 (Offences and penalties)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182-offences-and-penalties), as amended to 2026-06-30: "in addition to and not in derogation of any punishment to which he may be liable under this Ordinance or any other law" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "withholding tax statements for the relevant tax year have been filed if required under the Ordinance;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 165 (Statements)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#165-statements), as amended to 2026-06-30: "shall be required to file withholding statement even where no withholding tax is collected or deducted during the period" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Why is the withholding rate on our services doubled when the company is not on the Active Taxpayers List? Source: https://qanoondigest.com/faq/software-houses/non-atl-software-house-double-withholding Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 100BA applies the Tenth Schedule to persons not on the active taxpayers' list, and rule 1 of that Schedule increases a withholding rate by one hundred percent. For IT services in tax year 2027, a client deducts 8% instead of 4% under section 153. The extra tax is adjustable once the return is filed in time. **Applies to:** Software houses and IT companies paid by local clients whose name does not appear on the Active Taxpayers List, including newly formed companies. The doubling is written into the Income Tax Ordinance itself. Section 100BA hands the treatment of anyone missing from the active taxpayers' list to the Tenth Schedule, and rule 1 of that Schedule raises the withholding rate by one hundred percent. A client paying for IT services in tax year 2027 therefore deducts 8% instead of 4%. ### What does the law say? Three provisions work together. **Section 181A** creates the list. It says the Board "shall have the power to institute active taxpayers' list" and that the list "shall be regulated as may be prescribed". The Ordinance itself does not set out who goes on the list. That detail is in the Income Tax Rules, 2002. **Section 100BA(1)** says that the collection or deduction of advance income tax, and the computation of income and tax, for a person not appearing on the active taxpayers' list "shall be determined in accordance with the rules in the Tenth Schedule". Section 100BA(2) gives the Tenth Schedule effect notwithstanding anything to the contrary in the Ordinance. **Rule 1 of the Tenth Schedule** says that where tax is to be deducted or collected under any provision of the Ordinance from a person not on the list, the rate "shall be increased by hundred percent of the rate specified in this Ordinance". Its provisos set special figures for property and distributor transactions. None of them concerns payments for services. ### Who decides whether a software house is on the list? Rule 81B of the Income Tax Rules, 2002, in the edition held in this corpus (amended to 24 November 2023), sets the criteria: - Sub-rule (5): a person is included if it filed a return of income, or a statement in place of a return, for the tax year whose filing due date fell in the preceding twelve months. - Proviso to sub-rule (5): a company or AOP whose return is not yet due because it was incorporated or formed after 30 June of that tax year "shall be included" in the list. - Sub-rule (4): the list is updated every Sunday at 24:00 hours. - Sub-rule (8): a person who meets the criteria is included on the next updation date. For a brand new software house, the proviso matters. On the text of the rule, a company is not left off the list merely because its first return is not yet due. A company that missed its first return deadline is in a different position. ### How is the higher rate applied to our invoices? Section 153 requires a prescribed person paying for services to deduct tax from the gross amount payable, including sales tax, at the rate in Division III of Part III of the First Schedule. For tax year 2027, paragraph (2)(i) of that Division sets 7% for a list of services, and its proviso sets 4% for IT services and IT enabled services as defined in the Ordinance. Rule 10 of the Tenth Schedule lists the deductions to which the Schedule does not apply. Section 153 is not among them, so rule 1 applies to deductions from payments for IT services. Clause (ca) of rule 10 does exclude the separate deduction banks make on export proceeds, so the export rate is not doubled. | Service | Normal rate, tax year 2027 | Rate if not on the list | |---|---|---| | IT services and IT enabled services | 4% | 8% | | Other services in paragraph (2)(i) | 7% | 14% | ### Worked example (illustrative figures) Indus Pixel (Pvt) Ltd, a Lahore software house, missed its return deadline and dropped off the list. A Karachi bank then pays it Rs. 2,500,000 for a mobile app build in tax year 2027. 1. Division III rate for IT services: 4%. 2. Rule 1 increase: 4% + (100% of 4%) = 8%. 3. Tax deducted: Rs. 2,500,000 x 8% = Rs. 200,000. 4. At the normal rate: Rs. 2,500,000 x 4% = Rs. 100,000. 5. Extra deduction because of list status: Rs. 200,000 - Rs. 100,000 = Rs. 100,000. Indus Pixel receives Rs. 2,300,000 instead of Rs. 2,400,000 on that invoice. ### What happens if the company still does not file? Rule 3 of the Tenth Schedule says that where tax was deducted under rule 1 and the person fails to file the return by the due date, the Commissioner makes a provisional assessment within sixty days, imputing income from the tax deducted. For a company, rule 6(b) defines imputed income as the income that would produce, under Division II of the First Schedule, tax equal to the tax deducted at the higher rate. Rule 4(1) turns the provisional assessment into a final assessment forty-five days after it is served. Rule 4(2) says it abates if the returns and wealth statement for that year and the preceding year are filed within those forty-five days. Rule 4(3) then makes the tax deducted under rule 1 adjustable against the tax payable in the return. ### What if the company was not required to file a return at all? Rule 2 lets the withholding agent, if satisfied that the payee was not required to file a return of income, send the Commissioner an electronic notice before deducting. The Commissioner has thirty days to accept this or direct deduction under rule 1. If no order is passed within thirty days, the contention is treated as accepted. ### What if we are on the list but filed late? Section 100BA(1) still mentions persons on the list who filed after the due date. The rule that set rates for them, rule 1A, was omitted by the Finance Act, 2026, according to the Schedule's footnotes. The Tenth Schedule in this corpus contains no separate rate for that group now. ### Common mistakes - **Assuming a new company is automatically off the list.** The proviso to rule 81B(5) includes a newly incorporated company whose return is not yet due. - **Treating the extra deduction as a penalty that cannot be recovered.** Rule 4(3) makes it adjustable when the return is filed in time. - **Assuming the doubling reaches export proceeds.** Rule 10(ca) takes the bank deduction on export proceeds out of the Schedule. ### What to check in the official text Read section 100BA, section 181A and rules 1 to 4, 6 and 10 of the Tenth Schedule in the Ordinance amended to 30 June 2026, and paragraph (2) of Division III of Part III of the First Schedule for the base rate. Rule 81B is quoted from the Income Tax Rules as amended to 24 November 2023. Any later change to the list criteria is not in this corpus, nor are the FBR portal steps for checking status. ### Frequently asked #### What rate does a client deduct from our IT services invoice if we are not on the Active Taxpayers List? Division III of Part III of the First Schedule sets 4% for IT services and IT enabled services as defined in the Ordinance. Rule 1 of the Tenth Schedule increases that by one hundred percent, so the deduction is 8% of the gross amount payable in tax year 2027. #### Our company was incorporated this year and no return is due yet. Are we off the list? Rule 81B(5) of the Income Tax Rules, 2002, in the copy held here (amended to 24 November 2023), says a company whose return is not yet due because it was incorporated after 30 June of the relevant tax year shall be included in the list. Whether the Board has since changed that rule is outside this corpus. #### Is the extra 4% lost? Not if the return is filed in time. Rule 4(3) of the Tenth Schedule makes tax deducted under rule 1 adjustable against the tax payable in the return for that year, where the return is filed before a provisional assessment or within forty-five days of receiving one. ### Citations - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "shall be determined in accordance with the rules in the Tenth Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule (Rules for persons not appearing in the active taxpayers' list), rules 1, 2, 3, 4, 6 and 10](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 181A (Active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181a-active-taxpayers-list), as amended to 2026-06-30: "The Board shall have the power to institute active taxpayers’ list." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "deduct tax from the gross amount payable (including sales tax, if any) at the rate specified in Division III of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), paragraph (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, Rule 81B (Active Taxpayers List), sub-rules (4), (5) and (8)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24), as amended to 2023-11-24 Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf --- ## What must a software house do as an employer to deduct and deposit tax on staff salaries? Source: https://qanoondigest.com/faq/software-houses/software-house-salary-withholding-duties Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 149 of the Income Tax Ordinance requires a software house paying salary to deduct tax at each payment, at the employee's average rate on estimated annual salary. Section 160 requires the tax to be paid to the Commissioner, section 165 requires quarterly and annual statements, and section 161 makes the employer liable for tax not deducted or paid. **Applies to:** Software houses, IT companies and tech startups in Pakistan setting up or running payroll for employees, for tax year 2027 (1 July 2026 to 30 June 2027). When a software house hires its first salaried developer, it becomes a withholding agent under the Income Tax Ordinance, 2001. The duty has four parts: work out and deduct tax at each salary payment, pay that tax to the Commissioner, report it in statements, and carry the liability if any step is missed. ### What does the law say? **Deduct at payment.** Section 149(1) says every person responsible for paying salary to an employee shall, at the time of payment, "deduct tax from the amount paid at the employee's average rate of tax computed at the rates specified in Division I of Part I of the First Schedule" on the employee's estimated salary income for the tax year. The employer adjusts for tax already withheld from the employee under other heads, for admissible tax credits where documentary evidence is obtained, and for any excess or shortfall from earlier deductions. **How the rate is found.** Section 149(2) sets the average rate as A/B. A is the tax that would be payable if B were the employee's taxable income. B is the employee's estimated income under the head "Salary" for the year. **What salary includes.** Section 12(2) covers "any pay, wages or other remuneration provided to an employee", including bonus, commission, overtime and leave pay, as well as perquisites, most allowances and reimbursed personal expenses. **Pay it over.** Section 160 says tax deducted under Division III of Part V of Chapter X, which includes section 149, "shall be paid to the Commissioner by the person making the collection or deduction within the time and in the manner as may be prescribed". The time and manner are set in the rules, not in the section. **Report it.** Section 165(1) requires a quarterly statement listing each employee's name, CNIC or NTN, address, payments made and tax deducted. Section 165(2) sets the due dates. Section 165(6) adds an annual statement for employers deducting under section 149. **Carry the risk.** Section 161(1) says that where a person fails to deduct tax as required, or deducts it but fails to pay it under section 160, "the person shall be personally liable to pay the amount of tax to the Commissioner". ### Which rates apply for tax year 2027? Where salary is more than 75% of an employee's taxable income, clause (2) of Division I of Part I of the First Schedule applies. For tax year 2027 the table reads: | Taxable income | Tax | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,001 to Rs. 1,200,000 | 1% of the amount over Rs. 600,000 | | Rs. 1,200,001 to Rs. 2,200,000 | Rs. 6,000 + 11% of the amount over Rs. 1,200,000 | | Rs. 2,200,001 to Rs. 3,200,000 | Rs. 116,000 + 20% of the amount over Rs. 2,200,000 | | Rs. 3,200,001 to Rs. 4,100,000 | Rs. 316,000 + 25% of the amount over Rs. 3,200,000 | | Rs. 4,100,001 to Rs. 5,600,000 | Rs. 541,000 + 29% of the amount over Rs. 4,100,000 | | Rs. 5,600,001 to Rs. 7,000,000 | Rs. 976,000 + 32% of the amount over Rs. 5,600,000 | | Above Rs. 7,000,000 | Rs. 1,424,000 + 35% of the amount over Rs. 7,000,000 | ### Worked example (illustrative figures) A Lahore software house employs Ayesha, a QA engineer, at Rs. 250,000 a month from July 2026. She has no other income. The figures are invented. The rates are the clause (2) rates above. 1. Estimated annual salary: Rs. 250,000 x 12 = Rs. 3,000,000. 2. Tax: Rs. 116,000 + 20% x (Rs. 3,000,000 - Rs. 2,200,000) = Rs. 116,000 + Rs. 160,000 = Rs. 276,000. 3. Average rate: Rs. 276,000 / Rs. 3,000,000 = 9.2%. 4. Monthly deduction: Rs. 250,000 x 9.2% = Rs. 23,000. 5. The company pays Rs. 23,000 to the Commissioner under section 160 and reports it in the quarterly statement under section 165. ### What if the salary changes during the year? Section 149(1) lets the employer adjust for "any excess deduction or deficiency arising out of any previous deduction". Suppose Ayesha is promoted from November 2026 to Rs. 300,000 a month. 1. Four months at Rs. 250,000 = Rs. 1,000,000. Tax deducted so far: 4 x Rs. 23,000 = Rs. 92,000. 2. Eight months at Rs. 300,000 = Rs. 2,400,000. 3. Revised estimated salary: Rs. 1,000,000 + Rs. 2,400,000 = Rs. 3,400,000. 4. Tax: Rs. 316,000 + 25% x (Rs. 3,400,000 - Rs. 3,200,000) = Rs. 316,000 + Rs. 50,000 = Rs. 366,000. 5. Still to deduct: Rs. 366,000 - Rs. 92,000 = Rs. 274,000. 6. Spread over eight months: Rs. 274,000 / 8 = Rs. 34,250 a month. Section 149 does not prescribe spreading the shortfall evenly. Even spreading is one way of making the adjustment the section allows. ### What if the company misses a deduction? Section 161(1)(a) makes the company personally liable for tax it failed to deduct. Under section 161(1A) no recovery is made without an opportunity of being heard. Under section 161(1B), if the employee has since paid the tax, the company is not charged the tax again but pays default surcharge at twelve per cent a year from the date it failed to deduct until the date the tax was paid. Section 161(2) lets the company recover the tax from the employee. ### Common mistakes - **Deducting on basic pay only.** Section 12(2) brings allowances, bonus and perquisites into salary. - **Treating each month separately.** Section 149 works on the estimated annual salary, not on one month in isolation. - **Skipping nil statements.** The first proviso to section 165(1) requires a statement even where no tax is deducted in the period. - **Assuming deduction ends the duty.** Section 161(1)(b) covers tax deducted but not paid over. ### What to check in the official text Read sections 12, 149, 160, 161 and 165, and the clause (2) table of Division I of Part I of the First Schedule in the official PDF. The payment deadline and statement forms are prescribed in the Income Tax Rules, 2002, which should be checked for the current form and time. ### Frequently asked #### Which payments count as salary for withholding? Section 12(2) defines salary broadly: pay, wages, leave pay, overtime, bonus, commission, most allowances, perquisites and reimbursed personal expenses. Section 149 withholding is worked out on the employee's estimated income under the head Salary, so all of these go into the estimate. #### When are the withholding statements due? Section 165(2) sets quarterly deadlines of 20 April, 20 July, 20 October and 20 January for the quarters ending March, June, September and December. Section 165(6) adds an annual statement for every person deducting under section 149, and the first proviso to section 165(1) requires a statement even when no tax was deducted. #### What happens if the company deducts tax but pays it late or not at all? Section 161(1)(b) makes a person who has deducted tax but fails to pay it to the Commissioner as required under section 160 personally liable for that amount, and the Commissioner may pass an order and recover it after giving an opportunity of being heard. ### Citations - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2) (salary exceeding seventy-five per cent of taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "any pay, wages or other remuneration provided to an employee" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 160 (Payment of tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#160-payment-of-tax-collected-or-deducted), as amended to 2026-06-30: "shall be paid to the Commissioner by the person making the collection or deduction within the time and in the manner as may be prescribed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 165 (Statements)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#165-statements), as amended to 2026-06-30: "Every person deducting tax from payment under section 149 shall furnish to the Commissioner an annual statement in the prescribed form and manner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 161 (Failure to pay tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#161-failure-to-pay-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be personally liable to pay the amount of tax to the Commissioner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What are a software house's obligations to deduct tax from staff salaries under section 149? Source: https://qanoondigest.com/faq/software-houses/software-house-salary-tax-deduction-section-149 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 149 of the Income Tax Ordinance requires an employer to deduct tax from each salary payment at the employee's average rate, based on estimated annual salary and the Division I rates. Section 165 requires quarterly and annual statements, and section 161 makes the employer personally liable for tax it fails to deduct or pay. **Applies to:** Software houses, IT companies and startups in Pakistan that pay salaries to employees, for tax year 2027 (1 July 2026 to 30 June 2027). A software house that pays salaries is a withholding agent under the Income Tax Ordinance, 2001. Each time it pays an employee, it must deduct tax from that payment, deposit it, and report it. If it gets this wrong, the Ordinance puts the unpaid tax on the employer. ### What does the law say? Section 149(1) requires every "person responsible for" paying salary to an employee to deduct tax "at the time of payment". The amount is the employee's average rate of tax, computed at the rates in Division I of Part I of the First Schedule, applied to the payment. The average rate is based on the employee's estimated income under the head "Salary" for the tax year in which the payment is made. Section 149(2) gives the formula: A/B, where A is the tax payable if B were the employee's taxable income, and B is the employee's estimated salary income for the year. "Salary" is broad. Section 12(2) includes pay, wages, leave pay, overtime, bonus, commission, fees, gratuity, "any perquisite, whether convertible to money or not", and allowances such as rent, utilities, education and travel, other than an allowance solely expended in performing the employee's duties. Section 149(1) also lets the employer make adjustments, after obtaining documentary evidence, for tax withheld from the employee under other heads, certain tax credits admissible to the employee, any excess deduction or deficiency from a previous deduction, and a failure to deduct earlier in the year. ### Which rate table applies for tax year 2027? Clause (2) of Division I applies where salary exceeds seventy-five per cent of the individual's taxable income. For tax year 2027 the table reads: | Taxable income | Tax | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,001 to Rs. 1,200,000 | 1% of the amount exceeding Rs. 600,000 | | Rs. 1,200,001 to Rs. 2,200,000 | Rs. 6,000 + 11% of the amount exceeding Rs. 1,200,000 | | Rs. 2,200,001 to Rs. 3,200,000 | Rs. 116,000 + 20% of the amount exceeding Rs. 2,200,000 | | Rs. 3,200,001 to Rs. 4,100,000 | Rs. 316,000 + 25% of the amount exceeding Rs. 3,200,000 | | Rs. 4,100,001 to Rs. 5,600,000 | Rs. 541,000 + 29% of the amount exceeding Rs. 4,100,000 | | Rs. 5,600,001 to Rs. 7,000,000 | Rs. 976,000 + 32% of the amount exceeding Rs. 5,600,000 | | Above Rs. 7,000,000 | Rs. 1,424,000 + 35% of the amount exceeding Rs. 7,000,000 | ### How does it work in practice? **Deposit and statements.** Section 165(1) requires every person deducting tax under this Division to furnish a quarterly statement to the Commissioner, showing each payee's name, CNIC or NTN and address, total payments and total tax deducted. The proviso requires a statement even for a quarter in which nothing was deducted. Section 165(2) sets the due dates: 20 April, 20 July, 20 October and 20 January. Section 165(2A) allows a revised statement within sixty days if an omission or error is found. **Annual statements.** Section 165(6) requires every person deducting tax under section 149 to furnish an annual statement in the prescribed form. Sub-sections (7) and (8) require prescribed persons to e-file an annual statement within thirty days of the end of the tax year and a reconciliation with the return and accounts by the return due date. **Directors' fees.** Section 149(3) is separate: a fee for directorship or for attending board meetings is subject to deduction at twenty percent of the gross amount, adjustable under section 149(4). ### Worked example (illustrative figures) Ayesha is a senior developer at a software house in Johar Town, Lahore. Her salary is Rs. 300,000 a month and she has no other income, so salary exceeds seventy-five per cent of taxable income. 1. Estimated salary for tax year 2027 (B): Rs. 300,000 x 12 = Rs. 3,600,000. 2. Tax on Rs. 3,600,000 (A): Rs. 316,000 + 25% x (Rs. 3,600,000 - Rs. 3,200,000) = Rs. 316,000 + Rs. 100,000 = Rs. 416,000. 3. Average rate (A/B): Rs. 416,000 / Rs. 3,600,000 = 11.56% (rounded). 4. Monthly deduction: Rs. 416,000 / 12 = Rs. 34,667 (rounded). **Mid-year raise.** From January, her salary rises to Rs. 350,000. 1. Revised estimate: (Rs. 300,000 x 6) + (Rs. 350,000 x 6) = Rs. 1,800,000 + Rs. 2,100,000 = Rs. 3,900,000. 2. Revised tax: Rs. 316,000 + 25% x (Rs. 3,900,000 - Rs. 3,200,000) = Rs. 316,000 + Rs. 175,000 = Rs. 491,000. 3. Already deducted July to December: Rs. 34,667 x 6 = Rs. 208,002. 4. Remaining: Rs. 491,000 - Rs. 208,002 = Rs. 282,998, spread over six months = Rs. 47,166 a month (rounded). Step 4 uses the section 149(1) adjustment for a deficiency arising out of previous deductions. ### What if an employee also has a second job or other income? The employer can only estimate the salary it pays and adjust for tax withheld under other heads on documentary evidence. Where salary is not more than seventy-five per cent of taxable income, clause (2) of Division I does not apply and the other rates in Division I govern the employee's own liability. ### What if we fail to deduct? Section 161(1) makes a person who fails to deduct tax as required, or deducts and fails to pay it, "personally liable to pay the amount of tax to the Commissioner". Section 161(1A) requires an opportunity of being heard first. Under section 161(1B), if the employee has already paid the tax, no recovery is made from the employer, but default surcharge at twelve per cent per annum runs from the date of failure to the date the tax was paid. Section 161(2) lets the employer recover the tax from the employee. ### Common mistakes - **Deducting on basic pay only.** Section 12(2) counts allowances and perquisites as salary. - **Skipping nil statements.** The proviso to section 165(1) requires a statement even where nothing was withheld. - **Not recalculating after a raise or bonus.** The average rate depends on estimated annual salary, which changes when pay changes. ### What to check in the official text Read sections 149, 161 and 165, and the clause (2) table in Division I of Part I of the First Schedule in the official PDF. The prescribed forms for statements are set by rules and Board procedures; the Income Tax Rules held in this corpus are amended only to 24 November 2023. ### Frequently asked #### How does a software house work out how much tax to deduct each month? Section 149(2) sets the average rate as A divided by B: the tax on the employee's estimated salary income for the year, divided by that estimated salary income. That rate is applied to each salary payment. #### What happens if we did not deduct enough in earlier months? Section 149(1) lets the employer adjust for any excess deduction or deficiency arising out of a previous deduction, and for a failure to deduct during the year. The remaining payments in the year can carry the correction. #### When are withholding statements due? Section 165(2) sets quarterly deadlines of 20 April, 20 July, 20 October and 20 January for the quarters ending March, June, September and December. Section 165(6) adds an annual statement for employers deducting under section 149. ### Citations - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2) (salary exceeding seventy-five per cent of taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 165 (Statements)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#165-statements), as amended to 2026-06-30: "Every person deducting tax from payment under section 149 shall furnish to the Commissioner an annual statement in the prescribed form and manner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 161 (Failure to pay tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#161-failure-to-pay-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be personally liable to pay the amount of tax to the Commissioner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "any perquisite, whether convertible to money or not" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much income tax does a software house pay on IT export revenue, and until when does the 0.25% rate run? Source: https://qanoondigest.com/faq/software-houses/software-house-tax-rate-it-exports Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 154A of the Income Tax Ordinance, the bank deducts tax when it realises the foreign exchange. Division IVA of the First Schedule sets 0.25% of proceeds for software, IT and IT-enabled exporters registered with PSEB, for tax years 2024 up to 2029, and 1% in any other case. **Applies to:** Software houses, IT companies and firms in Pakistan that receive foreign exchange proceeds for exports of computer software, IT services or IT-enabled services. A software house that exports software or IT services pays income tax on that revenue mainly through a deduction the bank makes when the foreign exchange arrives. The rate depends on one fact: whether the exporter is registered with the Pakistan Software Export Board (PSEB). ### What does the law say? Section 154A(1) of the Income Tax Ordinance, 2001 requires every authorized dealer in foreign exchange, at the time of realisation of foreign exchange proceeds, to "deduct tax from the proceeds at the rates specified in Division IVA of Part III of the First Schedule". Clause (a) of that sub-section covers "exports of computer software or IT services or IT enabled services" where the exporter is registered with and duly certified by PSEB. Clause (b) covers services rendered outside Pakistan or exported from Pakistan more generally. Division IVA of Part III of the First Schedule, as amended up to 30 June 2026, sets the rates: | S. No. | Type of receipt | Rate of tax | |---|---|---| | 1 | Export proceeds of computer software or IT services or IT enabled services by persons registered with Pakistan Software Export Board | 0.25% of proceeds for tax years 2024 up to tax year 2029 | | 2 | Any other case | 1% of proceeds | Section 2 of the Ordinance defines IT services in clause (30AD) to include, but not be limited to, software development, software maintenance, system integration, web design, web development, web hosting and network design. ### Until when does the 0.25% rate run? Row 1 runs to tax year 2029. Section 5 of the Finance Act, 2026 amended Division IVA so that "for the figure “2026”, the figure “2029” shall be substituted". Before that amendment the reduced rate stopped at tax year 2026. Section 74 of the Ordinance makes the normal tax year a period of twelve months ending on 30 June, named after the calendar year in which that date falls. So the reduced rate covers: | Tax year | Period | |---|---| | 2027 | 1 July 2026 to 30 June 2027 | | 2028 | 1 July 2027 to 30 June 2028 | | 2029 | 1 July 2028 to 30 June 2029 | The table as printed gives no reduced rate beyond tax year 2029. The Ordinance does not say what happens after that, so any later rate depends on a future amendment. ### How does it work in practice? The tax is taken at source. When a client in the United States or the UAE pays an invoice and the bank in Lahore or Karachi realises the foreign exchange, the bank deducts the Division IVA rate from the proceeds and credits the balance in rupees. The software house does not pay the tax separately on that revenue. Section 154A(2) makes the deduction a final tax on the income from those transactions if the conditions in that sub-section are met: the return has been filed and required withholding tax statements have been filed. For a PSEB-registered exporter under clause (a), the sales tax return condition does not apply. Where the tax is final, section 169 provides that no deduction is allowed for expenses and "the tax deducted shall not be reduced by any tax credit allowed under this Ordinance". ### Worked example (illustrative figures) Ravi Code Labs (Pvt) Ltd in Lahore is registered with and certified by PSEB. In tax year 2027 it realises export proceeds of Rs. 48,000,000 for software development work. Kohsar Digital, an Islamabad firm doing the same work, is not registered with PSEB and realises the same amount. 1. Ravi Code Labs falls in row 1 because tax year 2027 is within tax years 2024 up to 2029. 2. Tax deducted: Rs. 48,000,000 x 0.25% = Rs. 120,000. 3. Kohsar Digital falls in row 2, any other case. 4. Tax deducted: Rs. 48,000,000 x 1% = Rs. 480,000. 5. Difference: Rs. 480,000 - Rs. 120,000 = Rs. 360,000. If both firms meet the final tax conditions and do not opt out, these deductions are their income tax on the export income for the year. Expenses such as salaries and rent do not reduce it. ### What if our export revenue is received in an older tax year? The rate in row 1 was time-limited from tax year 2024. For proceeds realised in earlier years, the older text of Division IVA applies, not the current table. A footnote in the official Ordinance records that the version substituted by the Finance Act, 2022 read that the rate "shall be one percent of the proceeds of the export". Earlier years are not covered on this page. ### What if we also earn from local clients? Section 154A deals only with foreign exchange proceeds. Fees from Pakistani clients for IT services are a different stream with a different withholding regime and are not taxed at the Division IVA rate. ### Common mistakes - **Treating 2029 as the calendar year.** It is tax year 2029, which ends on 30 June 2029. - **Assuming any IT exporter gets 0.25%.** Row 1 applies to persons registered with PSEB. Everyone else is in row 2 at 1%. - **Assuming the rate is final no matter what.** Section 154A(2) makes it final only when the listed conditions are met, and section 154A(3) lets a person opt out each year. - **Claiming foreign tax already withheld by a client.** Section 154A(2)(d) states that no credit for foreign taxes paid shall be allowed where the final tax applies. ### What to check in the official text Read section 154A and the Division IVA table in the official PDF of the Ordinance amended up to 30 June 2026, since the site text leaves rate tables out. Compare it with section 5 of the Finance Act, 2026, which made the 2029 change. Section 154A(5) says the Board, in consultation with the State Bank of Pakistan, prescribes the mode and procedure for payment, and section 154A(6) lets the Board include or exclude services. Any such instructions are outside this corpus. ### Frequently asked #### Who deducts the tax on our IT export proceeds? Section 154A(1) places the duty on every authorized dealer in foreign exchange, which in practice is the bank that realises the proceeds. The deduction is made at the time the foreign exchange is realised, not when the invoice is raised. #### What is the last tax year for the 0.25% rate? Row 1 of Division IVA reads for tax years 2024 up to tax year 2029, after the Finance Act, 2026 replaced 2026 with 2029. Under section 74, tax year 2029 ends on 30 June 2029. #### Is 0.25% all the income tax a software house pays on export income? If the conditions in section 154A(2) are met, the deduction is a final tax on the export income and section 169 stops that income from being taxed again under a head of income. Other taxes and other income, such as local IT services, are outside that final tax. ### Citations - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "deduct tax from the proceeds at the rates specified in Division IVA of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2026, section 5 (Amendments of the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2026#5-amendments-of-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2026: "in Division IVA, in the Table, in column (1), in S. No. (1), in the entry in column (3), for the figure “2026”, the figure “2029” shall be substituted" Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Income Tax Ordinance, 2001, section 74 (Tax year)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#74-tax-year), as amended to 2026-06-30: "the tax year shall be a period of twelve months ending on the 30th day of June" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "the tax deducted shall not be reduced by any tax credit allowed under this Ordinance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "software development, software maintenance, system integration, web design, web development, web hosting and network design" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How is a software house taxed when it earns both export and local income, and how are expenses split between them? Source: https://qanoondigest.com/faq/software-houses/software-house-export-and-local-income Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer A software house with both kinds of income runs two tracks. Local IT fees are business income under section 18, taxed at 29% for most companies in tax year 2027. Export proceeds taxed as final under section 154A are kept out of taxable income by section 169. Section 67 splits shared costs, so only the local share is deducted. **Applies to:** Software houses and IT companies in Pakistan that earn both export proceeds and fees from local clients, for tax year 2027. ### What does the law say about each kind of income? The Ordinance puts the two income streams of a mixed software house on separate tracks. **Local IT income.** Fees from Pakistani clients for development, maintenance, hosting or support are "the profits and gains of any business" under section 18(1)(a), chargeable under the head "Income from Business". The company computes taxable income in the usual way and applies the Division II rate. For tax year 2027 that is 29% for "any other company" and 20% for a small company, as defined in the Ordinance. **Export proceeds.** When a bank realises foreign exchange proceeds for "exports of computer software or IT services or IT enabled services" by a Pakistan Software Export Board registered exporter, it deducts tax under section 154A(1)(a). Section 154A(2) makes that deduction a final tax, provided the return and any required withholding statements are filed. Once the tax is final, section 169(2) sets the rules: the income is not chargeable under any head in computing taxable income, no deduction is allowed for expenditure incurred in deriving it, and the tax deducted is not reduced by any tax credit. ### How are shared expenses split? Most software houses have costs that serve both kinds of work: office rent, electricity, internet, admin salaries, HR, accounts, laptops. Section 67(1) covers expenditure, deductions and allowances that relate to taxable income and a class of income taxed separately or as a final tax. It says these "shall be apportioned on any reasonable basis taking account of the relative nature and size of the activities to which the amount relates". Rule 13 of the Income Tax Rules, 2002 sets out how: - **Direct costs** (rule 13(2)): expenditure incurred for a particular class of income is allocated to that class. A developer team that works only on a foreign client's project is an export cost. A team working only for local clients is a local cost. - **Common costs** (rule 13(3)(a)): common expenditure is allocated to each class using **A x B/C**, where A is the expense, B is the gross receipts of that class for the tax year and C is the gross receipts and net gains of all classes. Financial expenses tied to non-business loans are left out of the pool. - **Gross receipts** are taken net of sales tax, under the Explanation to rule 13. Only the local share, direct and apportioned, is deducted in computing taxable income. The export share is simply not deductible, because the final tax already covers that income. ### Worked example (illustrative figures) A software house in Rawalpindi, a private company that is not a small company, for tax year 2027: - Export proceeds: Rs. 80,000,000 (section 154A tax final). - Local fees, excluding sales tax: Rs. 20,000,000. - Direct costs of local projects: Rs. 6,000,000. - Direct costs of export projects: Rs. 30,000,000. - Common costs (rent, admin staff, utilities): Rs. 25,000,000. 1. C, total gross receipts: Rs. 80,000,000 + Rs. 20,000,000 = Rs. 100,000,000. 2. B, local gross receipts: Rs. 20,000,000. B/C = 20%. 3. Local share of common costs: Rs. 25,000,000 x 20% = Rs. 5,000,000. 4. Export share of common costs: Rs. 25,000,000 minus Rs. 5,000,000 = Rs. 20,000,000, not deductible. 5. Local taxable income: Rs. 20,000,000 minus Rs. 6,000,000 minus Rs. 5,000,000 = Rs. 9,000,000. 6. Tax at 29%: Rs. 9,000,000 x 29% = Rs. 2,610,000. The Rs. 30,000,000 of direct export costs are also not deductible. The bank's deduction on the export proceeds stays as the final tax on that income; it is not credited against the Rs. 2,610,000. ### What if ...? **The exporter is not registered with the Pakistan Software Export Board.** Section 154A(1)(b) still covers services rendered outside Pakistan or exported from Pakistan, so a deduction is made, but at the rate for "any other case". The companion page on export rates covers the difference. **The conditions for final tax are not met.** Section 154A(3) says section 154A(2) does not apply to a person who does not fulfil the conditions, or who opts out. The export income then does not get final treatment under section 169, and the apportionment question changes because both streams would be computed as business income. **The local business makes a loss.** A loss on the local side cannot be absorbed by export income, because section 169(2) keeps that income out of taxable income. Minimum tax on local turnover is covered on the minimum tax page. ### Common mistakes - **Deducting the full payroll against local income.** Section 169(2)(b) denies deductions for costs of final-tax income, and section 67 requires the split. - **Using headcount or a round figure instead of the rule 13 formula** for common costs without a basis. Rule 13(3)(a) uses gross receipts. - **Including sales tax in the receipts figures.** The Explanation to rule 13 uses receipts net of sales tax. - **Crediting export tax against local tax.** Under section 154A(2) and section 169 the bank's deduction is the final tax on the export income itself, not a payment on account of tax on local income. ### What to check in the official text Read sections 18, 67, 154A and 169 of the Ordinance as amended to 30 June 2026, and rule 13 of the Income Tax Rules, 2002 as amended to 24 November 2023. Provincial sales tax on local IT services is charged under provincial laws not covered on this site. ### Frequently asked #### Can a software house deduct all its salaries and rent against local income? No. Section 169(2)(b) allows no deduction for expenditure incurred in deriving final-tax income. Costs that serve both export and local work are apportioned under section 67, and only the local share is deducted. #### What is the formula for splitting common expenses? Rule 13(3) of the Income Tax Rules, 2002 allocates common expenditure as A x B/C: the expense, multiplied by the gross receipts of the class of income, divided by the gross receipts of all classes. Costs incurred for one class only go wholly to that class under rule 13(2). #### What tax rate applies to local IT income of a company in tax year 2027? Division II of Part I of the First Schedule taxes a company other than a banking company or small company at 29% of taxable income. A small company, as defined in the Ordinance, is taxed at 20%. ### Citations - [Income Tax Ordinance, 2001, section 18 (Income from business)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#18-income-from-business), as amended to 2026-06-30: "the profits and gains of any business carried on by a person at any time in the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "The tax deductible under this section shall be a final tax on the income arising from the transactions referred to in this section" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "the income shall not be chargeable to tax under any head of income in computing the taxable income of the person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 67 (Apportionment of deductions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#67-apportionment-of-deductions), as amended to 2026-06-30: "shall be apportioned on any reasonable basis taking account of the relative nature and size of the activities to which the amount relates" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 13 (Apportionment of expenditures , deductions and allowances)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#13-apportionment-of-expenditures-deductions-and-allowances), as amended to 2023-11-24: "shall be allocated to each class of income according to the following formula, namely:-" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division II (Rates of Tax for Companies)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How does a software house split expenses, depreciation and losses between export income under final tax and local income? Source: https://qanoondigest.com/faq/software-houses/apportion-expenses-export-and-local-income Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Export income taxed as final under section 154A gets no deductions and no loss set-off under section 169. Costs used only for local work are deducted from local income. Common costs such as salaries, rent and depreciation are apportioned under section 67 and rule 13, normally in proportion to each class's gross receipts, and only the local share is deductible. **Applies to:** Software houses and IT companies in Pakistan with both foreign clients taxed under section 154A and local clients, for tax year 2027. ### What does the law say about expenses against export income? When a software house's export proceeds are taxed as final under section 154A(2), section 169 applies to that income. Section 169(2) says: - (a) the income "shall not be chargeable to tax under any head of income in computing the taxable income of the person"; - (b) no deduction is allowable for any expenditure incurred in deriving the income; - (c) the income is not reduced by any deductible allowance under Part IX of Chapter III, or by the set off of any loss. In plain words, the 0.25% or 1% deducted on export proceeds is the whole tax on that income. The costs of earning it cannot be used anywhere else. ### How are shared costs split? Most costs in a software house are shared: developers work on foreign and local projects, and the office, laptops and software licences serve both. Section 67(1)(ab) covers expenditure, deductions and allowances relating to the "derivation of income comprising of taxable income and any class of income to which sub-sections (4) and (5) of section 4 apply". Section 4(4)(b) covers income on which tax deducted is a final tax. Such amounts "shall be apportioned on any reasonable basis taking account of the relative nature and size of the activities to which the amount relates". Section 67(2) lets the Board make rules, and rule 13 of the Income Tax Rules, 2002 does so: - **Rule 13(2):** a cost incurred for a particular class of income is allocated to that class. A subcontractor hired only for a Lahore client's project goes to local income. - **Rule 13(3)(a):** common expenditure "shall be allocated to each class of income according to the following formula": **A x B / C**, where A is the common expenditure, B is the gross receipts of the class, and C is the gross receipts and net gains of all classes. - **Rule 13(4):** allocation must consider the nature and source of each class, on a reasonable basis, particularly for selling expenses. - **Rule 13(6):** the classes include Pakistan-source and foreign-source business income, exempt income, and "amounts to which section 169 applies". Depreciation is a deduction, so the words "expenditures, deductions and allowances" in section 67 and rule 13 bring it into the same split. ### Worked example (illustrative figures) **A software company in Lahore**, PSEB-registered, tax year 2027: - Export proceeds (final tax under section 154A): Rs. 150,000,000 - Local fees: Rs. 50,000,000 - Cost used only for a local project (subcontractor): Rs. 10,000,000 - Common costs (salaries, rent, utilities, depreciation on laptops and servers): Rs. 120,000,000 1. Direct local cost under rule 13(2): Rs. 10,000,000 to local income. 2. C = Rs. 150,000,000 + Rs. 50,000,000 = Rs. 200,000,000. 3. Local share of common costs: Rs. 120,000,000 x 50,000,000 / 200,000,000 = Rs. 30,000,000. 4. Export share: Rs. 120,000,000 x 150,000,000 / 200,000,000 = Rs. 90,000,000. Not deductible anywhere, under section 169(2)(b). 5. Local taxable income: Rs. 50,000,000 minus Rs. 10,000,000 minus Rs. 30,000,000 = Rs. 10,000,000. 6. Tax at the 29% Division II company rate: Rs. 2,900,000, against which tax deducted by local clients under section 153 is credited. If the company had deducted all Rs. 130,000,000 of costs against local fees, it would have shown a loss of Rs. 80,000,000. That is the result section 169 and rule 13 are designed to prevent. ### What if ...? **Local work makes a loss after apportionment.** Section 57(1) carries a business loss that cannot be set off in the year to the following tax year, and section 57(2) says "no loss can be carried forward to more than six tax years immediately succeeding the tax year for which the loss was first computed". It cannot be set against final-tax export income because of section 169(2)(c)(ii). Minimum tax under section 113 on local turnover may still apply in a loss year. **Depreciation is unabsorbed.** Section 57(4) sets the loss attributable to depreciation and amortisation against 50% of later business income, or 100% if taxable income is below Rs. 10 million. Only the local share of depreciation enters that loss. **The company opts out of final taxation.** Under section 154A(3) a person can opt out each year when filing the return. Section 169 then does not apply to the export income, and it is taxed with local income under the normal rules. ### Common mistakes - **Charging all salaries to local income** because export income "has no expenses". Section 169 disallows them; it does not move them. - **Using headcount or hours when the rules give a formula.** Rule 13(3) sets gross receipts as the basis for common costs. Rule 13(4) allows the nature of each class to be considered, and rule 13(5) accepts a certified basis unless significant variations are found. - **Setting a local loss against export income.** Section 169(2)(c)(ii) blocks it. ### What to check in the official text Read sections 67, 169 and 57 of the Ordinance amended to 30 June 2026, and rule 13 of the Income Tax Rules, 2002. The rules in this corpus are amended only to 24 November 2023, so check for later changes to rule 13. Rule 13(5) refers to a tolerance for "significant variations", whose printed wording in the source is unclear; read it in the official PDF. ### Frequently asked #### Can a software house deduct all its salaries from local income because export income is under final tax? No. Section 169(2)(b) allows no deduction for expenditure incurred in deriving final-tax income, and section 67(1)(ab) requires expenditure that relates to both taxable income and final-tax income to be apportioned. Rule 13 then allocates common costs by the share of gross receipts. #### Can a loss on local projects be set against export income? No. Section 169(2)(c)(ii) says final-tax income is not reduced by the set off of any loss. A loss under the head Income from Business is carried forward under section 57 against future business income, for up to six tax years. #### Who certifies the basis of allocation? Rule 13(5) says a certificate from a Chartered Accountant or Cost and Management Accountant stating the basis of allocation shall be accepted unless significant variations are found. Where accounts are not required to be audited, a reasonable basis under sub-rules (3) and (4) may be used. ### Citations - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "the income shall not be chargeable to tax under any head of income in computing the taxable income of the person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 67 (Apportionment of deductions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#67-apportionment-of-deductions), as amended to 2026-06-30: "shall be apportioned on any reasonable basis taking account of the relative nature and size of the activities to which the amount relates" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 13 (Apportionment of expenditures , deductions and allowances)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#13-apportionment-of-expenditures-deductions-and-allowances), as amended to 2023-11-24: "shall be allocated to each class of income according to the following formula, namely:-" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Ordinance, 2001, section 57 (Carry forward of business losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#57-carry-forward-of-business-losses), as amended to 2026-06-30: "no loss can be carried forward to more than six tax years immediately succeeding the tax year for which the loss was first computed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "exports of computer software or IT services or IT enabled services" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Does a certified startup still pay minimum tax, and do clients still withhold tax from its payments? Source: https://qanoondigest.com/faq/software-houses/startup-minimum-tax-and-withholding Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer In its three credit years, a startup's section 65F credit equals 100% of tax payable, expressly including minimum, alternate corporate and final taxes. Separately, clause (43F) of Part IV of the Second Schedule says section 153 does not apply where the payment recipient is a startup under clause (62A), so clients should not deduct section 153 tax from its payments. **Applies to:** Technology startups in Pakistan that meet the clause (62A) definition, and the local clients that pay them. Two separate provisions work together here. Section 65F gives a qualifying startup a credit that wipes out its tax payable, minimum tax included, for three tax years. Clause (43F) of Part IV of the Second Schedule takes a startup out of section 153 altogether, so local clients paying it should not withhold under that section. ### What does the law say about minimum tax? Section 65F(1) allows "a tax credit equal to one hundred per cent of the tax payable under any provisions of this Ordinance including minimum, alternate corporate tax and final taxes". Clause (b) extends it to a startup as defined in clause (62A) of section 2, for the tax year in which PSEB certifies it and the next following two tax years. Because the credit expressly names minimum, alternate corporate tax and final taxes, it is not limited to tax on profits. For a startup that also earns local IT income, section 153(3) would normally make tax deducted from services a minimum tax. In the credit years, section 65F covers that category of tax as well. The credit depends on the conditions in section 65F(2): the return filed, withholding statements filed where the startup is a withholding agent, and sales tax returns filed where required. ### What does the law say about withholding? Clause (43F) of Part IV of the Second Schedule reads: "The provisions of section 153 shall not apply in the case of a start-up, being recipient of payment, as defined in clause (62A) of section 2." Clause (62A) defines a startup as a business of a resident individual, AOP or company that began on or after 1 July 2012, offers or intends to offer technology driven products or services, is registered with and duly certified by PSEB, and has turnover under one hundred million in each of the last five tax years. Sub-clause (ii) also lets the Board, with the Federal Minister-in-charge's approval, notify other businesses. ### How does it work in practice? The two provisions are not tied to the same period. Section 65F(1)(b) limits the credit to three tax years. Clause (43F) refers only to a start-up "as defined in clause (62A)" and contains no year limit of its own. On the text, clause (43F) applies for as long as the recipient meets the definition, but the Ordinance does not say this in so many words. Clause (43F) also says nothing about how a client should confirm that a supplier is a startup. Section 159(2) tells a payer to deduct the full amount specified in Division III unless a section 159 certificate is in force. Section 159(1)(c) allows a certificate where an amount "is subject to hundred percent tax credit". A startup in its credit years fits that wording. The Ordinance does not say whether a startup must hold such a certificate before clause (43F) takes effect for a client. This page does not resolve that. Clause (43F) switches off section 153 only. Other deductions under Division III of Part V of Chapter X, such as tax deducted on export proceeds, are not mentioned in it. For those, the section 159(1)(c) certificate route is the one the Ordinance provides. ### Worked example (illustrative figures) Qalam Code (Pvt) Ltd in Peshawar is a startup under clause (62A)(i), certified by PSEB in tax year 2027. A Lahore company pays it Rs. 3,000,000 for IT services in that year. 1. Without clause (43F), the client would deduct at the Division III rate for IT services, 4%: Rs. 3,000,000 x 4% = Rs. 120,000. 2. Clause (43F) says section 153 does not apply to a startup recipient, so the deduction is Rs. 0 and Qalam Code receives Rs. 3,000,000. 3. Suppose Qalam Code's total tax payable for tax year 2027, including any minimum tax, is Rs. 450,000. 4. Section 65F credit: 100% x Rs. 450,000 = Rs. 450,000. Tax left to pay: Rs. 0, if the section 65F(2) conditions are met. ### What if the credit years end but the business is still a startup? The section 65F credit stops after the second tax year following certification. Clause (43F) is not tied to those years, so withholding under section 153 would stay switched off while the business meets clause (62A). Tax payable, including any minimum tax, would then be due in the ordinary way. ### What if a client deducts anyway? Neither clause (43F) nor section 65F sets out a procedure for recovering tax a client deducted despite clause (43F). The corpus does not answer this directly. ### Common mistakes - **Assuming the credit excludes minimum tax.** Section 65F(1) names minimum, alternate corporate tax and final taxes. - **Assuming clause (43F) ends with the credit.** It has no year limit of its own. - **Assuming clause (43F) covers every withholding.** It refers to section 153 only. ### What to check in the official text Read section 65F, clause (62A) of section 2, and clause (43F) of Part IV of the Second Schedule in the official PDF. Read section 159(1)(c) and (2) if a client asks for a certificate. PSEB certification procedures and any Board notifications under clause (62A)(ii) are outside this corpus. ### Frequently asked #### Does the startup credit cover minimum tax? Yes. Section 65F(1) describes the credit as one hundred per cent of the tax payable under any provision of the Ordinance, including minimum, alternate corporate tax and final taxes. It runs for the tax year of PSEB certification and the next two tax years. #### Should a client deduct section 153 tax when paying a startup? Clause (43F) of Part IV of the Second Schedule says section 153 shall not apply in the case of a start-up, being recipient of payment, as defined in clause (62A) of section 2. The clause itself does not set a time limit or require a certificate. #### Does the startup need a section 159 certificate? The Ordinance does not say a certificate is required for clause (43F) to apply. Section 159(1)(c) does allow the Commissioner to issue an exemption or lower rate certificate for an amount subject to a hundred percent tax credit, which covers a startup in its section 65F credit years. ### Citations - [Income Tax Ordinance, 2001, section 65F (Tax credit for certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#65f-tax-credit-for-certain-persons), as amended to 2026-06-30: "a tax credit equal to one hundred per cent of the tax payable under any provisions of this Ordinance including minimum, alternate corporate tax and final taxes" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clause (43F)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 159 (Exemption or lower rate certificate)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#159-exemption-or-lower-rate-certificate), as amended to 2026-06-30: "is subject to hundred percent tax credit under" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "for the rendering of or providing of services" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "is engaged in or intends to offer technology driven products or services to any sector of the economy" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), paragraph (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Does a certified startup still pay minimum tax, and do clients still withhold tax from its payments? Source: https://qanoondigest.com/faq/software-houses/startup-minimum-tax-withholding-exemption Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer For its three credit years, no. Section 65F allows a startup a credit of one hundred per cent of tax payable, including minimum, alternate corporate and final taxes. Separately, clause (43F) of Part IV of the Second Schedule says section 153 does not apply to a startup as recipient of payment, so clients should not deduct under it. **Applies to:** Technology startups registered with and certified by the Pakistan Software Export Board that receive payments from local clients. A PSEB-certified startup gets two separate reliefs from the Income Tax Ordinance. Section 65F gives it a credit that wipes out tax payable, minimum tax included, for three tax years. Clause (43F) of Part IV of the Second Schedule stops section 153 applying to payments it receives. The two have different time limits. ### What does the law say? **The credit.** Section 65F(1) allows "a tax credit equal to one hundred per cent of the tax payable under any provisions of this Ordinance including minimum, alternate corporate tax and final taxes". Clause (b) extends it to a startup as defined in clause (62A) of section 2, for the tax year of PSEB certification and the next following two tax years. Section 65F(2) makes it conditional on filing the return, filing withholding tax statements where the startup is a withholding agent, and filing sales tax returns where required. **The withholding switch.** Clause (43F) of Part IV of the Second Schedule reads: "The provisions of section 153 shall not apply in the case of a start-up, being recipient of payment, as defined in clause (62A) of section 2." Section 53(1)(d) says persons specified in the Second Schedule shall be "exempted from the operation of any provision of this Ordinance, subject to any conditions and to the extent specified therein". Part IV of the Second Schedule is headed "Exemption from specific provisions". **The definition.** Clause (62A)(i) of section 2 requires a business that commenced on or after 1 July 2012, that "is engaged in or intends to offer technology driven products or services to any sector of the economy", that is registered with and certified by PSEB, and that has turnover of less than one hundred million in each of the last five tax years. ### How does minimum tax interact with the credit? Section 113(1) applies minimum tax where, because of reasons including "the application of credits or rebates", no tax or too little tax is payable. Read alone, that might suggest a startup whose tax is cancelled by a credit falls into minimum tax. Section 65F answers that point on its face. Its credit is against tax payable "including minimum" tax. So even where minimum tax is computed on turnover under section 113, the section 65F credit covers it in full for the three credit years, provided the section 65F(2) conditions are met. The Ordinance does not set out a step-by-step order for applying the two sections, but the wording of section 65F leaves no minimum tax outstanding. ### How does the withholding exemption work in practice? Section 153 normally requires a prescribed person, such as a company, paying for services to deduct tax from the gross amount payable at the Division III rate, 4% for IT services in tax year 2027. Clause (43F) takes a startup, as recipient, out of that section altogether. The Ordinance does not say how a paying client should confirm that the payee is a startup. Clause (43F) itself does not mention a certificate. The related page on exemption certificates explains the certificate route a startup can use to put its status on record. ### Worked example (illustrative figures) Karigar AI (Pvt) Ltd, a Lahore startup certified by PSEB in tax year 2027, bills a Faisalabad textile group Rs. 3,000,000 for an inventory system. 1. Ordinary deduction for an IT services company: Rs. 3,000,000 x 4% = Rs. 120,000. 2. Karigar is a startup under clause (62A), so clause (43F) switches off section 153: deduction nil, and Karigar receives Rs. 3,000,000. 3. Suppose Karigar's tax payable for tax year 2027, including any minimum tax, is Rs. 210,000. 4. Section 65F credit: 100% x Rs. 210,000 = Rs. 210,000, so tax left to pay is nil, if it has filed its return and required statements. ### What if the three credit years are over? The section 65F credit ends after the certification year and the next two tax years. Clause (43F) contains no time limit. It depends only on the business still meeting the clause (62A) definition, including turnover below one hundred million in each of the last five tax years. On the text, a business can stop receiving the credit and still be outside section 153, although the tax it then owes is computed without the credit. ### What if the startup misses a filing condition? Section 65F(2) makes the credit conditional. If the startup has not filed its withholding tax statements for a year in which it paid salaries, the credit is not available for that year, and tax payable, including any minimum tax, must be paid. Clause (43F) has no filing condition of its own. ### Common mistakes - **Assuming minimum tax always applies once income is cancelled by a credit.** Section 65F expressly reaches minimum tax. - **Linking the withholding exemption to the three credit years.** Clause (43F) does not refer to section 65F. - **Forgetting the turnover test.** Clause (62A)(i) requires turnover below one hundred million in each of the last five tax years. ### What to check in the official text Read section 65F, section 113(1), section 53(1)(d), clause (62A) of section 2 and clause (43F) of Part IV of the Second Schedule in the Ordinance amended to 30 June 2026. PSEB certification procedures are not in this corpus. ### Frequently asked #### Does the section 65F credit cover minimum tax on turnover? Yes, on its wording. Section 65F(1) allows a credit equal to one hundred per cent of the tax payable under any provision of the Ordinance including minimum, alternate corporate tax and final taxes, for the startup's certification year and the next two tax years, subject to the filing conditions in section 65F(2). #### Should a client deduct 4% from a payment to a certified startup? Clause (43F) of Part IV of the Second Schedule says the provisions of section 153 shall not apply in the case of a start-up, being recipient of payment, as defined in clause (62A) of section 2. Section 53(1)(d) gives effect to such exemptions from specific provisions. #### Does the withholding exemption end after three years like the credit? Clause (43F) does not set a time limit of its own. It turns on the startup definition in clause (62A), which requires PSEB certification and turnover under one hundred million in each of the last five tax years. The three-year limit is written only into section 65F. ### Citations - [Income Tax Ordinance, 2001, section 65F (Tax credit for certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#65f-tax-credit-for-certain-persons), as amended to 2026-06-30: "a tax credit equal to one hundred per cent of the tax payable under any provisions of this Ordinance including minimum, alternate corporate tax and final taxes" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV (Exemption from specific provisions), clause (43F)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "deduct tax from the gross amount payable (including sales tax, if any) at the rate specified in Division III of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 53 (Exemptions and tax concessions in the Second Schedule)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#53-exemptions-and-tax-concessions-in-the-second-schedule), as amended to 2026-06-30: "exempted from the operation of any provision of this Ordinance, subject to any conditions and to the extent specified therein" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "the application of credits or rebates" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "is engaged in or intends to offer technology driven products or services to any sector of the economy" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Does super tax under section 4C apply to a software house whose income is mostly IT exports? Source: https://qanoondigest.com/faq/software-houses/super-tax-it-export-companies Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Not if export proceeds realised for the tax year are more than 80% of total turnover: clause (104B) of Part IV of the Second Schedule switches section 4C off. Below that line, section 4C applies. Export income taxed as final is outside taxable income under section 169 but counts as imputable income. Most companies pay 8% above Rs. 500 million. **Applies to:** Profitable software houses and IT companies in Pakistan that earn both export and local income, for tax year 2027. ### What does section 4C charge? Section 4C imposes a super tax "for tax year 2022 and onwards" on the income of every person, at the rates in Division IIB of Part I of the First Schedule. For this purpose, section 4C(2) defines "income" as the sum of four items: 1. profit on debt, dividend, capital gains, brokerage and commission; 2. taxable income as computed under the Ordinance, ignoring brought forward depreciation and brought forward business losses, and excluding the item 1 amounts; 3. imputable income as defined in clause (28A) of section 2, excluding the item 1 amounts; 4. income computed under the Fourth, Fifth, Seventh and Eighth Schedules, again ignoring brought forward depreciation, amortization and losses. ### Is there a special rule for IT exporters? Yes, since the Finance Act, 2026. Clause (104B) of Part IV of the Second Schedule reads: "The provisions of section 4C shall not apply to a person if the export proceeds realized for the tax year represent more than eighty percent of his total turnover for the tax year." So the first test for a software house is a simple ratio: export proceeds realised in the tax year divided by total turnover for that year. Above 80%, section 4C does not apply to the company at all, whatever its profit. At 80% or below, the rest of this page applies. The clause does not define "total turnover" or say whether it follows the definition used for minimum tax, so the exact base for the ratio is not spelled out in the clause itself. ### How is export income treated below the 80% line? Two provisions pull in different directions. - **Section 169** keeps final-tax income out of taxable income: where tax on export proceeds is final under section 154A(2), "the income shall not be chargeable to tax under any head of income in computing the taxable income of the person". That income therefore does not enter item 2 above. - **Section 4C(2)(iii)** separately adds imputable income. Section 2 defines imputable income, "in relation to an amount subject to final tax", as "the income which would have resulted in the same tax, had this amount not been subject to final tax". The effect is that export income taxed as final is not counted at its full value, but it is counted as a notional income figure derived from the final tax paid. The definition does not say which rate to use when converting the final tax back into income. This page does not settle that point. ### What rate applies for tax year 2027? The Division IIB table, as substituted by the Finance Act, 2026, has four rows: | S. No. | Income under section 4C and person | Rate | |---|---|---| | 1 | Banking company, income exceeding Rs. 150 million | 10% of the income | | 2 | Income computed under Part I of the Fifth Schedule, exceeding Rs. 150 million (up to the rule 4 limit) | 10% of the income | | 3 | Person selling any kind of fertilizer, income exceeding Rs. 150 million | 10% of the income | | 4 | Any other person, income exceeding Rs. 500 million | 8% of the income | A software house falls in row 4. There is no row for such a person with income at or below Rs. 500 million, so no super tax is charged at that level. The row says "8% of the income"; it does not describe a rate on only the excess over Rs. 500 million. ### Worked example (illustrative figures) A software company in Islamabad, tax year 2027: - Export proceeds realised: Rs. 1,160,000,000, with section 154A tax treated as final. - Local turnover: Rs. 900,000,000. - Total turnover: Rs. 2,060,000,000. **Step 1: the 80% test.** Rs. 1,160,000,000 / Rs. 2,060,000,000 = about 56%. That is not more than 80%, so clause (104B) does not help and section 4C applies. **Step 2: income under section 4C(2).** - Profit on debt from bank deposits: Rs. 15,000,000 (item 1). - Taxable income from the local business, before brought forward losses and depreciation: Rs. 480,000,000 (item 2). - Imputable income on the export proceeds: assume Rs. 10,000,000 (item 3). This is an invented figure; the Ordinance does not state the conversion rate. Total: Rs. 15,000,000 + Rs. 480,000,000 + Rs. 10,000,000 = Rs. 505,000,000. **Step 3: rate.** Income exceeds Rs. 500 million, so row 4 applies: Rs. 505,000,000 x 8% = Rs. 40,400,000. Without the imputable income the total would be Rs. 495,000,000, below the row 4 threshold. The example shows why the imputable income item matters for companies near Rs. 500 million. **Variation.** If the same company had realised Rs. 3,700,000,000 of export proceeds against Rs. 900,000,000 of local turnover, the ratio would be Rs. 3,700,000,000 / Rs. 4,600,000,000 = about 80.4%. That is more than 80%, so clause (104B) takes the company out of section 4C for that year. ### Common mistakes - **Assuming final tax income is invisible for super tax.** It is outside taxable income, but section 4C(2)(iii) brings it back in as imputable income. - **Treating the 80% test as permanent.** Clause (104B) is tested "for the tax year", so a company can move in and out of section 4C from year to year. - **Using the old graduated table.** Before the Finance Act, 2026, Division IIB had graduated slabs starting above Rs. 150 million. The current table has only the four rows above. - **Deducting brought forward losses.** Section 4C(2)(ii) takes taxable income "other than brought forward depreciation and brought forward business losses". ### What to check in the official text Read section 4C, clause (28A) of section 2, section 169(2), clause (104B) of Part IV of the Second Schedule and the Division IIB table in the Ordinance as amended to 30 June 2026. Confirm that section 154A tax on your proceeds is in fact final for the year, since the conditions in section 154A(2) must be met. ### Frequently asked #### Is an IT exporter completely outside super tax? Only if its export proceeds realised for the tax year are more than 80% of its total turnover. Clause (104B) of Part IV of the Second Schedule, inserted by the Finance Act, 2026, then says section 4C does not apply to that person at all. #### Does final-tax export income count toward the Rs. 500 million threshold? Section 169 keeps it out of taxable income, so it does not enter through clause (ii) of section 4C(2). But clause (iii) adds imputable income, which section 2 defines by reference to amounts subject to final tax. So it can enter the super tax base that way. #### What is the super tax rate for a software house for tax year 2027? The Division IIB table, as substituted by the Finance Act, 2026, sets 8% of the income for a person not covered by the banking, Fifth Schedule or fertilizer rows, where income exceeds Rs. 500 million. There is no row for such a person at or below Rs. 500 million. ### Citations - [Income Tax Ordinance, 2001, section 4C (Super tax on high earning persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4c-super-tax-on-high-earning-persons), as amended to 2026-06-30: "imputable income as defined in clause (28A) of section 2 excluding amounts specified in clause (i)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clause (104B)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IIB (Super Tax on high earning persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "“imputable income” in relation to an amount subject to final tax means the income which would have resulted in the same tax, had this amount not been subject to final tax" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "the income shall not be chargeable to tax under any head of income in computing the taxable income of the person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "exports of computer software or IT services or IT enabled services" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Does super tax under section 4C apply to an IT company whose income is mostly exports? Source: https://qanoondigest.com/faq/software-houses/super-tax-on-it-export-companies Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer From the Finance Act, 2026, clause (104B) of Part IV of the Second Schedule says section 4C does not apply if export proceeds realised for the tax year are more than 80% of total turnover. Otherwise super tax applies, final-tax export income counts as imputable income, and most companies pay 8% where income exceeds Rs. 500 million. **Applies to:** Profitable software houses and IT companies in Pakistan with both export and local income, for tax year 2027. ### What does section 4C say? Section 4C(1) imposes super tax "for tax year 2022 and onwards" at the rates in Division IIB of Part I of the First Schedule on the income of every person. There is no general carve-out for IT or software businesses in the section itself. Section 4C(2) defines "income" for this purpose as the sum of: 1. profit on debt, dividend, capital gains, brokerage and commission; 2. taxable income under section 9, ignoring brought forward depreciation and brought forward business losses; 3. "imputable income as defined in clause (28A) of section 2 excluding amounts specified in clause (i)"; and 4. income computed under the Fourth, Fifth, Seventh and Eighth Schedules. ### Is there an exclusion for mainly exporting companies? Yes, from the Finance Act, 2026. Section 5 of that Act inserted clause (104B) into Part IV of the Second Schedule: "The provisions of section 4C shall not apply to a person if the export proceeds realized for the tax year represent more than eighty percent of his total turnover for the tax year." Three points about this clause: - **It does not name IT exports.** It does not mention software, IT services, IT-enabled services or the PSEB. On its words it covers any person whose export proceeds pass the test. - **The test is a ratio of receipts, not income.** It compares export proceeds realised with total turnover for the same tax year. - **Its key terms are not defined in the clause.** "Export proceeds realized" and "total turnover" are not given a meaning in clause (104B). Section 113(3) has its own definition of turnover, but clause (104B) does not refer to it. How the ratio is measured in borderline cases is not settled by the text. ### How does final-tax export income count if clause (104B) does not apply? Section 169(2)(a) keeps final-tax income out of taxable income. That removes it from item 2 of section 4C(2). But item 3 picks it up again as imputable income. Section 2(28A) defines this as the income "which would have resulted in the same tax, had this amount not been subject to final tax". The definition gives no formula. For a company taxed at the flat Division II rate of 29%, the plain reading is the amount that would produce the section 154A tax at 29%. That is how the worked example below computes it. It is a reading of the definition, not a figure the law states. ### What are the tax year 2027 rates? The Division IIB Table as substituted by the Finance Act, 2026: | S. No. | Income under section 4C and person | Rate | |---|---|---| | 1 | Income of a banking company exceeding Rs. 150 million | 10% of the income | | 2 | Income computed under Part I of the Fifth Schedule exceeding Rs. 150 million, within the rule 4 limit | 10% of the income | | 3 | Income of a person selling any kind of fertilizer exceeding Rs. 150 million | 10% of the income | | 4 | Income of any other person exceeding Rs. 500 million | 8% of the income | A software house falls in row 4. The table has no row for such a person at Rs. 500 million or below, and row 4 expresses the rate as "8% of the income", not of the excess over Rs. 500 million. ### Worked example (illustrative figures) **Company A, Islamabad:** export proceeds Rs. 9,000,000,000 and local receipts Rs. 1,000,000,000 in tax year 2027. Exports are 90% of total receipts. If total turnover is read as both figures together, the 80% test in clause (104B) is met and section 4C does not apply. **Company B, Lahore:** PSEB-registered, export proceeds Rs. 6,000,000,000 and local receipts Rs. 4,000,000,000. Exports are 60%, so clause (104B) does not help. 1. Section 154A tax on exports at 0.25%: Rs. 6,000,000,000 x 0.25% = Rs. 15,000,000. 2. Imputable income at the 29% company rate: Rs. 15,000,000 / 29% = Rs. 51,724,138 (rounded). 3. Taxable income from local business: Rs. 450,000,000. 4. Section 4C income: Rs. 450,000,000 + Rs. 51,724,138 = Rs. 501,724,138. 5. This exceeds Rs. 500 million, so row 4 applies: Rs. 501,724,138 x 8% = Rs. 40,137,931 (rounded). Without the imputable income, Company B's income would be Rs. 450,000,000 and no row of the table would apply. ### What if ...? **The company has a loss brought forward.** Section 4C(2)(ii) ignores brought forward depreciation and business losses, so they do not reduce super tax income. **The company is in a minimum tax position.** The Explanation to section 113(1) says "tax payable or paid" does not include tax under section 4C. Super tax is not used to escape section 113, and vice versa. **Payment.** Section 4C(3) applies section 137 for payment, and section 4C(5A) applies section 147, so advance tax rules cover super tax. ### Common mistakes - **Assuming final-tax exports are outside super tax.** Only clause (104B) takes a company fully out. Below 80%, imputable income counts. - **Using the old graduated table.** The 1% to 10% bands were replaced by the Finance Act, 2026 table above. - **Assuming clause (104B) needs PSEB registration.** It does not say so. ### What to check in the official text Read section 4C, section 2(28A), the Division IIB Table and clause (104B) of Part IV of the Second Schedule in the Ordinance amended to 30 June 2026. Confirm how "export proceeds realized" and "total turnover" are being measured for your company, since the clause does not define them. ### Frequently asked #### Does clause (104B) only cover IT exports? No. It does not mention IT, software or the PSEB. It refers to 'export proceeds realized for the tax year' against 'total turnover', so on its words it applies to any person meeting the 80% test. Neither phrase is defined in the clause itself. #### What is the super tax rate for a software company in tax year 2027? The Division IIB Table, substituted by the Finance Act, 2026, sets 10% for banking companies, Fifth Schedule persons and fertilizer sellers above Rs. 150 million, and 8% of the income for any other person with income exceeding Rs. 500 million. A software company falls in the last row. #### Is export income under final tax free of super tax? Not automatically. Section 169 keeps it out of taxable income, but section 4C(2)(iii) adds imputable income, which is defined by reference to amounts subject to final tax. Only clause (104B) takes a mainly exporting company fully outside section 4C. ### Citations - [Income Tax Ordinance, 2001, section 4C (Super tax on high earning persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4c-super-tax-on-high-earning-persons), as amended to 2026-06-30: "imputable income as defined in clause (28A) of section 2 excluding amounts specified in clause (i)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2026, section 5 (Amendments of the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2026#5-amendments-of-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2026: "“(104B) The provisions of section 4C shall not apply to a person if the export proceeds realized for the tax year represent more than eighty percent of his total turnover for the tax year.”;" Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IIB (Super Tax on high earning persons), Table](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "“imputable income” in relation to an amount subject to final tax means the income which would have resulted in the same tax, had this amount not been subject to final tax;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "the income shall not be chargeable to tax under any head of income in computing the taxable income of the person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "tax already paid or payable in respect of deemed income which is assessed as final discharge of the tax liability under section 169" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How is tax deducted when an IT company pays salaries in dollars or linked to the dollar rate? Source: https://qanoondigest.com/faq/software-houses/dollar-linked-salary-tax-deduction Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 71 of the Income Tax Ordinance says every amount is taken in rupees, and a foreign currency amount is converted at the State Bank of Pakistan rate on the date it is taken into account. The employer then deducts tax under section 149 at the employee's average rate on the estimated rupee salary, re-estimating as the exchange rate moves. **Applies to:** Software houses and tech employers in Pakistan that pay staff in US dollars or in rupees pegged to the dollar rate, for tax year 2027 (1 July 2026 to 30 June 2027). Many Pakistani software houses earn in dollars and pay senior developers the same way, either in dollars or in rupees fixed by reference to the dollar rate. The Income Tax Ordinance, 2001 has no separate regime for this. It converts every amount to rupees and then applies the ordinary salary withholding rules. ### What does the law say? **Everything is in rupees.** Section 71(1) says "Every amount taken into account under this Ordinance shall be in Rupees." Section 71(2) says a foreign currency amount is converted to rupees at the State Bank of Pakistan rate applying between that currency and the rupee "on the date the amount is taken into account for the purposes of this Ordinance". **When salary is taken into account.** Section 12(1) charges "Any salary received by an employee in a tax year" under the head "Salary". Section 69 treats an amount as received when it is actually received, applied on the person's behalf, or made available to the person. **Withholding.** Section 149(1) requires the person paying salary, "at the time of payment, deduct tax from the amount paid", at the employee's average rate of tax on estimated annual salary under Division I of Part I of the First Schedule. **Source.** Section 101(1)(a) makes salary Pakistan-source income to the extent it is received from employment exercised in Pakistan, "wherever paid". ### How does it work in practice? Two arrangements need to be kept apart. **Salary fixed in dollars.** The contract says USD 2,000 a month. Each payment is a foreign currency amount, so section 71(2) converts it to rupees at the State Bank rate on the date it is taken into account. Section 71 does not name that date for salary. Because section 12(1) charges salary when received and section 149 deducts at the time of payment, the payment date is the date that lines up with both. The Ordinance does not say this in terms. **Salary in rupees linked to the dollar.** The contract says the rupee salary equals USD 2,000 at a stated rate each month. The amount paid is already in rupees, so section 71 has nothing to convert. The rupee amount paid is the salary, and it changes from month to month. In both cases the employer's section 149 estimate of annual salary is a forecast in rupees. The Ordinance does not say which future exchange rate to assume. What it does provide, in section 149(1), is an adjustment for "any excess deduction or deficiency arising out of any previous deduction", which lets later months correct earlier ones. ### Worked example (illustrative figures) Bilal is a senior engineer at an Islamabad software house, paid USD 2,000 a month with no other income. The exchange rates below are invented for the example and are not State Bank rates. The tax rates are the clause (2) rates for tax year 2027. **July to December 2026, rate Rs. 280 per dollar:** 1. Monthly rupee salary: USD 2,000 x Rs. 280 = Rs. 560,000. 2. Estimated annual salary: Rs. 560,000 x 12 = Rs. 6,720,000. 3. Tax under clause (2): Rs. 976,000 + 32% x (Rs. 6,720,000 - Rs. 5,600,000) = Rs. 976,000 + Rs. 358,400 = Rs. 1,334,400. 4. Monthly deduction: Rs. 1,334,400 / 12 = Rs. 111,200. 5. Deducted over six months: 6 x Rs. 111,200 = Rs. 667,200. **January to June 2027, rate Rs. 290 per dollar:** 1. Monthly rupee salary: USD 2,000 x Rs. 290 = Rs. 580,000. 2. Revised annual salary: (6 x Rs. 560,000) + (6 x Rs. 580,000) = Rs. 3,360,000 + Rs. 3,480,000 = Rs. 6,840,000. 3. Revised tax: Rs. 976,000 + 32% x (Rs. 6,840,000 - Rs. 5,600,000) = Rs. 976,000 + Rs. 396,800 = Rs. 1,372,800. 4. Still to deduct: Rs. 1,372,800 - Rs. 667,200 = Rs. 705,600. 5. Monthly deduction for the last six months: Rs. 705,600 / 6 = Rs. 117,600. Even spreading of the balance is one way of making the section 149 adjustment. The section does not prescribe it. ### What if the salary is paid by a foreign parent? Section 12(5)(a) treats an amount as received from employment whether paid by the employer, an associate of the employer, or a third party under an arrangement with the employer. Section 101(1)(a) keeps the salary Pakistan-source if the work is done in Pakistan, wherever paid. Section 149 places the deduction duty on the "person responsible for paying salary". The Ordinance does not spell out how that duty applies when the payer is a non-resident with no presence in Pakistan, and this page does not resolve that. ### What if the employee receives dollars into a foreign currency account? The account type does not change section 71. The salary is still converted to rupees for tax purposes. Rules on foreign currency accounts under State Bank regulations are outside this corpus. ### Common mistakes - **Using the contract rate for tax.** For a salary fixed in dollars, section 71(2) uses the State Bank rate, not an internal or contract rate. - **Freezing the estimate in July.** A dollar salary changes in rupee terms. Section 149 withholding works on estimated annual salary, which moves with the rupee. - **Treating offshore payment as offshore income.** Section 101(1)(a) looks at where the employment is exercised. ### What to check in the official text Read sections 12, 69, 71, 101 and 149, and the clause (2) table of Division I of Part I of the First Schedule in the official PDF. The State Bank of Pakistan's published exchange rates, which section 71 relies on, are not part of this corpus. ### Frequently asked #### Which exchange rate is used for a dollar salary? Section 71(2) uses the State Bank of Pakistan rate between the foreign currency and the rupee on the date the amount is taken into account. Salary is charged when received under section 12(1), and section 149 deducts tax at the time of payment, so the payment date is the natural reference point, though section 71 does not name it. #### Is a salary paid into a foreign bank account still taxed in Pakistan? Section 101(1)(a) treats salary as Pakistan-source income to the extent it is received from any employment exercised in Pakistan, wherever paid. Paying a Pakistan-based employee abroad does not by itself change the source of the salary. #### What if the rupee moves sharply mid-year? The employer's estimate of annual salary under section 149 changes. Section 149(1) allows adjustment for any excess or deficiency arising out of a previous deduction, so later deductions can absorb the difference. ### Citations - [Income Tax Ordinance, 2001, section 71 (Currency conversion)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#71-currency-conversion), as amended to 2026-06-30: "Every amount taken into account under this Ordinance shall be in Rupees." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "at the time of payment, deduct tax from the amount paid" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "Any salary received by an employee in a tax year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 69 (Receipt of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#69-receipt-of-income), as amended to 2026-06-30: "actually received by the person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 101 (Geographical source of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#101-geographical-source-of-income), as amended to 2026-06-30: "is received from any employment exercised in Pakistan, wherever paid" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2) (salary exceeding seventy-five per cent of taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Must a software house deduct tax when it pays local freelance or contract developers? Source: https://qanoondigest.com/faq/software-houses/withholding-on-local-freelancers-contractors Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, if the software house is a company. Section 153(1)(b) makes every company a withholding agent on payments to resident persons for services, unless the year's payments to that person stay under Rs. 30,000. For tax year 2027, Division III sets 15% for software engineers or developers working independently. **Applies to:** Software houses and IT companies in Pakistan that pay resident freelance developers, designers or contract programmers for services in tax year 2027. A software house that sends a module to a freelance developer in Pakistan pays for services, not salary. Section 153 of the Income Tax Ordinance, 2001 then makes the company collect tax out of that payment for the government. The rate comes from a table in the First Schedule, and the deduction is reported every quarter. ### Who has to deduct under section 153? Section 153(1) says every "prescribed person" paying a resident person, in full or in part and including an advance, "for the rendering of or providing of services" deducts tax from the gross amount payable at the time of payment, at the rate in Division III of Part III of the First Schedule. Section 153(7) lists prescribed persons. It includes "a company", so a private limited or public limited software house is covered whatever its size. It also covers an association of persons or an individual with turnover of one hundred million rupees or more in any of the preceding tax years. A sole proprietor or partnership software house below that turnover is not listed. "Services" in section 153(7) includes professional services "otherwise than as an employee". That line separates a contractor from staff. Salary paid to an employee falls under section 149 instead, where the employer deducts at the employee's average rate of tax. ### When does the Rs. 30,000 threshold apply? Clause (b) of section 153(1) excludes payments for services where the payment is less than thirty thousand rupees in aggregate during a financial year. The test is the total paid to one person over the financial year. Once payments to a developer reach Rs. 30,000 in the year, the exclusion no longer covers them. The section does not say how to treat smaller payments made earlier in the year before the total crossed that figure. ### Which rate applies for tax year 2027? Paragraph (2) of Division III sets the rates for section 153(1)(b) payments. Two entries touch IT work: | Sub-paragraph | What it covers | Rate | |---|---|---| | (i) | A list of services that includes software development services, and IT services and IT enabled services as defined in the Ordinance | 7% of the gross amount, with a proviso that the rate is 4% for IT services and IT enabled services | | (ii) | Independent professional services such as doctors, lawyers, architects, accountants, software engineers or developers, working independently | 15% | Sub-paragraph (ii) describes the person: a developer working independently, which is what a freelancer is. Sub-paragraph (i) describes the service. An Explanation limits sub-paragraph (i) to a service provider whose services are subjected to withholding on gross receipts and who has not challenged that taxation before any court. The Schedule does not say which entry governs when an individual's work fits both. This page does not resolve that. ### How does it work in practice? **Payee not on the active taxpayers' list.** Rule 1 of the Tenth Schedule says that where tax is to be deducted from a person not appearing in the active taxpayers' list, the rate "shall be increased by hundred percent" of the rate in the Ordinance. A 15% rate becomes 30%. **Quarterly statement.** Section 165 requires every person deducting tax under Division III of Part V of Chapter X to file a quarterly statement with each payee's name, CNIC or NTN and address, the payments made and the tax deducted. Section 165(2) sets the due dates as 20 April, 20 July, 20 October and 20 January for the quarters ending March, June, September and December. **Freelancer paid through an agent.** A proviso to section 153(1) covers a recipient paid through an agent or third person that keeps a fee. The agent is treated as paid that fee by the recipient, and the recipient collects tax along with the payment. **Status for the freelancer.** Section 153(3) makes the tax deductible under section 153(1) a minimum tax on the recipient's income. The provisos that soften this deal with goods and contracts, not services. ### Worked example (illustrative figures) Kohsar Labs (Pvt) Ltd in Islamabad engages Areeba, a React developer in Faisalabad, at Rs. 180,000 a month for four months in tax year 2027. The company applies sub-paragraph (ii). **Areeba is on the active taxpayers' list:** 1. Tax per payment: Rs. 180,000 x 15% = Rs. 27,000. 2. Net paid each month: Rs. 180,000 - Rs. 27,000 = Rs. 153,000. 3. Total deducted over four months: Rs. 27,000 x 4 = Rs. 108,000. **Areeba is not on the list:** 1. Rate under rule 1 of the Tenth Schedule: 15% + 15% = 30%. 2. Tax per payment: Rs. 180,000 x 30% = Rs. 54,000. 3. Total over four months: Rs. 54,000 x 4 = Rs. 216,000. **A one-off icon set:** the same company pays Hamza, a designer in Multan, Rs. 22,000 once in the financial year and nothing else. The aggregate is below Rs. 30,000, so section 153(1)(b) does not require a deduction. ### What if the company forgets to deduct? Section 161(1) makes a person who fails to deduct as required "personally liable to pay the amount of tax to the Commissioner". Section 161(2) gives the company a right to recover that tax from the person from whom it should have been deducted. The same section applies where tax was deducted but not paid over. ### Common mistakes - **Treating small companies as exempt.** Section 153(7) lists "a company" with no size test. - **Reading the threshold per invoice.** The Rs. 30,000 figure is an annual aggregate for each payee. - **Calling an employee a contractor.** Services "otherwise than as an employee" fall under section 153. Salary falls under section 149. - **Skipping nil quarters.** The proviso to section 165(1) requires a statement even when nothing was deducted. ### What to check in the official text Read section 153(1), (3) and (7), paragraph (2) of Division III of Part III of the First Schedule, and rule 1 of the Tenth Schedule in the official PDF of the Ordinance amended to 30 June 2026. Check the definitions of IT services and IT enabled services in the Ordinance's definitions, which sub-paragraph (i) refers to, and the section 165 due dates. ### Frequently asked #### What rate applies to a freelance developer in tax year 2027? Sub-paragraph (ii) of paragraph (2) of Division III sets 15% for independent professional services such as software engineers or developers working independently. Sub-paragraph (i) separately lists software development and IT services at 7%, with 4% for IT services, and the Schedule does not say which entry prevails for an individual freelancer. #### Is there an amount below which no tax is deducted? Yes. Section 153(1)(b) excludes payments for services where the payment is less than thirty thousand rupees in aggregate during a financial year. The test is the total paid to that person in the year, not the size of one invoice. #### Does the software house have to report these deductions? Yes. Section 165 requires a quarterly withholding statement listing each person paid, the payments and the tax deducted. The proviso requires the statement even for a quarter in which no tax was deducted. ### Citations - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "except where payment is less than thirty thousand Rupees in aggregate, during a financial year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III, paragraph (2), sub-paragraphs (i) and (ii)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 165 (Statements)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#165-statements), as amended to 2026-06-30: "shall be required to file withholding statement even where no withholding tax is collected or deducted during the period" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (rate of deduction or collection of tax for persons not appearing in the active taxpayers' list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 161 (Failure to pay tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#161-failure-to-pay-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be personally liable to pay the amount of tax to the Commissioner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is tax deducted when a software house pays AWS, Google Cloud or foreign SaaS subscriptions from Pakistan? Source: https://qanoondigest.com/faq/software-houses/withholding-on-foreign-cloud-saas-payments Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Usually yes. Hosting, online computing and similar foreign services fall within the section 2 definition of fee for offshore digital services. Section 6 taxes the non-resident provider at 15% of the gross fee for tax year 2027, and section 152(1C) makes the bank remitting the payment deduct that tax, unless Digital Presence Proceeds Tax has already been collected. **Applies to:** Software houses and IT companies in Pakistan paying non-resident providers for cloud hosting, computing, storage, SaaS tools or other online services. Most Pakistani software houses pay foreign providers every month: cloud hosting, code repositories, design tools, email and collaboration suites. The Income Tax Ordinance, 2001 treats many of these as "fees for offshore digital services" earned in Pakistan by a non-resident, and it collects the tax through the bank that sends the money abroad. ### What counts as a fee for offshore digital services? Clause (22B) of section 2 defines the term as any consideration for services rendered by a non-resident person for online advertising, designing, creating, hosting or maintenance of websites, digital or cyber space for websites, advertising, e-mails, online computing, blogs, online content and online data, uploading, storing or distributing digital content, online collection or processing of data related to users in Pakistan, any facility for online sale of goods or services "or any other online facility". The list is wide. Cloud hosting, online computing and storage, e-mail services and online tools used by a software house fit the words "hosting", "online computing", "storing" and "any other online facility". The Ordinance does not name any provider, and it does not classify particular products. Whether a specific licence is instead a royalty under clause (54) of section 2 is a separate question this page does not decide. ### Is the fee taxed in Pakistan at all? Section 101(12A) makes a fee for offshore digital services Pakistan-source income if it is paid by a resident person, or borne by a Pakistani permanent establishment of a non-resident. There is an exception where the fee is for services used in a business the resident carries on outside Pakistan through a permanent establishment. Section 6(1) then imposes tax on every non-resident person who receives a Pakistan-source fee for offshore digital services. Section 6(2) computes the tax on the gross amount. Section 6(3)(b) switches section 6 off where the services are rendered through a permanent establishment in Pakistan of the non-resident. ### What is the rate? Division IV of Part I of the First Schedule sets the section 6 rate at 15% of the gross amount of royalty or fee for technical services "or fee of offshore digital services", and 10% in any other case. The words covering offshore digital services were added by the Finance Act, 2025. This is the rate for tax year 2027 under the Ordinance as amended to 30 June 2026. ### Who deducts it? Section 152(1C) requires every banking company or financial institution remitting a fee for offshore digital services outside Pakistan, chargeable to tax under section 6, on behalf of a resident, to deduct tax from the gross amount at the Division IV rate. The software house is the resident on whose behalf the bank remits. Section 152(2), the general rule that makes payers deduct 20% from other payments to non-residents, expressly excludes amounts to which sub-section (1C) applies. **Digital Presence Proceeds Tax.** A proviso added by the Finance Act, 2025 says the bank shall not deduct under section 152(1C) where the recipient is also liable to Digital Presence Proceeds Tax and that tax has been collected. That tax comes from a separate law that is not in this corpus, so this page does not explain when it applies. ### Worked example (illustrative figures) Margalla Stack (Pvt) Ltd in Islamabad pays a foreign cloud provider a monthly hosting bill of Rs. 800,000 through its bank in tax year 2027. The provider has no permanent establishment in Pakistan and no Digital Presence Proceeds Tax has been collected. 1. Pakistan-source under section 101(12A)(a): paid by a resident person. 2. Chargeable under section 6 at the Division IV rate: 15%. 3. Bank deduction under section 152(1C): Rs. 800,000 x 15% = Rs. 120,000. 4. Over twelve equal months: Rs. 120,000 x 12 = Rs. 1,440,000 deducted in the year. The Ordinance says the tax is deducted "from the gross amount paid". It does not say who bears the cost commercially, which is a matter for the contract and the provider's billing terms. ### What if we pay by company card? Section 152(1C) speaks of a bank or financial institution "remitting outside Pakistan" a fee. The section does not say in terms whether a card charge is a remittance for this purpose. The State Bank's operating rules and any FBR procedure for card payments are not in this corpus. ### Common mistakes - **Deducting 20% under section 152(2) as well.** Section 152(2) excludes amounts covered by sub-section (1C). - **Assuming the company has no role.** The bank deducts, but section 152(1C) turns on the fee being chargeable under section 6, which depends on facts the company holds, such as whether the provider has a Pakistani permanent establishment. - **Using the old rate.** A footnote to Division IV shows an older version, replaced by the Finance Act, 2022, that taxed these fees at 5%. The words naming offshore digital services in the 15% rate were added by the Finance Act, 2025. ### What to check in the official text Read clause (22B) of section 2, section 6(1) to (4), section 101(12A) and section 152(1C) with its proviso and sub-section (2). Check the Division IV rate in the official PDF of the Ordinance. Treaty relief under a double taxation agreement, and the Digital Presence Proceeds Tax law, are outside this corpus. ### Frequently asked #### Does the software house itself deduct the tax on an AWS or SaaS bill? Section 152(1C) puts the duty on the banking company or financial institution remitting the fee outside Pakistan. Section 152(2), the general rule for other payments to non-residents, does not apply to an amount covered by sub-section (1C). #### What is the rate for tax year 2027? Division IV of Part I of the First Schedule sets 15% of the gross amount of a fee for offshore digital services. Section 152(1C) applies the same Division IV rate to the bank's deduction. #### What if the provider has a permanent establishment in Pakistan? Section 6(3)(b) says section 6 does not apply to a fee where the services are rendered through a permanent establishment in Pakistan, and section 6(4) treats it as business income of that establishment. Section 152(1C) only covers fees chargeable under section 6. ### Citations - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "means any consideration for providing or rendering services by a non-resident person for online advertising including digital advertising space, designing, creating, hosting or maintenance of websites, digital or cyber space for websites" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 6 (Tax on certain payments to non-residents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#6-tax-on-certain-payments-to-non-residents), as amended to 2026-06-30: "The tax imposed under sub-section (1) on a non-resident person shall be computed by applying the relevant rate of tax to the gross" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 152 (Payments to non-residents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#152-payments-to-non-residents), as amended to 2026-06-30: "Every banking company or a financial institution remitting outside Pakistan an amount of fee for offshore digital services, chargeable to tax under section 6" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 101 (Geographical source of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#101-geographical-source-of-income), as amended to 2026-06-30: "A fee for offshore digital services shall be Pakistan- source income, if it is" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IV (Rate of Tax on Certain Payments)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How is income from local Pakistani clients taxed for a software house that also exports, and is the tax clients deduct adjustable? Source: https://qanoondigest.com/faq/software-houses/local-it-services-income-software-house Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Fees from Pakistani clients are business income under section 18, taxed at the Division II rate, 29% for most companies in tax year 2027. Clients who are prescribed persons deduct 4% on IT services under section 153(1)(b). Section 153(3) makes that deduction minimum tax: it is credited under section 168, but tax on that income cannot fall below it. **Applies to:** Software houses and IT companies in Pakistan that earn from both foreign and local clients, for tax year 2027. A software house that exports and also works for Pakistani clients is taxed under two separate systems. Export proceeds go through section 154A. Local fees go through the normal rules for business income, with tax deducted at source under section 153. ### What does the law say about local fees? Section 18(1)(a) makes "the profits and gains of any business carried on by a person at any time in the year" chargeable under the head "Income from Business". Fees from local clients for software development, maintenance, hosting or IT-enabled services are part of those profits. For a company, the rate is in Division II of Part I of the First Schedule. The Table as substituted by the Income Tax (Amendment) Act, 2025 sets: | Type of company | Rate | |---|---| | Banking company | 42% for tax year 2027 and onwards | | Small company | 20% | | Any other company | 29% | "Small company" has its own definition in section 2, which is not covered on this page. Most software houses that are not small companies pay 29% on their local taxable income. ### How is tax deducted by local clients? Section 153(1)(b) requires every prescribed person making a payment "for the rendering of or providing of services" to deduct tax, unless payments are less than Rs. 30,000 in aggregate during a financial year. Prescribed persons listed in section 153(7) include the Federal Government, companies, AOPs constituted by law, non-profit organisations, and individuals and AOPs with turnover of Rs. 100 million or more in any preceding tax year. The rate is in paragraph (2)(i) of Division III of Part III of the First Schedule. It lists "software development services, IT services and IT enabled services as defined in section 2" at 7%, and then provides: "the rate of tax shall be 4% in case of IT services and IT enabled services as defined in section 2." Section 2(30AD) says IT services include software development, software maintenance, system integration, web design, web development, web hosting and network design. An Explanation limits paragraph (2)(i) to a provider whose services are subject to withholding on gross receipts and who has not challenged taxation of gross receipts in court. ### Is the deducted tax final, adjustable or minimum? Section 153(3) says the tax deductible under sub-section (1) on the income of a resident person "shall be minimum tax". The proviso lists exceptions for goods sold by a manufacturer or listed company and contracts executed by a listed company. There is no exception for services, so tax deducted on a software house's local fees is minimum tax. The Explanation to section 153(3) says the income it relates to is "the amount on which tax is deductible". Section 168(1)(b) treats deducted tax as "tax paid by the person from whom the tax was collected or deducted", and section 168(2) allows a credit for it in computing tax due. Section 168(3) lists final taxes that get no credit, including section 154A(2), but not section 153. So the deduction is credited against the Division II tax, while its minimum character sets a floor on the tax for that income. Section 153 as it stands contains no carry-forward rule for any excess, unlike section 113(2)(c). ### Worked example (illustrative figures) **A software company in Rawalpindi**, not a small company, for tax year 2027. Local fees from corporate clients: Rs. 30,000,000. Clients deduct 4%: Rs. 1,200,000. **Case 1: profitable local work.** Local taxable income after apportioned expenses is Rs. 6,000,000. 1. Tax at 29%: Rs. 6,000,000 x 29% = Rs. 1,740,000. 2. Credit under section 168 for tax deducted: Rs. 1,200,000. 3. Balance payable with the return: Rs. 540,000. **Case 2: thin margins.** Local taxable income is Rs. 1,500,000. 1. Tax at 29%: Rs. 435,000. 2. Tax deducted is Rs. 1,200,000, and it is minimum tax under section 153(3). 3. Because the deduction is minimum tax, tax on this income is not less than Rs. 1,200,000. Section 153 contains no rule for refunding or carrying forward the Rs. 765,000 difference, and the Ordinance does not define "minimum tax" in the section itself. Export proceeds are handled separately under section 154A and do not change either case. ### What if ...? **The company is not on the active taxpayers' list.** The Tenth Schedule can raise withholding rates for persons not on the list. That is covered on a separate page. **The client is an individual below the turnover line.** An individual with turnover under Rs. 100 million in every preceding tax year is not a prescribed person, so no tax is deducted. The fees are still business income. **The company is in Islamabad.** Sales tax on IT services under the Islamabad Capital Territory (Tax on Services) Ordinance, 2001 is a separate tax, covered on another page. Provincial sales tax on services in Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan is outside this corpus. ### Common mistakes - **Treating the 4% as a final tax.** For services, section 153(3) makes it minimum tax. - **Treating it as a pure advance payment.** It is credited, but cannot be recovered below the minimum. - **Applying section 169 to local fees.** Section 169 covers only the final taxes it lists, such as section 154A(2). ### What to check in the official text Read sections 18, 153 and 168, Division II of Part I and paragraph (2) of Division III of Part III of the First Schedule in the Ordinance amended to 30 June 2026. Confirm whether your client is a prescribed person under section 153(7), and whether the section 113 minimum tax also affects your local turnover. ### Frequently asked #### Is the 4% deducted by local clients a final tax for a software company? No. Section 153(3) says tax deductible under section 153(1) on the income of a resident person shall be minimum tax. The exceptions in the proviso concern goods sold by manufacturers or listed companies and contracts of listed companies, not services. #### Can the software house claim credit for the 4% against its tax? Yes. Section 168(1)(b) treats tax deducted under Division III of Part V of Chapter X as tax paid, and section 168(3), which lists final taxes that get no credit, does not include section 153. Because the tax is also minimum tax, the company's tax on that income cannot be lower than the amount deducted. #### Does local income get the same 0.25% rate as exports? No. The 0.25% rate in Division IVA applies only to export proceeds realised through an authorised dealer under section 154A. Local fees are business income taxed under Division II of Part I of the First Schedule. ### Citations - [Income Tax Ordinance, 2001, section 18 (Income from business)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#18-income-from-business), as amended to 2026-06-30: "the profits and gains of any business carried on by a person at any time in the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division II (Rates of Tax for Companies)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "for the rendering of or providing of services" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), paragraph (2)(i) and proviso](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "shall be treated as tax paid by the person from whom the tax was collected or deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Must a software house deduct tax when paying AWS, foreign SaaS vendors or a foreign subcontractor? Source: https://qanoondigest.com/faq/software-houses/paying-foreign-cloud-saas-subcontractors Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Usually yes, but who deducts depends on the payment. Section 152(1C) makes the remitting bank deduct 15% from fees for offshore digital services such as hosting and online computing. A software house paying a foreign subcontractor deducts 15% on fees for technical services under section 152(1), or 20% under section 152(2). Card payments abroad also attract 0.5% under section 236Y. **Applies to:** Software houses and IT companies in Pakistan paying non-resident cloud, SaaS or software vendors, or foreign subcontractors, in tax year 2027. A Pakistani software house typically pays foreign providers every month: cloud hosting, code repositories, design and collaboration tools, and sometimes a developer or studio abroad. The Income Tax Ordinance, 2001 taxes the non-resident on many of these payments and collects that tax in Pakistan, either through the bank that sends the money or through the software house itself. The rates below are for tax year 2027. ### What does the law say about cloud and SaaS fees? Clause (22B) of section 2 defines a "fee for offshore digital services" as consideration for services by a non-resident for online advertising, designing, creating, hosting or maintenance of websites, digital or cyber space for websites, e-mails, online computing, blogs, online content and online data, uploading, storing or distributing digital content, online processing of data related to users in Pakistan, online sale facilities "or any other online facility". Hosting, online computing, storage and e-mail services fit those words. The Ordinance names no provider and does not classify individual products. Whether a particular software licence is instead a royalty is a separate question this page does not decide. Section 101(12A) makes the fee Pakistan-source income if a resident pays it, unless the services are used in a business the resident carries on outside Pakistan through a permanent establishment. Section 6(1) then taxes the non-resident, and section 6(2) computes the tax on the gross amount. Division IV of Part I of the First Schedule sets 15% of the gross amount of royalty or fee for technical services "or fee of offshore digital services", and 10% in any other case. ### Who deducts on a cloud or SaaS payment? Section 152(1C) says every banking company or financial institution remitting a fee for offshore digital services outside Pakistan, chargeable under section 6, on behalf of a resident, deducts tax from the gross amount at the Division IV rate. A proviso says the bank does not deduct where the recipient is also liable to Digital Presence Proceeds tax and that tax has been collected. That separate law is not in this corpus. Section 152(2) excludes amounts covered by sub-section (1C), so the software house does not deduct 20% on top. ### What about a foreign subcontractor? A developer or studio abroad is usually paid directly by the software house, which then carries the deduction duty. - **Fee for technical services.** Clause (23) of section 2 defines this as consideration for managerial, technical or consultancy services, including services of technical or other personnel. Section 101 makes a technical fee paid by a resident Pakistan-source, with the same permanent establishment exception. Section 152(1) requires the payer to deduct at the Division IV rate of 15%. - **Any other amount.** Section 152(2) requires deduction from other payments to non-residents at the rate in Division II of Part III, which paragraph (2) sets at 20% of the gross amount. Section 152(3)(d) switches this off where the non-resident is not chargeable to tax on the amount. - **Paying without deduction.** Section 152(5) requires the payer to give the Commissioner a written notice before paying without deduction, naming the payee, the nature and amount of the payment and other prescribed particulars. Section 152(5A) requires an order within thirty days. Payments at a reduced treaty rate are outside this notice route, and treaty texts are not in this corpus. The Ordinance does not say which kinds of software work are "technical or consultancy services". Classifying a given contract means reading clause (23) against its terms. ### What does section 236Y add for card payments? Section 236Y(1) says every banking company collects advance tax when it transfers any sum remitted outside Pakistan on behalf of a person who has completed a credit, debit or prepaid card transaction with a person outside Pakistan. Division XXVII of Part IV sets the rate at 0.5% of the gross amount remitted abroad. A footnote records that 0.5% replaced 5% through the Finance Act, 2026. Section 236Y(2) makes the tax adjustable. The Ordinance does not say how section 236Y and section 152(1C) interact when a cloud bill is paid by company card. This page does not resolve that. ### Worked example (illustrative figures) Sialkot Stack (Pvt) Ltd makes three payments in tax year 2027. No provider has a permanent establishment in Pakistan. **Cloud hosting by bank remittance:** Rs. 900,000. 1. Fee for offshore digital services, paid by a resident: chargeable under section 6. 2. Bank deduction under section 152(1C): Rs. 900,000 x 15% = Rs. 135,000. **Foreign subcontractor for a mobile app module:** Rs. 2,400,000. 1. If treated as a fee for technical services: Rs. 2,400,000 x 15% = Rs. 360,000 under section 152(1). 2. If not: Rs. 2,400,000 x 20% = Rs. 480,000 under section 152(2). **Design tool subscription on a company debit card:** Rs. 50,000. 1. Advance tax under section 236Y: Rs. 50,000 x 0.5% = Rs. 250, adjustable. ### Common mistakes - **Deducting under section 152(2) on top of the bank's deduction.** Section 152(2) excludes amounts covered by sub-section (1C). - **Paying a subcontractor first and notifying later.** Section 152(5) requires the notice before payment. - **Using an old rate.** A footnote shows Division IV once taxed offshore digital services at 5%. The words covering them in the 15% rate were added by the Finance Act, 2025. - **Treating the card charge as the end of the matter.** Section 236Y collects advance tax on the card transaction, and section 236Y(2) makes it adjustable. It is a separate charge from the tax on the foreign vendor under section 6. ### What to check in the official text Read clauses (22B) and (23) of section 2, section 6, section 101(12) and (12A), section 152(1), (1C), (2), (3), (5) and (5A), and section 236Y. Check Division IV of Part I, paragraph (2) of Division II of Part III and Division XXVII of Part IV of the First Schedule in the official PDF. Double taxation agreements and the Digital Presence Proceeds tax law are outside this corpus. ### Frequently asked #### Does the software house itself deduct tax from an AWS or SaaS bill? For a fee for offshore digital services, section 152(1C) puts the duty on the banking company or financial institution remitting the fee abroad on behalf of the resident. Section 152(2), the general rule for other payments to non-residents, does not apply to an amount covered by sub-section (1C). #### What rate applies to a foreign subcontractor in tax year 2027? If the payment is a fee for technical services chargeable under section 6, section 152(1) applies the Division IV rate of 15% of the gross amount. Other amounts paid to a non-resident fall under section 152(2) at 20% under paragraph (2) of Division II of Part III, subject to the exceptions in section 152(3). #### Is the 0.5% card charge a final tax? No. Section 236Y(2) says the advance tax collected under that section shall be adjustable. The rate of 0.5% of the gross amount remitted abroad comes from Division XXVII of Part IV of the First Schedule. ### Citations - [Income Tax Ordinance, 2001, section 6 (Tax on certain payments to non-residents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#6-tax-on-certain-payments-to-non-residents), as amended to 2026-06-30: "shall be computed by applying the relevant rate of tax to the gross" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 152 (Payments to non-residents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#152-payments-to-non-residents), as amended to 2026-06-30: "Every banking company or a financial institution remitting outside Pakistan an amount of fee for offshore digital services, chargeable to tax under section 6" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236Y (Advance tax on persons remitting amounts abroad through credit or debit or prepaid cards)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236y-advance-tax-on-persons-remitting-amounts-abroad-through-credit-or-debit-or-prepaid-cards), as amended to 2026-06-30: "Every banking company shall collect advance tax, at the time of transfer of any sum remitted outside Pakistan" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "online computing, blogs, online content and online data" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 101 (Geographical source of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#101-geographical-source-of-income), as amended to 2026-06-30: "A fee for offshore digital services shall be Pakistan- source income" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IV; Part III, Division II, paragraph (2); Part IV, Division XXVII](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What withholding applies when a Pakistani software house pays a foreign subcontractor or its foreign parent company? Source: https://qanoondigest.com/faq/software-houses/payments-to-foreign-subcontractor-or-parent Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It depends on what is paid and to whom. Under section 152(1), fees for technical services or royalty to a non-resident are taxed at 15% for tax year 2027. Other chargeable amounts take 20% under section 152(2). IT services paid to the non-resident's Pakistani permanent establishment take 4% under section 152(2A). Section 152(5) allows a notice to pay without deduction. **Applies to:** Software houses and IT companies in Pakistan that pay non-resident subcontractors, foreign group companies or their Pakistani branches. A software house in Lahore or Karachi often buys work from abroad: a subcontracted module from a developer in another country, a management charge from its foreign parent, or services from the parent's branch in Pakistan. Section 152 of the Income Tax Ordinance, 2001 sets a different withholding route for each, and the rate depends on what the payment is for. ### What does the law say? Section 152 has three routes that matter for an IT company: | Payment | Provision | Rate for tax year 2027 | |---|---|---| | Royalty or fee for technical services to a non-resident, chargeable under section 6 | Section 152(1), First Schedule Part I Division IV | 15% of the gross amount | | Any other amount paid to a non-resident (not covered by the specific sub-sections) | Section 152(2), First Schedule Part III Division II paragraph (2) | 20% of the gross amount | | Services from a Pakistani permanent establishment of a non-resident, paid by a prescribed person | Section 152(2A)(b), First Schedule Part III Division II paragraph (5) | 4% for IT services and IT enabled services; 8% for the other listed services; 15% for services not listed | **Fee for technical services.** Clause (23) of section 2 defines it as consideration for managerial, technical or consultancy services, including the services of technical or other personnel. It excludes construction-project services and amounts taxable as salary. **Pakistan source.** Section 101(12) makes a technical fee Pakistan-source income if it is paid by a resident person, unless it is for services used in a business the resident carries on outside Pakistan through a permanent establishment. Section 6(1) taxes a non-resident on a Pakistan-source royalty or fee for technical services, on the gross amount. **The Pakistani branch route.** Section 6(3)(b) switches section 6 off where the services are rendered through a permanent establishment in Pakistan, and section 6(4) treats the fee as business income of that establishment. Payments to it then fall under section 152(2A). Section 152(8) borrows the meaning of "prescribed person" from the section on payments for goods and services, and that definition includes a company. Section 152(2B) makes the section 152(2A) deduction a minimum tax. **Where the 4% comes from.** Paragraph (5)(i) of Division II lists software development services, IT services and IT enabled services at 8%, with a proviso that "the rate of tax shall be 4% in case of IT services and IT enabled services as defined in section 2". Clause (30AD) of section 2 says IT services include software development, software maintenance, system integration, web design, web development, web hosting and network design. ### How does the section 152(5) notice work? Section 152(5) says that where a person intends to pay a non-resident without deducting tax, other than a payment liable to a reduced treaty rate, it must first give the Commissioner a written notice with the payee's name and address, the nature and amount of the payment, and other prescribed particulars. Under section 152(5A) the Commissioner, within thirty days, passes an order accepting the position or directing deduction under section 152(6). A proviso treats an exemption certificate as issued once thirty days pass, processed through Iris, excluding adjournments the applicant took. Section 152(3)(d) separately says section 152(2) does not apply where the non-resident is not chargeable to tax on the amount. ### Worked example (illustrative figures) Indus Pixel (Pvt) Ltd, a Karachi software house, makes two payments in tax year 2027: **Payment A.** Rs. 3,000,000 to its foreign parent for managerial and technical consultancy. The parent has no permanent establishment in Pakistan. 1. Fee for technical services under clause (23) of section 2. 2. Pakistan-source under section 101(12)(a): paid by a resident. 3. Deduction under section 152(1) at 15%: Rs. 3,000,000 x 15% = Rs. 450,000. 4. Net paid to the parent: Rs. 3,000,000 - Rs. 450,000 = Rs. 2,550,000. **Payment B.** Rs. 2,000,000 to the Pakistani branch of a foreign IT group for system integration work. 1. Services by a permanent establishment in Pakistan: section 152(2A)(b). 2. IT services under clause (30AD): 4% under the proviso to paragraph (5)(i). 3. Deduction: Rs. 2,000,000 x 4% = Rs. 80,000. 4. Net paid: Rs. 2,000,000 - Rs. 80,000 = Rs. 1,920,000. ### What if the subcontractor's work is not a technical fee? Section 152(2) then applies to the gross amount at 20%, unless an exception in section 152(3) applies or the Commissioner has accepted a section 152(5) notice. The Ordinance does not list which kinds of software work are "technical or consultancy services", so the classification of a given contract is a matter of reading clause (23) against the facts. ### Common mistakes - **Using the 4% rate for a payee abroad.** The 4% proviso sits in the paragraph for section 152(2A), which only covers a permanent establishment in Pakistan. - **Paying first and notifying later.** Section 152(5) requires the notice before the payment. - **Treating a treaty rate as automatic.** Treaty texts are outside this corpus. Section 152(5) only notes that treaty reduced-rate payments are outside its notice route. ### What to check in the official text Read section 152(1), (2), (2A), (2B), (3), (5), (5A), (6) and (8), section 6(1) to (4), section 101(12), and clauses (23) and (30AD) of section 2. Check Division IV of Part I and Division II of Part III of the First Schedule in the official PDF. The applicable double taxation agreement, if any, is outside this corpus. ### Frequently asked #### Is a management fee to our foreign parent a fee for technical services? Clause (23) of section 2 defines fee for technical services as consideration for managerial, technical or consultancy services. A management fee for managerial services falls within those words. Paid by a resident, it is Pakistan-source under section 101(12) and taxed at 15% under section 6. #### Can we pay a foreign subcontractor without deducting tax? Section 152(5) requires a notice to the Commissioner before paying without deduction, giving the payee's name and address and the nature and amount of the payment. The Commissioner must pass an order within thirty days, and may direct deduction under section 152(6). #### Where do treaty rates come from? Section 152(5) refers to payments liable to a reduced rate under an agreement for avoidance of double taxation. The treaties themselves are not in this corpus, so this page gives no treaty rate. ### Citations - [Income Tax Ordinance, 2001, section 152 (Payments to non-residents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#152-payments-to-non-residents), as amended to 2026-06-30: "the person shall, before making the payment, furnish to the Commissioner a notice in writing setting out" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 6 (Tax on certain payments to non-residents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#6-tax-on-certain-payments-to-non-residents), as amended to 2026-06-30: "shall be treated as income from business attributable to the permanent establishment in Pakistan of the person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "means any consideration, whether periodical or lump sum, for the rendering of any managerial, technical or consultancy services including the services of technical or other personnel" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 101 (Geographical source of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#101-geographical-source-of-income), as amended to 2026-06-30: "A technical fee shall be Pakistan-source income if it is" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IV (Rate of Tax on Certain Payments)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division II (Payments to non-residents), paragraphs (2) and (5)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Must a software house deduct tax when it pays local freelancers or contract developers? Source: https://qanoondigest.com/faq/software-houses/withholding-on-payments-to-local-freelancers Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. A company is a prescribed person under section 153, so it deducts tax when paying a resident freelancer for services, unless payments stay under Rs. 30,000 in the financial year. Division III sets 15% for software engineers or developers working independently, and the Tenth Schedule doubles it for payees not on the active taxpayers' list. **Applies to:** Software houses and IT companies in Pakistan that pay resident individual freelancers, contract developers or designers for services, for tax year 2027. When a software house outsources work to an individual developer or designer in Pakistan, the payment is for services, not salary. Section 153 of the Income Tax Ordinance, 2001 then makes the company a withholding agent. The rate depends on how the Division III table classifies the service and on whether the freelancer appears on the active taxpayers' list. ### What does the law say? Section 153(1) requires every "prescribed person" making a payment, in full or in part and including an advance, to a resident person "for the rendering of or providing of services" to deduct tax from the gross amount payable at the time of payment. The rate is in Division III of Part III of the First Schedule. Payments for services are excluded "where payment is less than thirty thousand Rupees in aggregate, during a financial year". Section 153(7) lists prescribed persons. It includes "a company", so every software house that is a company is covered. It also includes individuals and associations of persons with turnover of one hundred million rupees or more in any of the preceding tax years. "Services" includes professional services "otherwise than as an employee". ### Which rate applies for tax year 2027? Paragraph (2) of Division III sets the rates for payments under section 153(1)(b). Two entries are relevant to IT work: | Sub-paragraph | Services | Rate | |---|---|---| | (i) | A list including software development services, and IT services and IT enabled services as defined in the Ordinance | 7% of the gross amount, with a proviso that the rate is 4% for IT services and IT enabled services | | (ii) | Independent professional services such as doctors, lawyers, architects, accountants, software engineers or developers, working independently | 15% | Sub-paragraph (ii) names "software engineers or developers, working independently", which describes a freelancer. Sub-paragraph (i) names the service rather than the person, and an explanation limits it to service providers whose gross receipts are subject to withholding and who have not challenged taxation of gross receipts in court. The Schedule does not state which entry governs when an individual developer's work fits both. This page does not resolve that. ### How does it work in practice? **Not on the active taxpayers' list.** Section 100BA says tax for persons not on the list is determined under the Tenth Schedule. Rule 1 of that Schedule increases the rate of deduction by hundred percent of the rate specified in the Ordinance. The Schedule also requires the withholding agent to report complete and accurate particulars of such persons in its withholding statement. **Status of the tax for the freelancer.** Section 153(3) makes tax deductible under section 153(1) a minimum tax on the recipient's income, with exceptions for certain goods and contract payments that do not cover services. **If the company does not deduct.** Section 161(1) makes a person who fails to deduct as required "personally liable to pay the amount of tax to the Commissioner". Section 161(2) lets it recover the tax from the freelancer. **Contractor or employee.** If the developer is in substance an employee, the payment is salary and section 149 applies instead, with deduction at the employee's average rate. Section 153 covers services "otherwise than as an employee". ### Worked example (illustrative figures) A software house in Gulberg, Lahore engages Bilal, a freelance React developer in Faisalabad, at Rs. 150,000 a month for six months. The company applies sub-paragraph (ii). **Bilal is on the active taxpayers' list:** 1. Tax per payment: Rs. 150,000 x 15% = Rs. 22,500. 2. Net paid to Bilal each month: Rs. 150,000 - Rs. 22,500 = Rs. 127,500. 3. Total deducted over six months: Rs. 22,500 x 6 = Rs. 135,000. **Bilal is not on the list:** 1. Rate: 15% increased by hundred percent = 30%. 2. Tax per payment: Rs. 150,000 x 30% = Rs. 45,000. 3. Total over six months: Rs. 45,000 x 6 = Rs. 270,000. **A one-off logo design:** the company pays Sana, a designer, Rs. 25,000 once in the financial year. The aggregate is below Rs. 30,000, so section 153(1)(b) does not require a deduction. ### What if payments cross Rs. 30,000 partway through the year? Section 153(1)(b) excludes payments "less than thirty thousand Rupees in aggregate, during a financial year". It does not say how to treat earlier payments once the aggregate crosses that figure. The text is silent on this point. ### What if the freelancer works through a platform? The proviso to section 153(1) says that where the recipient is paid through an agent or third person that retains a fee, the agent is treated as paid that fee by the recipient, and the recipient collects tax along with the payment. How that applies to a particular platform is not set out further. ### Common mistakes - **Assuming small firms are exempt.** A company is a prescribed person whatever its size. - **Ignoring the aggregate test.** The Rs. 30,000 limit is an annual aggregate, not per invoice. - **Not checking the active taxpayers' list.** The Tenth Schedule doubles the rate, and reporting errors about non-listed payees carry their own consequences. ### What to check in the official text Read section 153, paragraph (2) of Division III of Part III of the First Schedule, and rule 1 of the Tenth Schedule in the official PDF. Check the Ordinance's definitions of IT services and IT enabled services, which sub-paragraph (i) refers to. ### Frequently asked #### What rate applies to a freelance software developer in tax year 2027? Sub-paragraph (ii) of paragraph (2) of Division III sets 15% for independent professional services such as software engineers or developers working independently. Sub-paragraph (i) separately lists software development and IT services at 7%, with a proviso of 4% for IT services, and the Schedule does not say which entry prevails for an individual freelancer. #### Is there a minimum payment below which no tax is deducted? Yes. Section 153(1)(b) excludes payments for services where the payment is less than thirty thousand rupees in aggregate during a financial year. #### What if the freelancer is not on the active taxpayers' list? Rule 1 of the Tenth Schedule increases the rate of deduction by hundred percent of the rate specified in the Ordinance for persons not appearing in the active taxpayers' list. A 15% rate becomes 30%. ### Citations - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "except where payment is less than thirty thousand Rupees in aggregate, during a financial year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III, paragraph (2), sub-paragraphs (i) and (ii)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (rate of deduction or collection of tax for persons not appearing in the active taxpayers' list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "shall be determined in accordance with the rules in the Tenth Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 161 (Failure to pay tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#161-failure-to-pay-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be personally liable to pay the amount of tax to the Commissioner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- # Sole proprietors and small businesses Registering, keeping records, turnover tax and filing for a one-person business. ## Is there a 10% surcharge on business income, and does it apply to me? Source: https://qanoondigest.com/faq/sole-proprietors/surcharge-on-business-income-over-ten-million Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 4AB, printed at the end of section 4, charges every individual and association of persons a surcharge of ten percent of the Division I income tax where taxable income exceeds Rs. 10 million. Its proviso, as amended by the Finance Act, 2026, says an individual deriving salary income pays no surcharge. **Applies to:** Individuals running a business in their own name, and associations of persons, whose taxable income for tax year 2027 is above Rs. 10 million. ### What does the law say? The Income Tax Ordinance, 2001 contains a provision numbered 4AB. In FBR's consolidated text it is printed at the end of section 4, after sub-section (6), rather than as a separate section with its own heading. It says: > "Subject to this Ordinance, a surcharge shall be payable by every individual and association of persons at the rate of ten percent of the income tax imposed under Division I of Part I of the First Schedule where the taxable income exceeds rupees ten million" Its proviso, as it reads after the Finance Act, 2026, says that "in case of an individual deriving income chargeable under the head “Salary”, no surcharge shall be payable." So there are three conditions for a sole proprietor: 1. You are an individual (or an association of persons). 2. Your taxable income for the year exceeds Rs. 10 million. 3. You do not derive any income under the head "Salary". ### How does it work in practice? The surcharge is a percentage of tax, not of income. First the Division I tax is worked out on taxable income using the clause (1) table. Then ten percent of that tax is added. For tax year 2027, a sole proprietor's taxable income above Rs. 5,600,000 falls in the top row of the clause (1) table: Rs. 1,610,000 plus 45% of the amount over Rs. 5,600,000. Anyone crossing Rs. 10 million is therefore already in that band. ### Worked example (illustrative figures) **Farhan trades cloth in Faisalabad.** He has no salary. His taxable income for tax year 2027 is Rs. 12,000,000. 1. Amount over Rs. 5,600,000: Rs. 12,000,000 minus Rs. 5,600,000 = Rs. 6,400,000. 2. 45% of Rs. 6,400,000 = Rs. 2,880,000. 3. Division I tax: Rs. 1,610,000 + Rs. 2,880,000 = Rs. 4,490,000. 4. Taxable income exceeds Rs. 10 million, so section 4AB applies: 10% of Rs. 4,490,000 = Rs. 449,000. 5. Total of Division I tax and surcharge: Rs. 4,939,000, before any tax credits. **What happens right at the line?** At taxable income of exactly Rs. 10,000,000, Division I tax is Rs. 1,610,000 + 45% of Rs. 4,400,000 = Rs. 3,590,000, and there is no surcharge. At Rs. 10,100,000, Division I tax is Rs. 1,610,000 + 45% of Rs. 4,500,000 = Rs. 3,635,000, and the surcharge is Rs. 363,500, for a total of Rs. 3,998,500. The extra Rs. 100,000 of income adds Rs. 408,500 to the bill. Section 4AB as printed contains no provision that softens this jump. ### What if I have a salary too? Read literally, the proviso removes the surcharge for any individual "deriving income chargeable under the head “Salary”". It does not say how large the salary must be, or that salary must be the main income. The Ordinance does not resolve whether a small salary next to a large business profit was intended to be enough, and this page does not resolve it either. The footnotes in the official PDF show the history. The proviso was added by the Finance Act, 2025. Before the Finance Act, 2026 substituted its wording, the proviso charged individuals with salary income a surcharge at nine percent where taxable income exceeded Rs. 10 million. From the edition amended to 30 June 2026, that is replaced by "no surcharge shall be payable". ### Is this the same as super tax? No. Section 4C imposes a separate super tax at the rates in Division IIB of Part I of the First Schedule, on a wider measure of income. Its rates and thresholds are not covered on this page. ### Common mistakes - **Taking 10% of income.** On Rs. 12,000,000 of income, 10% of income would be Rs. 1,200,000. The actual surcharge is 10% of the tax, Rs. 449,000. - **Applying it at Rs. 10 million exactly.** The test is "exceeds rupees ten million". - **Applying it to final tax.** The surcharge is on tax imposed under Division I, the slab table. Income taxed separately as final tax is kept out of taxable income under section 4(5). ### What to check in the official text Read the end of section 4 in the Ordinance amended to 30 June 2026, where section 4AB and its footnotes appear, and clause (1) of Division I of Part I of the First Schedule for the rate table. Our site copy of section 4 runs the section 4AB text into sub-section (6), so the official PDF is clearer on layout. ### Frequently asked #### Is the surcharge 10% of my income or 10% of my tax? Of the tax. Section 4AB charges ten percent of the income tax imposed under Division I of Part I of the First Schedule. On Rs. 4,490,000 of Division I tax, the surcharge is Rs. 449,000. #### My taxable income is exactly Rs. 10,000,000. Do I pay the surcharge? No. The section applies where taxable income exceeds rupees ten million. Income of exactly Rs. 10,000,000 does not exceed that figure. #### I have a small salary as well as my business. Am I exempt? The proviso says that for an individual deriving income chargeable under the head Salary, no surcharge shall be payable. It sets no minimum amount or share of salary. The text does not address whether a small salary alongside a large business was meant to be covered, so this is a point to confirm against the official text. ### Citations - [Income Tax Ordinance, 2001, section 4 (Tax on taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4-tax-on-taxable-income), as amended to 2026-06-30: "a surcharge shall be payable by every individual and association of persons at the rate of ten percent of the income tax imposed under Division I of Part I of the First Schedule where the taxable income exceeds rupees ten million" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 4AB (surcharge), proviso](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1) (rate table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 4C (Super tax on high earning persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4c-super-tax-on-high-earning-persons), as amended to 2026-06-30: "A super tax shall be imposed for tax year 2022 and onwards at the rates specified in Division IIB of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Which taxes withheld from my business can I adjust against my income tax, and which are final? Source: https://qanoondigest.com/faq/sole-proprietors/adjustable-vs-final-withholding-taxes-business Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 168(2) of the Income Tax Ordinance lets you credit tax collected or deducted from you against your tax for the year, unless section 168(3) makes it final. For a sole proprietor, tax collected by suppliers under section 236H and on cash withdrawals under section 231AB is adjustable. Section 153 deductions by customers are creditable but are declared minimum tax. **Applies to:** Individuals running a business who have had income tax deducted by customers or collected by suppliers or banks, and who are preparing a return. Most income tax withheld from a small business in Pakistan can be set against the owner's tax for the year. The Income Tax Ordinance, 2001 treats withheld tax as a credit by default and makes it final only where a specific provision says so. For a sole proprietor, the provision that needs the most care is section 153, because its deductions are labelled minimum tax. ### What does the law say? **Section 168: the general rule.** Section 168(1)(b) treats tax collected under Division II or deducted under Division III of Part V of Chapter X, or under Chapter XII, as tax paid by the person it was taken from. Section 168(2) allows that person a tax credit for it, for the tax year in which it was collected or deducted. Section 168(1)(a) also treats tax deducted from a payment as income derived by the person paid, so the full amount of a sale counts as received, including the part the customer withheld and deposited as tax. **Section 168(3): the exceptions.** No credit is allowed for tax that is final under the provisions listed there. They deal with matters such as certain payments to non-residents, export of services, prizes and winnings, petroleum products and bonus shares. Sections 153, 236H and 231AB are not on that list. **Section 169: what "final" means.** Where section 169 applies, the income is not chargeable under any head, no deduction is allowed for expenses of earning it, it is not reduced by deductible allowances or losses, the tax is not reduced by credits, and there is no refund unless the tax exceeds what the person is chargeable to. ### How does each common withholding work? | Tax | Who takes it | Treatment for a sole proprietor | | --- | --- | --- | | Section 153(1)(a), (b), (c): payments for goods, services and contracts | A prescribed person paying you, such as a company or an individual with turnover of Rs. 100 million or more in any preceding tax year | Creditable under section 168(2); section 153(3) declares it minimum tax | | Section 236H: purchases by a retailer | Manufacturer, distributor, dealer, wholesaler or commercial importer selling to you | Adjustable: section 236H(2) allows credit | | Section 231AB: cash withdrawals | Your bank, if you are not on the active taxpayers' list and withdraw over Rs. 50,000 in a day | Adjustable: the section calls it "advance adjustable tax" | **Section 153 in more detail.** Section 153(3) says tax deductible under sub-sections (1) and (2) on the income of a resident person "shall be minimum tax". Its provisos take some company and listed-company receipts out of that rule, but none of them covers an individual. The explanation to section 153(3) says the income meant is the amount on which tax is deductible. The Ordinance does not define "minimum tax" in section 2. The word indicates that the tax deducted sets a floor for tax on that income. The credit itself comes from section 168(2), since section 153 is not in section 168(3). The rates for section 153 are in Division III of Part III of the First Schedule, and differ between companies and other persons and by type of payment. **Section 236H.** The collection rate on the gross amount of sales is set in Division XV of Part IV of the First Schedule. After the 2024 amendments the section no longer lists particular sectors for sales to retailers. **Section 231AB.** The rate is 0.8% of cash withdrawals, applied to a person whose name does not appear in the active taxpayers' list, where the day's withdrawals together exceed fifty thousand rupees. ### Worked example (illustrative figures) Imran runs a building materials shop in Peshawar. For tax year 2027 his made-up figures are: - Tax deducted by a construction company buying cement from him under section 153(1)(a): Rs. 44,000. - Tax collected by a cement distributor on his purchases under section 236H: Rs. 30,000. - Tax deducted by his bank on cash withdrawals under section 231AB while he was off the active taxpayers' list: Rs. 8,000. - Tax on his taxable income at the normal rates: Rs. 210,000. Step by step: 1. Credits under sections 168(2), 236H(2) and 231AB: Rs. 44,000 + Rs. 30,000 + Rs. 8,000 = Rs. 82,000. 2. Tax still payable: Rs. 210,000 minus Rs. 82,000 = Rs. 128,000. Because the section 153 amount is minimum tax, the position changes if tax at normal rates on the income from those sales would be lower than Rs. 44,000. How the floor is worked for a mixed business is not spelled out in section 153 itself, so check it against the return form and any Board guidance. ### What if ...? **What if a customer deducted tax but never deposited it?** S. No. 36 of the Table in section 182(1) penalises claiming credit beyond the amount verifiably deducted and deposited, as confirmed through the Board's computerised system or otherwise. The penalty equals the excess credit claimed. **What if my credits exceed my tax?** Section 168(5) says a credit, or part of a credit, that cannot be applied for the year is refunded to the taxpayer. **What if I am paid for services?** Section 153(1)(b) deductions follow the same section 153(3) rule: minimum tax, with credit under section 168(2). ### Common mistakes - **Relying on the old "final tax" rule for section 153.** Footnotes in the consolidated text show section 153(6) once made goods payments final. The current section 153(3) says minimum tax. - **Leaving withheld tax out of income.** Section 168(1)(a) treats the tax deducted as part of what you received. - **Claiming credit without evidence.** The S. No. 36 penalty is tied to what was verifiably deposited. - **Assuming the cash withdrawal tax applies to everyone.** Section 231AB applies only to persons not on the active taxpayers' list. ### What to check in the official text Read section 168 and section 169 together, then sections 153, 236H and 231AB. Check the rates in Division III of Part III and Division XV of Part IV of the First Schedule in the official PDF. Section 153(4) lets the Commissioner issue a reduced-rate certificate where the deduction is not minimum tax. The Tenth Schedule and any Board notifications on persons not on the active taxpayers' list are not covered on this page. ### Frequently asked #### Is tax deducted under section 153 on my sale of goods a final tax? Not under the current text. Section 153(3) says tax deductible under sub-section (1) on the income of a resident person shall be minimum tax, and section 153 is not in the final-tax lists in sections 168(3) and 169(1). Older wording that made it final has been replaced, so older guidance may be out of date. #### My supplier charged advance tax on my purchases. Can I claim it? Yes, if you are a retailer and the supplier collected it under section 236H. Section 236H(2) allows credit for that tax against the tax due on your taxable income for the tax year in which it was collected. The rate is set in Division XV of Part IV of the First Schedule. #### What if I claim more withheld tax than was actually deposited? S. No. 36 of the Table in section 182(1) applies where a person claims credit for tax withheld at source in excess of the amount verifiably deducted and deposited by the withholding agent. The penalty equals the amount of excess credit claimed. ### Citations - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "No tax credit shall be allowed for any tax collected or deducted that is a final tax under-" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "the income shall not be chargeable to tax under any head of income in computing the taxable income of the person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "the income of resident person referred to in sub-section (3) means the amount on which tax is deductible under sub-section (1) or" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236H (Advance tax on sales to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236h-advance-tax-on-sales-to-retailers), as amended to 2026-06-30: "Credit for the tax collected under sub-section (1) shall be allowed in computing the tax due by the retailer on the taxable income for the tax year in which the tax was collected." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 231AB (Advance tax on cash withdrawal)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#231ab-advance-tax-on-cash-withdrawal), as amended to 2026-06-30: "Every banking company shall deduct advance adjustable tax" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 182(1), Table, S. No. 36 (claiming credit for tax withheld in excess of the amount verifiably deducted and deposited)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Which taxes withheld from my business, such as advance tax on my purchases, are adjustable and which are final? Source: https://qanoondigest.com/faq/sole-proprietors/adjustable-vs-final-withholding-tax-business Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 168 of the Income Tax Ordinance, tax collected from you or deducted from your receipts is a credit against your tax for that year, unless section 168(3) lists it as final. Advance tax a supplier collects on sales to you under section 236G (distributors, dealers, wholesalers) or section 236H (retailers) is expressly creditable, so it is adjustable. **Applies to:** Sole proprietors such as retailers, wholesalers, distributors and dealers who have tax collected on purchases or deducted from payments they receive. ### What does the law say? The Income Tax Ordinance, 2001 has one general rule and a short list of exceptions. **The general rule: credit under section 168.** Section 168(1)(b) treats tax collected under Division II of Part V of Chapter X or Chapter XII, or deducted under Division III or Chapter XII, as tax paid by the person from whom it was collected or deducted. Section 168(2) then allows that person a tax credit for it when computing tax due on taxable income for the tax year in which it was collected or deducted. In everyday terms, this is "adjustable" tax: it counts as a payment toward your year-end bill. **The exceptions: final tax.** Section 168(3) says no credit is allowed for tax that is a final tax under the provisions it lists. The current list is short and mostly outside ordinary trading. It covers items such as prizes and winnings, commission paid to petrol pump operators, export of services, certain payments to non-residents, and bonus shares. Section 169 describes what final means. Under section 169(2): - the income is not charged to tax under any head in computing taxable income; - no deduction is allowed for expenses incurred in earning it; - the income is not reduced by deductible allowances or set-off of losses; - the tax is not reduced by any tax credit; and - there is no refund unless the tax collected or deducted exceeds the amount for which the taxpayer is chargeable. ### What about advance tax on my purchases? Two sections in Chapter XII make suppliers collect advance tax from small buyers, and both say directly that it is creditable. | Section | Who collects | From whom | Rate (First Schedule, Part IV) | Treatment | | --- | --- | --- | --- | --- | | 236G | Manufacturer or commercial importer | Distributors, dealers and wholesalers | Division XIV: 0.7% for fertilizers, 0.1% for other goods (fertilizer is 0.25% where the buyer is on both the income tax and sales tax active taxpayers' lists) | Section 236G(2): credit allowed against the distributor's, dealer's or wholesaler's tax due for the year | | 236H | Manufacturer, distributor, dealer, wholesaler or commercial importer | Retailers (and, from a distributor or dealer, another wholesaler) | Division XV: 0.5% of the gross amount of sales | Section 236H(2): credit allowed against the retailer's tax due for the year | These rates are the ones in force for tax year 2027 (1 July 2026 to 30 June 2027) in the text amended to 30 June 2026. ### Worked example (illustrative figures) Bilal owns a general store in Peshawar. In tax year 2027 he buys Rs. 7,200,000 of stock from distributors, who each collect advance tax under section 236H. 1. Advance tax collected: Rs. 7,200,000 x 0.5% = Rs. 36,000. 2. Suppose, when he files his return, the tax on his taxable business income comes to Rs. 95,000. 3. Section 236H(2) and section 168(2) give a credit of Rs. 36,000. 4. Tax still payable with the return: Rs. 95,000 minus Rs. 36,000 = Rs. 59,000. If instead the tax on his income were Rs. 20,000, the credit of Rs. 36,000 would exceed it by Rs. 16,000. Section 168(5) says a credit that cannot be applied for the year is refunded to the taxpayer. Now compare a final tax. Suppose Bilal also received a prize from which tax was deducted as a final tax. Under section 169(2), that prize is left out of his taxable income, the tax on it cannot be used against the tax on his shop's profit, and it is not refunded unless it is more than he is chargeable to. ### What if...? **What if tax is deducted from payments I receive from companies?** That is section 153. It is not on the section 168(3) list. Section 153(3) calls the tax deductible under it a minimum tax, which works differently from both adjustable and final tax. **What if I have no proof the supplier collected the tax?** Section 168(2) gives credit for tax that "has been collected". Keep the supplier's invoice showing the advance tax so the credit can be supported. ### Common mistakes - **Treating every withholding as final.** Most taxes collected or deducted are creditable under section 168(2). Final treatment applies only where section 168(3) and section 169 say so. - **Forgetting the tax year.** Credit under section 168(2) and sections 236G(2) and 236H(2) is for the tax year in which the tax was collected, not the year you happen to find the receipt. - **Deducting expenses against final-tax income.** Section 169(2)(b) allows no deduction for expenditure incurred in deriving income taxed as final. ### What to check in the official text Read section 168, especially sub-sections (2), (3) and (5), for the list of final taxes as it stands on 30 June 2026. Read section 169(2) for what final treatment means. For purchases, read sections 236G and 236H with Divisions XIV and XV of Part IV of the First Schedule. The Tenth Schedule sets higher collection rates for persons not on the active taxpayers' list, so check it if you are not on that list. ### Frequently asked #### My distributor charges 0.5% advance tax on my shop's purchases. Is that lost money? No. Section 236H(2) allows credit for that tax in computing the tax due by the retailer for the tax year in which it was collected. It reduces the tax payable on your return, and section 168(5) provides for a refund of any credit that cannot be used for the year. #### What does it mean if a tax is final? Section 169(2) says the income it relates to is left out of taxable income, no expenses are deductible against it, and the tax is not reduced by credits. There is no refund unless the tax collected is more than the amount you are chargeable to under the Ordinance. #### Is tax deducted by my customers under section 153 final? Section 153 is not in the final-tax list in section 168(3). Section 153(3) instead calls the tax deductible under sub-sections (1) and (2) a minimum tax, which is a separate category covered on its own page. ### Citations - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "the income shall not be chargeable to tax under any head of income in computing the taxable income of the person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236G (Advance tax on sales to distributors, dealers and wholesalers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236g-advance-tax-on-sales-to-distributors-dealers-and-wholesalers), as amended to 2026-06-30: "Every manufacturer or commercial importer" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236H (Advance tax on sales to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236h-advance-tax-on-sales-to-retailers), as amended to 2026-06-30: "Credit for the tax collected under sub-section (1) shall be allowed in computing the tax due by the retailer on the taxable income for the tax year in which the tax was collected." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XIV (section 236G rates) and Division XV (section 236H rate)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What books of account and records must a sole proprietor keep, and for how long? Source: https://qanoondigest.com/faq/sole-proprietors/books-of-account-sole-proprietor Law current to: 30 June 2026 (Ordinance); 24 November 2023 (Rules). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 174 of the Income Tax Ordinance requires every taxpayer to keep prescribed records in Pakistan. Rules 29 and 30 of the Income Tax Rules list them: numbered sale invoices, a daily record of receipts and expenses, and purchase vouchers, with more for larger traders. Records are kept six years after the tax year, longer while a proceeding is pending. **Applies to:** Individuals running a business as sole proprietors, from a small shop to a wholesaler or manufacturer, who have income under the head Income from Business. ### What does the law say? Section 174(1) of the Income Tax Ordinance, 2001 says that, unless the Commissioner authorises otherwise, every taxpayer must maintain in Pakistan the accounts, documents and records that are prescribed. The prescribing is done in Chapter VII of the Income Tax Rules, 2002. Rule 28 says that chapter sets the minimum level of books and records, and that a business may keep more, add columns, or adapt the format to the nature of its business. Rule 29(1) requires every taxpayer with income under the head "Income from Business" to keep proper books, documents and records of: - all money received and spent, and what each receipt or payment was for; - all sales and purchases of goods, and all services provided and obtained; - all assets; - all liabilities; and - for assembly, production, processing, manufacturing, mining or similar work, all items of cost for materials, labour and other inputs. Rule 30 then lists the minimum books for taxpayers other than companies, in four groups. ### Which records apply to my kind of business? | Group under rule 30 | Minimum records | | --- | --- | | (1) Business income up to Rs. 500,000, and new business taxpayers | Serially numbered, dated cash memo, invoice or receipt for each sale; daily record of receipts, sales, payments, purchases and expenses (single daily entries per head are enough); vouchers of purchases and expenses | | (2) Business income above Rs. 500,000, and all wholesalers, distributors, dealers and commission agents | Numbered, dated invoices; cash book or bank book, or a daily record; general ledger or an annual summary under separate heads; vouchers of purchases and expenses; quarterly inventory of stock-in-trade if you buy and sell goods | | (3) Professionals such as doctors, lawyers, accountants, architects and engineers | Numbered, dated patient slip, invoice or receipt; daily appointment diary; daily record of receipts and expenses; vouchers | | (4) Manufacturers with turnover above Rs. 2.5 million | Numbered invoices; cash book or bank book; sales and purchase day books and ledgers where applicable; general ledger; vouchers; stock register supported by gate inward and outward records, with a quarterly inventory including work-in-process | Each invoice must show your name or business name, address, NTN or CNIC, and sales tax registration number if any, plus the description, quantity and value of what was sold. Where each transaction is Rs. 100 or less, one or more cash memos per day for all such sales may be kept instead. In groups (2) and (4), a single sale above Rs. 10,000 must record the customer's name and address (in group (2), this applies to wholesalers, distributors, dealers and commission agents), and a purchase or expense voucher above Rs. 10,000 must carry the payee's name and address. ### How long must records be kept? Section 174(3) and rule 29(4) both say six years after the end of the tax year to which the records relate. For tax year 2027 (1 July 2026 to 30 June 2027), that means until at least 30 June 2033. Two things extend this. First, the proviso to section 174(3) and rule 29(5) require you to keep the record until the final decision where any proceeding is pending before an authority or court. The explanation in section 174(3) lists assessment or amendment of assessment, appeal, revision, reference, petition, prosecution and Alternative Dispute Resolution proceedings. Second, the six-year limit does not apply to records about income, assets, expenses or transactions covered by section 111(2)(ii), which deals with assets or expenditure outside Pakistan and foreign-source concealed income. ### Worked example (illustrative figures) Tariq runs a hardware shop in Faisalabad as a sole proprietor. His business income for tax year 2027 is Rs. 1,800,000, and he also sells in bulk to smaller shops as a wholesaler. 1. His business income is above Rs. 500,000, and he is a wholesaler, so rule 30(2) applies. 2. Every sale needs a serially numbered, dated invoice with his business name, address and NTN. A bulk sale of Rs. 45,000 to a shop in Jhang is above Rs. 10,000, so that invoice must also carry the buyer's name and address. 3. He keeps a cash book or bank book (or a daily record), a general ledger or annual summary under heads such as rent, wages and electricity, and purchase vouchers. A Rs. 60,000 purchase voucher from a Lahore supplier must show the supplier's name and address. 4. Because he deals in goods, he takes a stock count showing description, quantity and value every quarter. 5. He keeps the tax year 2027 records until at least 30 June 2033. If his tax year 2027 assessment is under appeal in 2033, he keeps them until the appeal is finally decided. ### What if...? **What if my business is brand new?** Rule 30(1) places new taxpayers deriving business income in the first group, unless they fall within the professional or manufacturer groups. **What if the Board requires an electronic system?** Section 174(5) lets the Board require any person or class of persons, by notification in the official Gazette, to install and use an electronic resource for recording transactions. Whether that applies to your trade depends on a notification, and those are not in this corpus. **What if I keep records at home in another country?** Section 174(1) requires the records to be kept in Pakistan unless the Commissioner authorises otherwise. ### Common mistakes - **Keeping only bank statements.** Rule 29(1) and rule 30 ask for invoices, a daily or cash record and vouchers. A bank statement alone does not cover cash sales or record what each payment was for. - **Throwing records away after five years.** The period was five years before amendment; the current text in both section 174(3) and rule 29(4) says six. - **Assuming a small shop needs nothing.** Even the first group under rule 30(1) must issue numbered sale memos and keep a daily record and vouchers. - **Missing receipts for expenses.** Under section 174(2), an expense without evidence can be disallowed or reduced unless you had reasonable cause. ### What to check in the official text Read section 174 in full, and Chapter VII of the Income Tax Rules, 2002, rules 28 to 30. The Rules in this corpus are amended to 24 November 2023. The Rs. 500,000 thresholds in rule 30 were set by S.R.O. 1218(I)/2015, so check whether a later S.R.O. has changed them. Penalties and prosecution for not keeping records are covered on a separate page. ### Frequently asked #### How long must I keep my shop's records? Section 174(3) and rule 29(4) both set six years after the end of the tax year to which the records relate. If an assessment, appeal or other proceeding is pending, the proviso to section 174(3) and rule 29(5) require you to keep the record until the final decision. #### Can I use computer software instead of handwritten books? Rule 29(2) allows a taxpayer using a fiscal electronic cash register or computerised accounting software to issue cash memos, invoices or receipts generated by it. Rule 29(3) makes the electronic copies part of the records you must keep. #### What happens if I claim an expense but have no receipt? Section 174(2) lets the Commissioner disallow or reduce the deduction if you cannot, without reasonable cause, produce a receipt or other evidence of the transaction. Section 174(4) says a deduction means any amount debited to the trading, manufacturing, or profit and loss account. ### Citations - [Income Tax Ordinance, 2001, section 174 (Records)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#174-records), as amended to 2026-06-30: "every taxpayer shall maintain in Pakistan such accounts, documents and records as may be prescribed." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 28 (Application of Chapter)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#28-application-of-chapter), as amended to 2023-11-24: "The purpose of this Chapter is to prescribe the minimum level of books of accounts, documents and records to be maintained by taxpayers" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Rules, 2002, section 29 (Books of account, documents and records to be maintained)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#29-books-of-account-documents-and-records-to-be-maintained), as amended to 2023-11-24: "all sums of money received and expended by the taxpayer and the matters in respect of which the receipt and expenditure takes place" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Rules, 2002, Rule 30, minimum books of account for taxpayers other than companies, sub-rules (1) to (4)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24), as amended to 2023-11-24 Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Ordinance, 2001, section 111 (Unexplained income or assets)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#111-unexplained-income-or-assets), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Which business expenses are not allowed as a deduction under section 21? Source: https://qanoondigest.com/faq/sole-proprietors/business-expenses-not-allowed-section-21 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 21 of the Income Tax Ordinance lists expenses that cannot be deducted from business income even if they relate to the business. For small businesses the main ones are tax on profits, fines and penalties, personal spending, capital expenditure, ten percent of purchases from people without an NTN, and certain cash payments. **Applies to:** Sole proprietors and small business owners preparing accounts and working out income under the head Income from Business. Section 21 of the Income Tax Ordinance, 2001 is the list of expenses that cannot be deducted from business income. It overrides the general rule in section 20: an expense can be genuinely for the business and still be refused because section 21 names it. The list below covers the clauses a small business is most likely to meet. ### What does the law say? Section 21 opens by saying that, except as otherwise provided in the Ordinance, no deduction is allowed in computing income under the head Income from Business for the items that follow. Here are the clauses that matter most to sole proprietors, in plain words. | Clause | What is disallowed | Plain meaning | | --- | --- | --- | | (a) | Any cess, rate or tax levied on the profits or gains of the business, or assessed on the basis of those profits | Income tax on your profit is not a business expense | | (b) | Tax deducted from an amount you receive under Division III of Part V of Chapter X | Tax withheld from your receipts is not deducted as a cost | | (c) | Expenditure from which you had to deduct or collect tax, unless you deducted and paid it | Not withholding when the law required it costs you the deduction. For purchases of raw materials and finished goods, the disallowance is capped at twenty percent of those purchases | | (d) | Entertainment above the prescribed limits or in breach of conditions | Rule 10 of the Income Tax Rules, 2002 sets out which entertainment is allowed | | (g) | Any fine or penalty for breaking any law, rule or regulation | Traffic fines, late-filing penalties and similar are not deductible | | (h) | Any personal expenditure | Household and family spending is not a business cost | | (i) | Any amount carried to a reserve fund or capitalised | Setting money aside is not spending it | | (l) | Expenditure under a single account head above Rs. 250,000 not paid through the banking channel from the business bank account | Large cash payments lose the deduction, with exceptions | | (m) | Salary above Rs. 32,000 a month to an individual not paid by crossed cheque, direct bank transfer or digital means | Cash wages above that level are not deductible | | (n) | Expenditure of a capital nature, except as provided for depreciation and similar allowances | Equipment and vehicles are recovered through depreciation, not deducted outright | | (p) | Utility bills above prescribed limits or in breach of prescribed conditions | Depends on limits set by rules | | (q) | Ten percent of claimed expenditure attributable to purchases from persons who are not National Tax Number holders | A tenth of non-NTN purchases is added back | | (r) | Three percent of the expenditure claimed by a person who fails to install the required electronic resource or act as an integrated enterprise as required by law | Applies to those the law requires to integrate | | (s) | Fifty percent of the expenditure claimed in respect of a sale where more than Rs. 200,000 was received against a single invoice otherwise than through a banking channel or digital means | Large cash sales cost half the related expense | Clauses (e), (ea), (f) and (j) deal with employee funds and payments by an association of persons to its members. Clause (ca) applies to commission on Third Schedule goods under the Sales Tax Act, and clause (o) to pharmaceutical manufacturers. ### How does it work in practice? You first list the expenses that meet section 20, then check each against section 21. Anything caught is added back to profit. Capital spending caught by clause (n) is not lost entirely: section 22(1) allows depreciation on depreciable assets used in the business, spread over the asset's life. Clause (q) is a fixed percentage. It does not ask whether the supplier's price was fair. The first proviso limits it, for agricultural produce, to purchases from a middleman. The second proviso lets the Board exempt persons or classes of persons by notification in the official Gazette. Any such notification is outside this corpus. ### Worked example (illustrative figures) Tariq runs a hardware store in Peshawar. His made-up figures for tax year 2027 include: | Item | Amount | | --- | --- | | Purchases from suppliers without an NTN | Rs. 2,000,000 | | Traffic and municipal fines paid from the till | Rs. 15,000 | | Family groceries paid from the business account | Rs. 300,000 | | New display shelving | Rs. 400,000 | Step by step: 1. Clause (q): Rs. 2,000,000 x 10% = Rs. 200,000 added back. 2. Clause (g): fines of Rs. 15,000 added back. 3. Clause (h): groceries of Rs. 300,000 added back. 4. Clause (n): shelving of Rs. 400,000 added back as a deduction, then recovered through depreciation under section 22. 5. Total added back before depreciation: Rs. 200,000 + Rs. 15,000 + Rs. 300,000 + Rs. 400,000 = Rs. 915,000. ### What if ...? **What if I paid a big supplier bill in cash?** Clause (l) may apply. The limits and exceptions are explained on the page on cash payments. **What if I did not deduct withholding tax on rent I paid?** Clause (c) may disallow the rent. Its second proviso says that if the tax is later recovered under the recovery provisions it names, that recovery is considered tax paid. **What if the utility bill limit applies to me?** Clause (p) depends on limits "as may be prescribed". The Income Tax Rules held here, amended to 24 November 2023, do not set that limit. Any later rule is outside this corpus. ### Common mistakes - **Deducting income tax paid.** Clause (a) blocks it. - **Deducting the full cost of a non-NTN purchase and forgetting clause (q).** Ten percent comes back. - **Treating fines as a cost of doing business.** Clause (g) blocks all fines and penalties for breaking the law. - **Assuming capital spending is lost.** Clause (n) blocks the direct deduction; depreciation under section 22 still applies. ### What to check in the official text Read section 21 clause by clause, including the provisos to clauses (c), (l) and (q). For entertainment, read rule 10 of the Income Tax Rules, 2002. Check for any Board notification exempting your class of person from clause (q), and for any rule prescribing utility bill limits under clause (p). ### Frequently asked #### Can I deduct the income tax I pay on my business profit? No. Section 21(a) disallows any cess, rate or tax levied on the profits or gains of the business or assessed on the basis of those profits. Tax deducted at source from amounts you receive is also disallowed under section 21(b). #### I buy from small suppliers who have no NTN. Is the whole purchase disallowed? No. Section 21(q) disallows ten percent of the claimed expenditure attributable to purchases from persons who are not National Tax Number holders. For agricultural produce it applies only to purchases from a middleman, and the Board can exempt classes of persons by notification. #### Is the fine for a late return deductible? No. Section 21(g) disallows any fine or penalty paid or payable for the violation of any law, rule or regulation. ### Citations - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "any fine or penalty paid or payable by the person for the violation of any law, rule or regulation" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 20 (Deductions in computing income chargeable under the head “Income from Business”)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#20-deductions-in-computing-income-chargeable-under-the-head-income-from-business), as amended to 2026-06-30: "a deduction shall be allowed for any expenditure incurred by the person in the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 22 (Depreciation)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#22-depreciation), as amended to 2026-06-30: "deduction for the depreciation of the person’s depreciable assets used in the person’s business in the tax year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 10 (Entertainment expenditure)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#10-entertainment-expenditure), as amended to 2023-11-24: "a deduction for entertainment expenditure shall be limited to expenditure incurred by a person that satisfies the conditions laid down in sub-section (1) of section 20" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf --- ## Which expenses does the law not allow as a deduction for a business? Source: https://qanoondigest.com/faq/sole-proprietors/expenses-not-allowed-section-21 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 21 of the Income Tax Ordinance lists costs that cannot be deducted from business income even if the business paid them. For a small proprietor the main ones are tax on profits, fines, personal spending, capital expenditure, some cash payments and entertainment outside the prescribed limits. Section 174 also lets the Commissioner refuse a claim with no receipt. **Applies to:** Sole proprietors and small business owners working out income under the head Income from Business for tax year 2027. ### What does the law say? Section 20 of the Income Tax Ordinance, 2001 allows a deduction for expenditure incurred wholly and exclusively for the purposes of business. Section 21 then overrides it. It opens with "no deduction shall be allowed" and lists specific items. An expense can be a genuine business cost and still be refused because section 21 names it. The clauses a shop owner, trader or small service business is most likely to meet are these: | Clause | What cannot be deducted | |---|---| | 21(a) | Any cess, rate or tax levied on the profits or gains of the business, in Pakistan or abroad | | 21(b) | Tax deducted from amounts the business receives under Division III of Part V of Chapter X | | 21(c) | Payments on which you had to deduct or collect tax but did not deduct and pay it (capped at 20% of purchases of raw materials and finished goods) | | 21(d) | Entertainment expenditure beyond the limits and conditions prescribed | | 21(g) | Any fine or penalty for breaking a law, rule or regulation | | 21(h) | Personal expenditure | | 21(i) | Amounts carried to a reserve fund or capitalised | | 21(l) | Expenditure over Rs. 250,000 under a single account head not paid through the banking channel from the business bank account | | 21(m) | Salary over Rs. 32,000 a month paid other than by crossed cheque, bank transfer or digital means | | 21(n) | Expenditure of a capital nature, except as allowed in Division III (depreciation and similar) | | 21(p) | Utility bills beyond the limits and conditions prescribed | | 21(q) | Ten percent of expenditure on purchases from persons who are not National Tax Number holders | | 21(s) | Fifty percent of expenditure claimed for a sale where more than Rs. 200,000 against one invoice was received outside banking channels or digital means | ### How does it work in practice? The disallowed amount is added back when business income is worked out. Your accounts may show the expense, but it does not reduce taxable income. **Personal spending.** Household groceries, children's school fees or a family holiday paid from the shop's till are personal expenditure under section 21(h), even if the business account paid them. **Capital spending.** Buying a freezer, a delivery van or shop fittings is capital expenditure. Section 21(n) blocks the full cost in one year. Section 20(2) routes it through depreciation under sections 22 and 23, so the cost is recovered over several years. **Entertainment.** Rule 10 of the Income Tax Rules, 2002 sets the limits for clause 21(d). It allows entertainment of customers and clients at the business premises, entertainment of foreign customers and suppliers in Pakistan, entertainment at a meeting of shareholders, agents, directors or employees, entertainment at the opening of branches, and some spending outside Pakistan in connection with business. The people entertained must be related directly to the business. "Entertainment" means meals, refreshments and reasonable leisure facilities. **Utility bills.** Clause 21(p) refers to limits and conditions "as may be prescribed". The Income Tax Rules edition held in this corpus (amended to 24 November 2023) does not contain those limits, so they are not covered here. **Purchases from people without an NTN.** Clause 21(q) does not refuse the whole purchase. It disallows ten percent of the expenditure attributable to those purchases. For agricultural produce it applies only to purchases from a middleman, and the Board can exempt classes of persons by notification. **No receipt.** Separately from section 21, section 174(2) lets the Commissioner disallow or reduce any deduction if the taxpayer cannot, without reasonable cause, produce a receipt or other record of the transaction. Section 174(4) defines "deduction" for this purpose as any amount debited to the trading, manufacturing, receipts and expenses, or profit and loss account. ### Worked example (illustrative figures) Bilal runs a mobile accessories shop in Faisalabad. For tax year 2027 his expense ledger shows Rs. 3,400,000. Some of it is caught by section 21: | Item in the ledger | Amount (Rs.) | Treatment | |---|---|---| | Advance income tax paid | 150,000 | Disallowed, 21(a) | | Fine for a municipal encroachment | 20,000 | Disallowed, 21(g) | | Family wedding costs paid from the shop account | 300,000 | Disallowed, 21(h) | | New glass display counters | 400,000 | Disallowed as capital, 21(n); claimed as depreciation instead | | Purchases of Rs. 500,000 from suppliers without an NTN | 50,000 | Ten percent disallowed, 21(q) | | **Total added back** | **920,000** | | Step 1: Rs. 150,000 + 20,000 + 300,000 + 400,000 + 50,000 = Rs. 920,000. Step 2: Expenses allowed = Rs. 3,400,000 - 920,000 = Rs. 2,480,000, plus any depreciation on the counters worked out under section 22. The advance tax of Rs. 150,000 is a payment of income tax itself, which is why section 21(a) keeps it out of the expense side. How advance tax is adjusted against the final liability is a separate question, covered on the quarterly advance tax page. ### What if my expense is partly business and partly personal? Section 20(1) allows only expenditure incurred wholly and exclusively for business. Section 21(h) blocks personal expenditure. The Ordinance does not give a general formula for splitting a mixed expense such as a mobile phone bill. For depreciable assets used partly for private purposes, section 22(3) does give a proportional rule. ### Common mistakes - **Treating withheld tax as an expense.** Tax deducted from your receipts is disallowed by section 21(b). It counts against your tax bill, not your income. - **Expensing equipment in one year.** Section 21(n) disallows capital expenditure. Depreciation is the route. - **Thinking "paid from the business account" makes it a business expense.** The test is the purpose of the spending, not which account paid it. - **Ignoring the payment method.** Clauses 21(l), 21(m) and 21(s) disallow amounts because of how money was paid or received, not what it was for. ### What to check in the official text Read section 21 in full: several clauses, including (ca) on commissions, (e) and (ea) on fund contributions, (o) on pharmaceutical promotion and (r) on electronic integration, apply only to particular businesses. Check rule 10 for entertainment. For utility limits under clause 21(p), look for the rule or notification in force, which this corpus does not hold. Check whether the Board has issued any exemption notification under the proviso to clause 21(q). ### Frequently asked #### Can I deduct the income tax I pay on my business profit? No. Section 21(a) disallows any cess, rate or tax levied on the profits or gains of the business, and section 21(b) disallows tax deducted at source under Division III of Part V of Chapter X from amounts you receive. #### Is the cost of a new display counter or generator a deductible expense? Not in the year you pay for it. Section 21(n) disallows expenditure of a capital nature, and section 20(2) says the cost of a depreciable asset is recovered through depreciation under sections 22 and 23 instead. #### What happens if I lose the bill for an expense? Section 174(2) lets the Commissioner disallow or reduce a deduction if you cannot, without reasonable cause, produce a receipt or other record or evidence of the transaction. Section 174(3) requires business records to be kept for six years after the end of the tax year. ### Citations - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "any personal expenditures incurred by the person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 20 (Deductions in computing income chargeable under the head “Income from Business”)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#20-deductions-in-computing-income-chargeable-under-the-head-income-from-business), as amended to 2026-06-30: "a deduction shall be allowed for any expenditure incurred by the person in the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 174 (Records)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#174-records), as amended to 2026-06-30: "to provide a receipt, or other record or evidence of the transaction or circumstances giving rise to the claim for the deduction" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 22 (Depreciation)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#22-depreciation), as amended to 2026-06-30: "the deduction allowed under this section for that year shall be restricted to the fair proportional part of the amount that would be allowed if the asset" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 23 (Initial allowance)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#23-initial-allowance), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 10 (Entertainment expenditure)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#10-entertainment-expenditure), as amended to 2023-11-24: "A person shall be allowed a deduction under sub-rule (1) only for expenditure incurred on the entertainment of persons related directly to the person's business." Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf --- ## My business made a loss. Can I set it off against my salary or rent, or carry it forward, and for how many years? Source: https://qanoondigest.com/faq/sole-proprietors/business-loss-carry-forward-and-set-off Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 56 bars setting a business loss against salary and, since the Finance Act, 2025, against income from property. Other heads remain available. The unused loss is carried forward under section 57 against future business income only, for up to six tax years, and section 114 requires a return to claim it. **Applies to:** Individuals running a business that made a loss, including those who also earn a salary or rent, for tax year 2027 onward. ### What does the law say? Two sections of the Income Tax Ordinance, 2001 decide what happens to a business loss. **Section 56: set off in the same year.** Subject to the separate rules for speculation losses in section 58 and for capital losses, a person who has a loss under one head of income may set it off against income under any other head for the same tax year, **except income under the head Salary**. A proviso added by the Finance Act, 2025 adds a second exception: a business loss **shall not be allowed against income from property** for the tax year. Section 56(3) says that where there is a business loss and a loss under another head, the business loss is set off last. **Section 57: carry forward.** Whatever part of the business loss cannot be set off under section 56 is carried forward to the next tax year and set off **only against income under the head Income from Business**. This repeats year after year, but no loss can be carried forward to more than **six tax years** immediately after the year in which it was first computed. Section 57(3) says the oldest loss is used first. **Section 114: return.** Section 114(1)(b)(ii) requires a return of income from a person who claims a loss carried forward under the Ordinance for a tax year. ### How does it work in practice? For a sole proprietor who also has a job or a rented property, the two heads a business loss cannot touch are exactly the ones most likely to carry income: Salary and Income from Property. Section 56 leaves the other heads, Capital Gains and Income from Other Sources, available for set-off. Some income under those heads is taxed at separate rates or as a final tax under other provisions, and how set-off works against that income is not covered on this page. What cannot be used this year moves forward, but only against future business profit. A loss from a failed clothing shop can later be used against profit from a new catering business, because both are Income from Business. It cannot be used against a later year's salary or rent. **Depreciation inside the loss.** Section 57(4) treats the part of a loss that comes from depreciation, initial allowance and amortisation deductions differently. That part is set off against fifty percent of the balance business income in later years, or one hundred percent if taxable income for the year is less than Rs. 10 million, and continues "until completely set off". Section 57(5) says these deductions are treated as used last. The six-year limit in section 57(2) is written for the loss generally; section 57(4) has its own "until completely set off" wording for the depreciation part. **Speculation business.** Section 58 keeps speculation losses separate. They are set off only against income from another speculation business, and also carry forward for six tax years. ### Worked example (illustrative figures) Sana lives in Karachi. She works for a bank and also opened a bakery in tax year 2027. She rents out a flat. She has no other income. **Tax year 2027** | Head | Amount (Rs.) | |---|---| | Salary | 2,400,000 | | Income from property (rent) | 600,000 | | Income from Business (bakery) | loss of 800,000 | Step 1: Section 56 set-off. The loss cannot reduce salary (section 56(1)) or rent (the 2025 proviso). Salary of Rs. 2,400,000 and rent of Rs. 600,000 are taxed in full. Step 2: Carry forward. The whole Rs. 800,000 goes to tax year 2028 under section 57. **Tax year 2028:** the bakery makes a profit of Rs. 500,000. Step 3: Set off Rs. 500,000 of the brought-forward loss. Business income for 2028 = Rs. 0. Loss left = Rs. 800,000 - 500,000 = Rs. 300,000. **Tax year 2029:** profit of Rs. 700,000. Step 4: Set off the remaining Rs. 300,000. Business income = Rs. 700,000 - 300,000 = Rs. 400,000. The loss of tax year 2027 could have been carried forward at most to tax year 2033, the sixth tax year after it was first computed. Sana's salary and rent were taxed in full throughout. In tax years 2028 and 2029, section 114(1)(b)(ii) requires a return because she claims a carried-forward loss. This example assumes none of the loss came from depreciation. If part did, that part would follow the section 57(4) rules instead. ### What if I have losses from two different years? Section 57(3) sets off the loss of the earliest tax year first. That protects the older loss from expiring while a newer one is used. ### What if I bought the business from someone else? Section 59A(4)(b) says a person who succeeds another person in a business, otherwise than by inheritance, is not entitled to carry forward and set off the previous owner's loss. Buying a running shop does not bring its past losses with it. Section 59A(7) adds that a loss is carried forward under section 57 only if it has been assessed or determined under one of the assessment orders listed in that sub-section. The loss has to be established for the year it arose before it can be used later. ### What if I closed the business? Section 57 carries a loss forward only against income chargeable under the head Income from Business. If there is no business income in later years, the loss has nothing to be set against. The Ordinance does not provide a way to use it against salary or rent instead. ### Common mistakes - **Relying on older guidance about rent.** The words excluding income from property were removed from section 56(1) by the Finance Act, 2021, and a proviso barring business losses against property income was added by the Finance Act, 2025. Guidance written between those dates may be out of date. - **Setting a loss against salary.** Section 56(1) excludes salary. - **Carrying forward beyond six years.** Section 57(2) sets a six tax year limit for the general loss. - **Not filing in the claim year.** Section 114(1)(b)(ii) requires a return when a carried-forward loss is claimed. ### What to check in the official text Read section 56 with its proviso and the note that it was added by the Finance Act, 2025. Read section 57 in full, especially sub-sections (4) and (5) on the depreciation part of a loss. Sub-sections (2A), (2B) and (2C) give longer periods only to specific banks, hotel companies and Pakistan International Airlines, not to sole proprietors. ### Frequently asked #### Can my shop's loss reduce the tax deducted from my salary? No. Section 56(1) allows a loss under one head to be set off against income under any other head except income under the head salary. The salary is taxed on its own. #### If my business loss is not used within six years, what happens to it? Section 57(2) says no loss can be carried forward to more than six tax years immediately succeeding the tax year in which it was first computed. Any part still unused after that is lost, except the depreciation portion, which section 57(4) carries forward until completely set off. #### Do I have to file a return in a loss year? Section 114(1)(b)(ii) requires a return from a person who claims a loss carried forward under the Ordinance for a tax year. Other clauses of section 114 may also apply, for example if you hold a National Tax Number. ### Citations - [Income Tax Ordinance, 2001, section 56 (Set off of losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#56-set-off-of-losses), as amended to 2026-06-30: "Provided that the adjustment of business loss shall not be allowed against income from property for the tax year." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 57 (Carry forward of business losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#57-carry-forward-of-business-losses), as amended to 2026-06-30: "but no loss can be carried forward to more than six tax years immediately succeeding the tax year for which the loss was first computed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "claims a loss carried forward under this Ordinance for a tax year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 59A (Limitations on set off and carry forward of losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#59a-limitations-on-set-off-and-carry-forward-of-losses), as amended to 2026-06-30: "any person who has succeeded, in such capacity, any other person carrying on any business or profession, otherwise than by inheritance, to carry forward and set off against his income, any loss sustained by such other person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 58 (Carry forward of speculation business losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#58-carry-forward-of-speculation-business-losses), as amended to 2026-06-30: "the loss shall be set off only against the income of the person from any other speculation business of the person chargeable to tax for that year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can I set off my business loss against my salary or rental income? Source: https://qanoondigest.com/faq/sole-proprietors/business-loss-against-salary-or-rent Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No, for both. Section 56(1) of the Income Tax Ordinance allows a loss under one head to be set off against other heads in the same year, except income under the head salary, and its proviso bars adjusting a business loss against income from property. What is left is carried forward against business income under section 57. **Applies to:** Individuals who have a salary or rental income and also run a business that made a loss in the tax year. A loss from your business cannot reduce your salary, and under the Ordinance as amended to 30 June 2026 it cannot reduce your rental income either. Section 56 of the Income Tax Ordinance, 2001 sets these limits, and section 57 decides what happens to the loss instead. ### What does the law say? **How a loss arises.** Section 11 sorts income into five heads: Salary, Income from Property, Income from Business, Capital Gains and Income from Other Sources. Under section 11(3), where the deductions under a head exceed the amounts chargeable under it, the person is treated as sustaining a loss for that head for that year. **Section 56(1): set-off in the same year.** Subject to sections 58 and 59, a loss under any head can be set off against the person's income chargeable under any other head for the year, with two limits: 1. The main text excludes "income under the head salary". 2. A proviso, added by the Finance Act, 2025, says the adjustment of business loss "shall not be allowed against income from property for the tax year". **Section 56(2): no general carry-forward.** A loss that cannot be set off under sub-section (1) cannot be carried forward, except as provided in that Part of the Ordinance. **Section 56(3): order of set-off.** Where a person has a loss under Income from Business and a loss under another head in the same year, the business loss is set off last. **Section 57: the carry-forward.** The unused business loss is carried forward to the following tax year and set off against income under the head Income from Business, for up to six tax years. That is covered in detail on a separate page. ### How does it work in practice? For a salaried person or a landlord with a losing business, the effect is that the salary and rent are taxed as if the business did not exist that year. The business loss does not disappear: it waits for future business profits under section 57. The two sections that section 56(1) is subject to point the same way. Section 58 confines a speculation business loss to speculation income. Section 59 says a capital loss is not set off against income under any other head, and is carried forward only against capital gains. ### Worked example (illustrative figures) Farah works as an accounts officer in Karachi on a salary of Rs. 2,400,000 for tax year 2027. She lets out a flat for Rs. 600,000 a year and runs an online clothing business that made a loss of Rs. 900,000. She has no other income. All figures are made up. 1. **Salary:** Rs. 2,400,000. Section 56(1) excludes salary from set-off. Taxable salary stays Rs. 2,400,000. 2. **Income from property:** Rs. 600,000. The proviso to section 56(1) bars the business loss. Rental income stays Rs. 600,000. 3. **Other heads:** none, so nothing is available for set-off in tax year 2027. 4. **Loss carried forward:** Rs. 900,000 goes to tax year 2028 under section 57, to be set off against business income only. In tax year 2028, if the clothing business makes a profit of Rs. 1,100,000, the carried-forward loss reduces it to Rs. 1,100,000 minus Rs. 900,000 = Rs. 200,000. Her salary and rent in 2028 are again unaffected. ### What if ...? **What if I have a capital gain in the same year?** Capital Gains is not one of the heads excluded by section 56(1) or its proviso, so the text allows a business loss to be set off against it, subject to sections 58 and 59. Some gains are taxed under separate provisions that are outside this page. **What if both my business and my property made a loss?** Section 56(3) says the business loss is set off last. The property loss is used first against eligible heads, which keeps more of the business loss available for section 57. **What if the business loss is from speculation?** Section 58 restricts a speculation loss to income from another speculation business, so it is not set off against other heads at all. ### Common mistakes - **Netting a shop loss against salary on the return.** Section 56(1) excludes salary. - **Relying on older guidance about rental income.** The footnotes show the words "or income from property" were omitted from section 56(1) by the Finance Act, 2021, and the proviso barring a business loss against income from property was added by the Finance Act, 2025. The answer for an older tax year depends on the version then in force. - **Assuming the loss is lost.** The unused business loss carries forward under section 57, but only against business income. - **Treating a capital loss like a business loss.** Section 59 keeps capital losses within the Capital Gains head. ### What to check in the official text Read section 11 on heads of income, section 56 with its proviso, and sections 57, 58 and 59. The proviso on income from property applies "for the tax year", and its footnote records the Finance Act, 2025 as the source. If you are looking at a tax year before that change, check the version of section 56 in force for that year. ### Frequently asked #### Can my shop's loss reduce the tax deducted from my salary? No. Section 56(1) allows a loss to be set off against income under any other head except income under the head salary. Salary is taxed without reduction for the business loss, and the loss is carried forward under section 57. #### Can my business loss reduce the rent I earn from a house or shop I let out? No. The proviso to section 56(1), added by the Finance Act, 2025, says the adjustment of business loss shall not be allowed against income from property for the tax year. #### Which income can a business loss reduce in the same year, then? After salary and income from property are excluded, the remaining heads in section 11(1) are Capital Gains and Income from Other Sources. Section 56(1) is subject to sections 58 and 59, and some types of income have separate rules not covered here. ### Citations - [Income Tax Ordinance, 2001, section 56 (Set off of losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#56-set-off-of-losses), as amended to 2026-06-30: "Provided that the adjustment of business loss shall not be allowed against income from property for the tax year." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 57 (Carry forward of business losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#57-carry-forward-of-business-losses), as amended to 2026-06-30: "so much of the loss that has not been set off shall be carried forward to the following tax year and set off against the person’s income chargeable under the head “Income from Business” for that year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 11 (Heads of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#11-heads-of-income), as amended to 2026-06-30: "the person shall be treated as sustaining a loss for that head for that year of an amount equal to the excess" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 58 (Carry forward of speculation business losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#58-carry-forward-of-speculation-business-losses), as amended to 2026-06-30: "the loss shall be set off only against the income of the person from any other speculation business of the person chargeable to tax for that year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 59 (Carry forward of capital losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#59-carry-forward-of-capital-losses), as amended to 2026-06-30: "the loss shall not be set off against the person’s income, if any, chargeable under any other head of income for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## I deposit a lot of cash sales in my bank account. Can FBR treat it as unexplained income? Source: https://qanoondigest.com/faq/sole-proprietors/cash-deposits-unexplained-income-section-111 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Only to the extent the source is not adequately explained. Section 111 adds unexplained credits, money and investments to income from other sources, and suppressed sales to income from business, where there is no explanation or the Commissioner finds it unsatisfactory. Records kept under section 174 that tie deposits to declared sales are how the source is shown. **Applies to:** Sole proprietors and shopkeepers whose customers pay mostly in cash and who bank their takings. Depositing cash takings is not itself taxed. What section 111 of the Income Tax Ordinance targets is money whose source a person cannot explain, and sales a person has not declared. For a cash business, the practical question is whether the deposits in the bank statement can be traced back to sales that were recorded and declared. ### What does the law say? Section 111(1) applies where any of these is found: - (a) an amount credited in a person's books of account; - (b) an investment made, or money or a valuable article owned; - (c) expenditure incurred; - (d) concealed income or inaccurate particulars, including suppression of production, sales or any amount chargeable to tax, or of any receipt liable to tax. The section is triggered when the person offers no explanation about the nature and source of the amount, or the explanation offered is not, in the Commissioner's opinion, satisfactory. The consequence then splits in two: | What is unexplained | Where it is added | Section | | --- | --- | --- | | Amount credited, investment, money, valuable article or expenditure | Income from Other Sources | 111(1)(a) | | Suppressed production, sales, amount chargeable to tax or receipt | Income from Business | 111(1)(b) | In both cases the words are "to the extent it is not adequately explained". Only the unexplained part is added, not the whole deposit. Under section 111(2)(i), a Pakistan-source amount is included in the tax year to which it relates. ### How does it work in practice? Section 174(1) requires every taxpayer to keep the accounts, documents and records that are prescribed. Rule 29 of the Income Tax Rules, 2002 prescribes records of all money received and spent, all sales and purchases, all assets and all liabilities. Rule 30 sets the minimum for taxpayers other than companies. For business income above Rs. 500,000, it includes: - serially numbered and dated cash memos, invoices or receipts for each sale, with the business name, address and NTN or CNIC (one or more cash memos per day can cover all transactions of Rs. 100 or less); - a cash book, bank book or daily record of receipts, sales, payments, purchases and expenses; - a general ledger or annual summary under separate heads; - vouchers of purchases and expenses; - for traders in goods, a quarterly inventory of stock. These are the documents that turn a deposit into an explained amount. A deposit that matches a day's recorded cash memos and the cash book is explained by those records. A deposit with no matching sale, loan or other source is the kind of amount section 111 is written for. Section 174(2) adds that the Commissioner may disallow or reduce a deduction if you cannot, without reasonable cause, produce a receipt or record of it. The entry at serial 2 of the section 182 table sets a penalty for failing to issue a cash memo, invoice or receipt when required: five thousand rupees or three per cent of the tax involved, whichever is higher. ### Worked example (illustrative figures) Nadia runs a fabric shop in Anarkali, Lahore, as a sole proprietor. In tax year 2027 her bank statement shows cash deposits of Rs. 24,000,000. Her return declares sales of Rs. 21,500,000, of which Rs. 1,000,000 was received by bank transfer. Recorded cash sales are therefore Rs. 20,500,000. Her reconciliation: | Item | Amount (Rs.) | | --- | --- | | Cash deposits per bank statement | 24,000,000 | | Less: cash sales per cash memos and cash book | 20,500,000 | | Less: cash withdrawn earlier in the year and redeposited, shown in the cash book | 1,700,000 | | Less: loan from her brother, supported by a written agreement | 1,000,000 | | Unreconciled balance | 800,000 | The first three items are supported by her records. The Rs. 800,000 has no matching entry. If she cannot give a satisfactory explanation, section 111 lets the Commissioner include that Rs. 800,000 in her income. It would go under Income from Business if treated as suppressed sales, or under Income from Other Sources if treated as an unexplained credit. It is the unreconciled Rs. 800,000, not the full Rs. 24,000,000, that is at risk. ### What if some of my income is taxed as final tax? Section 111(4A) deals with this. If you rely on a source taxed under a final tax provision to explain an amount, you cannot take credit for more than the imputable income from it. The exception is where the excess is reasonably attributed to those final tax business activities and you provide financial statements audited by a chartered accountant. ### What if the money came from abroad or from farming? Section 111(4) excludes foreign exchange up to five million rupees in a tax year, remitted through normal banking channels, encashed into rupees by a scheduled bank and backed by the bank's certificate. The proviso to section 111(1) accepts agricultural income as an explanation to the extent worked back from agricultural income tax paid under the provincial law. Provincial agricultural income tax itself is outside this corpus. ### Common mistakes - **Assuming a deposit is safe because it is cash from the shop.** Section 111 asks for an explanation of the source. Records are what supply it. - **Keeping only a bank statement.** Rule 30 expects cash memos, a daily record and vouchers, not just the bank's record. - **Discarding old records.** Section 174(3) sets six years after the end of the tax year, longer if proceedings are pending. - **Thinking the whole balance is taxed.** The section includes only the amount "not adequately explained". ### What to check in the official text Read all of section 111, including the Explanation at the end: a separate notice under section 111 is not required if the question was already put to you in a show cause notice under section 122(9). Read rules 29 and 30 of the Income Tax Rules, 2002 for the records that apply to your size and type of business. Section 174(5) lets the Board require certain persons to install an electronic resource or act as an integrated enterprise by notification; check whether any such notification applies to your trade. ### Frequently asked #### Does section 111 mention bank deposits by name? No. It speaks of amounts credited in books of account, investments, money or valuable articles owned, expenditure, and suppressed production, sales or receipts. A bank deposit can fall within those words, but the section does not single out deposits. #### Which head of income does an unexplained amount go under? Under section 111(1), an unexplained credit, investment, money, article or expenditure goes under Income from Other Sources. A suppressed amount of production, sales or receipts goes under Income from Business. In both cases only the part not adequately explained is included. #### How long should I keep sales records? Section 174(3) requires records to be kept for six years after the end of the tax year they relate to, and longer while any proceeding is pending before an authority or court. ### Citations - [Income Tax Ordinance, 2001, section 111 (Unexplained income or assets)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#111-unexplained-income-or-assets), as amended to 2026-06-30: "the suppressed amount of production, sales or any amount chargeable to tax or of any item of receipt liable to tax shall be included in the person’s income chargeable to tax" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 174 (Records)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#174-records), as amended to 2026-06-30: "every taxpayer shall maintain in Pakistan such accounts, documents and records as may be prescribed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 29 (Books of account, documents and records to be maintained)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#29-books-of-account-documents-and-records-to-be-maintained), as amended to 2023-11-24: "all sums of money received and expended by the taxpayer and the matters in respect of which the receipt and expenditure takes place" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Rules, 2002, Income Tax Rules, 2002, rule 30 (minimum books of account for taxpayers other than companies)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24), as amended to 2023-11-24 Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Ordinance, 2001, section 182 (Offences and penalties)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182-offences-and-penalties), as amended to 2026-06-30: "Any person who commits any offence specified in column (2) of the Table below shall" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## My business made a loss. Can I carry it forward, and for how many years? Source: https://qanoondigest.com/faq/sole-proprietors/carry-forward-business-loss-six-years Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Under section 57 of the Income Tax Ordinance, a business loss that cannot be set off in the same year is carried forward and set off only against business income, for no more than six following tax years, oldest loss first. The part of the loss caused by depreciation follows section 57(4) instead, with no six-year limit. **Applies to:** Sole proprietors whose business deductions exceeded business receipts in a tax year and who want to use that loss in later years. A business loss is not wasted if it cannot be used in the year it happens. Section 57 of the Income Tax Ordinance, 2001 carries it forward, but only against future business income and only for a limited number of years. Depreciation that could not be absorbed follows a separate rule. ### What does the law say? **Step one is section 56.** A loss under one head is first set off against income under other heads in the same year, within the limits in section 56(1) (covered on a separate page). Section 56(2) says a loss that cannot be set off that way cannot be carried forward "except as provided in this Part". **Section 57 is that exception for business losses.** - **57(1):** the part of a business loss not set off under section 56 is carried forward to the following tax year and set off against income chargeable under the head Income from Business for that year. - **57(2):** anything still not set off is carried forward again, "and so on", but no loss can be carried forward to more than six tax years immediately succeeding the tax year for which it was first computed. - **57(3):** where losses from more than one year are carried forward, the loss of the earliest tax year is set off first. - **57(4):** the part of the loss attributable to deductions for depreciation, initial allowance, first year allowance for alternate energy and amortisation of intangibles that has not been set off is set off against fifty percent of the balance business income, after the section 57(1) set-off, in the following year and so on until completely set off. The limit is one hundred percent of that balance if taxable income for the year is less than ten million rupees. - **57(5):** in deciding whether those depreciation-type deductions have been set off, they are taken into account last. Section 57(1) expressly does not cover a loss to which sub-section (4) or section 58 applies. Section 58 deals with speculation business: a speculation loss is set off only against income from another speculation business, also for up to six years. **Section 114(1)(b)(ii)** requires a return of income from any person who claims a loss carried forward under the Ordinance for a tax year. ### How does it work in practice? Each year's loss has its own six-year clock, starting from the tax year in which it was first computed. A loss for tax year 2026 can be used in tax years 2027 to 2032 at most. If the business also has a loss from tax year 2028 carried forward, the 2026 loss is used first under section 57(3). Because section 57(5) takes depreciation into account last, the part of a loss that remains unabsorbed is treated as depreciation first. That part moves under section 57(4) rather than the six-year rule. ### Worked example (illustrative figures) Bilal opens a printing shop in Rawalpindi. He has no other income. Made-up figures: **Tax year 2026:** receipts Rs. 3,000,000; running expenses Rs. 3,500,000; depreciation Rs. 400,000. 1. Total deductions: Rs. 3,500,000 + Rs. 400,000 = Rs. 3,900,000. 2. Loss: Rs. 3,900,000 minus Rs. 3,000,000 = Rs. 900,000. 3. Depreciation is taken into account last (section 57(5)), so receipts absorb Rs. 3,000,000 of running expenses first. Unabsorbed running expenses: Rs. 500,000. Unabsorbed depreciation: Rs. 400,000. 4. Rs. 500,000 is carried forward under section 57(1) and (2). Rs. 400,000 is carried forward under section 57(4). **Tax year 2027:** business income before losses is Rs. 1,000,000. 1. Set off the section 57(1) loss: Rs. 1,000,000 minus Rs. 500,000 = Rs. 500,000 balance. 2. Taxable income is well under Rs. 10,000,000, so unabsorbed depreciation can be set off against one hundred percent of the balance: Rs. 500,000 minus Rs. 400,000 = Rs. 100,000. 3. Business income for tax year 2027: Rs. 100,000. Both carried-forward amounts are fully used. If tax year 2027 had instead produced only Rs. 200,000 of business income, Rs. 300,000 of the ordinary loss would move on to tax year 2028, and could be carried no later than tax year 2032. ### What if ...? **What if my taxable income is Rs. 10 million or more?** Section 57(4) limits the set-off of unabsorbed depreciation to fifty percent of the balance business income for that year. The rest waits for later years. The text does not say whether "taxable income for the year" is measured before or after that set-off. **What if I did not file a return for the loss year?** Section 114(1)(b)(ii) ties the filing duty to claiming a carried-forward loss. The Ordinance's consequences for a missing return are outside this page. **What if the business closes?** Section 57 sets carried-forward losses against income under the head Income from Business. It does not carry them to other heads. ### Common mistakes - **Setting a carried-forward loss against salary or rent.** Section 57(1) allows set-off only against business income in later years. - **Using the newest loss first.** Section 57(3) requires the earliest year's loss to be set off first. - **Treating the whole loss as subject to the six-year limit.** Unabsorbed depreciation moves under section 57(4). - **Mixing speculation losses with ordinary business losses.** Section 58 keeps them separate. ### What to check in the official text Read sections 56, 57 and 58 together, and section 114(1)(b)(ii) on returns. Sub-sections (2A), (2B) and (2C) of section 57 give longer periods to specific entities such as certain banking companies, hotel companies and one airline; they do not apply to a sole proprietor. ### Frequently asked #### Can a carried-forward business loss reduce my salary or rent in a later year? No. Section 57(1) sets a carried-forward loss only against income chargeable under the head Income from Business in the following year. Salary and income from property in later years are not reduced by it. #### What happens to a loss still unused after six years? Section 57(2) says no loss can be carried forward to more than six tax years immediately succeeding the tax year for which it was first computed. Any part still unused after that period cannot be carried further under section 57. #### Do I have to file a return to carry a loss forward? Section 114(1)(b)(ii) requires a return from any person who claims a loss carried forward under the Ordinance for a tax year. That applies even if the person is not otherwise required to file. #### Is unabsorbed depreciation also limited to six years? Section 57(1) excludes a loss to which section 57(4) applies. Section 57(4) sets unabsorbed depreciation off against business income in following years until completely set off, subject to a fifty percent limit where taxable income is ten million rupees or more. ### Citations - [Income Tax Ordinance, 2001, section 57 (Carry forward of business losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#57-carry-forward-of-business-losses), as amended to 2026-06-30: "no loss can be carried forward to more than six tax years immediately succeeding the tax year for which the loss was first computed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 56 (Set off of losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#56-set-off-of-losses), as amended to 2026-06-30: "the person shall not be permitted to carry the loss forward to the next tax year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 58 (Carry forward of speculation business losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#58-carry-forward-of-speculation-business-losses), as amended to 2026-06-30: "the loss shall be set off only against the income of the person from any other speculation business of the person chargeable to tax for that year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "claims a loss carried forward under this Ordinance for a tax year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can I carry forward the extra minimum tax I paid and adjust it in later years? Source: https://qanoondigest.com/faq/sole-proprietors/carry-forward-excess-minimum-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, for two years. Section 113(2)(c) of the Income Tax Ordinance, 2001 carries forward minimum tax paid above normal tax under clause (1) of Division I, or the whole amount if no normal tax was payable. It can be adjusted only in the two tax years immediately after the year of payment. Any balance left after that lapses. **Applies to:** Individuals with business turnover of Rs. 100 million or more who paid minimum tax under section 113 because it was higher than their normal tax, for tax year 2027. 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. ### Frequently asked #### How many years can I carry forward excess minimum tax? Two. The second proviso to section 113(2)(c) limits the carry forward to the two tax years immediately succeeding the tax year for which the amount was paid. The footnotes show the period was five years, then three, and the Finance Act, 2025 substituted two. #### What if I made a loss and paid minimum tax on turnover? The first proviso to section 113(2)(c) covers this. Where minimum tax was paid because no tax was payable for the year, the entire amount paid under section 113(1) is carried forward, not just an excess over normal tax. #### Can the carried forward amount be used against any tax? No. Section 113(2)(c) allows adjustment against tax liability under the aforesaid Part, and the Explanation says this means clause (1) of Division I or Division II of Part I of the First Schedule. For an individual, that is the normal slab tax under clause (1) of Division I. ### Citations - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "the excess amount of tax paid shall be carried forward for adjustment against tax liability under the aforesaid Part of the subsequent tax year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "the entire amount of tax paid under sub-section (1) shall be carried forward for adjustment in the manner stated aforesaid" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1) (rates of tax for individuals and associations of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IX (Minimum tax under section 113)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## If I pay a supplier or employee in cash above a certain amount, is that expense disallowed? Source: https://qanoondigest.com/faq/sole-proprietors/cash-payments-disallowed-over-limit Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, above set limits. Section 21(l) of the Income Tax Ordinance disallows expenditure under a single account head exceeding Rs. 250,000 in aggregate unless paid by crossed banking instrument, online transfer or card from the business bank account. Section 21(m) disallows salary above Rs. 32,000 a month not paid by crossed cheque, bank transfer or digital means. **Applies to:** Sole proprietors and traders who pay suppliers, contractors or staff in cash and claim those payments as business expenses. A cash payment above the limits in section 21 of the Income Tax Ordinance, 2001 loses its deduction, even if it was a genuine business cost. Two clauses do this. Clause (l) covers spending under one account head above Rs. 250,000. Clause (m) covers salary above Rs. 32,000 a month to one person. ### What does the law say? **Clause (l): large payments.** No deduction is allowed for any expenditure for a transaction, paid or payable under a single account head, which in aggregate exceeds Rs. 250,000, if it is made other than by: - a crossed cheque drawn on a bank; - a crossed bank draft or crossed pay order; or - any other crossed banking instrument showing transfer of the amount from the business bank account of the taxpayer. The first proviso adds two accepted methods: an online transfer from the payer's business account to the payee's business account, and payment by credit card. Both count as the banking channel only if the transaction can be verified from the bank statements of both payer and payee. The second proviso lists what clause (l) does not cover: | Exception | Detail | | --- | --- | | Small expenditures | Expenditures not exceeding Rs. 25,000 | | Utility bills | Any amount | | Freight charges | Any amount | | Travel fare | Any amount | | Postage | Any amount | | Statutory payments | Taxes, duties, fees, fines or any other statutory obligation | **Clause (m): salaries.** No deduction is allowed for any salary exceeding Rs. 32,000 per month to an individual, paid other than by crossed cheque, direct transfer of funds to the employee's bank account, or digital means. **The business bank account.** Section 114A(1) requires every taxpayer to declare to the Commissioner the bank account used for business transactions. Section 114A(2) says this is done through the original or modified registration form prescribed under the Ordinance. Clause (l) refers to transfers from this account. ### How does it work in practice? Clause (l) looks at the account head, such as "Purchases: cement" or "Repairs", and at whether the amount under it, in aggregate, is over Rs. 250,000. The clause uses both "for a transaction" and "in aggregate" in the same sentence. The Ordinance does not define further how payments are grouped for this test, so this page does not settle it. The clause disallows the expenditure itself. It does not say that only the portion above Rs. 250,000 is disallowed. Clause (m) is measured per individual, per month. A salary above Rs. 32,000 must go by crossed cheque, direct bank transfer or digital means. A salary at or below that figure is not caught by clause (m), though it still has to meet the section 20 test. A separate clause (la) applies only to companies and only from a date the Board notifies. It does not apply to a sole proprietor. ### Worked example (illustrative figures) Bilal runs a small furniture workshop in Lahore. His made-up payments for tax year 2027: | Payment | Method | Amount | | --- | --- | --- | | Timber from one supplier, single invoice | Cash | Rs. 380,000 | | Hardware and fittings, single invoice | Cash | Rs. 22,000 | | Freight for a delivery to Islamabad | Cash | Rs. 40,000 | | Carpenter's salary | Cash, Rs. 45,000 a month for 12 months | Rs. 540,000 | | Helper's salary | Cash, Rs. 28,000 a month for 12 months | Rs. 336,000 | Step by step: 1. Timber: Rs. 380,000 is above Rs. 250,000, paid in cash, and not in any exception. Clause (l) disallows Rs. 380,000. 2. Hardware: Rs. 22,000 does not exceed Rs. 25,000, so the second proviso excludes it from clause (l). 3. Freight: excluded from clause (l) as freight charges. 4. Carpenter: Rs. 45,000 a month exceeds Rs. 32,000 and was paid in cash. Clause (m) disallows Rs. 45,000 x 12 = Rs. 540,000. 5. Helper: Rs. 28,000 a month does not exceed Rs. 32,000, so clause (m) does not apply. 6. Total disallowed under clauses (l) and (m): Rs. 380,000 + Rs. 540,000 = Rs. 920,000. Had Bilal paid the timber by crossed cheque or online transfer from his declared business bank account, and the carpenter by bank transfer, neither clause would disallow those amounts. ### What if ...? **What if I pay by card?** The first proviso to clause (l) treats payment through a credit card as a transaction through the banking channel, if it is verifiable from the bank statements of both sides. **What if I pay from my personal account instead of the business account?** Clause (l) refers to transfer from "the business bank account of the taxpayer", and the online-transfer proviso to the payer's business account. A payment from an undeclared personal account is not within those words. **What if I receive large amounts in cash from customers?** That is a different rule, clause (s) of section 21, covered on the page on cash sales over Rs. 200,000. ### Common mistakes - **Assuming only the amount above Rs. 250,000 is lost.** The clause refers to the expenditure, not the excess. - **Paying staff cash above Rs. 32,000 a month.** Clause (m) removes the whole salary deduction for those months. - **Using a non-crossed cheque.** Clause (l) names crossed instruments. - **Forgetting to declare the business account.** Section 114A(1) requires it. ### What to check in the official text Read clauses (l), (la) and (m) of section 21 with their provisos, and section 114A. Check the account you use for business is the one declared on your registration form. ### Frequently asked #### Is the whole payment disallowed or only the part above Rs. 250,000? Section 21(l) says no deduction is allowed for any expenditure under a single account head which, in aggregate, exceeds Rs. 250,000 and is made other than through the listed banking instruments. The wording refers to the expenditure itself, and the clause does not say that only the excess is disallowed. #### Does the Rs. 250,000 limit apply to my electricity bill paid in cash? No. The second proviso to section 21(l) excludes utility bills, freight charges, travel fare, postage, and payment of taxes, duties, fees, fines or other statutory obligations. It also excludes expenditures not exceeding Rs. 25,000. #### Can I pay my shop assistant Rs. 30,000 a month in cash? Section 21(m) disallows salary exceeding Rs. 32,000 a month to an individual paid other than by crossed cheque, direct transfer to the employee's bank account or digital means. A monthly salary of Rs. 30,000 is below that figure, so clause (m) does not disallow it. ### Citations - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "made other than by a crossed cheque drawn on a bank or by crossed bank draft or crossed pay order or any other crossed banking instrument showing transfer of amount from the business bank account of the taxpayer" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114A (Business bank account)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114a-business-bank-account), as amended to 2026-06-30: "Every taxpayer shall declare to the Commissioner the bank account utilized by the taxpayer for business transactions." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 20 (Deductions in computing income chargeable under the head “Income from Business”)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#20-deductions-in-computing-income-chargeable-under-the-head-income-from-business), as amended to 2026-06-30: "a deduction shall be allowed for any expenditure incurred by the person in the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## If I pay a supplier or staff in cash above a certain amount, is that expense disallowed? Source: https://qanoondigest.com/faq/sole-proprietors/cash-payments-expense-disallowed Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, in two cases. Section 21(l) disallows expenditure under a single account head that exceeds Rs. 250,000 in aggregate unless paid through a crossed banking instrument or online transfer from the business bank account. Section 21(m) disallows salary above Rs. 32,000 a month to an individual unless paid by crossed cheque, bank transfer or digital means. **Applies to:** Sole proprietors and small businesses that pay suppliers, contractors or employees in cash, for tax year 2027. ### What does the law say? Two clauses of section 21 of the Income Tax Ordinance, 2001 turn on how a business pays, not on what it pays for. **Section 21(l): payments under one account head.** No deduction is allowed for expenditure paid or payable under a single account head which, in aggregate, exceeds Rs. 250,000, if it was made other than by a crossed cheque, crossed bank draft, crossed pay order or other crossed banking instrument showing transfer from the business bank account of the taxpayer. The first proviso treats two more methods as the banking channel: an online transfer from the payer's business account to the payee's business account, and payment by credit card, provided both are verifiable from the bank statements of the payer and the payee. The clause does not apply to: - expenditures not exceeding Rs. 25,000; - utility bills; - freight charges; - travel fare; - postage; and - payment of taxes, duties, fees, fines or any other statutory obligation. **Section 21(m): salary.** No deduction is allowed for salary exceeding Rs. 32,000 per month to an individual paid other than by a crossed cheque, direct transfer of funds to the employee's bank account, or digital means. ### How does it work in practice? **The account head matters.** Section 21(l) looks at payments "under a single account head" in aggregate. If a bakery in Rawalpindi books all flour purchases under "Flour purchases" and pays the mill Rs. 60,000 in cash every week, the aggregate under that head passes Rs. 250,000 within the year. Many small payments can together cross the line. **Whose bank account.** The protected methods all refer to the business bank account. The text does not describe payments from the owner's personal account or from a relative's account. **What the clause does not spell out.** The text says the expenditure "which, in aggregate, exceeds" Rs. 250,000 is not deductible. It does not say whether only the cash portion, or only the part above Rs. 250,000, is caught when an account head has a mix of bank and cash payments. It also does not define whether the Rs. 25,000 exclusion is measured per payment or per head. The Ordinance is silent on these points, and this page does not resolve them. **Salary.** Section 21(m) is tested per individual per month. A wage of Rs. 32,000 exactly is not "exceeding" the figure. A wage above it, paid in cash, is disallowed. **Companies.** Clause 21(la) sets a separate digital-payment rule for companies, effective from a date the Board notifies. It does not apply to a sole proprietor. **Records.** Section 174(2) adds a second layer: any deduction can be disallowed or reduced if there is no receipt or other evidence, without reasonable cause. A cash payment below the section 21(l) limit still needs a record. ### Worked example (illustrative figures) Nadia runs a garment stitching unit in Lahore. In tax year 2027: **Supplier payments.** She buys packing material under the account head "Packing material". Payments during the year: | Method | Amount (Rs.) | |---|---| | Cash to a local vendor, 12 payments of Rs. 30,000 | 360,000 | | Online transfer from business account to vendor's business account | 200,000 | | **Total under the head** | **560,000** | The head exceeds Rs. 250,000 in aggregate, and Rs. 360,000 of it was paid in cash. Each cash payment is above Rs. 25,000, so that exclusion does not help. The cash payments fall within clause 21(l). As noted above, the text does not say exactly how a mixed head is split, so the amount the Commissioner would add back is not settled by the Ordinance itself. **Transport.** She pays a Suzuki pickup driver Rs. 400,000 in cash over the year for freight. Freight charges are excluded from clause 21(l). **Staff salaries.** | Employee | Monthly wage (Rs.) | Method | Section 21(m) | |---|---|---|---| | Tailor A | 45,000 | Cash | Disallowed: above Rs. 32,000 and paid in cash | | Tailor B | 45,000 | Bank transfer | Allowed | | Helper | 28,000 | Cash | Not caught: below Rs. 32,000 | For Tailor A: Rs. 45,000 x 12 = Rs. 540,000 of salary for the year is not deductible under clause 21(m). ### What if the payment is to a supplier who only accepts cash? The Ordinance does not make an exception for suppliers who refuse bank payment. The exclusions are the ones listed in the proviso. A payment outside them and above the limit is caught whatever the reason. ### What if the salary is paid through a mobile wallet? Clause 21(m) accepts "digital means" alongside a crossed cheque and direct bank transfer. The Ordinance does not define digital means in the clause itself. ### Common mistakes - **Checking each payment against Rs. 250,000.** The clause tests the aggregate under a single account head, not each payment. - **Assuming any bank transfer is enough.** The text refers to the business bank account, and for online transfers, business account to business account. - **Forgetting the exclusions.** Utility bills, freight, travel fare, postage and taxes are outside clause 21(l) even when paid in cash. - **Confusing the two limits.** Rs. 250,000 applies to account heads under clause 21(l). Rs. 32,000 a month applies to each employee's salary under clause 21(m). ### What to check in the official text Read clauses (l), (la) and (m) of section 21 with their provisos. The figures of Rs. 250,000 and Rs. 25,000 were substituted by the Finance Act, 2020, and the Rs. 32,000 salary figure by the Finance Act, 2023, so older guidance may quote different amounts. Check whether the Board has notified the start date for clause (la) if you later incorporate a company. ### Frequently asked #### Are cash payments for electricity bills or transport freight caught by section 21(l)? No. The proviso to section 21(l) excludes utility bills, freight charges, travel fare, postage, and payments of taxes, duties, fees, fines or other statutory obligations. It also excludes expenditures not exceeding Rs. 25,000. #### I pay a helper Rs. 30,000 a month in cash. Is that salary disallowed? Not under section 21(m). That clause catches salary exceeding Rs. 32,000 per month to an individual paid other than by crossed cheque, direct transfer to the employee's bank account or digital means. Rs. 30,000 is below the figure. #### Does a bank transfer from my personal account count? The clause refers to a crossed instrument showing transfer from the business bank account of the taxpayer, and online transfers from the business account of the payer to the business account of the payee. A transfer from a personal account is not described in the text, so the clause does not expressly protect it. ### Citations - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "Provided that online transfer of payment from the business account of the payer to the business account of payee as well as payments through credit card shall be treated as transactions through the banking channel" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "other than by a crossed cheque or direct transfer of funds to the employee’s bank account" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 174 (Records)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#174-records), as amended to 2026-06-30: "to provide a receipt, or other record or evidence of the transaction or circumstances giving rise to the claim for the deduction" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How do I close my business for tax purposes, and do I still file returns afterwards? Source: https://qanoondigest.com/faq/sole-proprietors/closing-business-notice-section-117 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 117 requires anyone discontinuing a business to give the Commissioner written notice within fifteen days and to file a return for the period from the start of that tax year to the closing date, treated as a separate tax year. Returns for later years still depend on the section 114 tests, such as holding an NTN. **Applies to:** Individuals who are shutting down, or have already shut down, a business run in their own name. ### What does the law say? Section 117 of the Income Tax Ordinance, 2001 sets out what happens when a person stops carrying on a business. It has four parts: 1. **Notice.** Under section 117(1), any person discontinuing a business must give the Commissioner a notice in writing within fifteen days of the discontinuance. 2. **Part-year return.** Under section 117(2), the person must furnish a return of income for the period from the first day of the tax year in which the business closed to the date of closing. That period is treated as a separate tax year. The return is furnished "under the provisions of this Ordinance or on being required by the Commissioner by notice". 3. **Commissioner's own notice.** Under section 117(3), if no notice was given but the Commissioner has reasonable grounds to believe the business has discontinued or is likely to, the Commissioner may serve a notice requiring a return for the period specified, within the time specified. 4. **Status of the return.** Section 117(4) says a return furnished under the section is treated for all purposes of the Ordinance as a return of income. ### How does it work in practice? The tax year for an individual runs from 1 July to 30 June. When a sole proprietor closes mid-year, section 117(2) cuts that year short: the months from 1 July to the closing date become their own tax year for the closing return. Where the return is required by a notice under section 117, section 118(5) makes it due by the date specified in the notice. Section 119(1)(a) lists "a return of income under section 114 or 117" among the returns for which a person may apply in writing to the Commissioner for more time. Section 119(2) requires that application to be made by the due date. The Ordinance text does not state a separate due date for a part-year return that a person files on their own, without any notice. Section 118(5) covers only returns required by a section 117 notice. This page does not fill that gap. ### Worked example (illustrative figures) Nadia runs a clothing boutique in Lahore in her own name. She closes it on 31 October 2026. The dates and amounts are invented; the time limits and penalty formula are from sections 117 and 182. 1. **Tax year affected.** Tax year 2027 runs from 1 July 2026 to 30 June 2027, so the closure falls in tax year 2027. 2. **Notice deadline.** Fifteen days after 31 October 2026 is 15 November 2026. Section 117(1) requires her written notice by then. 3. **Closing return period.** 1 July 2026 to 31 October 2026, treated as a separate tax year under section 117(2). 4. **If she sends no notice.** Suppose the Commissioner serves a section 117(3) notice requiring the return by a stated date, and Nadia files 20 days late. Suppose the tax payable for the period is Rs. 30,000. - 0.1% of Rs. 30,000 for each day: Rs. 30 x 20 days = Rs. 600. - Rs. 1,000 for each day: Rs. 1,000 x 20 days = Rs. 20,000. - The higher of the two is Rs. 20,000, which is above the Rs. 10,000 minimum for an individual. - Penalty under serial 1B: Rs. 20,000. ### Do I still file returns after closing? Section 117 deals with the closing period. It does not say the person's filing duty ends. For every later tax year, the tests in section 114(1) apply as they do to anyone. Several of them can still catch a former shopkeeper: - clause (b)(i): having been charged to tax in respect of either of the two preceding tax years. A person who paid tax on business profit in the last year or two of trading may meet this test for the next years. - clause (b)(vii): having obtained a National Tax Number. - clause (b)(vi): owning a motor vehicle with engine capacity above 1000 CC, and the property tests in clauses (b)(iii) to (v). - clause (ab): taxable income from any source, such as salary from a new job or rent, above the tax-free amount. Section 114(4) and (5) also let the Commissioner, by notice, require a return from a person who in the Commissioner's opinion should have filed for any of the last five completed tax years, extended to ten where no return was filed for any of the last five. ### What if I had a carried-forward business loss? A loss carried forward from the business is claimed through a return. Section 114(1)(b)(ii) makes a return compulsory for anyone who claims a carried-forward loss for a tax year. Whether a loss from a closed business can be set off in later years depends on the loss provisions in Chapter IV, which this page does not cover. ### Common mistakes - **Simply stopping.** Closing the shutter does not satisfy section 117(1). The notice must be in writing to the Commissioner. - **Filing a full-year return for the closing year.** Section 117(2) treats the period up to the closing date as a separate tax year. - **Assuming the NTN lapses on its own.** Nothing in section 117 cancels registration, and clause (b)(vii) of section 114(1) applies to anyone who has obtained an NTN. - **Throwing away the books.** Section 174(3) requires accounts and documents to be kept for six years after the end of the tax year they relate to, and longer while any proceeding is pending. ### What to check in the official text Read section 117 in full, section 118(5) on the due date for a return required by notice, and section 119 on extensions. Read serial 1B of the table in section 182 for the penalty on a section 117(3) return. How registration is modified after a business closes is set by the taxpayer registration rules and Board procedures, which this page does not cover. Sales tax and provincial registrations follow their own laws and are not covered here. ### Frequently asked #### How soon must I tell the tax department that my shop has closed? Section 117(1) requires a written notice to the Commissioner within fifteen days of the discontinuance. The section itself does not prescribe a form for the notice. #### Does closing the business stop all future returns? No. Section 117 deals with the closing period only. For later years, section 114 still requires a return from anyone who meets one of its tests, for example having obtained an NTN or having been charged to tax in either of the two preceding tax years. #### What is the penalty if the Commissioner asks for a closing return and I do not file it? Serial 1B of the section 182 table covers failure to file a return required under section 117(3) within the time in the notice. The penalty is the higher of 0.1% of tax payable for each day of default or Rs. 1,000 per day, with a minimum of Rs. 10,000 for an individual. ### Citations - [Income Tax Ordinance, 2001, section 117 (Notice of discontinued business)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#117-notice-of-discontinued-business), as amended to 2026-06-30: "Any person discontinuing a business shall give the Commissioner a notice in writing to that effect within fifteen" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 118 (Method of furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#118-method-of-furnishing-returns-and-other-documents), as amended to 2026-06-30: "A return required to be furnished by a notice issued under section 117 shall be furnished by the due date specified in the notice." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 182 (Offences and penalties)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182-offences-and-penalties), as amended to 2026-06-30: "Such person shall pay a penalty equal to higher of" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "has been charged to tax in respect of any of the two preceding tax years" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 119 (Extension of time for furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#119-extension-of-time-for-furnishing-returns-and-other-documents), as amended to 2026-06-30: "a return of income under section 114 or 117" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 174 (Records)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#174-records), as amended to 2026-06-30: "shall be maintained for" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How do I close my business for tax purposes, and do I still have to file returns? Source: https://qanoondigest.com/faq/sole-proprietors/closing-sole-proprietorship-tax-notice Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 117 requires anyone discontinuing a business to give the Commissioner written notice within fifteen days. A return is then due for the period from the start of that tax year to the closing date, treated as a separate tax year. Closing the business does not by itself end the section 114 tests for later years. **Applies to:** Individuals who are shutting down, or have already shut down, a business run in their own name. Closing a business has its own rule in the Income Tax Ordinance. Section 117, headed "Notice of discontinued business", sets a short deadline for telling the Commissioner and creates a part-year return. It does not deal with every later obligation, so the other filing rules still need checking once the shutters are down. ### What does the law say? Section 117 has four sub-sections: | Sub-section | What it says | | --- | --- | | 117(1) | Anyone discontinuing a business must give the Commissioner written notice within fifteen days of the discontinuance. | | 117(2) | The person must furnish a return for the period from the first day of the tax year in which the business closed to the date of closing. The duty arises under the Ordinance or on a notice from the Commissioner. That period is treated as a separate tax year. | | 117(3) | If no notice was given but the Commissioner has reasonable grounds to believe the business has discontinued or is likely to, the Commissioner may require a return for the period specified in a notice. | | 117(4) | A return under section 117 is treated as a return of income for all purposes, including section 120. | Section 118(5) says a return required by a notice issued under section 117 is due by the date specified in the notice. ### How does it work in practice? The notice under section 117(1) is a written notice to the Commissioner. The section does not prescribe a form in its own text, and any IRIS procedure for it is outside this corpus. The closing return covers a short period. Because section 117(2) treats that period as a separate tax year, the income and expenses up to the closing date are reported on their own, not added to a full twelve-month year. Section 117(4) brings in section 120, so the return is treated like any other return for assessment purposes. Section 117(2) says the return is required "under the provisions of this Ordinance or on being required by the Commissioner by notice". Where a notice is issued, section 118(5) fixes the due date. Where no notice is issued, section 117 does not state a due date in its own words, and this page does not resolve which date applies. Section 114(3) separately lets the Commissioner require a return for a period of less than twelve months, for example where a person has died, become bankrupt, or is about to leave Pakistan permanently, or in any other case the Commissioner considers appropriate. ### Worked example (illustrative figures) Rukhsana runs a bakery in Satellite Town, Rawalpindi, as a sole proprietor. Tax year 2027 runs from 1 July 2026 to 30 June 2027. She closes the bakery on 15 March 2027. 1. **Notice:** fifteen days from 15 March 2027 takes her to 30 March 2027. Her written notice to the Commissioner should reach the Commissioner by then. 2. **Return period:** 1 July 2026 to 15 March 2027. Section 117(2) treats this as a separate tax year. 3. **Income for the period (illustrative):** sales of Rs. 5,400,000 and allowable expenses of Rs. 4,900,000 give business income of Rs. 500,000 for that separate tax year. 4. **After closing:** from 16 March 2027 she takes a salaried job. Her position for tax year 2028 depends on section 114, not section 117. If Rukhsana gives no notice and the Commissioner later issues a notice under section 117(3), the return is due by the date in that notice under section 118(5). ### Do I still have to file returns after closing? Section 117 deals with the year of closing. It does not say that closing a business ends the tests in section 114(1) for later years. Those tests include having taxable income above the tax-free amount, having been charged to tax in either of the two preceding tax years, and having obtained a National Tax Number. If any of them still applies to you in a later tax year, section 114 still requires a return for that year. The sections read for this page do not provide for cancelling an NTN, and this page does not cover that. ### What if the Commissioner asks for the return and I miss the date? Serial 1B of the table in section 182 covers failure to furnish a return required under section 117(3) within the time specified in the notice. The penalty is the higher of 0.1% of the tax payable for that tax year for each day of default, or Rs. 1,000 for each day of default. The minimum is Rs. 10,000 for an individual and Rs. 50,000 in all other cases. ### What if the business had unused losses? The closing return is still a return, so a loss for the part-year is reported in it. Whether and how a business loss can be carried into later years is governed by the loss provisions of the Ordinance, not by section 117. See the page on carrying forward business losses. ### Common mistakes - **Simply stopping.** Section 117(1) requires a written notice within fifteen days. - **Waiting for 30 September and filing a full-year return.** Section 117(2) makes the closing period a separate tax year. - **Assuming the NTN stops all future filing.** Section 114(1)(b)(vii) still lists having obtained an NTN as a filing test, and section 117 does not switch it off. - **Throwing away records on closing.** Section 174(3) keeps the six-year retention period running after the end of the tax year to which records relate. ### What to check in the official text Read section 117 in full, section 118(5) for the notice due date, and serial 1B in the section 182 table. Check section 114(1) for each later tax year to see whether any filing test still applies. Sales tax deregistration, provincial service tax registrations and any FBR portal steps for closing a business are outside this corpus. ### Frequently asked #### How soon must I tell the tax department that I have closed my shop? Section 117(1) requires written notice to the Commissioner within fifteen days of the discontinuance. The section does not prescribe a form in its own text. #### What period does the closing return cover? Section 117(2) says it runs from the first day of the tax year in which the business closed to the date of closing, and that period is treated as a separate tax year. #### What if I never sent a closing notice? Under section 117(3), if the Commissioner has reasonable grounds to believe a business has discontinued or is likely to, the Commissioner can serve a notice requiring a return for the period specified. Serial 1B of the section 182 table sets a penalty for not filing that return within the time in the notice. ### Citations - [Income Tax Ordinance, 2001, section 117 (Notice of discontinued business)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#117-notice-of-discontinued-business), as amended to 2026-06-30: "Any person discontinuing a business shall give the Commissioner a notice in writing to that effect within fifteen" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 118 (Method of furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#118-method-of-furnishing-returns-and-other-documents), as amended to 2026-06-30: "A return required to be furnished by a notice issued under section 117 shall be furnished by the due date specified in the notice" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 182 (Offences and penalties)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182-offences-and-penalties), as amended to 2026-06-30: "Such person shall pay a penalty equal to higher of" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "the person is about to leave Pakistan permanently" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 174 (Records)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#174-records), as amended to 2026-06-30: "shall be maintained for" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Which business expenses can I deduct, including costs of running the business from home? Source: https://qanoondigest.com/faq/sole-proprietors/deductible-business-expenses-sole-proprietor Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 20 of the Income Tax Ordinance allows a deduction for any expenditure incurred wholly and exclusively for the purposes of business, such as rent, salaries and utilities. Section 21(h) bars personal expenditure. The Ordinance has no specific home-office rule; mixed costs are apportioned on a reasonable basis under section 67, and section 22(3) does the same for depreciation. **Applies to:** Sole proprietors, including those who run a shop, workshop or service business partly or wholly from their own home. An expense is deductible when it is incurred wholly and exclusively for the purposes of the business and the Ordinance does not specifically block it. That single test in section 20 of the Income Tax Ordinance, 2001 covers rent, salaries, utilities and most day-to-day costs. Personal spending is excluded, and costs that serve both home and business are split. ### What does the law say? **The general rule.** Section 20(1) allows a deduction, in computing income under the head Income from Business, for any expenditure incurred by the person in the year wholly and exclusively for the purposes of business. The Ordinance does not give a list of approved expenses. Any cost that meets the test qualifies unless another provision says otherwise. **Capital costs.** Section 20(2) says that where the spending buys a depreciable asset, an intangible with a useful life of more than one year, or is pre-commencement expenditure, it must be depreciated or amortised rather than deducted at once. **Personal costs.** Section 21(h) disallows "any personal expenditures incurred by the person". Household food, family travel and school fees are personal, even when paid from the shop's cash. **Mixed costs.** Section 67(1)(b) covers expenditure that relates to income under a head of income "and to some other purpose". It must be apportioned on any reasonable basis, taking account of the relative nature and size of the activities. **Mixed-use assets.** Section 22(3) applies where a depreciable asset is used partly for the business and partly for another use. The depreciation deduction is restricted to the fair proportional part. ### Is there a home-office rule? No. The Ordinance contains no provision written for people who run a business from home. It does not set a fixed percentage, a per-room allowance or a floor-area formula. The general rules decide the matter: section 20 for the business part, section 21(h) for the personal part, and section 67 for splitting a cost between them. Section 67(2) lets the Board make rules on apportionment, but the Income Tax Rules held in this corpus contain no home-office method. ### What kinds of expenses usually pass the section 20 test? | Expense | When it meets the section 20 test | | --- | --- | | Shop or workshop rent | Premises used for the business | | Staff salaries | Staff working in the business, subject to the banking rule for salaries above Rs. 32,000 a month in section 21(m) | | Electricity, gas, phone, internet | Business connection, or the business share of a shared connection | | Stock and raw materials | Goods bought for resale or for making products | | Transport and delivery | Business trips and deliveries | | Customer entertainment | Only within rule 10 of the Income Tax Rules, 2002, read with section 21(d) | Every item in this table is still subject to section 21. That section blocks, among other things, certain cash payments and expenses where required tax was not withheld. Those rules are on separate pages. ### Worked example (illustrative figures) Rukhsana runs a tailoring business from her rented house in Multan. One of the four rooms is used only as the workroom. Her made-up yearly figures: | Cost | Total paid | | --- | --- | | House rent | Rs. 480,000 | | Electricity | Rs. 180,000 | | Thread, cloth and trimmings | Rs. 350,000 | | Salary of one helper | Rs. 240,000 | The Ordinance does not fix a method. For illustration, suppose she treats one room out of four as a reasonable basis for rent, and half of the electricity because the sewing machines draw most of it. 1. Rent, business share: Rs. 480,000 x 1/4 = Rs. 120,000. 2. Electricity, business share: Rs. 180,000 x 1/2 = Rs. 90,000. 3. Materials, used wholly for the business: Rs. 350,000. 4. Helper's salary, wholly for the business: Rs. 240,000. 5. Total claimed: Rs. 120,000 + Rs. 90,000 + Rs. 350,000 + Rs. 240,000 = Rs. 800,000. The remaining Rs. 360,000 of rent and Rs. 90,000 of electricity are personal under section 21(h). Whether her bases are reasonable is a question of fact under section 67. The law does not answer it in advance. ### What if ...? **What if I use my car for both business and family?** The car is a depreciable asset, so section 22(3) restricts depreciation to the fair proportional part for business use. Running costs such as fuel are mixed expenditure under section 67. **What if a room is used for business in the day and by the family at night?** That is a mixed use. Section 67 requires a reasonable basis, taking account of the nature and size of each activity. The Ordinance does not set one. **What if I buy a sewing machine?** Section 20(2) sends the cost through depreciation over several years, not a single deduction. ### Common mistakes - **Claiming the whole house rent.** Only the business share meets section 20. The rest is personal under section 21(h). - **Assuming there is a fixed home-office percentage.** The Ordinance does not provide one. - **Deducting equipment in full in the year of purchase.** Section 20(2) requires depreciation. - **Treating every lunch with a supplier as deductible.** Rule 10 limits entertainment to listed situations and to persons directly related to the business. ### What to check in the official text Read section 20, then every clause of section 21 against each expense you claim. For mixed costs, read section 67 and section 22(3). For entertainment, read rule 10 of the Income Tax Rules, 2002. Keep in mind that section 21(p) allows limits on utility bills to be prescribed; the Rules held here, amended to 24 November 2023, do not set such a limit, and any later rule is outside this corpus. ### Frequently asked #### Can I claim part of my house rent and electricity if I work from home? The Ordinance has no rule written specifically for home offices. Where one cost serves both the business and a personal purpose, section 67(1)(b) requires it to be apportioned on a reasonable basis, and only the business part meets the section 20 test. The personal part is barred by section 21(h). #### Can I deduct the full price of a motorcycle I use for deliveries? No. Section 20(2) says spending on a depreciable asset is recovered through depreciation, not deducted in one year. If the motorcycle is also used privately, section 22(3) limits the depreciation to the fair proportional part for business use. #### Are tea and meals for customers deductible? Entertainment is allowed only within the limits in rule 10 of the Income Tax Rules, 2002, read with section 21(d). Rule 10 includes entertaining customers and clients at the business premises, and only for persons directly related to the business. ### Citations - [Income Tax Ordinance, 2001, section 20 (Deductions in computing income chargeable under the head “Income from Business”)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#20-deductions-in-computing-income-chargeable-under-the-head-income-from-business), as amended to 2026-06-30: "a deduction shall be allowed for any expenditure incurred by the person in the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "any personal expenditures incurred by the person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 67 (Apportionment of deductions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#67-apportionment-of-deductions), as amended to 2026-06-30: "shall be apportioned on any reasonable basis taking account of the relative nature and size of the activities to which the amount relates" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 22 (Depreciation)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#22-depreciation), as amended to 2026-06-30: "the deduction allowed under this section for that year shall be restricted to the fair proportional part of the amount that would be allowed if the asset" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 10 (Entertainment expenditure)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#10-entertainment-expenditure), as amended to 2023-11-24: "a deduction for entertainment expenditure shall be limited to expenditure incurred by a person that satisfies the conditions laid down in sub-section (1) of section 20" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf --- ## Can I claim depreciation on my shop equipment, furniture, vehicle or machinery? Source: https://qanoondigest.com/faq/sole-proprietors/depreciation-on-business-assets Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 22 of the Income Tax Ordinance allows a yearly deduction for depreciation of assets used in the business, at the Third Schedule rates applied to written down value: 15% for furniture, machinery and vehicles, 30% for computers, 10% for buildings. Section 23 adds a 25% initial allowance for eligible new plant and machinery. **Applies to:** Sole proprietors and small businesses that own equipment, furniture, vehicles, computers or buildings used in the business, for tax year 2027. ### What does the law say? Section 20(2) of the Income Tax Ordinance, 2001 says that expenditure on a depreciable asset with a useful life of more than one year must be depreciated under sections 22 and 23, not deducted in full when paid. Section 22 then allows a yearly deduction for depreciation of assets used in the business. Section 23 gives an extra first-year deduction, the initial allowance, for certain new assets. A "depreciable asset" under section 22(15) is tangible movable property, immovable property (other than unimproved land) or a structural improvement, that has a normal useful life over one year, is likely to lose value through wear and tear or obsolescence, and is used wholly or partly to earn business income. #### Rates for tax year 2027 The rates in Part I of the Third Schedule are applied to the written down value: | Asset | Rate | |---|---| | Building (all types) | 10% | | Furniture (including fittings), machinery and plant (not otherwise specified), motor vehicles (all types), ships, technical or professional books | 15% | | Computer hardware including printer, monitor and allied items, machinery and equipment used in manufacture of I.T. products, aircraft and aero engines | 30% | | Ramp built to provide access to persons with disabilities, not exceeding Rs. 250,000 each | 100% | Part II of the Third Schedule sets the initial allowance under section 23 at **25% for plant and machinery**, applied to cost. ### How does it work in practice? **Written down value.** Section 22(5) defines it. For an asset bought during the tax year, it is cost less any initial allowance. For older assets, it is cost less all depreciation and initial allowance already allowed. The Ordinance no longer halves depreciation in the first year: the proviso that did so was omitted by the Finance Act, 2022. **Initial allowance.** Section 23 applies when an eligible asset is placed into service in Pakistan for the first time. Section 23(5) excludes road transport vehicles unless plying for hire, furniture and fittings, plant or machinery that has been used previously in Pakistan, and immovable property or structural improvements. So a new sewing machine or oven qualifies. A second-hand machine bought locally, a shop counter or the owner's car does not. **Partly private use.** Section 22(3) restricts the deduction to the "fair proportional part" when an asset is used partly for business and partly for another purpose. Section 22(6) says the written down value is still worked out as if the asset were used solely for business. **Vehicles.** Section 22(13)(a) caps the cost of a passenger transport vehicle not plying for hire at Rs. 7,500,000. **Buildings.** Section 22(13)(b) excludes the cost of land from the cost of a building. **Ceiling and disposal.** Section 22(7) says total depreciation and initial allowance cannot exceed the asset's cost. Section 22(8) denies depreciation in the year of disposal and taxes any gain over written down value as business income, or allows a loss below it as a deduction. **Withholding link.** The proviso to section 22(1) denies depreciation on amounts paid to a seller for capital assets where the tax that had to be withheld from those payments was not deducted and deposited in the treasury. **Particulars in the return.** Rule 12 of the Income Tax Rules, 2002 lists what must be furnished with the return to claim depreciation or initial allowance, including a description of each asset, the extent of part use, the date of acquisition and the written down value. ### Worked example (illustrative figures) Hamza runs a printing shop in Lahore. In tax year 2027 he buys, all new: | Asset | Cost (Rs.) | Use | |---|---|---| | Printing machine | 1,000,000 | Business only | | Furniture for the counter area | 200,000 | Business only | | Car | 9,000,000 | 60% business, 40% family | **Printing machine** 1. Initial allowance, 25% x Rs. 1,000,000 = Rs. 250,000. 2. Written down value for the year = Rs. 1,000,000 - 250,000 = Rs. 750,000. 3. Depreciation, 15% x Rs. 750,000 = Rs. 112,500. 4. Total deduction in year one = Rs. 250,000 + 112,500 = Rs. 362,500. 5. Written down value carried to next year = Rs. 1,000,000 - 362,500 = Rs. 637,500. Year two depreciation = 15% x Rs. 637,500 = Rs. 95,625. **Furniture** No initial allowance. Depreciation = 15% x Rs. 200,000 = Rs. 30,000. **Car** 1. Cost capped at Rs. 7,500,000. No initial allowance. 2. Full depreciation = 15% x Rs. 7,500,000 = Rs. 1,125,000. 3. Business share, 60% x Rs. 1,125,000 = Rs. 675,000 deductible. 4. Next year's written down value, as if wholly business = Rs. 7,500,000 - 1,125,000 = Rs. 6,375,000. **Total for tax year 2027:** Rs. 362,500 + 30,000 + 675,000 = Rs. 1,067,500. ### What if I bought a used machine? It still earns yearly depreciation under section 22. If it has been used previously in Pakistan, section 23(5)(c) excludes it from the initial allowance. ### What if depreciation creates a loss? The Ordinance has separate rules for carrying forward the part of a business loss that comes from depreciation. They are explained on the page on business losses. ### Common mistakes - **Deducting the full cost of equipment in one year.** Section 20(2) requires the cost to be recovered through depreciation instead. - **Claiming initial allowance on furniture or a car.** Both are excluded by section 23(5). - **Using the car's full price.** The cost is capped at Rs. 7,500,000. - **Reducing next year's value by only the business share.** Section 22(6) works out written down value as if the asset were used only for business. ### What to check in the official text Read Part I and Part II of the Third Schedule in the consolidated Ordinance. The printed text also shows an older rate table in a footnote that was replaced by the Finance Act, 2005; the rates above are the current ones. Read section 22 in full, including sub-sections (8) to (11) on disposal, and section 23(5) for the list of excluded assets. ### Frequently asked #### Can I claim the initial allowance on my car or my shop furniture? No. Section 23(5) excludes road transport vehicles unless plying for hire, furniture including fittings, plant or machinery previously used in Pakistan, and immovable property. Those assets get only the yearly depreciation under section 22. #### My car cost more than Rs. 7.5 million. Is depreciation worked out on the full price? No. Section 22(13)(a) caps the cost of a passenger transport vehicle not plying for hire at seven and a half million rupees for depreciation purposes. #### Do I get depreciation in the year I sell an asset? No. Section 22(8) allows no depreciation in the year of disposal. If the sale price is above written down value, the excess is business income; if below, the shortfall is a deduction. ### Citations - [Income Tax Ordinance, 2001, section 22 (Depreciation)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#22-depreciation), as amended to 2026-06-30: "the depreciation deduction for a tax year shall be computed by applying the rate specified in Part I of the Third Schedule against the written down value of the asset at the beginning of the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 23 (Initial allowance)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#23-initial-allowance), as amended to 2026-06-30: "The amount of the initial allowance of a person shall be computed by applying the rate specified in Part II of the Third Schedule against the cost of the asset." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Third Schedule, Part I (Depreciation)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Third Schedule, Part II (Initial allowance and first year allowance)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 20 (Deductions in computing income chargeable under the head “Income from Business”)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#20-deductions-in-computing-income-chargeable-under-the-head-income-from-business), as amended to 2026-06-30: "a deduction shall be allowed for any expenditure incurred by the person in the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 12 (Particulars required to be furnished for claiming depreciation deduction or initial allowance amortization deduction)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#12-particulars-required-to-be-furnished-for-claiming-depreciation-deduction-or-initial-allowance-amortization-deduction), as amended to 2023-11-24 Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf --- ## Can I claim depreciation on my shop equipment, vehicle or machinery? Source: https://qanoondigest.com/faq/sole-proprietors/depreciation-on-shop-equipment-vehicle Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, but not all at once. Section 20(2) of the Income Tax Ordinance says the cost of a depreciable asset is depreciated, not deducted in the year of purchase. Section 22 applies the Third Schedule Part I rates to written down value, section 23 adds a 25% initial allowance for eligible plant and machinery, and part-personal use is restricted. **Applies to:** Sole proprietors who buy furniture, fittings, computers, machinery, vehicles or buildings for use in their business. A sole proprietor can deduct the cost of business assets such as machinery, computers, furniture and vehicles, but through depreciation spread over several years rather than as a single expense. The Income Tax Ordinance, 2001 sets the rates in the Third Schedule and the method in sections 22 and 23. ### What does the law say? **Section 20(2): capital cost is not an ordinary expense.** Where expenditure is incurred in acquiring a depreciable asset, the person "must depreciate or amortise the expenditure in accordance with sections 22, 23, 24 and 25". **Section 22: yearly depreciation.** Section 22(1) allows a deduction for depreciation of depreciable assets used in the business in the tax year. Section 22(2) computes it by applying the Part I rate to the written down value of the asset at the beginning of the year. A "depreciable asset" in section 22(15) is tangible movable property, immovable property (other than unimproved land) or a structural improvement, with a normal useful life over one year, likely to lose value through wear and tear or obsolescence, and used wholly or partly in the business. **Section 23: initial allowance.** An eligible depreciable asset placed into service in Pakistan for the first time gets an initial allowance at the Part II rate, applied to cost. Section 23(5) excludes road transport vehicles unless plying for hire, furniture including fittings, plant or machinery used previously in Pakistan, and immovable property or structural improvements. **The rates in force.** The Third Schedule in the consolidated text as amended to 30 June 2026, which applies for tax year 2027: | Part I class | Rate on written down value | | --- | --- | | I. Building (all types) | 10% | | II. Furniture (including fittings) and machinery and plant (not otherwise specified), motor vehicles (all types), ships, technical or professional books | 15% | | III. Computer hardware including printer, monitor and allied items, machinery and equipment used in manufacture of I.T. products, aircrafts and aero engines | 30% | | V. A ramp built to provide access to persons with disabilities not exceeding Rs. 250,000 each | 100% | Part II sets the initial allowance under section 23 at 25% for plant and machinery. Class IV covers mineral oil concerns and is not relevant to most small businesses. ### How does it work in practice? In the year of purchase, the written down value at the beginning of the year is the cost less any initial allowance (section 22(5)(a)). In later years it is cost less all depreciation and initial allowance already allowed (section 22(5)(b)). Section 22(7) says total deductions over the life of the asset cannot exceed its cost. The current text of section 22 contains no month-by-month apportionment. The footnotes record that sub-section (4), which used to reduce depreciation by months of use, was omitted by the Finance Act, 2004. **Part-personal use.** Under section 22(3), where an asset is used partly for the business and partly for another purpose, the deduction is restricted to the "fair proportional part". Section 22(6) says the written down value is still computed as if the asset were used only for business. **Vehicles.** Under section 22(13)(a), the cost of a passenger transport vehicle not plying for hire cannot exceed Rs. 7,500,000 for depreciation. ### Worked example (illustrative figures) Sana runs a bakery in Lahore. In tax year 2027 she buys a new oven that has not been used in Pakistan before, for Rs. 1,000,000, and a car for Rs. 4,000,000. Assume, for this example, that the oven is plant and machinery within Part I class II, and that the fair proportional part of the car's business use is 75%. **Oven, tax year 2027:** 1. Initial allowance: 25% of Rs. 1,000,000 = Rs. 250,000. 2. Written down value at the beginning of the year: Rs. 1,000,000 minus Rs. 250,000 = Rs. 750,000. 3. Depreciation: 15% of Rs. 750,000 = Rs. 112,500. 4. Total deduction: Rs. 250,000 + Rs. 112,500 = Rs. 362,500. **Oven, tax year 2028:** written down value = Rs. 1,000,000 minus Rs. 362,500 = Rs. 637,500. Depreciation: 15% of Rs. 637,500 = Rs. 95,625. **Car, tax year 2027:** 1. No initial allowance, because section 23(5)(a) excludes a road transport vehicle not plying for hire. 2. Cost is under the Rs. 7,500,000 cap, so the full Rs. 4,000,000 is used. 3. Depreciation at full business use: 15% of Rs. 4,000,000 = Rs. 600,000. 4. Restricted to 75%: Rs. 450,000 allowed. 5. Written down value carried to tax year 2028, computed as if used only for business under section 22(6): Rs. 4,000,000 minus Rs. 600,000 = Rs. 3,400,000. ### What if ...? **What if I buy a second-hand machine?** Section 23(5)(c) excludes plant or machinery that has been used previously in Pakistan from the initial allowance. Section 22 depreciation still applies. **What if I sell the asset?** Section 22(8) allows no depreciation in the year of disposal. A sale price above written down value is taxed as business income; a lower price gives a deduction for the difference. **What if I did not deduct withholding tax when paying for the asset?** The proviso to section 22(1) denies depreciation on the amount paid for the asset where the withholding tax deductible on that payment was not deducted and deposited. That rule is covered on a separate page. ### Common mistakes - **Using the old table.** The consolidated text still prints the pre-2005 table as a footnote with rates such as 20% for motor vehicles. The current Part I gives 15% for vehicles and 30% for computer hardware. - **Claiming initial allowance on furniture or a car.** Section 23(5) excludes both. - **Including land.** Section 22(13)(b) excludes the cost of land from the cost of immovable property. - **Depreciating the full price of an expensive car.** The Rs. 7,500,000 cap in section 22(13)(a) applies. ### What to check in the official text Read sections 20(2), 22 and 23, then Part I and Part II of the Third Schedule in the official PDF. Whether a particular item, such as a point-of-sale terminal or a refrigerated display, falls within "machinery and plant" or "computer hardware" is a question of classification that the Schedule does not answer item by item. ### Frequently asked #### Can I deduct the full price of a new machine in the year I buy it? No. Section 20(2) requires the cost of a depreciable asset to be depreciated under sections 22 and 23. For new plant and machinery, the initial allowance under section 23 gives 25% of cost in the first year, and depreciation then runs on the written down value. #### Do I get the initial allowance on a car or on shop furniture? No. Section 23(5) excludes road transport vehicles unless plying for hire, furniture including fittings, plant or machinery used previously in Pakistan, and immovable property. Those assets get only the section 22 depreciation. #### Is there a limit on the cost of a car for depreciation? Yes. Section 22(13)(a) says the cost of a passenger transport vehicle not plying for hire shall not exceed seven and a half million rupees for the purposes of depreciation. #### What happens when I sell the asset? Under section 22(8), no depreciation is allowed in the year of disposal. If the sale price exceeds the written down value, the excess is business income for that year. If it is lower, the difference is allowed as a deduction. ### Citations - [Income Tax Ordinance, 2001, section 20 (Deductions in computing income chargeable under the head “Income from Business”)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#20-deductions-in-computing-income-chargeable-under-the-head-income-from-business), as amended to 2026-06-30: "the person must depreciate or amortise the expenditure in accordance with sections 22, 23, 24 and 25" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 22 (Depreciation)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#22-depreciation), as amended to 2026-06-30: "the depreciation deduction for a tax year shall be computed by applying the rate specified in Part I of the Third Schedule against the written down value of the asset at the beginning of the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 23 (Initial allowance)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#23-initial-allowance), as amended to 2026-06-30: "The amount of the initial allowance of a person shall be computed by applying the rate specified in Part II of the Third Schedule against the cost of the asset" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Third Schedule, Part I, Depreciation (See Section 22)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Third Schedule, Part II, Initial Allowance and First Year Allowance (See Sections 23 and 23B)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## If I do not deduct withholding tax when I pay someone, can the expense be disallowed? Source: https://qanoondigest.com/faq/sole-proprietors/expense-disallowed-withholding-not-deducted Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 21(c) of the Income Tax Ordinance disallows any expenditure from which you were required to deduct or collect tax, unless you deducted and paid it. For purchases of raw materials and finished goods the disallowance cannot exceed twenty percent of those purchases, and the section 22(1) proviso blocks depreciation on capital assets bought without deduction. **Applies to:** Sole proprietors and other businesses that are required to deduct or collect tax when making payments, for example as a prescribed person under section 153. Where the law makes you a withholding agent, failing to deduct and pay the tax can cost you the deduction for the expense itself. Section 21(c) of the Income Tax Ordinance, 2001 does this for running expenses, and a proviso to section 22(1) does the same for depreciation on assets bought without deducting tax. ### What does the law say? **Section 21(c): the main rule.** No deduction is allowed for any expenditure from which the person is required to deduct or collect tax under Part V of Chapter X (the withholding provisions) or Chapter XII, unless the person has paid, or deducted and paid, the tax as required by Division IV of Part V of Chapter X. Two provisos follow: 1. For purchases of raw materials and finished goods, the disallowance under clause (c) "shall not exceed twenty per cent of purchases of raw materials and finished goods". 2. Recovery of any amount of tax under section 161 or 162 is considered as tax paid. **Section 22(1) proviso: depreciable assets.** Depreciation is not allowed, in all relevant tax years, for the amount paid to a seller for addition of capital assets if the tax deductible on those payments under section 153, or under the separate section on payments to non-residents, has not been deducted and deposited. The proviso does this by leaving that amount out of the assets used to compute tax depreciation. **Sections 161 and 162: the other consequences.** Under section 161, a person who fails to deduct tax as required is personally liable to pay that tax to the Commissioner. Under section 162, the Commissioner may recover the tax from the person who was paid. Section 162(2) says that recovery does not absolve the person who failed to deduct from other legal action, default surcharge, or "the disallowance of a deduction for the expense to which the failure relates". ### How does it work in practice? The first question is whether you were required to deduct at all. For payments for goods, services and contracts, section 153(1) puts the duty on a "prescribed person". Section 153(7) lists who that is. For an individual, the list includes an individual having turnover of Rs. 100 million or above in any of the preceding tax years. A small shop below that level is not a prescribed person under section 153 on that ground, though other withholding sections have their own rules. If you were required to deduct and did not, three separate things can follow: the expense is disallowed under section 21(c), you can be made personally liable for the tax under section 161, and default surcharge can apply. The disallowance is not a substitute for paying the tax. ### Worked example (illustrative figures) Imran runs a furniture manufacturing unit in Gujranwala as a sole proprietor. His turnover exceeded Rs. 100 million in an earlier tax year, so he is a prescribed person under section 153(7). In tax year 2027 he makes these payments without deducting the tax required under section 153 (made-up amounts): | Payment | Amount | | --- | --- | | Timber and board (raw materials), all purchases for the year | Rs. 30,000,000 | | Polishing and transport services | Rs. 1,200,000 | | A new cutting machine | Rs. 5,000,000 | Step by step: 1. **Raw materials.** Without the proviso, Rs. 30,000,000 would be disallowed. The cap is 20% of purchases of raw materials and finished goods: 20% of Rs. 30,000,000 = Rs. 6,000,000. Disallowed: Rs. 6,000,000. 2. **Services.** The twenty percent cap applies only to raw materials and finished goods, so the full Rs. 1,200,000 is disallowed. 3. **Machine.** Under the section 22(1) proviso, the Rs. 5,000,000 is not added to his assets for tax depreciation, so no depreciation is allowed on it in any year. Total expenses disallowed for tax year 2027: Rs. 6,000,000 + Rs. 1,200,000 = Rs. 7,200,000, plus the lost depreciation on the machine. This is separate from the tax he may be made to pay under section 161. ### What if ...? **What if only some of my raw material purchases were paid without deduction?** The proviso caps the disallowance at twenty percent "of purchases of raw materials and finished goods". The text does not say whether that means twenty percent of all such purchases for the year or of only the purchases on which tax was not deducted. This page does not decide between the two readings. **What if the Commissioner later recovers the tax?** The second proviso treats a recovery under section 161 or 162 as tax paid, which brings the expense back within the words "paid or deducted and paid". The proviso does not say how a recovery of only part of the tax is treated. **What if I deducted the tax but did not deposit it?** Clause (c) requires the tax to be deducted and paid. Deducting without paying does not meet the condition. ### Common mistakes - **Thinking the twenty percent cap applies to every expense.** It is limited to purchases of raw materials and finished goods. - **Assuming a disallowance settles the matter.** Section 162(2) keeps the disallowance, default surcharge and other action as separate consequences. - **Claiming depreciation on an asset bought without deduction.** The section 22(1) proviso excludes that amount in all relevant tax years. - **Assuming every sole proprietor is a withholding agent under section 153.** The individual test in section 153(7) turns on turnover of Rs. 100 million or above in a preceding tax year. ### What to check in the official text Read clause (c) of section 21 with both provisos, the proviso to section 22(1), the definition of "prescribed person" in section 153(7), and sections 161 and 162. The rates to be deducted are in Division III of Part III of the First Schedule, which is not reproduced here. ### Frequently asked #### Is the whole expense disallowed if I forget to deduct tax? For most expenses, yes: section 21(c) disallows the expenditure from which tax should have been deducted, unless it was deducted and paid. For purchases of raw materials and finished goods, the first proviso caps the disallowance at twenty percent of those purchases. #### What if the tax is later recovered by the Commissioner? The second proviso to section 21(c) says recovery of any amount of tax under section 161 or 162 shall be considered as tax paid. The text does not say how a partial recovery is treated against the full expense. #### As a sole proprietor, do I have to deduct tax under section 153? Section 153(7) includes an individual in the list of prescribed persons only where the individual had turnover of Rs. 100 million or above in any of the preceding tax years. Other withholding provisions have their own tests and are not covered here. ### Citations - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "any expenditure from which the person is required to deduct or collect tax under Part V of Chapter X or Chapter XII, unless the person has paid or deducted and paid the tax as required by Division IV of Part V of Chapter X" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 22 (Depreciation)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#22-depreciation), as amended to 2026-06-30: "the depreciation expense shall not be allowed for the amount paid for addition of capital assets to a seller in all relevant tax years if the tax deductible under sections 152 or 153 of the Ordinance in respect of those payments has not been deducted and deposited in the treasury" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "Every prescribed person making a payment in full or part including a payment by way of advance to a resident person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 161 (Failure to pay tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#161-failure-to-pay-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be personally liable to pay the amount of tax to the Commissioner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 162 (Recovery of tax from the person from whom tax was not collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#162-recovery-of-tax-from-the-person-from-whom-tax-was-not-collected-or-deducted), as amended to 2026-06-30: "does not absolve the person who failed to deduct tax as required under Division III of this Part" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How is my business income calculated? Is tax charged on my sales or on my profit? Source: https://qanoondigest.com/faq/sole-proprietors/how-business-income-is-calculated Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Income tax on a sole proprietor is normally charged on profit, not sales. Section 18 taxes the profits and gains of a business, section 20 allows expenses incurred wholly and exclusively for the business, and section 9 turns total income into taxable income. Only section 113 minimum tax uses turnover, and only above Rs. 100 million. **Applies to:** Individuals who run one or more businesses as sole proprietors and want to know what figure their income tax is worked out on. For a sole proprietor, income tax is normally charged on profit. The Income Tax Ordinance, 2001 takes what the business earns in the year, subtracts the expenses the law allows, and applies the rates to what is left. Turnover is used as the base only when section 113 minimum tax applies. ### What does the law say? The calculation runs through four sections in order. 1. **Section 18: what is taxed.** The head Income from Business charges "the profits and gains of any business carried on by a person at any time in the year". 2. **Section 20: what is deducted.** Section 20(1) allows a deduction for any expenditure incurred in the year wholly and exclusively for the purposes of business. Section 20(2) says that spending on a depreciable asset, an intangible with a life of more than one year, or pre-commencement expenditure is not deducted at once. It is depreciated or amortised instead. The Ordinance also lists expenses that are never allowed, covered on a separate page. 3. **Section 11: one head for all businesses.** Section 11(1) sorts income into five heads: Salary, Income from Property, Income from Business, Capital Gains and Income from Other Sources. Under section 11(2), income under a head is the total of amounts chargeable under it, reduced by the total deductions allowed under it. 4. **Section 9: taxable income.** Section 10 adds up income under all heads and exempt income to give total income. Section 9 then reduces total income under section 10(a), but not below zero, by any deductible allowances under Part IX of Chapter III. The tax rates are then applied to taxable income, and any tax credits are subtracted. For an individual the rates are in Division I of Part I of the First Schedule, covered on a separate page. ### How does it work in practice? Every sale and every fee earned by the business goes into the gross figure. Stock purchases, rent, staff salaries, utilities and similar running costs come off, provided they meet the section 20 test and are not on the Ordinance's list of disallowed expenses. Equipment and vehicles come off gradually through depreciation. The result is the profit that is taxed. If you run two businesses, there is no separate calculation for each one at the end. Both sit under the single head Income from Business in section 11(1)(c). Their amounts and deductions are totalled under section 11(2), and the combined figure feeds into total income under section 10 for the tax year. ### Worked example (illustrative figures) Saima owns a cloth shop in Faisalabad and a small mobile repair counter in another market. Her made-up figures for tax year 2027: | Item | Cloth shop | Repair counter | | --- | --- | --- | | Sales and fees | Rs. 12,000,000 | Rs. 800,000 | | Cost of cloth sold or parts used | Rs. 9,000,000 | Rs. 250,000 | | Rent | Rs. 600,000 | Rs. 180,000 | | Staff salaries | Rs. 900,000 | Rs. 120,000 | | Electricity and phone | Rs. 240,000 | Rs. 60,000 | Step by step: 1. Cloth shop expenses: Rs. 9,000,000 + Rs. 600,000 + Rs. 900,000 + Rs. 240,000 = Rs. 10,740,000. 2. Cloth shop profit: Rs. 12,000,000 minus Rs. 10,740,000 = Rs. 1,260,000. 3. Repair counter expenses: Rs. 250,000 + Rs. 180,000 + Rs. 120,000 + Rs. 60,000 = Rs. 610,000. 4. Repair counter profit: Rs. 800,000 minus Rs. 610,000 = Rs. 190,000. 5. Income from Business under section 11(2): Rs. 1,260,000 + Rs. 190,000 = Rs. 1,450,000. Assuming Saima has no other income and no deductible allowances, her taxable income under section 9 is Rs. 1,450,000. The rates in Division I of Part I of the First Schedule apply to that figure, not to her Rs. 12,800,000 of combined sales. This example also assumes every expense passes the section 20 test and none is disallowed. ### What if ...? **What if one business makes a loss?** Section 11(2) nets all amounts and deductions under the head, so a loss in one business reduces the profit of the other. If the whole head ends in a loss, section 11(3) treats it as a loss for that head, dealt with under Part VIII of Chapter III. **What if my turnover is Rs. 100 million or more?** Section 113 may apply. Where the tax on profit is lower than the percentage of turnover set in Division IX of Part I of the First Schedule, the person pays the minimum tax, and under section 113(2)(a) turnover is treated as income for the year. **What if I also have a salary?** Salary is a different head under section 11(1). Both heads feed into total income under section 10. ### Common mistakes - **Believing tax is a percentage of sales.** Under sections 9 and 18, the normal base is taxable income, which is profit after allowed deductions. - **Deducting the full price of a vehicle or machine in one year.** Section 20(2) sends that cost through depreciation. - **Filing separate figures for each shop as if they were separate taxpayers.** A sole proprietorship is not a separate person. All business income sits under one head. - **Forgetting withholding and final taxes.** Some receipts may be taxed separately under final tax provisions. That is covered on the page on adjustable and final withholding taxes. ### What to check in the official text Read sections 9, 10, 11, 18 and 20 together, then the list of disallowed expenses that follows section 20. Check Division I of Part I of the First Schedule for the rates on individuals, and section 113 with Division IX if your turnover reaches Rs. 100 million. ### Frequently asked #### Is income tax charged on my total sales? Not under the normal rules. Section 18 taxes the profits and gains of a business, and section 20 allows business expenses to be deducted first. Turnover becomes the base only where section 113 minimum tax applies, which for an individual starts at turnover of Rs. 100 million. #### I have two shops. Do I calculate them separately? Section 11 places all business income of a person under one head, Income from Business. Section 11(2) adds all amounts chargeable under that head and subtracts all deductions under it, so the results of both shops are combined into one figure for the tax year. #### Can a loss in one business reduce the profit of the other? Within the head Income from Business, section 11(2) works on the total of amounts and the total of deductions, so a loss in one business reduces the profit of the other. A speculation business is an exception, because the Ordinance treats it as separate from any other business. ### Citations - [Income Tax Ordinance, 2001, section 18 (Income from business)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#18-income-from-business), as amended to 2026-06-30: "the profits and gains of any business carried on by a person at any time in the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 20 (Deductions in computing income chargeable under the head “Income from Business”)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#20-deductions-in-computing-income-chargeable-under-the-head-income-from-business), as amended to 2026-06-30: "a deduction shall be allowed for any expenditure incurred by the person in the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 11 (Heads of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#11-heads-of-income), as amended to 2026-06-30: "the income of a person under a head of income for a tax year shall be the total of the amounts derived by the person in that year that are chargeable to tax under the head as reduced by the total deductions" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 9 (Taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#9-taxable-income), as amended to 2026-06-30: "reduced (but not below zero) by the total of any deductible allowances under Part IX of this Chapter of the person for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 10 (Total Income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#10-total-income), as amended to 2026-06-30: "person’s income under all heads of income for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "the person shall pay as income tax for the tax year (instead of the actual tax payable under this Ordinance)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## 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? Source: https://qanoondigest.com/faq/sole-proprietors/business-income-tax-rates-sole-proprietor Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 4 and clause (1) of Division I of the First Schedule, a sole proprietor pays 0% on taxable income up to Rs. 600,000 in tax year 2027. Above that the rate climbs in steps: 15%, 20%, 30%, 40% and finally 45% on income over Rs. 5,600,000. These steps are steeper than the salaried table. **Applies to:** Individuals who run a business in their own name (shopkeepers, traders, workshop owners, contractors) and have no salary, or whose salary is 75% or less of taxable income, for tax year 2027. ### What does the law say? Section 4 of the Income Tax Ordinance, 2001 imposes income tax, at the rates in Division I of Part I of the First Schedule, "on every person who has taxable income for the year". A sole proprietor is an individual, and the profit of the business is income under the head "Income from Business". Section 18(1)(a) brings into that head "the profits and gains of any business carried on by a person at any time in the year". Division I has two tables for individuals. Clause (1) covers "every individual and association of persons except a salaried individual". Clause (2) covers an individual whose salary exceeds seventy-five per cent of taxable income. A person running a business with no salary falls under clause (1). The clause (1) table, as it stands in the Ordinance amended to 30 June 2026 (so for tax year 2027, income earned from 1 July 2026 to 30 June 2027), reads: | Taxable income | Tax | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,001 to Rs. 1,200,000 | 15% of the amount over Rs. 600,000 | | Rs. 1,200,001 to Rs. 1,600,000 | Rs. 90,000 + 20% of the amount over Rs. 1,200,000 | | Rs. 1,600,001 to Rs. 3,200,000 | Rs. 170,000 + 30% of the amount over Rs. 1,600,000 | | Rs. 3,200,001 to Rs. 5,600,000 | Rs. 650,000 + 40% of the amount over Rs. 3,200,000 | | Above Rs. 5,600,000 | Rs. 1,610,000 + 45% of the amount over Rs. 5,600,000 | A proviso to the table lowers the top 45% rate to 40% for an association of persons that is a professional firm barred by law or professional rules from incorporating. That proviso does not apply to an individual sole proprietor. ### How does it work in practice? The table is applied to taxable income, not to sales. Section 9 defines taxable income as total income "reduced (but not below zero) by the total of any deductible allowances" for the year. For most sole proprietors, total income is business profit plus any other income such as rent. Each rate applies only to the slice of income inside its band. The fixed amounts in the table (Rs. 90,000, Rs. 170,000 and so on) are simply the tax on all the bands below. Section 4(2) then subtracts any tax credits from the result to give the tax payable. ### Why is this table steeper than the salaried table? The Ordinance simply sets different figures. For the same Rs. 600,001 to Rs. 1,200,000 band, the clause (2) salaried table charges 1% of the amount over Rs. 600,000, while clause (1) charges 15%. The top rate is 35% for salaried individuals and 45% for others. Both tables share the same Rs. 600,000 nil band. ### Worked example (illustrative figures) **Bilal runs a hardware shop in Sialkot.** He has no salary. After expenses, his taxable income for tax year 2027 is Rs. 2,400,000. 1. Band: Rs. 1,600,001 to Rs. 3,200,000. 2. Amount over Rs. 1,600,000: Rs. 2,400,000 minus Rs. 1,600,000 = Rs. 800,000. 3. 30% of Rs. 800,000 = Rs. 240,000. 4. Tax: Rs. 170,000 + Rs. 240,000 = Rs. 410,000, before any tax credits. **Rukhsana runs a tailoring shop in Peshawar.** Her taxable income is Rs. 1,000,000. 1. Band: Rs. 600,001 to Rs. 1,200,000. 2. Amount over Rs. 600,000: Rs. 400,000. 3. Tax: 15% of Rs. 400,000 = Rs. 60,000. For comparison only, if Bilal's Rs. 2,400,000 had been salary taxed on the clause (2) table, the tax would be Rs. 116,000 + 20% of Rs. 200,000 = Rs. 156,000. ### What if my profit is very high? Two other provisions can add to the slab tax. Section 4AB, printed at the end of section 4, charges a surcharge of ten percent of the Division I tax where taxable income exceeds Rs. 10 million. Section 113 imposes minimum tax on turnover for an individual with turnover of Rs. 100 million or more, where normal tax is lower than the Division IX percentage. Both are explained on their own pages. ### What if I also draw a salary? If salary is more than 75% of your taxable income, clause (2) applies instead, to the whole taxable income. If it is 75% or less, clause (1) above applies to the whole amount, salary included. ### Common mistakes - **"Rs. 600,000 of sales is tax free."** The nil band is for taxable income, meaning profit after allowable expenses, not sales. - **Applying 30% to the whole income.** Only the slice above Rs. 1,600,000 is taxed at 30%. The lower slices keep their own rates. - **Using last year's table.** The Finance Act, 2024 substituted the clause (1) table, and earlier tables are printed in the footnotes of the official PDF. Those older figures are not the tax year 2027 rates. ### What to check in the official text Read section 4, section 9 and section 18(1) in the Ordinance, then clause (1) of Division I of Part I of the First Schedule in the official PDF. Our site copy of the Ordinance leaves out tables, so the rates above were taken from the table in the PDF amended to 30 June 2026. ### Frequently asked #### Is the first Rs. 600,000 of business profit tax free? Yes, in the sense that the first row of the clause (1) table charges 0% where taxable income does not exceed Rs. 600,000. Once taxable income goes above that, only the part above Rs. 600,000 is taxed at 15% in the next band, so the first Rs. 600,000 stays untaxed. #### Why does a shopkeeper pay more tax than a salaried person on the same income? Because the Ordinance uses two different tables. Clause (1) of Division I, for individuals other than salaried individuals, charges 15% from the first rupee above Rs. 600,000, while clause (2), for individuals whose salary exceeds 75% of taxable income, charges 1% in the same band. #### Is the tax charged on my sales or on my profit? The slab table applies to taxable income, which for a business is profit under section 18 as reduced by any deductible allowances under section 9. Sales matter separately for minimum tax under section 113, which applies to individuals with turnover of Rs. 100 million or more. ### Citations - [Income Tax Ordinance, 2001, section 4 (Tax on taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4-tax-on-taxable-income), as amended to 2026-06-30: "on every person who has taxable income for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 18 (Income from business)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#18-income-from-business), as amended to 2026-06-30: "the profits and gains of any business carried on by a person at any time in the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 9 (Taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#9-taxable-income), as amended to 2026-06-30: "reduced (but not below zero) by the total of any deductible allowances" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1) (rate table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "no tax is payable or paid by the person for a tax year or the tax payable or paid by the person for a tax year is less than" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## When customers deduct tax from my payments under section 153, is that my final tax? Source: https://qanoondigest.com/faq/sole-proprietors/section-153-deduction-is-it-final-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No. Since the Finance Act, 2019, section 153(3) of the Income Tax Ordinance calls tax deducted on payments for goods, services and contracts a minimum tax, and section 153 is not in the final-tax list in section 168(3). For a sole proprietor, the deduction counts toward the year's tax, but the Ordinance treats it as a minimum on those receipts. **Applies to:** Sole proprietors who sell goods, provide services or carry out contracts for companies, government bodies and other prescribed persons that deduct tax under section 153. ### What does the law say? Section 153(1) of the Income Tax Ordinance, 2001 requires a prescribed person paying a resident person to deduct tax, at the time of payment, from the gross amount payable (including sales tax) at the rates in Division III of Part III of the First Schedule. It covers three kinds of payment: - **(a) sale of goods**, including toll manufacturing, except where payments are less than Rs. 75,000 in aggregate during a financial year; - **(b) services**, except where payments are less than Rs. 30,000 in aggregate during a financial year; and - **(c) execution of contracts**, other than contracts for goods or services. Section 153(3) says the tax deductible under sub-sections (1) and (2) on the income of a resident person "shall be minimum tax". The word "final" was replaced with "minimum" by the Finance Act, 2019. The provisos that make the tax not minimum, or adjustable, apply only to manufacturer companies and listed public companies. None applies to an individual. An explanation adds that the "income" meant here is the amount on which tax is deductible, that is, the payment itself. Section 168(3) lists the final taxes for which no credit is allowed. Section 153 is not on that list, so the general rule in section 168(2) gives credit for tax deducted under it. ### Who has to deduct? Section 153(7) defines "prescribed person". It includes the Federal Government, companies, associations of persons constituted by or under law, non-profit organisations, foreign contractors, consortiums, and builders and developers. It also includes an individual or association of persons with turnover of Rs. 100 million or more in any preceding tax year, and a sales tax registered person with turnover of Rs. 100 million or more. A small shop buying from you is usually not a prescribed person, so no section 153 deduction arises. ### What rates apply in tax year 2027? For payments made from 1 July 2026 to 30 June 2027, Division III of Part III of the First Schedule sets these rates for a recipient other than a company: | Payment | Rate on gross amount | | --- | --- | | Rice, cotton seed oil or edible oils | 1.5% | | Other goods | 5.5% | | Toll manufacturing | 11% | | Listed services such as transport, courier, security guard, car rental, IT and engineering services | 7% (4% for IT and IT enabled services) | | Independent professional services (doctors, lawyers, architects, accountants, software engineers) | 15% | | Advertising services by electronic and print media | 1.5% | | Other services | 14% | | Contracts | 8% (15% for sportspersons) | Rule 1 of the Tenth Schedule increases a deduction rate by one hundred per cent for a person not appearing in the active taxpayers' list. ### What does "minimum tax" mean for me? Section 153 does not itself set out the arithmetic for combining a minimum tax with normal tax for an individual. What the text does settle is this: the deduction is not final, so the receipts stay in your taxable business income, and the tax deducted is a credit under section 168(2). The word "minimum" points to the deducted amount acting as a floor for the tax on those receipts, so it is not refunded merely because your profit turned out low. The Ordinance does not spell this out inside section 153, so check how the return form applies it. ### Worked example (illustrative figures) Farah runs a packaging supply business in Karachi. In tax year 2027 a company pays her Rs. 3,000,000 (including sales tax) for cartons. 1. Rate for goods, supplier other than a company: 5.5%. 2. Tax deducted: Rs. 3,000,000 x 5.5% = Rs. 165,000. **Case A.** Suppose the tax on her whole taxable income at normal rates is Rs. 240,000. The Rs. 165,000 is credited, and she pays Rs. 240,000 minus Rs. 165,000 = Rs. 75,000 with her return. **Case B.** Suppose a bad year leaves the normal tax on those receipts at Rs. 100,000. On the minimum-tax reading above, her tax on them does not fall below the Rs. 165,000 already deducted, and the Rs. 65,000 difference is not refunded. ### Common mistakes - **Relying on old guidance that says "final".** Before the Finance Act, 2019, section 153(3) said final. The current text says minimum. - **Confusing it with section 113.** Section 113 is a separate minimum tax on turnover. For individuals, it applies only to those with turnover of Rs. 100 million or more in tax year 2017 or a later year. - **Leaving section 153 receipts out of the return.** Since the tax is not final under section 168(3), section 169 does not exclude the income from taxable income. - **Ignoring the sales tax element.** The deduction is on the gross amount including sales tax. ### What to check in the official text Read section 153, especially sub-sections (1), (3), (4) and (7), in the official PDF, because the site's extracted text mixes current wording with superseded footnote text. Read Division III of Part III of the First Schedule for the full service list, and rule 1 of the Tenth Schedule. Section 153(2A), added by the Finance Act, 2025, has a separate collection rule for e-commerce sellers paid through payment intermediaries or couriers. ### Frequently asked #### Is income that suffered section 153 deduction left out of my taxable income? No. The deduction is a minimum tax, not one of the final taxes listed in section 168(3), so section 169 does not exclude that income. It stays in your business income, and the tax deducted is credited under section 168(2). #### Can I get a certificate so my customer deducts less? Section 153(4) lets the Commissioner allow deduction at a reduced rate only where the tax deductible under sub-section (1) is not minimum. For an individual, section 153(3) makes it minimum tax, so the text does not open that route to a sole proprietor. #### What rate will a company deduct from my payment for goods? For tax year 2027, Division III of Part III of the First Schedule sets 5.5% of the gross amount for a supplier other than a company, 11% for toll manufacturing, and 1.5% for rice, cotton seed oil and edible oils. The gross amount includes sales tax. ### Citations - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "except where payment is less than seventy-five thousand Rupees in aggregate, during a financial year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III, paragraphs (1), (2) and (3) (rates under section 153)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "No tax credit shall be allowed for any tax collected or deducted that is a final tax under-" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (rates for persons not appearing in the active taxpayers' list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## I have a job and a side business. Which tax slab applies to me, salaried or business? Source: https://qanoondigest.com/faq/sole-proprietors/job-and-side-business-which-tax-slab Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It depends on one ratio. Under clause (2) of Division I of the First Schedule, the salaried table applies only where your salary exceeds seventy-five per cent of your taxable income. If salary is 75% or less, clause (1), the steeper table for individuals other than salaried individuals, applies to your whole taxable income, salary included. **Applies to:** Employees in Pakistan who also earn business profit in their own name, such as a teacher running a tuition academy or a bank officer with a shop, for tax year 2027. ### What does the law say? Section 11 of the Income Tax Ordinance, 2001 says "all income shall be classified under the following heads": Salary, Income from Property, Income from Business, Capital Gains and Income from Other Sources. Your pay from an employer is under "Salary". The profit from your side business is under "Income from Business". Both feed into one taxable income for the year. Division I of Part I of the First Schedule then gives two rate tables for individuals: - **Clause (1)** sets the rates for "every individual and association of persons except a salaried individual", and opens with the words "Subject to clause (2)". - **Clause (2)** says: where the income of an individual chargeable under the head "salary" exceeds seventy-five per cent of his taxable income, the rates in its table apply. The Ordinance does not define "salaried individual" separately. The working test in the text is the 75% ratio in clause (2). ### How do the two tables compare in tax year 2027? **Clause (2), where salary exceeds 75% of taxable income:** | Taxable income | Tax | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,001 to Rs. 1,200,000 | 1% of the amount over Rs. 600,000 | | Rs. 1,200,001 to Rs. 2,200,000 | Rs. 6,000 + 11% of the amount over Rs. 1,200,000 | | Rs. 2,200,001 to Rs. 3,200,000 | Rs. 116,000 + 20% of the amount over Rs. 2,200,000 | | Rs. 3,200,001 to Rs. 4,100,000 | Rs. 316,000 + 25% of the amount over Rs. 3,200,000 | | Rs. 4,100,001 to Rs. 5,600,000 | Rs. 541,000 + 29% of the amount over Rs. 4,100,000 | | Rs. 5,600,001 to Rs. 7,000,000 | Rs. 976,000 + 32% of the amount over Rs. 5,600,000 | | Above Rs. 7,000,000 | Rs. 1,424,000 + 35% of the amount over Rs. 7,000,000 | **Clause (1), in every other case:** | Taxable income | Tax | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,001 to Rs. 1,200,000 | 15% of the amount over Rs. 600,000 | | Rs. 1,200,001 to Rs. 1,600,000 | Rs. 90,000 + 20% of the amount over Rs. 1,200,000 | | Rs. 1,600,001 to Rs. 3,200,000 | Rs. 170,000 + 30% of the amount over Rs. 1,600,000 | | Rs. 3,200,001 to Rs. 5,600,000 | Rs. 650,000 + 40% of the amount over Rs. 3,200,000 | | Above Rs. 5,600,000 | Rs. 1,610,000 + 45% of the amount over Rs. 5,600,000 | ### Worked example (illustrative figures) **Kamran is a bank officer in Lahore who runs a tuition academy in the evenings.** His salary is Rs. 3,000,000. Assume no deductible allowances and no other income. **Case A: academy profit Rs. 600,000.** 1. Taxable income: Rs. 3,000,000 + Rs. 600,000 = Rs. 3,600,000. 2. Salary share: Rs. 3,000,000 / Rs. 3,600,000 = 83.3%. That exceeds 75%, so clause (2) applies. 3. Band: Rs. 3,200,001 to Rs. 4,100,000. Amount over Rs. 3,200,000: Rs. 400,000. 4. Tax: Rs. 316,000 + 25% of Rs. 400,000 = Rs. 316,000 + Rs. 100,000 = Rs. 416,000. **Case B: academy profit Rs. 1,200,000.** 1. Taxable income: Rs. 3,000,000 + Rs. 1,200,000 = Rs. 4,200,000. 2. Salary share: Rs. 3,000,000 / Rs. 4,200,000 = 71.4%. That does not exceed 75%, so clause (1) applies to the whole Rs. 4,200,000. 3. Band: Rs. 3,200,001 to Rs. 5,600,000. Amount over Rs. 3,200,000: Rs. 1,000,000. 4. Tax: Rs. 650,000 + 40% of Rs. 1,000,000 = Rs. 1,050,000. Had clause (2) applied in Case B, the tax on Rs. 4,200,000 would have been Rs. 541,000 + 29% of Rs. 100,000 = Rs. 570,000. Crossing the 75% line cost Rs. 480,000. **Where is the line?** With a salary of Rs. 3,000,000, salary stays above 75% only while business profit is below Rs. 1,000,000. At exactly Rs. 1,000,000 of profit, salary is exactly 75% of Rs. 4,000,000, which does not exceed 75%. ### What if I have rent or other income too? The ratio is salary against taxable income, so any income inside taxable income lowers the salary share. Section 4(4) says "Certain classes of income (including the income of certain classes of persons) may be subject to" separate taxation or final tax, and section 4(5) keeps that income out of the computation of taxable income. Income of that kind does not enter the ratio. Which of your other receipts fall in that group depends on the provision that taxes them. ### What about the employer's deduction? Section 149 requires the employer to deduct tax "on the estimated income of the employee chargeable under the head “Salary”". The deduction is worked out on salary alone. If your business income moves you onto clause (1), the tax on the return will be higher than what was deducted from salary. ### Common mistakes - **Splitting the tables.** Salary is not taxed on clause (2) while profit goes on clause (1). One table covers the whole taxable income. - **Testing against total receipts.** The 75% test uses taxable income, which for the business part is profit, not sales. - **Assuming a job always means the salaried table.** A job alone does not decide it. The ratio does. ### What to check in the official text Read clauses (1) and (2) of Division I of Part I of the First Schedule in the official PDF amended to 30 June 2026, since our site copy leaves out the tables. Read section 4(4) and (5), section 11 and section 149(1) in the Ordinance. ### Frequently asked #### My salary is exactly 75% of my taxable income. Which table applies? Clause (1), the business table. Clause (2) applies only where salary exceeds seventy-five per cent of taxable income. At exactly 75%, salary does not exceed that share. #### Is my salary taxed on one table and my business on the other? No. Division I picks one table for the individual, and that table is applied to the whole taxable income. There is no split where salary goes on the salaried table and business profit on the business table. #### My employer already deducts tax from my salary. Is that the end of it? Section 149 requires the employer to deduct tax on the estimated income of the employee chargeable under the head Salary. It does not take the business income into account, so where the business income changes the table or adds tax, the employer's deduction will not match the final liability worked out on the return. ### Citations - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1) (rate table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 4 (Tax on taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4-tax-on-taxable-income), as amended to 2026-06-30: "Certain classes of income (including the income of certain classes of persons) may be subject to" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 11 (Heads of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#11-heads-of-income), as amended to 2026-06-30: "all income shall be classified under the following heads" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "on the estimated income of the employee chargeable under the head “Salary” for the tax year in which the payment is made" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What is minimum tax on turnover under section 113, and do I have to pay it even if my business made a loss? Source: https://qanoondigest.com/faq/sole-proprietors/minimum-tax-on-turnover-section-113 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, if section 113 applies to you. It covers an individual with turnover of Rs. 100 million or more. Where a loss, deductions, credits or exemptions leave normal tax below the Division IX percentage of turnover, the person pays that percentage instead. The excess over normal tax is carried forward for two tax years. **Applies to:** Individuals running a business in their own name whose turnover is Rs. 100 million or more in tax year 2017 or any later tax year, for tax year 2027. ### What does the law say? Section 113 of the Income Tax Ordinance, 2001 sets a floor on the income tax of certain persons. For individuals, sub-section (1) applies to "an individual (having turnover of hundred million rupees or above in the tax year 2017 or in any subsequent tax year)". The same wording covers associations of persons. The section bites where, for one of five reasons, "no tax is payable or paid by the person for a tax year or the tax payable or paid by the person for a tax year is less than" the percentage of turnover in Division IX of Part I of the First Schedule. The five reasons are: - (a) a loss for the year; - (b) setting off a loss of an earlier year; - (c) exemption from tax; - (d) credits or rebates; - (e) allowances or deductions, including depreciation and amortization. Where it applies, section 113(2)(b) says the person "shall pay as income tax for the tax year (instead of the actual tax payable under this Ordinance)" the minimum tax at the Division IX rate. ### How does it work in practice? Each year there are two figures to compare: 1. **Normal tax:** tax on taxable income under clause (1) of Division I, the slab table for individuals other than salaried individuals. 2. **Minimum tax:** the Division IX percentage multiplied by turnover. For most businesses this is the "in all other cases" rate, currently 1.25%. Lower rates for listed sectors are on the sector rates page. If normal tax is lower, the person pays minimum tax. The Explanation to section 113(1) says "tax payable or paid" does not include final tax on deemed income or the two super taxes the Ordinance charges separately, so those amounts do not count toward reaching the minimum. "Turnover" is defined in section 113(3). For goods it is gross sales or gross receipts, exclusive of sales tax, federal excise duty and trade discounts shown on invoices. For services it is gross fees, and for contracts, gross receipts. Receipts already under final tax are left out. ### What happens to the extra tax? Section 113(2)(c) says that where tax paid under sub-section (1) exceeds the actual tax payable under clause (1) of Division I, "the excess amount of tax paid shall be carried forward for adjustment against tax liability under the aforesaid Part of the subsequent tax year". Where minimum tax was paid because no tax was payable at all, the first proviso carries forward the entire amount. The second proviso limits this to **two** tax years immediately after the year of payment. The footnotes show the period used to be five years, and that the Finance Act, 2025 replaced the word "three" with "two". Figures of five or three years are out of date. ### Worked example (illustrative figures) **Adeel sells tiles and sanitaryware in Gujranwala as a sole proprietor.** His business falls in "all other cases" in Division IX, so the rate is 1.25%. **Year 1 (tax year 2027): a loss year.** Turnover Rs. 150,000,000. After expenses he has a loss of Rs. 2,000,000, so normal tax is nil. 1. Minimum tax: 1.25% of Rs. 150,000,000 = Rs. 1,875,000. 2. He pays Rs. 1,875,000. 3. Because no tax was payable, the whole Rs. 1,875,000 is carried forward for tax years 2028 and 2029. **A different year: profit, but low tax.** Turnover Rs. 120,000,000 and taxable income Rs. 4,000,000. 1. Normal tax on the clause (1) table: Rs. 650,000 + 40% of Rs. 800,000 = Rs. 970,000. 2. Minimum tax: 1.25% of Rs. 120,000,000 = Rs. 1,500,000. 3. Normal tax is lower, so he pays Rs. 1,500,000. 4. Excess carried forward: Rs. 1,500,000 minus Rs. 970,000 = Rs. 530,000. Section 113(2)(c) does not spell out whether the carried-forward amount can reduce a later year's tax below that later year's own minimum tax. ### What if my turnover fell below Rs. 100 million this year? The wording is "turnover of hundred million rupees or above in the tax year 2017 or in any subsequent tax year". It can be read as looking at each year on its own, or as bringing a person in for good once the figure has been reached in any year since 2017. The section does not say which reading is right, and this page does not settle it. ### What if I am an SME? Rule 7 of the Fourteenth Schedule, which sets out the regime for small and medium enterprises, says that section 113 does not apply to SMEs. Whether a business qualifies is covered on the SME page. ### Common mistakes - **"No profit, no tax."** Section 113(1)(a) is written for exactly the loss case. - **Using 1% or 1.5%.** Those figures come from older text shown in footnotes. The current "all other cases" rate is 1.25%. - **Counting on a long carry-forward.** It is two tax years under the current text. ### What to check in the official text Read section 113 in full, including the Explanation to sub-section (1) and the provisos to sub-section (2)(c). The Division IX table is in the official PDF amended to 30 June 2026, as our site copy leaves out tables. The Second Schedule contains clauses that change the minimum tax rate or exclude section 113 for particular persons, and those are worth reading for your trade. ### Frequently asked #### My business made a loss. Can I still owe income tax? Yes, if section 113 applies to you. Section 113(1)(a) lists a loss for the year as one of the reasons that can leave tax below the minimum, and section 113(2)(b) then requires the minimum tax computed at the Division IX rate on turnover. #### Does section 113 apply to a small shop? For an individual, section 113(1) applies only where turnover is one hundred million rupees or above in tax year 2017 or any subsequent tax year. A shop with turnover below that has never been within the section. #### Do I lose the extra tax I paid under section 113? Not immediately. Section 113(2)(c) carries the excess over normal tax forward for adjustment against tax under clause (1) of Division I in the two tax years immediately after the year it was paid. Anything not adjusted within those two years is not carried further under that clause. ### Citations - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "no tax is payable or paid by the person for a tax year or the tax payable or paid by the person for a tax year is less than" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "the excess amount of tax paid shall be carried forward for adjustment against tax liability under the aforesaid Part of the subsequent tax year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IX (Minimum tax under section 113)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1) (rate table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Fourteenth Schedule, rule 7 (Exclusion from Minimum Tax on Turnover)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What is the minimum tax rate on turnover, and what counts as turnover? Source: https://qanoondigest.com/faq/sole-proprietors/minimum-tax-rate-and-turnover-meaning Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer For tax year 2027 the Division IX table sets minimum tax at 1.25% of turnover in all other cases, with 0.75%, 0.5% or 0.25% for listed sectors. Section 113(3) defines turnover for goods as gross sales or receipts, excluding sales tax, federal excise duty and trade discounts shown on invoices, and excluding amounts already taxed as final tax. **Applies to:** Individuals running a business in their own name with turnover of Rs. 100 million or more, who fall under section 113 of the Income Tax Ordinance, 2001, for tax year 2027. Two figures decide minimum tax under section 113 of the Income Tax Ordinance, 2001: the rate from the Division IX table and the turnover it is applied to. Both are fixed by the text of the Ordinance amended to 30 June 2026, which gives the rates for tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say about the rate? Section 113 does not contain a rate of its own. Section 113(2)(b) says a person within the section pays "minimum tax computed on the basis of rates as specified in Division IX of Part I of First Schedule". For an individual, the section applies only where turnover is one hundred million rupees or above in tax year 2017 or any later tax year. The current Division IX table reads: | S. No. | Persons | Minimum tax as % of turnover | |---|---|---| | 1 | Sui Southern Gas Company Limited and Sui Northern Gas Pipelines Limited (where annual turnover exceeds rupees one billion); Pakistani International Airlines Corporation; poultry industry including poultry breeding, broiler production, egg production and poultry feed production | 0.75% | | 2 | Oil refineries; motorcycle dealers registered under the Sales Tax Act, 1990; oil marketing companies | 0.5% | | 3 | Petroleum agents and distributors registered under the Sales Tax Act, 1990; rice mills and dealers; Tier-1 retailers of fast moving consumer goods integrated with the Board's computerized system for real time reporting; turnover from supplies through e-commerce, including an online marketplace; persons engaged in the sale and purchase of used vehicles; flour mills | 0.25% | | 4 | In all other cases | 1.25% | Most sole proprietors, such as a cloth merchant, a hardware store owner or a furniture maker, fall under serial 4 at 1.25%. ### Are there lower rates outside the table? Yes, in Part II of the Second Schedule: - **Clause (24D)** sets the rate under section 113(1) at 0.5% for distributors, dealers, sub-dealers and wholesalers of the goods in its table, subject to the condition that they appear on the active taxpayers' lists under the Sales Tax Act, 1990 and the Income Tax Ordinance, 2001. The goods include pharmaceuticals, fertilizer, cigarettes, sugar, locally manufactured mobile phones, electronics, beverages and dairy products, and various packaged foods and household products. - **Clause (28E)** sets the rate at 0.5% for a trader of yarn who is an individual. ### Where do 1% and 1.5% come from? Both figures appear in the official PDF, but only in footnotes showing superseded text: - The footnotes record that the Finance Act, 2014 replaced "an amount equal to one percent of the person's turnover for the year" in section 113(2)(b) with the reference to Division IX rates. - A footnote to Division IX says the Finance Act, 2021 substituted the table, and reproduces the earlier table in which "In all other cases" was 1.5%. Neither is the current general rate. ### What counts as turnover? Section 113(3) defines turnover in four parts: 1. **Goods:** "the gross sales or gross receipts, exclusive of Sales Tax and Federal Excise duty or any trade discounts shown on invoices, or bills", also excluding any amount taken as deemed income and assessed as final discharge of tax liability. 2. **Services:** the gross fees for rendering services, including commissions, except those covered by final discharge of tax liability. 3. **Contracts:** the gross receipts from executing contracts, except those covered by final discharge of tax liability. 4. **Companies:** a company's share of these amounts from an association of persons it belongs to. This part does not apply to a sole proprietor. The Explanation to section 113(2)(a) adds that turnover "covers receipts from all business activities", including receipts from sale of immovable property where those receipts are taxable under the head Income from Business. ### Worked example (illustrative figures) **Farhan runs a wholesale crockery business in Faisalabad as a sole proprietor.** He is not in any listed sector, so serial 4 applies. His invoices for the year show: - Gross amount invoiced to customers: Rs. 245,000,000 - Sales tax shown on those invoices: Rs. 36,000,000 - Trade discounts shown on those invoices: Rs. 4,000,000 Step by step: 1. Turnover: Rs. 245,000,000 minus Rs. 36,000,000 minus Rs. 4,000,000 = Rs. 205,000,000. 2. Turnover is above one hundred million rupees, so section 113 can apply. 3. Minimum tax: 1.25% of Rs. 205,000,000 = Rs. 2,562,500. 4. Farhan pays Rs. 2,562,500 only if normal tax on his taxable income is lower. If normal tax is higher, he pays normal tax. If Farhan were a rice dealer instead, serial 3 would apply: 0.25% of Rs. 205,000,000 = Rs. 512,500. ### What if my business fits more than one row? The Division IX table does not say how to split the turnover of a person with several activities between rows, except that serial 3 speaks of a "person's turnover from supplies through e-commerce". The text does not settle a mixed business, and this page does not either. ### Common mistakes - **Applying 1.5% for tax year 2027.** That rate belongs to the table replaced by the Finance Act, 2021. - **Counting sales tax as turnover.** Section 113(3)(a) excludes sales tax and federal excise duty. - **Deducting discounts that are not on the invoice.** The exclusion covers trade discounts "shown on invoices, or bills". Discounts not shown there are not mentioned in the exclusion. - **Applying minimum tax below Rs. 100 million.** For an individual, section 113(1) does not reach turnover below that figure. ### What to check in the official text Read the Division IX table and its footnotes in the official PDF amended to 30 June 2026, because our site copy leaves out tables. Read clauses (24D) and (28E) of Part II of the Second Schedule, and clause (11A) of Part IV of the Second Schedule, which lists persons and receipts to which section 113 does not apply, such as retail petroleum dealers for turnover from petrol pump sales. Read section 113(3) for the full definition of turnover. ### Frequently asked #### Is the minimum tax rate 1%, 1.25% or 1.5%? For tax year 2027 the general rate is 1.25%, under serial 4 of the Division IX table (in all other cases). The 1% figure is older wording of section 113 shown in footnotes, and 1.5% is the in all other cases rate in the table that the Finance Act, 2021 replaced. #### Is sales tax included in my turnover for minimum tax? No. Section 113(3)(a) defines turnover from the sale of goods as gross sales or gross receipts exclusive of Sales Tax and Federal Excise duty. Trade discounts shown on invoices or bills are also excluded. #### Do sales already taxed under final tax count as turnover? No. Section 113(3) leaves out amounts taken as deemed income and assessed as final discharge of tax liability, for goods, services and contracts alike. Only receipts that are not already under final tax count toward minimum tax turnover. ### Citations - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "gross receipts, exclusive of Sales Tax and Federal Excise duty or any trade discounts shown on invoices, or bills, derived from the sale of goods" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "minimum tax computed on the basis of rates as specified in Division IX of Part I of First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IX (Minimum tax under section 113)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part II, clause (24D)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part II, clause (28E)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clause (11A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What is the minimum tax rate on turnover: 1%, 1.25% or 1.5%? Source: https://qanoondigest.com/faq/sole-proprietors/minimum-tax-rate-on-turnover-by-sector Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer For tax year 2027 the rate is 1.25% of turnover in all other cases, under the Division IX table read with section 113. Listed sectors pay 0.75%, 0.5% or 0.25%, and some distributors and dealers get 0.5% under the Second Schedule. The 1% and 1.5% figures come from superseded wording printed in footnotes. **Applies to:** Individuals and associations of persons with turnover of Rs. 100 million or more who fall under section 113, and anyone checking a minimum tax figure seen elsewhere, for tax year 2027. ### What does the law say? Section 113(2)(b) requires a person within the section to pay "minimum tax computed on the basis of rates as specified in Division IX of Part I of First Schedule". The rate is therefore whatever the Division IX table says for the year, not a figure written into section 113. The Division IX table in the Income Tax Ordinance, 2001 amended to 30 June 2026 (tax year 2027) reads: | S. No. | Persons | Minimum tax as % of turnover | |---|---|---| | 1 | Sui Southern Gas Company Limited and Sui Northern Gas Pipelines Limited (where annual turnover exceeds rupees one billion); Pakistani International Airlines Corporation; poultry industry including poultry breeding, broiler production, egg production and poultry feed production | 0.75% | | 2 | Oil refineries; motorcycle dealers registered under the Sales Tax Act, 1990; oil marketing companies | 0.5% | | 3 | Petroleum agents and distributors registered under the Sales Tax Act, 1990; rice mills and dealers; Tier-1 retailers of fast moving consumer goods integrated with the Board's computerized system for real time reporting of sales and receipts; turnover from supplies through e-commerce, including from running an online marketplace; persons engaged in the sale and purchase of used vehicles; flour mills | 0.25% | | 4 | In all other cases | 1.25% | Serial 3 used to open with "(a) Distributors of pharmaceutical products, fast moving consumer goods and cigarettes". A footnote records that the Finance Act, 2026 omitted that entry. ### Are there reduced rates outside Division IX? Yes. Part II of the Second Schedule contains reductions: - **Clause (24D)** sets minimum tax under section 113(1) at 0.5% for distributors, dealers, sub-dealers and wholesalers of the goods in its table, on condition that they appear on the active taxpayers' lists under the Sales Tax Act, 1990 and the Income Tax Ordinance, 2001. The goods listed are pharmaceuticals, fertilizer, cigarettes, sugar, locally manufactured mobile phones, packaged food, electronics, beverages and dairy, and a range of packaged household and personal care products. The Finance Act, 2026 substituted this clause. The earlier version gave 0.25% to a list that also included retailers. - **Clause (28E)** sets minimum tax under section 113 at 0.5% for a trader of yarn who is an individual. Part IV of the Second Schedule also lists persons to whom section 113 does not apply at all. ### So where do 1% and 1.5% come from? Both appear in the official PDF, but only in older wording kept in footnotes: - **1%.** The footnotes to section 113 record that the Finance Act, 2014 replaced "an amount equal to one percent of the person's turnover for the year" in sub-section (2)(b) with the reference to Division IX rates. They also record that the Finance Act, 2017 replaced the words "one per cent" in sub-section (1). - **1.5%.** A footnote to Division IX says the table was substituted by the Finance Act, 2021 and reproduces the earlier table. In that superseded table, "In all other cases" is 1.5%, with 0.75%, 0.25% and 0.3% for listed sectors. Neither figure is the current general rate. For tax year 2027 the general rate is 1.25%. ### Worked example (illustrative figures) Four sole proprietors each have turnover of Rs. 200,000,000 and are within section 113: | Business | Rate | Minimum tax | |---|---|---| | Crockery trader in Hyderabad (all other cases) | 1.25% | Rs. 2,500,000 | | Poultry feed producer in Sheikhupura | 0.75% | Rs. 1,500,000 | | Pharmaceutical distributor in Multan on the active taxpayers' lists, clause (24D) | 0.5% | Rs. 1,000,000 | | Rice dealer in Gujranwala | 0.25% | Rs. 500,000 | Arithmetic: Rs. 200,000,000 x 1.25% = Rs. 2,500,000; x 0.75% = Rs. 1,500,000; x 0.5% = Rs. 1,000,000; x 0.25% = Rs. 500,000. Each pays the minimum tax only if it is higher than normal tax on taxable income. If normal tax is higher, normal tax is paid. ### What if my business fits two rows? Division IX does not say how to split turnover between rows for a person with several activities, apart from serial 3 which speaks of a "person's turnover from supplies through e-commerce". The text does not resolve mixed businesses, so the row descriptions have to be read against the actual activity. ### Common mistakes - **Quoting 1.5% for tax year 2027.** That rate is from the table replaced by the Finance Act, 2021. - **Assuming the pharmaceutical and FMCG distributor 0.25% still applies.** The Finance Act, 2026 omitted it from Division IX. Clause (24D) now gives 0.5%, subject to its condition. - **Applying any rate below Rs. 100 million of turnover.** For an individual, section 113 does not apply below that turnover. ### What to check in the official text Read the Division IX table and its footnotes in the official PDF amended to 30 June 2026, and clauses (24D) and (28E) of Part II and the section 113 clauses of Part IV of the Second Schedule. Our site copy of the Ordinance leaves out tables. Also read section 113, including the definition of turnover in sub-section (3). ### Frequently asked #### What is the minimum tax rate for an ordinary trader in tax year 2027? 1.25% of turnover, from serial 4 of the Division IX table, which covers all cases not listed in serials 1 to 3. This applies only where section 113 covers the person, which for an individual means turnover of Rs. 100 million or more. #### Where does the 1% figure come from? From older wording of section 113 itself. The footnotes record that the Finance Act, 2014 replaced a fixed one percent of turnover in section 113(2)(b) with a reference to the Division IX rates, and that the Finance Act, 2017 replaced the words one per cent in section 113(1). #### I distribute pharmaceutical products. Is my rate still 0.25%? Not under the current Division IX table. The Finance Act, 2026 omitted the entry for distributors of pharmaceutical products, fast moving consumer goods and cigarettes from the 0.25% row. Clause (24D) of Part II of the Second Schedule now gives 0.5% to distributors, dealers, sub-dealers and wholesalers of listed goods, including pharmaceuticals, if they appear on the active taxpayers' lists. ### Citations - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IX (Minimum tax under section 113)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "minimum tax computed on the basis of rates as specified in Division IX of Part I of First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part II, clause (24D)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part II, clause (28E)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## As a sole proprietor, do I have to deduct tax when I pay suppliers, contractors or my own employees? Source: https://qanoondigest.com/faq/sole-proprietors/sole-proprietor-withholding-agent-duties Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It depends on the payment. Section 149 requires every person paying salary to deduct tax from it, so an employer of any size is covered. Section 153 deduction on payments for goods, services and contracts applies to an individual whose turnover reached Rs. 100 million in a preceding tax year. A missed deduction can cost the expense under section 21(c). **Applies to:** Individuals running a business in their own name who pay staff, suppliers, service providers or contractors. A sole proprietor can become a withholding agent in two separate ways. Paying salary brings in section 149 regardless of how big the business is. Paying suppliers, service providers and contractors brings in section 153 only after the business crosses a turnover line. The two duties are worth keeping apart, because many owners assume that "small business" means "no withholding at all". ### What does the law say? **Salary (section 149).** Section 149(1) says every person responsible for paying salary to an employee must, at the time of payment, deduct tax at the employee's average rate. That rate is worked out on the employee's estimated salary income for the tax year, using the rates in Division I of Part I of the First Schedule. Section 149(2) gives the formula: the tax on the estimated salary divided by the estimated salary. Nothing in section 149 limits it to companies or large employers. **Goods, services and contracts (section 153).** Section 153(1) requires every "prescribed person" making a payment, including an advance, to a resident person to deduct tax from the gross amount payable: - for the sale of goods (including toll manufacturing), except where payments are less than Rs. 75,000 in aggregate during a financial year; - for services, except where payments are less than Rs. 30,000 in aggregate during a financial year; - on the execution of a contract, other than a contract for goods or services. Section 153(7) defines "prescribed person". For a sole proprietor, the relevant entry is sub-clause (i): an individual having turnover of one hundred million rupees or above in any of the preceding tax years. Sub-clause (j) separately covers a person registered under the Sales Tax Act, 1990 with turnover of one hundred million rupees or more in any of the preceding tax years, and sub-clauses (k) and (l) cover builders and developers whatever their turnover. **The cost of not deducting (section 21(c)).** Section 21(c) disallows any expenditure from which a person was required to deduct or collect tax, unless the tax was deducted and paid. The first proviso limits the disallowance for purchases of raw materials and finished goods to twenty per cent of those purchases. The second proviso says that tax later recovered under the Ordinance's recovery provisions for failure to deduct counts as tax paid. ### How does it work in practice? The turnover test in section 153(7) looks backwards. It asks whether turnover reached Rs. 100 million in any preceding tax year, so a single year above the line is enough, and nothing in the definition switches the status off if turnover later falls. "Turnover" is defined in the same sub-section as gross sales or receipts, inclusive of sales tax, federal excise duty and trade discounts shown on invoices, plus gross fees for services and gross receipts from contracts. The rates are set in Division III of Part III of the First Schedule, and they depend on what is being paid for and whether the recipient is a company. For a recipient that is not a company, the table in force for tax year 2027 gives these rates, among others: | Payment | Rate for a recipient other than a company | | --- | --- | | Sale of goods, other than toll manufacturing | 5.5% of the gross amount payable | | Toll manufacturing | 11% of the gross amount payable | | Execution of a contract | 8% of the gross amount payable | | Independent professional services such as doctors, lawyers, architects and accountants | 15% of the gross amount payable | | Services not covered by the other sub-paragraphs | 14% of the gross amount payable | Section 153(1) says the gross amount includes sales tax, if any. Section 153(4) lets the Commissioner, on the recipient's application, allow payment at a reduced rate where the tax is not minimum tax. ### Worked example (illustrative figures) Imran Traders is a Faisalabad wholesaler run by Imran as a sole proprietor. His turnover for tax year 2025 was Rs. 112,000,000. In tax year 2027 he makes these payments to resident individuals: 1. Rs. 2,000,000 to a supplier of finished goods. Deduction at 5.5%: 2,000,000 x 5.5% = **Rs. 110,000**. He pays the supplier Rs. 1,890,000. 2. Rs. 1,500,000 to a contractor for building a storeroom. Deduction at 8%: 1,500,000 x 8% = **Rs. 120,000**. He pays the contractor Rs. 1,380,000. 3. Salary to four shop staff. For each, he estimates the year's salary income and applies that person's average rate under section 149. Where the estimated salary falls in the 0% band of the salary table, the deduction is nil. Because Imran's tax year 2025 turnover was Rs. 112,000,000, he is a prescribed person for tax year 2027 under section 153(7)(i). If his turnover had never reached Rs. 100,000,000, items 1 and 2 would carry no deduction duty under that sub-clause, but item 3 would still fall under section 149. ### What if my turnover drops below Rs. 100 million? The wording is "in any of the preceding tax years". Read literally, one earlier year at or above the line keeps the individual within the definition. The section does not say how long that lasts, and this page does not resolve that question. ### What if I am registered for sales tax? Section 153(7)(j) brings in a sales tax registered person with turnover of Rs. 100 million or more in any preceding tax year. For an individual this overlaps with sub-clause (i), because the threshold is the same. ### Common mistakes - **Thinking salary withholding is only for companies.** Section 149 starts with "every person responsible for paying salary". - **Deducting on every small purchase.** Section 153(1) excludes goods payments below Rs. 75,000 and service payments below Rs. 30,000 in aggregate during a financial year. - **Treating the missed deduction as a paperwork issue only.** Under section 21(c) it can remove the expense from the profit calculation. - **Deducting on the amount before sales tax.** Section 153(1) says the gross amount payable includes sales tax. ### What to check in the official text Read section 153(7) for the full list of prescribed persons and the turnover definition, and section 153(5) for payments that are outside the section, such as a refund of a security deposit. The rate table in Division III of Part III of the First Schedule has more service categories than the summary above. How and when deducted tax must be deposited is set out in Division IV of Part V of Chapter X, which this page does not cover. ### Frequently asked #### My shop's turnover has never reached Rs. 100 million. Do I deduct tax from my suppliers? Section 153 places the duty on a prescribed person, and an individual is a prescribed person only if turnover was Rs. 100 million or more in any of the preceding tax years. Below that, the individual limb of the definition does not apply, though other limbs, such as being a builder or developer, can. #### Do I have to deduct tax from my shop assistant's salary? Section 149 applies to every person responsible for paying salary, with no business size limit. The deduction is at the employee's average rate on estimated salary income, so if that estimated income falls in the 0% band of the salary rate table, the amount deducted works out to nil. #### What happens if I was required to deduct and did not? Section 21(c) disallows the expense unless the tax was deducted and paid. For purchases of raw materials and finished goods, the proviso caps the disallowance at twenty per cent of those purchases. ### Citations - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "includes a sale of goods for cash or on credit, whether under written contract or not" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "any expenditure from which the person is required to deduct or collect tax under Part V of Chapter X or Chapter XII, unless the person has paid or deducted and paid the tax as required by Division IV of Part V of Chapter X" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do I have to file a return if my business income is below the taxable limit, and what must it include? Source: https://qanoondigest.com/faq/sole-proprietors/business-return-filing-requirements-due-date Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Often yes. Section 114 requires a return from anyone above the tax-free amount, and also from people below it who meet other tests, such as holding an NTN, a commercial electricity bill over Rs. 500,000 a year, or chamber membership. Section 118 sets a 30 September due date, and section 116 requires a wealth statement with it. **Applies to:** Individuals with business income, including those whose profit is below the 0% band of the tax table. Being under the taxable limit and being excused from filing are two different things in the Income Tax Ordinance. Section 114 lists several tests, and income is only one of them. A small shop owner with an NTN or a chamber membership is required to file even when no tax is payable. ### Who has to file a return? Section 114(1) lists the persons who must furnish a return of income for a tax year. For an individual in business, the relevant clauses are: - **(ab)** a person whose taxable income exceeds the maximum amount not chargeable to tax. For a non-salaried individual, the clause (1) table in Division I, Part I of the First Schedule charges 0% where taxable income does not exceed Rs. 600,000. - **(ae)** a person whose income for the year is subject to final taxation under any provision of the Ordinance. - **(b)** a person not covered by the earlier clauses who: - (i) was charged to tax for either of the two preceding tax years; - (ii) claims a loss carried forward for the tax year; - (iii) to (v) owns immovable property of 500 square yards or more, or certain flats, in the areas the clauses describe; - (vi) owns a motor vehicle above 1000 cc; - (vii) has obtained a National Tax Number; - (viii) holds a commercial or industrial electricity connection with an annual bill above Rs. 500,000; - (ix) is a resident registered with a chamber of commerce and industry, a trade or business association, a market committee or a listed professional body; - (x) is a resident individual required to file a foreign income and assets statement under section 116A. - **(c)** persons or classes of persons notified by the Board. Section 114(1A) separately says an individual whose income from business exceeds Rs. 300,000 but not Rs. 400,000 in a tax year must file. Section 114(4) lets the Commissioner, by notice, require a return from a person who should have filed but did not. Under section 114(5), such a notice can cover up to the last five completed tax years, or ten where no return was filed for any of the last five. ### What must the return include? Section 114(2) says a return: - is in the prescribed form, with the prescribed annexures, statements or documents; - fully states the particulars required by the form, including a declaration of the records kept by the taxpayer; - is signed by the individual; - is accompanied by evidence of payment of the tax due on the return; - is accompanied by a wealth statement under section 116; - is accompanied by a foreign income and assets statement under section 116A, where that applies. Section 114(2A) requires the return to be filed electronically on IRIS as the Board prescribes. Section 116(2) requires every resident individual filing a return to include a wealth statement and a wealth reconciliation statement. Section 116(1) describes what a wealth statement covers: assets and liabilities, including foreign ones, those of a dependent spouse, minor children and other dependents, assets transferred to others, and total expenditure. The sections covered on this page do not require an individual's business accounts to be audited. The prescribed forms and annexures themselves are set by the Board and are not reproduced in this corpus. ### When is it due? Section 118(3)(b) makes the return of any person other than a company due on or before 30 September following the end of the tax year. Section 118(4) makes the wealth statement due by the same date. Section 118(6) says a return from a person not on the National Tax Number Register who fails to apply in the prescribed form with the return is not treated as a return. Section 119 allows a written application for more time, made by the due date. The Commissioner may grant it for absence from Pakistan, sickness or other misadventure, or any other reasonable cause. It is normally up to fifteen days unless exceptional circumstances justify longer. Section 119(6) says an extension does not change the due date for paying tax, for default surcharge purposes. ### Worked example (illustrative figures) Ahmed repairs mobile phones in Saddar, Karachi. His taxable income for tax year 2027 is Rs. 450,000, inside the 0% band. He obtained an NTN two years ago and is registered with the local traders' association. His shop's commercial electricity bill for the year is Rs. 360,000. - Clause (ab): does not apply, because Rs. 450,000 does not exceed Rs. 600,000. - Clause (b)(viii): does not apply, because Rs. 360,000 does not exceed Rs. 500,000. - Clause (b)(vii): applies, because he has obtained an NTN. - Clause (b)(ix): applies, because he is registered with a trade association. Ahmed must file a return for tax year 2027, with a wealth statement and wealth reconciliation, by 30 September 2027. His tax is nil, but the return is still required. ### What if I file late? Serial 1 of the table in section 182 sets the penalty for failing to file a return under section 114 by the due date. It is the higher of 0.1% of the tax payable for each day of default, or Rs. 1,000 for each day of default. The minimum is Rs. 10,000 for an individual with seventy-five percent or more income from salary, and Rs. 50,000 in all other cases. The maximum is two hundred percent of tax payable. The penalty is reduced by 75%, 50% and 25% if the return is filed within one, two or three months after the due date or extended due date. The entry does not spell out how the minimum and the reductions interact, and this page does not resolve that. ### Common mistakes - **Treating "no tax" as "no return".** Section 114(1)(b) requires returns from many people with no tax payable. - **Forgetting the wealth statement.** Section 114(2)(e) and section 116(2) make it part of the return. - **Applying for an extension after 30 September.** Section 119(2) requires the application by the due date. - **Using the salaried table.** A sole proprietor whose income is mainly business uses clause (1), not clause (2), of Division I. ### What to check in the official text Read the full list in section 114(1)(b), especially the property clauses, which depend on location and size. Check whether the Board has notified any class of persons under section 114(1)(c). The prescribed return form and annexures are set by the Board and are outside this corpus. ### Frequently asked #### My business profit is only Rs. 450,000. Is filing optional? Not if any other test in section 114(1) applies. Having obtained an NTN, being registered with a chamber of commerce or trade association, or holding a commercial electricity connection with an annual bill above Rs. 500,000 each requires a return even when taxable income is inside the 0% band. #### When is the return for tax year 2027 due? Tax year 2027 ends on 30 June 2027. Section 118(3)(b) makes the return of a person other than a company due on or before 30 September following the end of the tax year, so 30 September 2027. #### Do I file a wealth statement even if I have little property? Section 116(2) requires every resident individual filing a return to furnish a wealth statement and a wealth reconciliation statement for that year with the return. It does not set a minimum value of assets. ### Citations - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "is the holder of commercial or industrial connection of electricity where the amount of annual bill exceeds rupees" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 118 (Method of furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#118-method-of-furnishing-returns-and-other-documents), as amended to 2026-06-30: "on or before the 30th day of September next following the end of the tax year to which the return relates" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 116 (Wealth statement)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#116-wealth-statement), as amended to 2026-06-30: "shall furnish a wealth statement" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1) (rate table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 182 (Offences and penalties)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182-offences-and-penalties), as amended to 2026-06-30: "fails to furnish a return of income as required" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 119 (Extension of time for furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#119-extension-of-time-for-furnishing-returns-and-other-documents), as amended to 2026-06-30: "any other reasonable cause, the Commissioner may" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do I have to file an income tax return if my business income is below the taxable limit? Source: https://qanoondigest.com/faq/sole-proprietors/must-small-business-file-tax-return Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Often yes. Section 114 requires a return from anyone whose taxable income is above the tax-free amount, but also from people below it who meet other tests: having obtained an NTN, claiming a carried-forward loss, being charged to tax in either of the two preceding tax years, or owning certain property or a car above 1000 CC. **Applies to:** Individuals running a business whose profit falls inside the 0% band of the individual rate table, or who owe no tax for another reason. ### What does the law say? Section 114(1) lists who must file a return of income, and taxable income is only one of the tests. Clause (ab) covers every person other than a company whose taxable income exceeds the amount that is not chargeable to tax. For an individual with business income, that amount comes from the rate table in clause (1) of Division I, Part I of the First Schedule, where taxable income up to Rs. 600,000 is taxed at 0%. That table applies for tax year 2027 (income earned from 1 July 2026 to 30 June 2027). Falling inside the 0% band does not end the matter. Clause (b) of section 114(1) then reaches any person not already covered who meets any one of these conditions: | Clause | The person... | |---|---| | (b)(i) | has been charged to tax in respect of either of the two preceding tax years | | (b)(ii) | claims a loss carried forward under the Ordinance for the tax year | | (b)(iii) and (iv) | owns immovable property with a land area of 500 square yards or more in the areas the clauses describe, including a rating area | | (b)(iii) and (v) | owns a flat in the areas clause (iii) describes, or a flat of 2,000 square feet or more of covered area in a rating area | | (b)(vi) | owns a motor vehicle with engine capacity above 1000 CC | | (b)(vii) | has obtained a National Tax Number | | (b)(viii) | holds a commercial or industrial electricity connection with an annual bill above Rs. 500,000 | | (b)(ix) | is a resident person registered with a chamber of commerce and industry, a trade or business association, a market committee or a listed professional body | | (b)(x) | is a resident individual required to file a foreign income and assets statement | Two more rules reach small owners. Clause (ae) requires a return from every person whose income for the year is subject to final taxation. Section 114(1A) separately requires a return from every individual whose income under the head Income from business is more than Rs. 300,000 but not more than Rs. 400,000 in a tax year. ### Why does holding an NTN matter so much? Clause (b)(vii) makes anyone who "has obtained National Tax Number" a required filer, whatever their income. Section 181 requires every taxpayer to apply for registration, and section 181(4) says that from tax year 2015 onwards, for individuals holding a CNIC issued by NADRA, the CNIC shall be used as the National Tax Number. The Ordinance does not say in terms whether an individual who has a CNIC but has never applied for registration "has obtained" an NTN for clause (b)(vii). This page does not resolve that point. What is clear from the text is that a business owner who has registered under section 181 falls within clause (b)(vii). ### When is the return due? Section 118(3)(b) makes the return of a person other than a company due on or before 30 September following the end of the tax year. For tax year 2027, which ends on 30 June 2027, that is 30 September 2027. ### Worked example (illustrative figures) Three shopkeepers in Multan each make a small profit in tax year 2027. The profits are invented; the tests are the ones in section 114. 1. **Imran, general store, profit Rs. 380,000.** No NTN, no property, no car, never charged to tax. His profit is inside the 0% band, so clause (ab) does not apply. But Rs. 380,000 is more than Rs. 300,000 and not more than Rs. 400,000, so section 114(1A) requires a return. 2. **Sadia, tailoring shop, profit Rs. 520,000.** No property or car, but she registered and obtained an NTN two years ago. Her profit is inside the 0% band and outside the section 114(1A) range, but clause (b)(vii) applies because she has obtained an NTN. She must file. 3. **Kamran, mobile repair stall, profit Rs. 450,000.** No NTN and no registration of any kind, no property, rides a motorcycle, and was not charged to tax in tax years 2025 or 2026. None of the tests in the table applies on these facts, and his profit is outside the section 114(1A) range. On these facts section 114 does not appear to require a return, subject to the NTN point above and to any notice or Board notification under section 114(1)(c). ### What if I have a loss to carry forward? Clause (b)(ii) makes a return compulsory for a person who claims a carried-forward loss for the tax year. Section 182A adds a consequence for filing late: a person who misses the due date is not allowed, for that tax year, to carry forward any loss. A small owner who wants to keep a loss alive therefore has a reason in the text of the law to file on time. ### What happens if I do not file, or file late? Section 182A says a person who does not file by the due date is not included in the active taxpayers' list for that year. The person can be included on filing late by paying a surcharge of Rs. 25,000 in the case of an individual. The same section also withholds refunds while the person is off the list. Serial 1 of the table in section 182 sets the penalty for not filing a section 114 return by the due date: the higher of 0.1% of tax payable for each day of default or Rs. 1,000 for each day of default. The minimum is Rs. 10,000 for an individual with 75% or more of income from salary and Rs. 50,000 in all other cases. The maximum is 200% of tax payable, and the penalty is reduced by 75%, 50% or 25% if the return is filed within one, two or three months after the due date. The entry does not spell out how the minimum and the 200% cap interact when tax payable is nil, and this page does not resolve that. ### Common mistakes - **Treating "no tax" as "no return".** Section 114(1)(b) exists precisely for people who may owe nothing. - **Forgetting past years.** Clause (b)(i) looks back two tax years. Being charged to tax in tax year 2025 or 2026 is enough for tax year 2027. - **Assuming business registration is harmless.** Once an NTN has been obtained, clause (b)(vii) applies every year. - **Ignoring trade body membership.** Registration with a market committee or trade association is its own trigger under clause (b)(ix). ### What to check in the official text Read all of section 114(1) and (1A), and note that clause (c) lets the Board, with the Minister's approval, notify further persons who must file. Those notifications are not part of this corpus. Check the rate table in clause (1) of Division I, Part I of the First Schedule for the current 0% band. Read section 182A and serial 1 of the section 182 table for the consequences of a late return. ### Frequently asked #### My shop's profit is below Rs. 600,000. Is filing optional? Only if none of the other tests in section 114 applies. Having obtained an NTN, claiming a carried-forward loss, being charged to tax in either of the two preceding tax years, or owning a motor vehicle above 1000 CC each creates a filing duty even when the tax works out to nil. #### Does section 114 have a separate rule for small business income? Yes. Section 114(1A) requires every individual whose income under the head Income from business is more than Rs. 300,000 but not more than Rs. 400,000 in a tax year to file a return, even though that amount is inside the 0% band. #### What happens if I file late when I owe no tax? Section 182A keeps a person who misses the due date off the active taxpayers' list for that year unless a surcharge is paid, which is Rs. 25,000 for an individual, and bars carrying forward a loss for that year. Serial 1 of the section 182 table also sets a penalty for a late return. ### Citations - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "has been charged to tax in respect of any of the two preceding tax years" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 181 (Taxpayer’s registration)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181-taxpayer-s-registration), as amended to 2026-06-30: "CNIC shall be used as National Tax Number" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 118 (Method of furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#118-method-of-furnishing-returns-and-other-documents), as amended to 2026-06-30: "on or before the 30th day of September next following the end of the tax year to which the return relates" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 182A (Return not filed within due date)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182a-return-not-filed-within-due-date), as amended to 2026-06-30: "not be allowed, for that tax year, to carry forward any loss" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 182 (Offences and penalties)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182-offences-and-penalties), as amended to 2026-06-30: "fails to furnish a return of income as required" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1) (rates of tax for individuals and association of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do I need a separate NTN for my business, or is my CNIC enough? Source: https://qanoondigest.com/faq/sole-proprietors/ntn-registration-sole-proprietorship Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Your CNIC is enough as the number. Section 181(4) of the Income Tax Ordinance, 2001 says an individual's CNIC is used as the National Tax Number, and a sole proprietorship is not a separate person under section 80. You still apply for registration under section 181(1), and once you hold an NTN, section 114 requires you to file a return. **Applies to:** Individuals who run a shop, trade, workshop or service in their own name, without forming a company or a partnership. A business run by one person in their own name does not have a tax identity separate from that person. The Income Tax Ordinance, 2001 uses the owner's CNIC as the National Tax Number. Registering, however, is still a legal step, and holding the number brings its own duty to file a return every year. ### What does the law say? Four provisions answer the question. 1. **Section 80: who counts as a person.** Section 80(1) lists the persons recognised by the Ordinance: an individual; a company or association of persons; and governments and public international organisations. Section 80(2)(a) says an association of persons includes a firm, and section 80(2)(c) defines a firm as "the relation between persons who have agreed to share the profits of a business". The Ordinance does not list a sole proprietorship as a person of its own. A business owned by one individual is not a company, and it is not a firm because there are no other persons sharing profits. For tax purposes it is that individual carrying on business. 2. **Section 181(4): the number.** From tax year 2015 onwards, for individuals holding a CNIC issued by NADRA, the "CNIC shall be used as National Tax Number". 3. **Section 181(1): the duty to register.** Every taxpayer shall apply for registration in the prescribed form and manner. Section 2(66) defines a taxpayer as any person who derives an amount chargeable to tax, and includes any person required to furnish a return or pay tax. 4. **Section 114(1)(b)(vii): the filing trigger.** Among the persons required to furnish a return of income for a tax year is any person who "has obtained National Tax Number". ### How does it work in practice? For a sole proprietor, the owner is the taxpayer. Profit from the shop or workshop is the owner's income under the head Income from Business and goes into the owner's own return, alongside any salary, rent or other income. Section 181(4) settles which number is used. It does not remove the duty in section 181(1) to apply for registration. Section 181(3) says the registration scheme is regulated through rules notified by the Board, so the form and procedure come from those rules rather than the Ordinance itself. Once registered, two further provisions matter for a business: - **Section 181C** says every person deriving income from business chargeable to tax who has been issued a National Tax Number shall display it at a conspicuous place at every place of business. - **Section 181AA** says an application for a commercial or industrial electricity or gas connection shall not be processed, and the connection shall not be provided, unless the applicant is registered under section 181. ### Why does holding an NTN mean filing a return? Section 114(1) lists who must furnish a return. Clause (ab) covers a person, other than a company, whose taxable income exceeds the amount not chargeable to tax. Clause (b) then adds persons not already covered who meet other tests, and sub-clause (vii) is a person who has obtained National Tax Number. So an NTN holder falls within section 114 even in a year when the business earns little. Other sub-clauses of section 114(1)(b) are also relevant to businesses, including: - (viii) holding a commercial or industrial electricity connection where the annual bill exceeds five hundred thousand rupees; - (ix) being a resident person registered with a chamber of commerce and industry, a trade or business association, a market committee or a professional body. Section 114(1A) separately requires every individual whose income under the head Income from Business exceeds three hundred thousand rupees but does not exceed four hundred thousand rupees in a tax year to furnish a return. ### Worked example (illustrative figures) **Bilal opens a mobile phone repair shop in Rawalpindi under the name "Bilal Mobile Care".** He does not form a company or take a partner. 1. The shop is not a separate person under section 80. Bilal, an individual, is the taxpayer. 2. He applies for registration under section 181(1). Under section 181(4), his CNIC number is his NTN. "Bilal Mobile Care" does not receive a separate NTN under the Ordinance. 3. Under section 181C, he displays the NTN at the shop. 4. Because he has obtained an NTN, section 114(1)(b)(vii) requires him to file a return for each tax year, including his first year when profit is low. 5. If he later applies for a commercial electricity connection for a second shop, section 181AA requires him to be registered under section 181 before the application is processed. ### What if I later take a partner or form a company? Then the business is no longer the individual alone. Section 80(2)(c) defines a firm as a relation between persons sharing profits, and a firm is an association of persons. A company is also a separate person under section 80(1)(b). Each of these is a different person from the owner, and the section 181(4) rule about CNICs applies only to individuals. ### Common mistakes - **Expecting a separate NTN for the trade name.** Section 181(4) uses the individual's CNIC. The Ordinance does not provide a separate number for a sole proprietorship. - **Assuming a CNIC alone means you are registered.** Section 181(1) still requires an application for registration. - **Registering and then not filing.** Obtaining an NTN is itself a trigger under section 114(1)(b)(vii). - **Treating income tax registration as sales tax registration.** Section 181 is income tax registration. Sales tax registration is a separate question under the Sales Tax Act, 1990. ### What to check in the official text Read sections 80, 114(1), 181, 181AA and 181C, and clause (66) of section 2. The registration form and procedure are set by rules notified by the Board under section 181(3), which this page does not cover step by step. FBR portal procedures are outside this corpus. ### Frequently asked #### Does my shop's trade name get its own NTN? Not under the Ordinance. Section 80 treats individuals, companies and associations of persons as persons, and a business owned by one individual is neither a company nor an association of persons. For an individual with a CNIC, section 181(4) makes the CNIC the National Tax Number, so the business uses the owner's number. #### If I register for an NTN, do I have to file a return every year? Section 114(1)(b)(vii) lists a person who has obtained National Tax Number among those required to furnish a return of income for a tax year. That applies even where the other tests in section 114(1), such as taxable income above the tax-free amount, are not met. #### Can I get a commercial electricity connection without registering? No. Section 181AA says an application for a commercial or industrial electricity or natural gas connection shall not be processed, and the connection shall not be provided, unless the applicant is registered under section 181. ### Citations - [Income Tax Ordinance, 2001, section 181 (Taxpayer’s registration)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181-taxpayer-s-registration), as amended to 2026-06-30: "in case of individuals having Computerized National Identity Card (CNIC) issued by the National Database and Registration Authority, CNIC shall be used as National Tax Number" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 80 (Person)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#80-person), as amended to 2026-06-30: "The following shall be treated as persons for the purposes of this Ordinance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "has obtained National Tax Number" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "“taxpayer” means any person who derives an amount chargeable to tax under this Ordinance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 181C (Displaying of National Tax Number)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181c-displaying-of-national-tax-number), as amended to 2026-06-30: "shall display his National Tax Number at a conspicuous place at every place of his business" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 181AA (Compulsory registration in certain cases)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181aa-compulsory-registration-in-certain-cases), as amended to 2026-06-30: "shall not be processed and such connection shall not be provided unless the person applying for electricity or gas connection is registered under section 181" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What is the penalty if I do not keep proper business records or issue invoices? Source: https://qanoondigest.com/faq/sole-proprietors/penalty-for-not-keeping-business-records Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under the section 182 table, failing to keep required records costs Rs. 10,000 or five per cent of the tax on the income, whichever is higher. Failing to issue a cash memo, invoice or receipt costs Rs. 5,000 or three per cent of the tax involved, whichever is higher. Section 193 separately allows prosecution, with fines up to Rs. 50,000. **Applies to:** Sole proprietors, shopkeepers and small traders who must keep books and issue sale memos under section 174 and the Income Tax Rules, 2002. ### What does the law say? Section 174 of the Income Tax Ordinance, 2001 requires every taxpayer to keep prescribed accounts, documents and records in Pakistan, and Chapter VII of the Income Tax Rules, 2002 sets out what those are, including numbered cash memos or invoices for sales. Two separate provisions deal with failures. **Section 182: penalties.** Section 182(1) has a table of offences and penalties. A penalty under it applies in addition to, not instead of, any other punishment under the Ordinance or another law. The entries that matter most to a small business are: | Serial number | Offence | Penalty | Linked provision | | --- | --- | --- | --- | | 2 | Failing to issue a cash memo, invoice or receipt when required under the Ordinance or rules | Rs. 5,000 or three per cent of the amount of the tax involved, whichever is higher | Section 174 and Chapter VII of the Income Tax Rules | | 7 | Failing to maintain records required under the Ordinance or rules | Rs. 10,000 or five per cent of the amount of tax on this income, whichever is higher | Section 174, among others | | 2A | Failing to install, use or maintain an electronic resource the Board has required under section 174(5), or tampering with it | One per cent of turnover or Rs. 1,000,000 for the first default, whichever is higher, and Rs. 2,000,000 for every subsequent quarterly default | Section 174(5) | Serial number 2A was inserted by the Finance Act, 2026. **Section 193: prosecution.** A person who fails to maintain records as required commits an offence. On conviction, a deliberate failure is punishable with a fine not exceeding Rs. 50,000, imprisonment for a term not exceeding two years, or both. In any other case the punishment is a fine not exceeding Rs. 50,000. ### How does it work in practice? A penalty under section 182 is not automatic. Section 182(2) says none is payable unless the Commissioner, the Commissioner (Appeals) or the Appellate Tribunal passes a written order after giving the person a chance to be heard. The same sub-section lets a taxpayer who admits the default pay the penalty voluntarily, and its explanation says mens rea (intention) does not need to be established. Section 182(4) reduces the penalty if the tax on which it was based is later reduced. Section 174(2) adds a separate consequence that is not a penalty: the Commissioner may disallow or reduce a claimed deduction if you cannot, without reasonable cause, produce a receipt or other evidence for it. That raises the taxable income, and so the tax, on top of any penalty. Section 193 is a criminal provision. It works through prosecution and conviction, not through an order of the Commissioner. ### Worked example (illustrative figures) Shazia runs a cosmetics shop in Hyderabad. During an audit for tax year 2027, the Commissioner finds she kept no daily record or vouchers, and issued no sale memos for part of the year. Records penalty under serial number 7: 1. Assume the tax on the income concerned is Rs. 140,000. 2. Five per cent of Rs. 140,000 = Rs. 7,000. 3. The higher of Rs. 10,000 and Rs. 7,000 is Rs. 10,000. Invoice penalty under serial number 2: 4. Assume the tax involved in the sales made without memos is Rs. 220,000. 5. Three per cent of Rs. 220,000 = Rs. 6,600. 6. The higher of Rs. 5,000 and Rs. 6,600 is Rs. 6,600. If both are imposed by written orders, the total is Rs. 10,000 + Rs. 6,600 = Rs. 16,600. Any expenses she could not support with evidence may also be disallowed under section 174(2), which increases her tax separately. ### What if...? **What if my tax is small?** The fixed amounts are floors. Even where five per cent or three per cent of the tax works out lower, the table charges the higher figure, so the minimum is Rs. 10,000 for records and Rs. 5,000 for invoices. **What if the Board has not notified my trade under section 174(5)?** Serial number 2A applies only to a person "having been required by the Board" under section 174(5). Without such a requirement, that entry does not reach you. **What if the failure was a genuine mistake?** Section 193 separates deliberate failures, which can bring imprisonment, from other cases, which carry a fine only. The section 182 penalty does not depend on intention, because of the explanation to section 182(2). ### Common mistakes - **Reading "tax involved" as turnover.** The percentages in serial numbers 2 and 7 are of tax, not of sales. The Ordinance does not define "tax involved" or "tax on this income" in the table itself, so how the figure is worked out in a given case is for the order to state. - **Thinking the penalty replaces tax.** Section 182(1) says the penalty is in addition to any other punishment, and disallowed expenses under section 174(2) still increase the tax due. - **Assuming the penalty is final once charged.** Section 182(4) reduces it if the underlying tax is later reduced by an order. ### What to check in the official text The table in section 182(1) does not reproduce cleanly in the site's extracted text, so read serial numbers 2, 2A and 7 in the official PDF. Read section 182(2) to (4) for the procedure, section 193 for prosecution, and section 174 for the underlying duty. Check whether the Board has issued any notification under section 174(5) for your trade; such notifications are not in this corpus. ### Frequently asked #### Is there a fixed fine for not giving a customer a receipt? Serial number 2 of the section 182 table sets the penalty at Rs. 5,000 or three per cent of the amount of the tax involved, whichever is higher. The offence refers to section 174 and Chapter VII of the Income Tax Rules, which require numbered cash memos, invoices or receipts. #### Can I be sent to prison for not keeping books? Section 193 makes failure to maintain records an offence. On conviction, a deliberate failure can bring a fine not exceeding Rs. 50,000, imprisonment up to two years, or both. In any other case the punishment is a fine not exceeding Rs. 50,000. #### Is the penalty charged automatically? No. Section 182(2) says no penalty is payable unless an order in writing is passed after giving you an opportunity of being heard. A taxpayer who admits the default may pay the penalty voluntarily. ### Citations - [Income Tax Ordinance, 2001, section 182 (Offences and penalties)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182-offences-and-penalties), as amended to 2026-06-30: "no penalty shall be payable unless an order in writing is passed by the Commissioner, Commissioner (Appeals) or the Appellate Tribunal after providing an opportunity of being heard to the person concerned" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 182(1), Table, serial numbers 2, 2A and 7 (as printed in the source PDF)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 193 (Prosecution for failure to maintain records)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#193-prosecution-for-failure-to-maintain-records), as amended to 2026-06-30: "A person who fails to maintain records as required under this Ordinance shall commit an offence punishable on conviction with -" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 174 (Records)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#174-records), as amended to 2026-06-30: "every taxpayer shall maintain in Pakistan such accounts, documents and records as may be prescribed." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do I have to pay quarterly advance tax under section 147, and how is it calculated? Source: https://qanoondigest.com/faq/sole-proprietors/quarterly-advance-tax-section-147 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer You pay quarterly advance tax if your latest assessed taxable income, leaving out salary and final-tax income, is Rs. 1 million or more. Under section 147(4B), each instalment is one quarter of the tax assessed for the latest tax year, minus creditable tax paid in that quarter. Instalments fall due on 15 September, December, March and June. **Applies to:** Individuals, including sole proprietors, whose income was charged to tax for the latest tax year and whose assessed income other than salary and final-tax income is Rs. 1 million or more. An individual whose latest assessed income, other than salary and final-tax income, is one million rupees or more pays income tax in four instalments during the year, not only when the return is filed. Section 147 of the Income Tax Ordinance, 2001 sets who pays, the formula and the due dates. Section 205 adds default surcharge for paying late. ### What does the law say? **Who pays.** Section 147(1) applies to every taxpayer whose income was charged to tax for the latest tax year. It leaves out certain income taxed separately under Chapter II, salary taxed at source under section 149, and income on which final tax was collected or deducted with no credit under section 168(3). Section 147(2) then says the section does not apply to an individual whose latest assessed taxable income, leaving out those categories, is less than one million rupees. **How much.** Section 147(4B) applies to an individual with latest assessed income of one million rupees or more. Each quarter's advance tax is: **(A / 4) - B** - **A** is the tax assessed to the taxpayer for the latest tax year. An explanation to section 147(4B) widens "tax assessed" to include one other liability, so read it with your assessment. - **B** is the tax paid in the quarter for which a tax credit is allowed under section 168, other than tax deducted under section 149. **When.** Section 147(5) sets the due dates for an individual: | Quarter | Due on or before | | --- | --- | | September quarter | 15 September | | December quarter | 15 December | | March quarter | 15 March | | June quarter | 15 June | For tax year 2027 (1 July 2026 to 30 June 2027), those dates are 15 September 2026, 15 December 2026, 15 March 2027 and 15 June 2027. ### How does it work in practice? Section 147 does not depend on receiving a demand. Section 147(7) says the Ordinance applies to advance tax due as if the amount were tax due under an assessment order. The "B" part matters for a business. Section 168(2) allows a credit for tax collected from you under Division II or deducted from payments to you under Division III, or under Chapter XII. Where such tax is creditable, what was collected or deducted in a quarter reduces that quarter's instalment. Tax that is final under section 168(3) is not creditable, so it does not count in B. At the end of the year, section 147(8) allows the advance tax paid as a credit against the tax due for that year. Section 4(3) applies credits under sections 147 and 168 after foreign tax credits and Part X credits. ### Worked example (illustrative figures) Rukhsana owns a crockery shop in Multan. Her latest assessed tax year is tax year 2026. Her made-up figures: - Assessed taxable income (all business): Rs. 3,200,000, which is not less than Rs. 1,000,000, so section 147(4B) applies. - Tax assessed for that year (A): Rs. 480,000. - Creditable tax collected from her during July to September 2026: Rs. 18,000. September quarter instalment: 1. A / 4 = Rs. 480,000 / 4 = Rs. 120,000. 2. B = Rs. 18,000. 3. Instalment = Rs. 120,000 minus Rs. 18,000 = Rs. 102,000, due by 15 September 2026. If she pays the Rs. 102,000 thirty days late, section 205(1A) charges default surcharge at 12 per cent per annum on the unpaid amount: 4. Rs. 102,000 × 12% = Rs. 12,240 for a full year. 5. Rs. 12,240 × 30 / 365 = about Rs. 1,006. Section 205(1A) does not state a day-count method. The daily split in step 5 is an illustration only. ### What if ...? **What if I expect lower tax this year?** Section 147(6) lets a taxpayer who estimates, before the last instalment is due, that tax payable for the year is likely to be less furnish an estimate to the Commissioner and pay the estimated amount, less what is already paid, in equal instalments on the remaining dates. Section 147(6B) requires the estimate to include turnover for completed and remaining quarters, evidence of expenses, deductions, tax payments and credits, and a computation of estimated taxable income. The Commissioner may reject an estimate that lacks these details after a hearing, and then the formula applies. **What if my estimate turns out too low?** Section 205(1B) applies where a taxpayer fails to pay tax under section 147(4A) or (6), or pays less than ninety per cent of the tax chargeable for the year. The default surcharge is 12 per cent per annum on the tax chargeable or on the shortfall below ninety per cent. It runs from 1 April in that year to the date of assessment or 30 June of the financial year next following, whichever is earlier. **What if my only income is salary?** Salary taxed under section 149 is left out of section 147(1) and of the one million rupee test. ### Common mistakes - **Using this year's expected profit as A.** In section 147(4B), A is tax assessed for the latest tax year, not an estimate. An estimate replaces the formula only through section 147(6). - **Subtracting salary deductions as B.** Tax deducted under section 149 is expressly excluded from B. - **Using the company dates.** Section 147(5A) gives associations of persons and companies the 25th of September, December and March. Individuals use the 15th under section 147(5). - **Treating default surcharge as waived by paying with the return.** Under section 205(1A) the surcharge runs until payment or the due date of the return, whichever is earlier. ### What to check in the official text Read section 147 in full, especially sub-sections (1), (2), (4B), (5), (6), (6B), (7) and (8). Read section 205(1A) and (1B) for default surcharge, and section 168(3) for the list of final taxes that do not count toward B. Section 147(7A) lets the Board prescribe how estimates are furnished through Iris or another automated system. That procedure is not in this corpus. ### Frequently asked #### My business income last year was Rs. 900,000. Do I pay advance tax? Not as an individual under section 147(2), provided that figure is your latest assessed taxable income leaving out salary and income covered by clauses (b), (c) and (d) of section 147(1). The section does not apply where that income is less than one million rupees. #### Do tax deductions from my salary reduce my advance tax instalment? No. In the section 147(4B) formula, B is creditable tax paid in the quarter other than tax deducted under section 149, which is salary. Salary income is also left out of the Rs. 1 million test by section 147(1)(c) and (2). #### What happens to the advance tax I paid when I file my return? Section 147(8) allows a tax credit for it against the tax due on your taxable income for that year. Section 4(3) applies it after other credits, and any part that cannot be used is refunded, as section 147(10) provides. ### Citations - [Income Tax Ordinance, 2001, section 147 (Advance tax paid by the taxpayer)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#147-advance-tax-paid-by-the-taxpayer), as amended to 2026-06-30: "A is the tax assessed to the taxpayer for the latest tax year or latest assessment year under the repealed Ordinance; and B is the tax paid in the quarter for which a tax credit is allowed under section 168" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 205 (Default surcharge)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#205-default-surcharge), as amended to 2026-06-30: "A person who fails to pay advance tax under section 147 shall be liable for" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 4 (Tax on taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4-tax-on-taxable-income), as amended to 2026-06-30: "any tax credit allowed under sections" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "paying salary to an employee shall, at the time of payment, deduct tax from the amount paid" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What books of account and records must a sole proprietor keep, for how long, and what happens if I do not? Source: https://qanoondigest.com/faq/sole-proprietors/books-of-account-sole-proprietor-records Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 174 of the Income Tax Ordinance requires records to be kept as prescribed, and rule 29 of the Rules lists them: money received and spent, sales, purchases, assets and liabilities. Rule 30 sets the minimum by income band. Records are kept six years, or longer while proceedings are pending. Gaps can lead to disallowed deductions, penalties and prosecution. **Applies to:** Individuals and other non-company taxpayers with income under the head Income from Business, including small shops and workshops that deal mostly in cash. A sole proprietor must keep records of what the business receives, spends, buys, sells, owns and owes. The Income Tax Ordinance, 2001 sets the duty and the consequences. The Income Tax Rules, 2002 say exactly what to keep, with a lighter list for small businesses and a fuller one for larger traders and manufacturers. ### What does the law say? **Section 174(1)** requires every taxpayer, unless the Commissioner authorises otherwise, to maintain in Pakistan such accounts, documents and records as may be prescribed. The Income Tax Rules, 2002 prescribe the minimum level in their chapter on books of account. **Rule 29(1)** requires every taxpayer with income under the head Income from Business to keep proper books, documents and records of: - all sums of money received and spent, and what they were for; - all sales and purchases of goods and all services provided and obtained; - all assets; - all liabilities; and - for manufacturing, assembly, processing, mining and similar activities, all items of cost for materials, labour and other inputs. Rule 29(3) adds that duplicate copies and electronic records of cash memos, invoices and receipts form part of the records. **How long:** section 174(3) and rule 29(4) both say six years after the end of the tax year to which the records relate. Where a proceeding is pending before any authority or court, the records are kept until it is finally decided. The explanation to section 174(3) lists assessment, amendment of assessment, appeal, revision, reference, petition, prosecution and Alternative Dispute Resolution proceedings. ### What minimum records apply to my business? Rule 30 applies to every taxpayer other than a company. It is printed under the rule 29 heading in the site file. | Category in rule 30 | Minimum records | | --- | --- | | (1) Business income up to Rs. 500,000, and new business taxpayers | Serially numbered, dated cash memo, invoice or receipt for each sale; daily record of receipts, sales, payments, purchases and expenses; vouchers of purchases and expenses | | (2) Business income over Rs. 500,000, and all wholesalers, distributors, dealers and commission agents | The above, plus cash book or bank book, general ledger or annual summary, payee name and address on vouchers over Rs. 10,000, and a quarterly stock inventory if you trade in goods. Wholesalers, distributors, dealers and commission agents also record the customer's name and address on sales over Rs. 10,000 | | (3) Professionals such as doctors, lawyers, accountants, engineers | Numbered patient slip, invoice or receipt with client details, daily appointment diary, daily record, vouchers | | (4) Manufacturers with turnover over Rs. 2.5 million | Cash book or bank book, sales and purchase day books and ledgers, general ledger, vouchers, and a stock register with gate inward and outward records and quarterly inventory | Each cash memo carries your name or business name, address, national tax number or CNIC, sales tax registration number if any, and the description, quantity and value of what was sold. Where each transaction is Rs. 100 or less, one or more cash memos per day may cover all of them. **Rule 32(1)** allows all of these to be kept on electronic media, provided sufficient steps are taken to ensure their sanctity and safe keeping. ### What happens if I do not keep them? - **Deductions can be cut.** Section 174(2) lets the Commissioner disallow or reduce a deduction where you cannot, without reasonable cause, produce a receipt or other evidence. Section 174(4) defines a deduction as any amount debited to the trading, manufacturing, receipts and expenses, or profit and loss account. - **Cash memo penalty.** S. No. 2 of the Table in section 182(1): failing to issue a cash memo, invoice or receipt when required costs five thousand rupees or three per cent of the tax involved, whichever is higher. - **Record-keeping penalty.** S. No. 7: failing to maintain records required under the Ordinance or rules costs ten thousand rupees or five per cent of the amount of tax on the income, whichever is higher. - **Prosecution.** Section 193 makes failure to maintain records an offence. Where the failure was deliberate, the punishment on conviction is a fine not exceeding fifty thousand rupees, imprisonment up to two years, or both. In any other case, a fine not exceeding fifty thousand rupees. ### Worked example (illustrative figures) Kashif runs a paint and hardware shop in Gujranwala as a sole proprietor. His business income for the year is Rs. 1,800,000, so rule 30(2) applies to him, not rule 30(1). He claims these expenses: shop rent Rs. 480,000, a helper's wages Rs. 360,000, and electricity Rs. 150,000. He has a rent agreement and bank transfers for the rent and the bills for electricity, but no vouchers or payment record for the wages. 1. Total expenses claimed: Rs. 480,000 + Rs. 360,000 + Rs. 150,000 = Rs. 990,000. 2. If the Commissioner uses section 174(2) to disallow the unsupported wages, allowed expenses become Rs. 990,000 minus Rs. 360,000 = Rs. 630,000. 3. His income for tax purposes rises by Rs. 360,000. Section 174(2) is discretionary ("may disallow or reduce") and applies where the failure is without reasonable cause, so the outcome depends on the facts. ### Common mistakes - **Thinking a small shop needs no records.** Rule 30(1) applies even at the lowest band and to every new business. - **Keeping records for five years.** The period became six years; both section 174(3) and rule 29(4) now say six. - **Discarding records during an appeal.** The six-year limit gives way to any pending proceeding. - **Overlooking foreign items.** The last proviso to section 174(3) removes the six-year limit for records of certain income, assets, expenses or transactions situated, incurred or sourced outside Pakistan. Read that proviso if any of your records relate to foreign items. ### What to check in the official text Read section 174 in full, including sub-section (5), which lets the Board require a person or class of persons to install and use a prescribed electronic resource. S. No. 2A of the section 182 Table penalises failure to comply. Read rules 28 to 33 of the Income Tax Rules, 2002, which also cover where records are kept. The rules in this corpus are amended to 24 November 2023, so check for later amendments. The penalty amounts are in the Table under section 182(1). ### Frequently asked #### Can I keep my records on a computer or phone instead of registers? Rule 32(1) allows books, documents and records to be kept on electronic media, provided sufficient steps are taken to ensure their sanctity and safe keeping. Rule 29(2) also allows cash memos and invoices generated by an electronic cash register or accounting software. #### Do I have to write a separate cash memo for every small sale? Not always. Under rule 30(1) and (2), where each transaction does not exceed Rs. 100, one or more cash memos per day may be kept for all such transactions. Larger sales need a serially numbered and dated cash memo, invoice or receipt. #### When can I throw away old records? Section 174(3) and rule 29(4) require records to be kept for six years after the end of the tax year to which they relate. If any proceeding, such as an assessment, appeal or prosecution, is pending, the records must be kept until it is finally decided. ### Citations - [Income Tax Ordinance, 2001, section 174 (Records)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#174-records), as amended to 2026-06-30: "to provide a receipt, or other record or evidence of the transaction or circumstances giving rise to the claim for the deduction" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 29 (Books of account, documents and records to be maintained)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#29-books-of-account-documents-and-records-to-be-maintained), as amended to 2023-11-24: "Every taxpayer deriving income chargeable under the head "Income from Business" shall maintain proper books of account, documents and records" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Rules, 2002, Rule 30 (minimum books of account, documents and records for taxpayers other than companies), printed under the rule 29 heading](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24), as amended to 2023-11-24 Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Rules, 2002, section 32 (General form of books of accounts, documents and records)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#32-general-form-of-books-of-accounts-documents-and-records), as amended to 2023-11-24: "may be kept on electronic media, provided sufficient steps have been taken to ensure the sanctity and safe keeping of such accounts, documents and records" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Ordinance, 2001, Section 182(1), Table, S. No. 2 (failure to issue cash memo, invoice or receipt) and S. No. 7 (failure to maintain records)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 193 (Prosecution for failure to maintain records)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#193-prosecution-for-failure-to-maintain-records), as amended to 2026-06-30: "A person who fails to maintain records as required under this Ordinance shall commit an offence" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do I have to register for sales tax as a small business, and am I exempt as a cottage industry? Source: https://qanoondigest.com/faq/sole-proprietors/sales-tax-registration-small-business Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It depends on what you do, not on being small. Section 14 of the Sales Tax Act, 1990 requires manufacturers, importers, wholesalers, dealers, distributors and certain retailers to register. A manufacturer running a cottage industry is excluded, but only if it meets all four conditions in section 2(5AB), including annual turnover not over Rs. 8 million. **Applies to:** Sole proprietors who make or sell goods, such as small manufacturers, workshops, wholesalers, dealers and shopkeepers. Being a small business does not by itself take you out of sales tax. The Sales Tax Act, 1990 decides registration by the kind of activity: making goods, importing, wholesaling, distributing, or certain kinds of retailing. The cottage industry exclusion is narrow and applies only to manufacturers who meet every one of its four conditions. ### What does the law say? **Section 14(1)** requires every person making taxable supplies in Pakistan, including zero-rated supplies, in the course or furtherance of a taxable activity, to be registered if they fall in any of these categories: | Clause | Who must register | | --- | --- | | (a) | A manufacturer who is not running a cottage industry | | (b) | A retailer liable to pay sales tax under the Act or rules, excluding a retailer required to pay through the electricity bill under section 3(9) | | (c) | An importer | | (d) | An exporter who intends to obtain a sales tax refund against zero-rated supplies | | (e) | A wholesaler, dealer or distributor | | (f) | A person required under another federal or provincial law to register for a duty or tax collected as if it were sales tax | Section 14(1A) adds persons selling digitally ordered goods from within Pakistan through an online marketplace, website or app, again leaving out cottage industries and electricity-bill retailers. **Section 2(5AB)** defines a cottage industry as a manufacturing concern which fulfils each of the following conditions: 1. it does not have an industrial gas or electricity connection; 2. it is located in a residential area; 3. it does not have a total labour force of more than ten workers; and 4. its annual turnover from all supplies does not exceed eight million rupees. **Section 3(1)** charges sales tax at eighteen per cent of the value of taxable supplies made by a registered person, and on imports. **Section 3(9)** charges retailers, other than Tier-1 retailers, through their monthly electricity bills: five per cent where the monthly bill does not exceed Rs. 20,000, and seven and a half per cent where it exceeds that amount. ### How does it work in practice? **Small manufacturers.** A home-based unit making, say, pickles or embroidered garments is excluded from section 14(1)(a) only while it meets all four cottage industry conditions. Section 2(17) defines a manufacturer widely, including anyone who assembles, mixes, cuts, bottles, packages or repackages goods. **Shopkeepers.** A retailer who is not Tier-1 pays through the electricity bill under section 3(9) and is excluded from section 14(1)(b). Section 2(43A) lists who is a Tier-1 retailer. It includes a retailer operating as a unit of a national or international chain, a retailer in an air-conditioned mall, plaza or centre (excluding kiosks), a retailer whose electricity bills over the preceding twelve consecutive months exceed Rs. 1,200,000, and a retailer with turnover exceeding two hundred million rupees in the preceding twelve months. A Tier-1 retailer pays sales tax at the rate applicable to the goods under section 3(9A). **Wholesalers, dealers and distributors.** Section 14(1)(e) names them without any size condition. **Buying while unregistered.** Section 3(1A) adds further tax at four per cent of the value where taxable supplies are made to a person who has not obtained a registration number or is not an active taxpayer, subject to exceptions the Federal Government may notify. ### Worked example (illustrative figures) Nasreen runs a small unit in her house in Sialkot, stitching sports gloves by hand. Her made-up facts for the last twelve months: - Domestic electricity connection only: condition 1 met. - Located in a residential street: condition 2 met. - Seven workers: condition 3 met, since seven is not more than ten. - Annual turnover from all supplies Rs. 7,400,000: condition 4 met, since Rs. 7,400,000 does not exceed Rs. 8,000,000. All four conditions hold, so her unit is a cottage industry and section 14(1)(a) does not require her to register. Now assume orders grow and her turnover reaches Rs. 8,600,000. Rs. 8,600,000 exceeds Rs. 8,000,000, so condition 4 fails. Her unit is no longer a cottage industry, and as a manufacturer she falls within section 14(1)(a). ### What if ...? **What if I sell services, not goods?** The Sales Tax Act, 1990 taxes goods. Sales tax on services is charged under provincial laws and, for Islamabad, under the Islamabad Capital Territory (Tax on Services) Ordinance, 2001. The provincial laws are outside this corpus and not covered here. **What if I should have registered and did not?** S. No. 7 of the Table in section 33 sets a penalty of fifty thousand rupees or five per cent of the tax involved, whichever is higher, for a person required to apply who fails to apply before making taxable supplies. Where the person fails to get registered within sixty days of starting the taxable activity, the same entry adds liability, on conviction by a Special Judge, to imprisonment of up to three years, a fine up to the tax involved, or both. Section 14(2A) also lets the Commissioner compulsorily register a person after giving a hearing. **What if I am a manufacturer and also retail my own goods?** Section 2(28) requires a person who combines manufacture with retail to notify and advertise wholesale and retail prices separately and declare the addresses of retail outlets. The cottage industry test still applies to the manufacturing concern. ### Common mistakes - **Treating "cottage industry" as a label for any small unit.** The section 2(5AB) conditions are cumulative. One industrial connection, an eleventh worker, or turnover above Rs. 8 million ends the exclusion. - **Counting only one product line toward turnover.** Condition 4 refers to annual turnover "from all supplies". - **Assuming income tax registration covers sales tax.** Section 181 of the Income Tax Ordinance, 2001 and section 14 of the Sales Tax Act, 1990 are separate duties. - **Assuming every shopkeeper is outside sales tax.** A retailer who is Tier-1 under section 2(43A) is not excluded from section 14(1)(b). ### What to check in the official text Read section 14 with the definitions in section 2, especially clauses (5AB), (17), (28), (43A) and (47). Read section 3(1), (1A), (9) and (9A) for how tax is charged. Section 3(12) lets the Federal Government change the electricity-bill tax by notification, and section 3(1A) refers to notified exceptions. Section 14(3) says registration is regulated as the Board prescribes. Those notifications are not in this corpus, so check them before relying on the rates here. ### Frequently asked #### Is there a turnover limit below which a small trader does not need sales tax registration? Section 14(1) does not set a general turnover threshold. It lists categories: a manufacturer not running a cottage industry, certain retailers, importers, exporters seeking refunds, and wholesalers, dealers or distributors. The only turnover limit on this page is the Rs. 8 million condition inside the cottage industry definition. #### My workshop has an industrial electricity connection but only four workers. Is it a cottage industry? No. Section 2(5AB) requires a manufacturing concern to meet each of four conditions, and the first is that it does not have an industrial gas or electricity connection. Failing any one condition means the unit is not a cottage industry, so the section 14(1)(a) exclusion does not apply. #### Does my NTN also register me for sales tax? No. Registration under section 181 of the Income Tax Ordinance, 2001 is for income tax. Registration under section 14 of the Sales Tax Act, 1990 is a separate requirement under a separate law, with its own penalties in section 33. ### Citations - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "a manufacturer who is not running a cottage industry" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“cottage industry” means a manufacturing concern, which fulfils each of following conditions" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "tax shall be charged from retailers, other than those falling in Tier-1, through their monthly electricity bills" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 33, Table, S. No. 7 (failure to apply for registration before making taxable supplies)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Income Tax Ordinance, 2001, section 181 (Taxpayer’s registration)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181-taxpayer-s-registration), as amended to 2026-06-30: "Every taxpayer" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What is the section 21(s) rule on sales received in cash over Rs. 200,000? Source: https://qanoondigest.com/faq/sole-proprietors/cash-sales-over-200000-section-21s Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 21(s) of the Income Tax Ordinance, added by the Finance Act, 2025, disallows fifty percent of the expenditure claimed in respect of a sale where the seller received more than Rs. 200,000 against a single invoice otherwise than through a banking channel or digital means. It penalises how the sale was collected, not the sale itself. **Applies to:** Sole proprietors, traders and service businesses that receive large customer payments in cash, for tax year 2027. ### What does the law say? Section 20 of the Income Tax Ordinance, 2001 allows a business to deduct expenditure incurred for the business. Section 21 lists deductions that are not allowed. Clause (s), inserted by the Finance Act, 2025, adds a new item to that list: > fifty percent of the expenditure claimed in respect of sale where the taxpayer received payment exceeding two hundred thousand rupees otherwise than through a banking channel or digital means against a single invoice containing one or more than one transactions of supply of goods or provisions of services. Four elements have to be present: 1. There is a **sale**, of goods or services. 2. The seller **received payment** for it. 3. The payment received **exceeds Rs. 200,000**, measured **against a single invoice**. One invoice can cover several transactions. 4. The payment was received **otherwise than through a banking channel or digital means**, which in practice means cash. When all four are met, **fifty percent of the expenditure claimed in respect of that sale** is not deductible. ### How does it work in practice? Most section 21 clauses look at how a business spends. Clause (s) looks at how it collects. A furniture maker who sells a bedroom set for Rs. 350,000 and takes the full amount in cash has met the conditions for that invoice. The consequence falls on the expense side of the accounts. The sale is still income as usual. What changes is that half of the costs claimed in respect of that sale are added back, so taxable profit goes up. The clause is tied to the invoice. It does not look at a customer's total purchases over the year. It looks at the payment received against each single invoice. ### What the clause does not spell out The Ordinance does not explain how to measure "the expenditure claimed in respect of sale". For a trader, the cost of the goods sold on that invoice is the most direct link, but section 21(s) does not say whether overheads such as rent, wages and electricity are also to be apportioned to the sale, or by what method. The clause also does not say how a partly cash, partly bank payment is treated. If Rs. 250,000 of a Rs. 400,000 invoice is paid in cash and the rest by bank transfer, the text asks whether the payment received otherwise than through a banking channel exceeds Rs. 200,000. It does not state a rule for mixed receipts beyond that. These gaps are left open here rather than filled in. ### Worked example (illustrative figures) Imran sells air conditioners from a shop in Multan. In tax year 2027 he raises this invoice: - Invoice value: Rs. 480,000 (two split units, installed) - Paid by the customer in cash at the counter: Rs. 480,000 - Cost of the two units that Imran claims as expenditure: Rs. 400,000 Step 1: Check the conditions. One invoice, payment received Rs. 480,000, which exceeds Rs. 200,000, received in cash. Clause (s) applies. Step 2: If the expenditure claimed in respect of this sale is taken as the Rs. 400,000 cost of the units, the disallowance is 50% x Rs. 400,000 = Rs. 200,000. Step 3: Effect on profit from this sale. | | Without clause (s) (Rs.) | With clause (s) (Rs.) | |---|---|---| | Sale | 480,000 | 480,000 | | Cost allowed | 400,000 | 200,000 | | Taxable profit from the sale | 80,000 | 280,000 | The taxable profit on this one invoice rises by Rs. 200,000. If Imran also claimed a share of shop rent or wages against this sale, the amount of expenditure "in respect of" it, and so the disallowance, would be larger. Step 2 uses the narrower measure only because the Ordinance does not fix one. Had the customer paid the whole Rs. 480,000 by bank transfer or through a digital payment, clause (s) would not apply to the invoice. ### What if the customer pays in instalments? The clause refers to "payment exceeding two hundred thousand rupees" received "against a single invoice". It does not say whether separate cash instalments against one invoice are added together. Read literally, the test is the payment received against the invoice, but the Ordinance does not state the rule for instalments in terms. ### What if I sell below Rs. 200,000 per invoice? An invoice where the cash received does not exceed Rs. 200,000 is outside clause (s). Other clauses still apply to the expense side, such as clause 21(l) for payments to suppliers. ### Common mistakes - **Thinking the whole sale is disallowed.** Clause (s) disallows fifty percent of the expenditure claimed in respect of the sale, not the sale amount. - **Confusing it with clause 21(l).** Clause (l) is about cash payments the business makes. Clause (s) is about cash the business receives. - **Treating it as a turnover limit.** The test is per invoice, not per customer or per year. - **Assuming no records are needed for cash sales.** Section 174(2) lets the Commissioner disallow or reduce any deduction that is not supported by a receipt or other evidence. ### What to check in the official text Read clause (s) at the end of section 21, together with the note that it was inserted by the Finance Act, 2025. Check whether the Board has issued any clarification on how "expenditure claimed in respect of sale" is measured, as this corpus holds no circular on the point. Read section 20 for the general rule that clause (s) cuts back. ### Frequently asked #### Is the cash sale itself taxed twice under section 21(s)? No. The clause does not add the sale to income a second time. It refuses fifty percent of the expenditure claimed in respect of that sale, so taxable profit rises by the disallowed amount. #### Does a sale of exactly Rs. 200,000 in cash fall under the clause? The clause applies where payment received is exceeding two hundred thousand rupees. A payment of exactly Rs. 200,000 does not exceed that figure. #### Does the rule apply to services as well as goods? Yes. The text covers a single invoice containing one or more transactions of supply of goods or provision of services. ### Citations - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "fifty percent of the expenditure claimed in respect of sale where the taxpayer received payment exceeding two hundred thousand rupees otherwise than through a banking channel or digital means against a single invoice containing one or more than one transactions of supply of goods or provisions of services." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 20 (Deductions in computing income chargeable under the head “Income from Business”)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#20-deductions-in-computing-income-chargeable-under-the-head-income-from-business), as amended to 2026-06-30: "a deduction shall be allowed for any expenditure incurred by the person in the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 174 (Records)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#174-records), as amended to 2026-06-30: "to provide a receipt, or other record or evidence of the transaction or circumstances giving rise to the claim for the deduction" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What is the section 21(s) rule on sales received in cash over Rs. 200,000? Source: https://qanoondigest.com/faq/sole-proprietors/section-21s-cash-sales-over-200000 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 21(s) of the Income Tax Ordinance disallows fifty percent of the expenditure claimed in respect of a sale where the business received more than Rs. 200,000 against a single invoice otherwise than through a banking channel or digital means. It targets the seller, not the buyer, and several points in the wording are left unclear. **Applies to:** Sole proprietors and other businesses that sell goods or services and sometimes receive large payments in cash against one invoice. Section 21(s) is a rule about how you are paid, not how you pay. If a customer pays more than Rs. 200,000 against one invoice in cash, or by any route that is neither a banking channel nor digital means, half of the expenditure you claim in respect of that sale is not allowed as a deduction. ### What does the law say? Section 21 of the Income Tax Ordinance, 2001 lists amounts for which "no deduction shall be allowed" when computing income under the head Income from Business. Clause (s), inserted by the Finance Act, 2025, adds this item to the list: - **What is disallowed:** fifty percent of the expenditure claimed in respect of a sale. - **When:** the taxpayer received payment exceeding Rs. 200,000. - **How the payment arrived:** otherwise than through a banking channel or digital means. - **Unit of measurement:** a single invoice, whether that invoice contains one transaction or several transactions of supply of goods or provision of services. Section 20(1) is the general rule that allows business expenditure as a deduction. Section 21 works as an exception to it, so clause (s) takes back part of a deduction that section 20 would otherwise give. "Digital means" is defined in section 2(17B). The definition covers digital payments and financial services including online payment portals, online interbank fund transfers, online bill or invoice payment services, over the counter digital payment services, and card payments using Point of Sale terminals, QR codes, mobile devices, ATMs, kiosks or other digital payment devices. ### How does it work in practice? The clause looks at the seller's side of a transaction. A shop, wholesaler, workshop or service business that issues an invoice and receives more than Rs. 200,000 on it in cash is the one affected. The buyer's deduction for a cash payment is dealt with separately, by clause (l) of the same section, which is covered on the page about cash payments. In practice the rule turns on three facts for each invoice: 1. How much was received against that invoice. 2. Whether the money came through a banking channel or digital means. 3. What expenditure the business claimed in respect of that sale. If the first two facts trigger the clause, half of the third figure is added back to business income. ### Worked example (illustrative figures) Tariq runs a building materials store in Gujranwala. Three invoices from tax year 2027, with made-up amounts: | Invoice | Amount | How paid | | --- | --- | --- | | A | Rs. 450,000 | Cash at the counter | | B | Rs. 450,000 | Online interbank transfer | | C | Rs. 180,000 | Cash at the counter | Assume, only for this example, that the expenditure Tariq claims in respect of invoice A is the cost of the goods sold on it, Rs. 380,000. The Ordinance does not say how that figure is to be measured (see below). 1. Invoice A: Rs. 450,000 in cash exceeds Rs. 200,000. Disallowed amount = 50% of Rs. 380,000 = Rs. 190,000. 2. Invoice B: paid by online interbank transfer, which is listed in the section 2(17B) definition of digital means. Clause (s) does not apply. 3. Invoice C: Rs. 180,000 in cash does not exceed Rs. 200,000. Clause (s) does not apply. Tariq's taxable business income for the year is Rs. 190,000 higher than it would have been without clause (s). The tax on that amount depends on his total income and the rates for individuals, which are covered on a separate page. ### What does the text leave unclear? The clause is short, and several practical questions are not answered in its wording. This page does not resolve them. - **Which expenditure is "claimed in respect of sale".** The clause does not say whether this means only the cost of the goods on that invoice, or also a share of rent, salaries and other overheads. It gives no formula. - **Part cash, part bank.** If an invoice of Rs. 450,000 is settled with Rs. 150,000 in cash and Rs. 300,000 by bank transfer, the text does not say whether "payment exceeding two hundred thousand rupees" refers to the cash part alone or to the whole payment. - **"Banking channel".** Section 2(17B) defines digital means, but the definitions in section 2 do not include one for "banking channel". Clause (l) of section 21 treats online transfers and credit card payments as banking channel transactions, but that proviso is written for clause (l). - **Several invoices to one customer.** The test is per single invoice. The clause does not address a sale split into several smaller invoices. - **Timing.** The clause does not say how it applies where the invoice is issued in one tax year and the cash is received in another. ### Common mistakes - **Treating it as a limit on cash sales.** Section 21(s) does not prohibit cash sales. It reduces the deduction for expenditure linked to them. - **Confusing it with clause (l).** Clause (l) concerns expenditure you pay other than through the banking channel. Clause (s) concerns sale proceeds you receive. - **Assuming the whole expenditure is lost.** The clause disallows fifty percent, not all of it. - **Assuming a card payment counts as cash.** Card payments through Point of Sale terminals are named in the definition of digital means. ### What to check in the official text Read clause (s) at the end of section 21 and the definition of digital means in section 2(17B). Compare clause (s) with clause (l) in the same section, which has its own proviso on what counts as the banking channel. Because the clause was added recently, check whether the Board has issued any circular or rules on how the expenditure "in respect of sale" is to be worked out. None is part of the text held here. ### Frequently asked #### Does section 21(s) tax the cash itself? No. Section 21(s) does not add a separate tax on the cash received. It removes fifty percent of the expenditure claimed in respect of that sale from your deductions, which raises taxable business income by that amount. #### Is a sale of Rs. 200,000 in cash caught? The clause applies where the payment received is exceeding two hundred thousand rupees. A cash receipt of exactly Rs. 200,000 against one invoice does not exceed that figure on the plain words of the clause. #### Does a card or QR payment count as digital means? Section 2(17B) defines digital means to include card payments using Point of Sale terminals, QR codes, mobile devices, ATMs and kiosks, as well as online transfers and portals. A payment through one of those listed routes is not a receipt otherwise than through digital means. #### When did clause (s) start? The footnotes in the consolidated Ordinance record that clause (s) was inserted by the Finance Act, 2025. The version on this page is the text as amended to 30 June 2026. ### Citations - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "fifty percent of the expenditure claimed in respect of sale where the taxpayer received payment exceeding two hundred thousand rupees otherwise than through a banking channel or digital means against a single invoice" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "digital payments and financial services including but not limited to- online portals or platforms for digital payments/receipts; online interbank fund transfer services" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 20 (Deductions in computing income chargeable under the head “Income from Business”)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#20-deductions-in-computing-income-chargeable-under-the-head-income-from-business), as amended to 2026-06-30: "a deduction shall be allowed for any expenditure incurred by the person in the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do I need a separate NTN for my business, or is my CNIC enough? Source: https://qanoondigest.com/faq/sole-proprietors/ntn-registration-sole-proprietorship-cnic Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Your CNIC is your National Tax Number. Section 181(4) of the Ordinance says an individual's CNIC is used as the NTN from tax year 2015. A business run in your own name is not a separate person under section 80, but section 181(1) still requires you to apply for registration and section 114A requires declaring your business bank account. **Applies to:** Individuals who run a shop, trade, workshop or practice in their own name, without forming a company or partnership. If you run a business in your own name, the Income Tax Ordinance, 2001 does not give that business a separate tax number. Your CNIC is your National Tax Number. What the law does require is that you apply to register as a taxpayer, declare the bank account you use for the business, and display the number at your business premises. ### What does the law say? Four provisions answer the question together. 1. **Section 181(4): the number.** From tax year 2015 onwards, where an individual holds a CNIC issued by NADRA, the CNIC "shall be used as National Tax Number". There is no separate number issued to an individual in its place. 2. **Section 80: who is a person.** Section 80(1) treats three kinds of persons: an individual; a company or association of persons; and governments and public international organisations. An association of persons includes a firm, and section 80(2)(c) defines a firm as "the relation between persons who have agreed to share the profits of a business". A business owned and run by one individual is none of these other categories, so for tax purposes it is simply that individual carrying on business. 3. **Section 181(1): the duty to register.** "Every taxpayer" shall apply for registration in the prescribed form and manner. Section 2(66) defines a taxpayer as any person who derives an amount chargeable to tax, and also includes any person required to furnish a return or pay tax. 4. **Section 114A: the business bank account.** Every taxpayer shall declare to the Commissioner the bank account used for business transactions. Section 114A(2) says this is done through the original or modified registration form prescribed under section 181. ### How does it work in practice? For a sole proprietor, the owner is the taxpayer. The profit of the shop or workshop is the owner's income under the head Income from Business, and it goes into the owner's own return. Because the owner is an individual with a CNIC, section 181(4) makes that CNIC the NTN. Registration is still a step you take. Section 181(1) places the duty to apply on every taxpayer, and section 181(3) says the registration scheme is regulated through rules notified by the Board. The registration form is also where section 114A(2) expects the business bank account to be declared. Once registered, section 181C adds a display duty: every person deriving business income chargeable to tax who has been issued a National Tax Number shall display it "at a conspicuous place at every place of his business". For an individual, that number is the CNIC. ### Worked example (illustrative figures) Bilal Ahmed opens a mobile accessories shop in Rawalpindi called "Bilal Telecom". He has not formed a company, and nobody shares the profits with him. - **Is "Bilal Telecom" a separate person?** No. It is not a company, and with a single owner it is not a firm under section 80(2)(c). The shop's profit is Bilal's own business income. - **Which number does the shop use?** Bilal's CNIC, under section 181(4). - **Does he still need to apply?** Yes. He derives income chargeable to tax, so he is a taxpayer under section 2(66), and section 181(1) requires him to apply for registration. - **What about his bank accounts?** Bilal keeps a personal savings account and opens a current account in which customers pay by transfer. The current account is used for business transactions, so section 114A requires him to declare it through the registration form. - **What must he display?** His NTN, which is his CNIC number, at the shop, under section 181C. ### What if ...? **What if I have two shops?** Both are businesses carried on by you as one person. Section 181C requires the number to be displayed at every place of business, and each bank account used for business transactions falls under section 114A. **What if I take in a partner?** Once two or more persons agree to share the profits of a business, section 80(2)(c) describes a firm, and section 80(2)(a) includes a firm in an association of persons. That is a different person from you, and this page does not cover its registration. **What if I never apply?** S. No. 3 of the Table in section 182(1) sets a penalty of ten thousand rupees for a person who is required to apply for registration but fails to make an application. S. No. 4 sets five thousand rupees for failing to notify material changes in the particulars of registration. **What if I do not declare my business account?** S. No. 29 of the same Table applies where a person wilfully fails to declare business bank accounts in the registration application or to amend the registration profile to declare them. The penalty is Rs. 10,000 for each day of default, counted from the date of the registration application or the date the undeclared account was opened, whichever is later. Where that works out to less than Rs. 100,000 for an account, the penalty is Rs. 100,000 for each undeclared business bank account. ### Common mistakes - **Treating the shop name as a separate taxpayer.** A trade name does not create a new person under section 80. The owner files one return covering the business. - **Assuming a CNIC means no registration is needed.** Section 181(4) decides the number. Section 181(1) still requires the application. - **Declaring only a personal account.** Section 114A is about the account used for business transactions. If customers or suppliers pay through an account, that account is the one the section is aimed at. - **Confusing income tax registration with sales tax registration.** Registration under section 181 is under the Income Tax Ordinance. Registration under the Sales Tax Act, 1990 is a separate question, covered on another page. ### What to check in the official text Read section 181 in full, including sub-section (1A) on online marketplaces, which applies if you sell digitally ordered goods or services. Read section 114A and the definition of "business bank account" in section 2(10A). The penalty amounts are in the Table under section 182(1), S. Nos. 3, 4 and 29. The registration form and procedure come from rules notified by the Board under section 181(3). Check the current form and procedure there, because the portal steps are not part of this corpus. ### Frequently asked #### Does my shop get its own NTN if it has a trade name? Not under the Ordinance. Section 80 lists individuals, companies and associations of persons as persons, and a shop run by one owner is none of the last two. For an individual, section 181(4) says the CNIC is used as the National Tax Number, so the business uses the owner's number. #### If my CNIC is my NTN, do I still have to register? Yes. Section 181(1) says every taxpayer shall apply for registration in the prescribed form and manner. Section 181(4) only decides which number is used once an individual is registered. The Table in section 182 sets a penalty of ten thousand rupees for failing to apply. #### Do I have to tell FBR which bank account my business uses? Yes. Section 114A requires every taxpayer to declare the bank account used for business transactions, through the original or modified registration form under section 181. Wilful failure to declare it carries a penalty under S. No. 29 of the section 182 Table. ### Citations - [Income Tax Ordinance, 2001, section 181 (Taxpayer’s registration)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181-taxpayer-s-registration), as amended to 2026-06-30: "in case of individuals having Computerized National Identity Card (CNIC) issued by the National Database and Registration Authority, CNIC shall be used as National Tax Number" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 80 (Person)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#80-person), as amended to 2026-06-30: "The following shall be treated as persons for the purposes of this Ordinance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "“taxpayer” means any person who derives an amount chargeable to tax under this Ordinance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114A (Business bank account)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114a-business-bank-account), as amended to 2026-06-30: "Every taxpayer shall declare to the Commissioner the bank account utilized by the taxpayer for business transactions." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 181C (Displaying of National Tax Number)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181c-displaying-of-national-tax-number), as amended to 2026-06-30: "shall display his National Tax Number at a conspicuous place at every place of his business" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 182(1), Table, S. No. 3 (failure to apply for registration) and S. No. 29 (failure to declare business bank account)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is there a reduced tax rate for small manufacturers, and do I qualify as an SME? Source: https://qanoondigest.com/faq/sole-proprietors/sme-tax-regime-small-manufacturers Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, if you manufacture and your business turnover in the tax year is not more than Rs. 250 million. Section 100E taxes such a small and medium enterprise under the Fourteenth Schedule: 7.5% or 15% of taxable income depending on turnover, or, by option, a final tax of 0.25% or 0.5% of turnover. Section 113 minimum tax does not apply. **Applies to:** Sole proprietors and other persons engaged in manufacturing whose annual business turnover does not exceed Rs. 250 million. The Income Tax Ordinance has a separate regime for small manufacturers, called small and medium enterprises (SMEs). It replaces the normal slab rates with a flat percentage of taxable income, or, if the SME opts for it, a small final tax on turnover. Whether a sole proprietor can use it turns on two facts: whether the business manufactures, and how large its turnover is. ### Who counts as a small and medium enterprise? Clause (59A) of section 2 defines a small and medium enterprise as a person who: 1. is engaged in manufacturing as defined in section 153(7)(iv), and 2. has business turnover in a tax year that does not exceed Rs. 250,000,000. Section 153(7)(iv) defines a manufacturer as a person engaged in production or manufacturing of goods. That includes any process by which an article is converted into a distinct article or changed so it can be used differently, and a process of assembling, mixing, cutting or preparing goods in any other manner. The definition applies to "a person", so an individual running a workshop in his own name can qualify. It does not cover pure trading or services. Clause (59A) does not define "turnover" itself, and this page does not supply a definition for it. The proviso to clause (59A) is strict. Once annual turnover exceeds Rs. 250,000,000, the business stops qualifying in that tax year and in any subsequent tax year. ### What does the law say about the rates? Section 100E(1) says that, for tax year 2021 onwards, an SME's tax is computed and paid under the rules in the Fourteenth Schedule. Rule 2 of that Schedule requires the SME to register with FBR on its Iris portal or with the Small and Medium Enterprises Development Authority on its SME registration portal. The rates in force for tax year 2027 are: | Category | Annual business turnover | Normal regime (rule 3) | Optional final tax (rule 4) | | --- | --- | --- | --- | | Category-1 | Up to Rs. 100 million | 7.5% of taxable income | 0.25% of gross turnover | | Category-2 | Above Rs. 100 million, up to Rs. 250 million | 15% of taxable income | 0.5% of gross turnover | Other rules in the Schedule matter too: - **Rule 4(2):** the final tax option is exercised when the return is filed and is irrevocable for three tax years. - **Rule 4(3):** sections 177 and 214C, the audit provisions, do not apply to an SME that opts for the final tax regime. - **Rule 5:** an SME on the normal regime may be selected for audit by computer ballot under section 214C if its tax-to-turnover ratio is below the rule 4 rates. Selections cannot exceed 5% of such SMEs. - **Rule 6:** export proceeds of SMEs are taxed at the rule 4 final tax rates. - **Rule 7:** section 113 minimum tax on turnover does not apply to SMEs. - **Rule 8:** tax deducted under section 153(1)(a) on an SME's sale of goods is not minimum tax. Section 100E(2) lets the Board prescribe a simplified return for SMEs. ### Worked example (illustrative figures) Bilal makes leather footballs in Sialkot as a sole proprietor. For tax year 2027 his turnover is Rs. 80,000,000 and his taxable income is Rs. 6,000,000. He is in Category-1. **Normal SME regime (rule 3):** 6,000,000 x 7.5% = **Rs. 450,000**. **Final tax option (rule 4):** 80,000,000 x 0.25% = **Rs. 200,000**. **For comparison, the ordinary individual table** in clause (1) of Division I, Part I of the First Schedule: taxable income of Rs. 6,000,000 falls in the band above Rs. 5,600,000. Tax is Rs. 1,610,000 + 45% of (6,000,000 - 5,600,000) = 1,610,000 + 180,000 = **Rs. 1,790,000**. As an SME, Bilal does not use this table. If Bilal chose the final tax option in his tax year 2027 return, rule 4(2) would keep him on it for three tax years, even if his profit margin fell and 7.5% of taxable income became the lower figure. Now suppose his turnover were Rs. 180,000,000 with taxable income of Rs. 12,000,000 (Category-2): - Normal SME regime: 12,000,000 x 15% = **Rs. 1,800,000**. - Final tax option: 180,000,000 x 0.5% = **Rs. 900,000**. ### What if my business makes a loss? Under rule 3 the rate applies to taxable income, and rule 7 removes section 113 minimum tax. Read together, a loss year on the normal SME regime produces no income to tax at 7.5% or 15%. Under the rule 4 final tax option, tax is a percentage of gross turnover, so it is payable whether or not there is a profit. ### What if I both manufacture and trade? The definition asks whether the person "is engaged in manufacturing" and looks at "his business turnover". The Schedule does not say how turnover from a separate trading activity is treated, so that question is left open here. ### Common mistakes - **Assuming any small business is an SME.** The definition in clause (59A) is limited to manufacturing. - **Choosing the turnover option for one year only.** Rule 4(2) locks it in for three tax years. - **Expecting to return to SME status after a big year.** The proviso to clause (59A) removes the status for the year of excess and every subsequent year. - **Paying minimum tax under section 113.** Rule 7 of the Fourteenth Schedule excludes SMEs from it. ### What to check in the official text Read clause (59A) of section 2, section 100E and all nine rules of the Fourteenth Schedule. Check section 153(7)(iv) to confirm your process counts as manufacturing. Rule 9 applies the rest of the Ordinance to SMEs, so return filing, records and withholding rules still apply. Any simplified return prescribed under section 100E(2) is set by the Board and is not part of this corpus. ### Frequently asked #### I run a trading shop, not a factory. Can I use the SME rates? No. Clause (59A) of section 2 limits the definition to a person engaged in manufacturing as defined in section 153(7)(iv). That covers converting or reshaping articles and assembling, mixing, cutting or preparing goods, but buying and reselling goods is not in that definition. #### Can I switch back to normal rates after choosing the final tax option? Not straight away. Rule 4(2) of the Fourteenth Schedule says the option is exercised when filing the return and, once exercised, is irrevocable for three tax years. #### What happens if my turnover goes above Rs. 250 million? The proviso to clause (59A) says you stop qualifying as a small and medium enterprise in the tax year in which turnover exceeds Rs. 250 million and in any subsequent tax year. ### Citations - [Income Tax Ordinance, 2001, section 100E (Special provisions relating. to small and medium enterprises)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100e-special-provisions-relating-to-small-and-medium-enterprises), as amended to 2026-06-30: "the tax payable by a small and medium enterprise as defined in clause (59A) of section 2 shall be computed and paid in accordance with rules made under the Fourteenth Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "his business turnover in a tax year does not exceed two hundred and fifty million rupees" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "a process of assembling, mixing, cutting or preparation of goods in any other manner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Fourteenth Schedule, rules 3 and 4 (Categories and tax rates; Option for Final Tax Regime)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Fourteenth Schedule, rule 7 (Exclusion from Minimum Tax on Turnover)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What does turnover include for minimum tax: gross sales, sales tax, returns and discounts? Source: https://qanoondigest.com/faq/sole-proprietors/what-counts-as-turnover-minimum-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 113(3) of the Income Tax Ordinance, turnover is gross sales or gross receipts from goods, gross fees for services and gross contract receipts. Sales tax, federal excise duty and trade discounts shown on invoices are left out, as are amounts already taxed as a final discharge. Sales returns are not mentioned. **Applies to:** Sole proprietors and other individuals whose business turnover is Rs. 100 million or more in a tax year, and who need to work out the base for minimum tax under section 113. Turnover for minimum tax is a gross figure, not a profit figure. Section 113(3) of the Income Tax Ordinance, 2001 starts from everything the business receives and removes only a short list of items: sales tax, federal excise duty, trade discounts shown on invoices or bills, and amounts already taxed as a final discharge. ### Who needs to work out turnover under section 113? Section 113(1) applies to a resident company, a permanent establishment of a non-resident company, and to an individual or an association of persons having turnover of one hundred million rupees or more in tax year 2017 or any later tax year. A sole proprietor whose turnover stays below Rs. 100 million is outside this section. For those inside it, section 113 compares the tax actually payable with a percentage of "turnover from all sources" set in Division IX of Part I of the First Schedule. If the normal tax is lower, or nil because of a loss, deductions or exemptions, the person pays the minimum tax instead. The rates are covered on a separate page. ### What does the law include in turnover? Section 113(3) lists four parts. Three matter to an individual: | Clause | What is included | What is left out | | --- | --- | --- | | (a) | Gross sales or gross receipts from the sale of goods | Sales tax, federal excise duty, trade discounts shown on invoices or bills, and amounts taken as deemed income assessed as final discharge | | (b) | Gross fees for rendering services or giving benefits, including commissions | Receipts covered by final discharge of tax liability for which tax is separately paid or payable | | (c) | Gross receipts from executing contracts | Receipts covered by final discharge of tax liability for which tax is separately paid or payable | Clause (d) deals with a company's share of an association's turnover and does not apply to a sole proprietor. An Explanation added to section 113(2)(a) removes any doubt about scope. It says the definition "covers receipts from all business activities", and names receipts from selling immoveable property where that receipt is taxed under the head Income from Business. ### Why are final tax receipts left out? Section 169 deals with tax collected or deducted as a final tax. Where it applies, the income "shall not be chargeable to tax under any head of income". Section 113(3) follows the same logic: a receipt whose tax is already a final discharge is not counted again in the turnover base. The Explanation to section 113(1) also says that "tax payable or paid" does not include tax on deemed income assessed as final discharge, so that tax is not used to meet the minimum either. ### Worked example (illustrative figures) Imran runs a wholesale electrical goods business in Gujranwala as a sole proprietor. His made-up figures for tax year 2027 are: | Item | Amount | | --- | --- | | Total invoiced to customers, including sales tax | Rs. 148,000,000 | | Sales tax shown on those invoices | Rs. 20,000,000 | | Trade discounts printed on those invoices | Rs. 3,000,000 | | Commission received from a manufacturer for promoting its products | Rs. 2,500,000 | | Receipts whose tax is a final discharge (assumed for this example) | Rs. 1,500,000 | Step by step: 1. Start with invoiced sales: Rs. 148,000,000. 2. Remove sales tax: Rs. 148,000,000 minus Rs. 20,000,000 = Rs. 128,000,000. 3. Remove trade discounts shown on invoices: Rs. 128,000,000 minus Rs. 3,000,000 = Rs. 125,000,000. 4. Remove the final discharge receipts: Rs. 125,000,000 minus Rs. 1,500,000 = Rs. 123,500,000. 5. Add commission under clause (b): Rs. 123,500,000 plus Rs. 2,500,000 = Rs. 126,000,000. Imran's turnover under section 113(3) is Rs. 126,000,000. It is above Rs. 100 million, so section 113 applies to him for the year. The applicable percentage then comes from Division IX of Part I of the First Schedule. ### What if ...? **What if customers return goods?** Section 113(3) does not mention sales returns. It speaks of "gross sales or gross receipts" and lists the exclusions. The Ordinance does not say whether a return reduces gross sales, so this page does not resolve it. **What if I give a discount that is not on the invoice?** The exclusion covers "trade discounts shown on invoices, or bills". A discount agreed later and not shown on an invoice or bill is not within those words. The law does not say anything more about it. **What if I run two businesses?** Section 113(1) refers to turnover "from all sources", and the Explanation covers receipts from all business activities. Turnover from both businesses is added together. **What if my business made a loss?** A loss for the year is one of the reasons listed in section 113(1) that can bring minimum tax into play. Turnover is measured the same way whether there is a profit or a loss. ### Common mistakes - **Using profit instead of turnover.** Section 113 is based on gross receipts. Expenses, cost of goods sold and depreciation are not subtracted. - **Leaving sales tax in the figure.** Section 113(3)(a) takes sales tax and federal excise duty out. - **Treating every discount as excluded.** Only trade discounts shown on invoices or bills are named. - **Assuming minimum tax applies to every trader.** For an individual, section 113(1) starts at turnover of Rs. 100 million. - **Counting only sales of goods.** Service fees, commissions and contract receipts are part of turnover under clauses (b) and (c). ### What to check in the official text Read section 113 in full, especially sub-section (3) and the Explanations to sub-sections (1) and (2)(a). Then check section 169 and the provision under which any receipt was taxed, to confirm whether that tax is a final discharge. The minimum tax percentage for your line of business is in Division IX of Part I of the First Schedule. ### Frequently asked #### Is sales tax part of my turnover for minimum tax? No. Section 113(3)(a) measures gross sales or gross receipts exclusive of sales tax and federal excise duty. The tax you charge customers on your invoices is taken out before the minimum tax base is worked out. #### Can I deduct sales returns from turnover? The definition in section 113(3) does not mention sales returns at all. It lists only sales tax, federal excise duty, trade discounts shown on invoices or bills, and amounts taxed as a final discharge. The Ordinance does not settle how returned goods are treated, so this page does not either. #### Does section 113 apply to every shopkeeper? No. For an individual, section 113(1) applies only where turnover is Rs. 100 million or more in tax year 2017 or any later tax year. Below that level, the minimum tax on turnover in section 113 does not reach a sole proprietor. ### Citations - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "gross receipts, exclusive of Sales Tax and Federal Excise duty or any trade discounts shown on invoices, or bills, derived from the sale of goods" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "the income shall not be chargeable to tax under any head of income in computing the taxable income of the person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 18 (Income from business)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#18-income-from-business), as amended to 2026-06-30: "the profits and gains of any business carried on by a person at any time in the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- # Retailers and shopkeepers Sales tax on retail, Tier-1 retailers, POS integration and tax on electricity bills. ## Can a shopkeeper charge sales tax on top of the printed retail price, and who is liable if no price is printed? Source: https://qanoondigest.com/faq/retail-shops/sales-tax-above-printed-retail-price Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer For Third Schedule goods, section 3(2)(a) of the Sales Tax Act charges eighteen percent of the retail price, and the maker or importer prints both the price and the tax on the pack. Section 3B sends any excess tax collected to the government, and section 33 serial 26 penalises the manufacturer or importer who fails to print the price. **Applies to:** Shoppers and shopkeepers in Pakistan buying or selling branded, packaged goods listed in the Third Schedule to the Sales Tax Act, 1990. For branded, packaged goods in the Third Schedule, the Sales Tax Act fixes both the tax base and who prints it. The shopkeeper does not set the retail price for tax; the manufacturer or importer does, and the tax figure goes on the pack with it. ### What does the law say about the printed price? Section 3(2)(a) of the Sales Tax Act, 1990 charges goods listed in the Third Schedule at eighteen percent of the retail price (or at Eighth Schedule rates where the goods are also listed there). It then requires that "the retail price thereof, along with the amount of sales tax" be printed or embossed by the manufacturer, or the importer for imported goods, on each article, packet, container, package, cover or label. Section 2(27) defines the retail price as the price fixed by the manufacturer or importer, "inclusive of all duties, charges and taxes (other than sales tax)", at which the brand or variety is sold to the general body of consumers. Where more than one price is fixed for the same brand or variety, the highest one counts. A proviso lets the Board specify zones or areas for working out the highest retail price. Put together: the pack should carry the retail price and the sales tax on it, and the tax is eighteen percent of that printed retail price. ### Can the shopkeeper add sales tax on top? Section 3 sets the tax on Third Schedule goods as eighteen percent of the retail price and requires that amount to be printed. Nothing in section 3 provides for a further sales tax charged by the retailer on the same retail price. If a shop does collect more, section 3B applies. Under section 3B(1), any person who collects any tax or charge that was not payable, or that is in excess of what is actually payable, and passes the incidence on to the consumer, must pay the amount collected to the Federal Government. This applies whether it was collected "under misapprehension of any provision of this Act or otherwise". Section 3B(2) makes that amount an arrear of tax, recoverable as such, and bars any refund claim for it. Section 3B(3) puts the burden of proving whether the tax was passed to the consumer on the person who collected it. Section 3B makes the collector pay the excess to the government. It does not itself provide a route for the shopper to get the money back. ### What about cold drinks sold at a higher price? The second proviso to section 2(27) deals with chilling charges on aerated water, beverages, mineral water and fruit juices. It says the reduction in price on account of chilling or similar charges shall not be more than five percent of the price inclusive of sales tax, federal excise duty and other taxes (except income tax) at which the goods are actually sold. The proviso is about working out the retail price for tax. It does not say in plain terms whether, or by how much, a shop may charge above the printed price for a chilled drink. ### Who is liable if no price is printed? The duty to print falls on the manufacturer, or the importer for imported goods, under section 3(2)(a). Serial 26 of the table in section 33 is the matching penalty. It covers a manufacturer or importer of an item taxed on the basis of retail price who fails to print the retail price in the manner the Act requires: | Consequence | Amount | | --- | --- | | Penalty | Rs. 10,000 or five percent of the amount of tax involved, whichever is higher | | Goods | Liable to confiscation, as may be prescribed | | Redemption | Allowed on payment of a fine of not less than twenty percent of the total retail price of the goods | Serial 26 names the manufacturer or importer, not the retailer. The Act's general rule on liability, in section 3(3)(a), makes the tax on a supply of goods the liability of the person making the supply. The provisions read for this page do not set a separate penalty on a retailer for selling Third Schedule goods that carry no printed price. ### Worked example (illustrative figures) A shampoo bottle in a Rawalpindi general store is printed "Retail price Rs. 600, sales tax Rs. 108". 1. Tax under section 3(2)(a): 18% x Rs. 600 = Rs. 108. The printed figures match. 2. The shop charges Rs. 600 + Rs. 108 = Rs. 708, and then adds a further 18% on Rs. 708 = Rs. 127.44, billing Rs. 835.44. 3. The Rs. 127.44 is not payable as tax under section 3. If it was passed to the customer, section 3B(1) requires the shop to pay Rs. 127.44 to the Federal Government. Now suppose a carton of 1,000 bottles reaches the market with no retail price printed, and the tax involved is Rs. 108,000. Five percent of Rs. 108,000 is Rs. 5,400, which is lower than Rs. 10,000, so the manufacturer's penalty under serial 26 is Rs. 10,000. If the goods are confiscated, redemption needs a fine of at least 20% x Rs. 600,000 = Rs. 120,000. ### Common mistakes - **Treating the printed retail price as tax-inclusive.** Section 2(27) excludes sales tax from the retail price; the tax is printed alongside. - **Believing a shop keeps overcharged tax.** Section 3B sends it to the Federal Government. - **Blaming the retailer for a missing price.** Serial 26 is aimed at the manufacturer or importer. ### What to check in the official text Read sections 2(27), 3(2)(a), 3(3) and 3B, serial 26 of the section 33 table, and the Third Schedule of the Sales Tax Act as amended to 30 June 2026. Check any Board order specifying zones for the highest retail price and any notification fixing retail prices under the provisos to section 2(27). These are not held in this corpus. Provincial consumer protection laws on overcharging are outside this corpus. ### Frequently asked #### Does the printed retail price already include sales tax? No, not by definition. Section 2(27) defines the retail price as inclusive of all duties, charges and taxes other than sales tax. Section 3(2)(a) then requires the amount of sales tax to be printed along with the retail price, so the pack should show both figures. #### Can a shopkeeper keep extra tax he collected by mistake? No. Section 3B(1) says any person who collects tax not payable, or in excess of what is payable, and passes the incidence to the consumer must pay that amount to the Federal Government, whether it was collected under misapprehension or otherwise. Section 3B(3) puts the burden of proof on the person who collected it. #### What is the penalty for not printing the retail price? Serial 26 of the section 33 table makes a manufacturer or importer who fails to print the retail price pay Rs. 10,000 or five percent of the tax involved, whichever is higher. The goods are also liable to confiscation, with redemption on a fine of not less than twenty percent of their total retail price. ### Citations - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "shall be legibly, prominently and indelibly printed or embossed by the manufacturer" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "with reference to the Third Schedule, means the price fixed by the manufacturer" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3B (Collection of excess sales tax etc)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3b-collection-of-excess-sales-tax-etc), as amended to 2026-06-30: "which was not payable as tax or charge or which is in excess of the tax or charge actually payable and the incidence of which has been passed on to the consumer, shall pay the amount of tax or charge so collected to the Federal Government." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 33, Table, S. No. 26 (failure to print the retail price)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Third Schedule (see clause (a) of sub-section (2) of section 3)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Can I adjust or get a refund of the income tax collected on my shop's electricity bill? Source: https://qanoondigest.com/faq/retail-shops/section-235-electricity-tax-adjustable-or-minimum Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Only partly, for a shopkeeper who is not a company. Section 235(4) of the Income Tax Ordinance, 2001 treats the tax collected up to a bill amount of Rs. 360,000 a year as minimum tax with no refund, and makes the tax on monthly bills above Rs. 30,000 adjustable. For a company, all of it is adjustable. **Applies to:** Individuals and associations of persons running shops on commercial electricity connections, and companies, for tax collected under section 235 in tax year 2027. ### What does the law say? Section 235(4) of the Income Tax Ordinance, 2001 splits the advance tax collected on electricity bills into parts that behave differently: | Who | Part of the tax | How it is treated | |---|---|---| | Taxpayer other than a company | Tax collected up to a bill amount of Rs. 360,000 per annum | Minimum tax on income, no refund (section 235(4)(a)) | | Taxpayer other than a company | Tax collected on a monthly bill over and above Rs. 30,000 per month | Adjustable (section 235(4)(b)) | | Company | All tax collected | Adjustable against tax liability (section 235(4)(c)) | A sole-proprietor shop or a partnership running as an association of persons is "a taxpayer other than a company", so the first two rows apply. "Adjustable" tax works through section 168. Tax collected under Chapter XII of the Ordinance, which includes section 235, is treated as tax paid by the person it was collected from, and that person gets a tax credit for it in the tax year of collection. Section 235 is not in the list of final taxes in section 168(3). Section 168(5) refunds any credit that cannot be used in the year. "Minimum tax" is different. Section 235(4)(a) says that part "shall be treated as minimum tax on the income of such persons and no refund shall be allowed". Section 235 does not set out the mechanics, but the plain effect of those words is that the shopkeeper's tax for the year cannot be brought below that amount by this route, and whatever part of it exceeds the tax actually due on the shop's income is not paid back. ### How is the tax calculated in the first place? For commercial consumers, Division IV of Part IV of the First Schedule (as amended to 30 June 2026, so applying in tax year 2027) sets nil on a gross bill up to Rs. 500, 10 percent of the bill above Rs. 500 up to Rs. 20,000, and Rs. 1,950 plus 12 percent of the amount exceeding Rs. 20,000 for larger bills. The related page on income tax on shop electricity bills explains the table and the higher rate for people not on the Active Taxpayers' List. ### Worked example (illustrative figures) Two shopkeepers in Peshawar, both individuals on the Active Taxpayers' List, each with the same bill every month of tax year 2027. **Tariq's grocery: gross bill Rs. 25,000 a month.** 1. Monthly tax: Rs. 1,950 + 12% of (Rs. 25,000 - Rs. 20,000) = Rs. 1,950 + Rs. 600 = Rs. 2,550. 2. Yearly tax: Rs. 2,550 x 12 = **Rs. 30,600**. 3. Yearly bills: Rs. 25,000 x 12 = Rs. 300,000, within the Rs. 360,000 limit, and no month is above Rs. 30,000. 4. Result: all Rs. 30,600 is minimum tax under section 235(4)(a). None of it is refundable. **Nadia's garment shop: gross bill Rs. 45,000 a month.** 1. Monthly tax: Rs. 1,950 + 12% of (Rs. 45,000 - Rs. 20,000) = Rs. 1,950 + Rs. 3,000 = Rs. 4,950. 2. Yearly tax: Rs. 4,950 x 12 = **Rs. 59,400**. Yearly bills: Rs. 540,000. Section 235(4) does not say how to divide the tax on a bill that is partly within and partly above the limits. Rs. 30,000 a month for twelve months equals Rs. 360,000, so one way to read clauses (a) and (b) together is to treat the tax on the first Rs. 30,000 of each monthly bill as minimum tax and the rest as adjustable: 3. Tax on a Rs. 30,000 bill: Rs. 1,950 + 12% of Rs. 10,000 = Rs. 3,150 a month, or Rs. 37,800 a year: minimum tax. 4. The rest: Rs. 4,950 - Rs. 3,150 = Rs. 1,800 a month, or Rs. 21,600 a year: adjustable. 5. Check: Rs. 37,800 + Rs. 21,600 = Rs. 59,400. Another reading of clause (b), that the whole tax on any monthly bill above Rs. 30,000 is adjustable, would treat all Rs. 59,400 as adjustable. The Ordinance does not settle which reading is correct, and bills that vary from month to month make the question harder. The split above is shown only to make the arithmetic visible, not as the settled answer. ### What if the certificate route applies? Section 235(3) stops the collection altogether for a person who produces a certificate from the Commissioner that his income for the tax year is exempt from tax, or that he has discharged his advance tax liability, or whose entire income is subject to the final tax regime or minimum tax regime under any provision of the Ordinance other than section 235. The section does not set out the application procedure; that is outside the text. ### What if the shop is run by a company? Section 235(4)(c) makes all the tax collected from a company adjustable against its tax liability. The Rs. 360,000 and Rs. 30,000 figures do not apply to it. ### Common mistakes - **Expecting a refund of all electricity bill tax at year end.** Section 235(4)(a) bars a refund of the minimum-tax part for non-company taxpayers. - **Assuming every bill above Rs. 30,000 is fully adjustable without question.** As the example shows, the text does not settle how the split works. - **Forgetting the credit exists.** The adjustable part is tax paid under section 168 and can be set against the tax due for the same tax year. - **Confusing this with sales tax on the bill.** Sales tax charged to small retailers through the electricity bill is a Sales Tax Act levy and has nothing to do with this income tax credit. ### What to check in the official text Read section 235(3) and (4), section 168(1) to (5), and Division IV of Part IV of the First Schedule. Section 235(4)(a) was amended to its current Rs. 360,000 per annum wording by later Finance Acts, so confirm you are reading the edition for the right tax year. ### Frequently asked #### Is any of the electricity bill income tax refundable for a small shop? The part that section 235(4)(a) treats as minimum tax, the tax collected up to a bill amount of Rs. 360,000 a year, is expressly not refundable. The part that section 235(4)(b) makes adjustable, on monthly bills above Rs. 30,000, is a tax credit under section 168, and section 168(5) refunds credit that cannot be used in the year. #### Does the Rs. 360,000 limit apply to companies? No. Section 235(4)(a) and (b) apply to a taxpayer other than a company. Under section 235(4)(c), tax collected from a company is adjustable against its tax liability. #### Can I stop the tax being collected in the first place? Section 235(3) says it is not collected from a person who produces a Commissioner's certificate that his income for the year is exempt, that he has discharged his advance tax liability, or that his entire income is under the final or minimum tax regime under other provisions of the Ordinance. ### Citations - [Income Tax Ordinance, 2001, section 235 (Electricity consumption)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#235-electricity-consumption), as amended to 2026-06-30: "shall be treated as minimum tax on the income of such persons and no refund shall be allowed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division IV (Electricity Consumption), clause (1) Table](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can an unregistered shop add sales tax to my bill? Source: https://qanoondigest.com/faq/retail-shops/unregistered-shop-charging-sales-tax Law current to: 30 June 2026 (Sales Tax Rules, 2006 as amended to 30 June 2025). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 23(2) of the Sales Tax Act says no person other than a registered person or a person paying retail tax shall issue a tax invoice. Section 3B makes anyone who collects tax that was not payable pay it to the Federal Government, and serial 3 of section 33 penalises unauthorised invoices showing tax. **Applies to:** Shoppers in Pakistan who are handed a bill with a sales tax line, and small shopkeepers who want to know whether they may show sales tax on their bills. A sales tax invoice is not something any shop can issue. The Sales Tax Act, 1990 limits the right to issue one, penalises unauthorised invoices that show tax, and says tax collected when it was not payable belongs to the Government, not the shop. ### What does the law say? Three provisions work together. **Who may issue an invoice.** Section 23(2) says no person other than a registered person or a person paying retail tax shall issue an invoice under section 23. Section 23(1) then requires the invoice to carry the supplier's registration number among its particulars. A shop with no registration has no number to print. **Tax wrongly collected.** Section 3B(1) covers any person who has collected any tax or charge that was not payable, or was more than what was payable, and passed it on to the consumer. That person "shall pay the amount of tax or charge so collected to the Federal Government". Section 3B(2) treats the amount as an arrear of tax and bars any refund claim for it, notwithstanding any court judgement. Section 3B(3) puts the burden of proving whether the tax was passed on to the consumer on the person who collected it. **Penalty.** Serial 3 of the table in section 33 covers "any person who un-authorizedly issues an invoice in which an amount of tax is specified". The penalty is Rs. 50,000 or 10 percent of the amount of tax involved, whichever is higher. ### How does it work in practice? For a shopper, the key question is whether the shop is registered. A registered supplier's invoice under section 23(1) must show the supplier's name, address and registration number, the value exclusive of tax, the tax, and the value inclusive of tax. A bill that shows a tax line but no registration number is missing a particular the Act requires. For a Tier-1 retailer integrated with the Board's system, rule 150ZEL of the Sales Tax Rules, 2006 lets the customer check the invoice through the Tax Asaan application or a WhatsApp number the Board announces. The app reports the invoice as "Verified" or "unverified", and an unverified invoice can be reported for a prize under the same rule. For a shopkeeper, section 3B means that adding a "sales tax" line without being entitled to does not leave the money with the shop. It is recoverable by the Government as an arrear, and the serial 3 penalty can be added on top. ### Worked example (illustrative figures) A shop in Faisalabad that is not registered sells a customer goods worth Rs. 10,000 and writes "GST 18% Rs. 1,800" on the bill, total Rs. 11,800. 1. Tax shown on the unauthorised invoice: Rs. 1,800. 2. Section 3B: the Rs. 1,800 collected from the customer is payable to the Federal Government. 3. Serial 3 penalty: 10 percent of Rs. 1,800 = Rs. 180. Rs. 180 is lower than Rs. 50,000, so the penalty is Rs. 50,000. If the same shop had shown a total of Rs. 900,000 as "tax" across all its bills, 10 percent would be Rs. 90,000. That is higher than Rs. 50,000, so the penalty would be Rs. 90,000, and the Rs. 900,000 would be payable under section 3B. ### What if the shop is liable to register but has not? Section 2(25) defines "registered person" to include a person who is liable to be registered. Its proviso says such a person, if not actually registered, is not entitled to any benefit available to a registered person. The Act does not say in terms whether this lets an unregistered but liable shop issue invoices under section 23. That point is not resolved in the text. ### What if a small shop pays sales tax through its electricity bill? Retailers other than Tier-1 pay sales tax through their monthly electricity bills under section 3(9), and they are carved out of the retailer limb of the registration rule. Section 23(2) also allows "a person paying retail tax" to issue an invoice, but the Act does not define "retail tax" in section 2. Whether an electricity-bill retailer counts as a person paying retail tax is not stated. ### Common mistakes - **Assuming any bill with "GST" on it is a tax invoice.** Section 23(1) lists the particulars, including the supplier's registration number. - **Assuming the shop keeps tax it wrongly charged.** Section 3B says it must be paid to the Federal Government. - **Confusing the printed price with an added tax.** On Third Schedule goods, the tax is worked out on the printed retail price and printed on the pack, under section 3(2)(a). ### What to check in the official text Read sections 3B and 23 and serial 3 of the section 33 table in the Sales Tax Act as amended to 30 June 2026, together with the definition of "registered person" in section 2(25). For invoice verification, read rule 150ZEL of the Sales Tax Rules, 2006, and check the WhatsApp number or app details the Board has announced, which are not held here. ### Frequently asked #### Is it legal for an unregistered shop to write 'GST' on my bill? Section 23(2) allows only a registered person or a person paying retail tax to issue an invoice under section 23. Serial 3 of the section 33 table penalises any person who issues an invoice showing an amount of tax without authority, at Rs. 50,000 or 10 percent of the tax involved, whichever is higher. #### If a shop wrongly charged me sales tax, does the money go to FBR? Section 3B requires any person who collected tax that was not payable, and passed it on to the consumer, to pay that amount to the Federal Government. It is treated as an arrear of tax. Section 3B does not provide a refund route for the customer. #### How can I check a big store's invoice? Rule 150ZEL of the Sales Tax Rules lets customers of integrated Tier-1 retailers verify the electronic invoice through the Tax Asaan application or a WhatsApp number the Board announces. The system reports the invoice as verified or unverified. ### Citations - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "No person other than a registered person or a person paying" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3B (Collection of excess sales tax etc)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3b-collection-of-excess-sales-tax-etc), as amended to 2026-06-30: "Any person who has collected or collects any tax or charge, whether under misapprehension of any provision of this Act or otherwise, which was not payable as tax or charge or which is in excess of the tax or charge actually payable and the incidence of which has been passed on to the consumer, shall pay the amount of tax or charge so collected to the Federal Government." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 33, Table, serial 3](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "Provided that a person liable to be registered but not registered under this Act" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "tax shall be charged from retailers, other than those falling in Tier-1, through their monthly electricity bills" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 150ZEL (Procedure for prize scheme)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zel-procedure-for-prize-scheme), as amended to 2025-06-30: "The customers shall verify the electronically generated invoice of integrated retailers either through" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf --- ## Can FBR cut my shop's electricity or block my bank account for not registering as a Tier-1 retailer? Source: https://qanoondigest.com/faq/retail-shops/unregistered-tier-1-electricity-bank-account-bar Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 14AB of the Sales Tax Act lets the Board order gas and electricity disconnection for a person who fails to register, including a Tier-1 retailer. Section 14AC lets the Commissioner suspend and then permanently bar bank accounts after three hearings, and section 14AE allows sealing, seizure or a receiver as the final step. **Applies to:** Shopkeepers in Pakistan who are Tier-1 retailers, or otherwise required to register for sales tax, and have not registered or have not integrated their outlets with FBR's system. The Sales Tax Act, 1990 gives FBR a ladder of enforcement steps against a person who should be registered for sales tax but is not. The steps run from cutting gas and electricity (section 14AB), to suspending and then barring bank accounts (section 14AC), to barring the transfer of property (section 14AD), and finally to sealing the business, seizing goods or appointing a receiver (section 14AE). ### Who is exposed to these steps? Two groups of shopkeepers are in the frame. The first is a retailer who is required to register but has not. Section 14(1)(b) requires registration of a retailer who is liable to pay sales tax under the Act or rules, but it excludes a retailer who pays sales tax through the electricity bill under section 3(9). Section 3(9) applies to retailers other than those falling in Tier-1, so a Tier-1 retailer cannot rely on that exclusion. The second group is a Tier-1 retailer who is registered but has not integrated with the Board's computerised system. Section 2(43A) defines a Tier-1 retailer by a list of categories; the separate page on what a Tier-1 retailer is covers that list. ### What does section 14AB allow? Section 14AB lets the Board, through a Sales Tax General Order, direct gas and electricity distribution companies to disconnect the gas and electricity connections of: - (a) any person, including Tier-1 retailers, who fails to register for sales tax; or - (b) notified Tier-1 retailers who are registered but not integrated with the Board's Computerized System. The proviso says that once the person registers or integrates, the Board shall notify restoration of the connection through a Sales Tax General Order. The section opens with "Notwithstanding anything contained in this Act or any other law", so it overrides other laws. It does not set a hearing step or a time limit for restoration. ### How does the bank account bar under section 14AC work? Section 14AC applies only when three conditions all hold: 1. the Commissioner has reasons to believe the person is supplying taxable goods without registration; 2. the Commissioner has given three consecutive opportunities of being heard to obtain registration; and 3. the person has still failed to register. The steps then follow in order: | Step | What the law allows | Sub-section | | --- | --- | --- | | First suspension | Written order to banks to suspend operation of the account for three working days | 14AC(2) | | Two repeat suspensions | Same suspension repeated two more times, one week apart | 14AC(3) | | Permanent bar | Written order to permanently bar operation of the bank accounts | 14AC(4) | | Removal | Order removing the bar within two working days of registration | 14AC(5) | | Appeal | To the Chief Commissioner Inland Revenue within thirty days | 14AC(6) | ### What happens if the shop still does not register? Section 14AD starts if the person fails to register within fifteen days of the permanent bar order under section 14AC(4). The Chief Commissioner forms a committee of the Chief Commissioner, the Commissioner and one member from a Chamber of Commerce or Trade Association. The committee issues a notice, which is also displayed at the business premises, and gives a personal hearing. It can recommend a bar on transfer of immovable property, but it must first give another fifteen days to register. The Commissioner can then direct the property registering authority to bar transfers. The bar is removed within two working days of registration. Section 14AE is the last step, and it applies "subject to prior action under section 14AC and 14AD". The Chief Commissioner may seal the business premises, seize moveable property, or appoint a receiver to manage the taxable activity. None of this can happen unless a public notice names the date, a committee (including a Chamber or Trade Association representative) hears the person in an open court, and the decision is published on the Board's website and in a newspaper. The order is reversed within two working days of registration. ### Worked example (illustrative figures) Rashid runs a large garments store in Faisalabad that falls in Tier-1 but has never registered. Using the order the Act sets out: 1. The Commissioner gives him three consecutive opportunities of being heard. He does not register. 2. His bank is ordered to suspend his account for three working days. 3. One week later, a second three-day suspension. One week after that, a third. 4. The Commissioner orders a permanent bar on his bank accounts. 5. Fifteen days pass without registration. The committee under section 14AD issues a notice, hears him, and gives a further fifteen days before recommending a property transfer bar. 6. Only after steps 2 to 5 can section 14AE sealing be used, after a public notice and an open-court hearing. Separately, at any point the Board could include him in a Sales Tax General Order under section 14AB directing his electricity company to disconnect the shop. If Rashid registers on a Monday, his bank bar must be lifted by Wednesday under section 14AC(5). ### Are these powers already in force? Not all of them can be confirmed from the Act alone. Section 14AC(7), section 14AD(8) and section 14AE(5) each say the section comes into force on a date the Board notifies in the official Gazette. Those notifications are not held in this corpus. Section 14AB carries no such commencement clause, but it works only through a Sales Tax General Order naming the persons, and those orders are also not held here. ### Common mistakes - **Thinking registration ends the section 14AB risk.** A notified Tier-1 retailer who is registered but not integrated is covered by clause (b). - **Assuming the bank bar comes without warning.** Section 14AC requires three consecutive opportunities of being heard before any suspension. - **Assuming sealing can come first.** Section 14AE is expressly subject to prior action under sections 14AC and 14AD. - **Treating every small shop as required to register.** Section 14(1)(b) excludes retailers who pay sales tax through the electricity bill under section 3(9). ### What to check in the official text Read sections 14, 14AB, 14AC, 14AD and 14AE and clause (43A) of section 2 of the Sales Tax Act as amended to 30 June 2026. Sections 14AB and 14AC are printed inside the text of section 14 in the consolidated edition. Check the Board's Gazette notifications bringing sections 14AC, 14AD and 14AE into force, and any Sales Tax General Order under section 14AB naming persons for disconnection. These are not held in this corpus. ### Frequently asked #### Can my shop's electricity be cut even though I am registered? Yes, in one case. Clause (b) of section 14AB covers notified Tier-1 retailers who are registered but not integrated with the Board's Computerized System. Registration alone does not take such a retailer outside section 14AB. #### How long does a bank account suspension under section 14AC last? Each suspension is for three working days, repeated two more times with a one-week gap between them. After that the Commissioner directs a permanent bar. Once the person registers, the bar must be lifted within two working days. #### Can I appeal against a bank account bar? Section 14AC(6) allows an appeal to the Chief Commissioner Inland Revenue within thirty days of receiving the order. Section 14AE(4) provides a representation to the Board, also within thirty days, against sealing, seizure or appointment of a receiver. ### Citations - [Sales Tax Act, 1990, Section 14AB (Discontinuance of gas and electricity connections), printed within the text of section 14](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30: "the Board shall have power through Sales Tax General Order to direct the gas and electricity distribution companies for discontinuing the gas and electricity connections of any person who fall in the following categories" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 14AC (Bar on operations of Bank Accounts), printed within the text of section 14](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30: "to intermittently suspend operation of the bank account of such a person for three working days" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 14AD (Bar on transfer of Immoveable Property)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14ad-bar-on-transfer-of-immoveable-property), as amended to 2026-06-30: "Where the person fails to obtain registration within fifteen days from issuance of order under sub-section (4) of section 14AC" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 14AE (Other measures for non-registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14ae-other-measures-for-non-registration), as amended to 2026-06-30: "Subject to prior action under section 14AC and 14AD, any person who fails to get registered for the purposes of this Act, the Chief Commissioner shall have the powers to--" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "a retailer who is liable to pay sales tax under the Act or rules made thereunder, excluding such retailer required to pay sales tax through his electricity bill under sub-section (9) of section 3" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“Tier-1 retailer” means a retailer falling in any one or more of the following categories" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Can FBR seal my shop over POS violations, and how is it de-sealed? Source: https://qanoondigest.com/faq/retail-shops/shop-sealing-de-sealing-tier-1 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Rules 150ZEO and 150ZEP of the Sales Tax Rules, 2006 allow sealing of a Tier-1 retailer's premises for unverified invoices, POS disconnection or non-integration, after the Commissioner seeks and the Chief Commissioner gives written approval. De-sealing follows payment of the section 33 penalty and, for non-integrated retailers, integration of every POS machine. **Applies to:** Tier-1 retailers under the Sales Tax Act, 1990, both those already integrated with FBR's computerized system and those required to integrate but not yet integrated. ### What does the law say? The Sales Tax Act, 1990 gives the power, and the Sales Tax Rules, 2006 give the procedure. Serial 24 of the section 33 table (invoice and monitoring offences by integrated persons) and serial 25A (failure to register or integrate) each say the business premises are liable to be sealed by an officer of Inland Revenue "in the manner prescribed". That manner is Chapter XIV-AD of the Rules, titled "Procedure for sealing and de-sealing of business premises of Tier-1 retailers". The chapter covers two groups: - **Integrated Tier-1 retailers** who avoid reporting sales, or issue invoices without the prescribed invoice number or QR code, or with a duplicate number or counterfeit QR code. Sealing is under rule 150ZEO and de-sealing under rule 150ZEQ. - **Tier-1 retailers required to integrate** who have not registered, or have registered but not integrated. Sealing is under rule 150ZEP and de-sealing under rule 150ZER. ### How is an integrated retailer's shop sealed? Rule 150ZEO sets out the steps: 1. **Information.** The Commissioner may start proceedings on information that the retailer issued an invoice without the prescribed number or QR code, a duplicate number, a counterfeit QR code, a defaced invoice, or other evidence of tampering. The information can come from invoices reported unverified on Tax Asaan or the POS Dashboard, from mystery shopping, or from any other reliable source. 2. **Verification.** The Commissioner shall verify the invoice through its number or QR code before declaring it unverified. 3. **Request for approval.** Where there is evidence of unverified invoices, or the store is disconnected from the FBR database for 48 hours, or offline invoices are not entered within the next 24 hours, or the device does not keep offline records, the Commissioner seeks the written approval of the Chief Commissioner and names the sealing team. 4. **Decision.** The Chief Commissioner either allows or disallows sealing and, if allowed, notifies the team. He also decides whether one or more branches are sealed. 5. **Record.** The sealing order goes to the Member (IR-Operations) and a copy to Chief (POS). Sub-rule (8), added in February 2025, adds that the premises "may be sealed on any violation made by registered person." It does not define "violation". ### How is a non-integrated retailer's shop sealed? Under rule 150ZEP, an officer not below Assistant Commissioner reports the non-integration in writing to the Commissioner, recommending sealing under serial 25A. The Commissioner holds an inquiry and forwards the report with reasons to the Chief Commissioner, who issues a written order allowing or disallowing sealing after recording reasons. ### How is the shop de-sealed? The conditions differ by group. | | Integrated retailer (rule 150ZEQ) | Non-integrated retailer (rule 150ZER) | |---|---|---| | Penalty order | Serial 24 of section 33 | Serial 25A of section 33 | | Condition to open | Payment of penalty and the demand created during audit; software bug removed | Payment of penalty and integration of all POS machines in all branches or outlets | | Timing | De-sealing order within 24 hours of payment | Premises remain sealed until both conditions are met | | After opening | Software audit of all POS machines in all branches within three working days | Commissioner certifies to the Chief Commissioner within three days that all POS machines are integrated and error-free | Rule 150ZEQ adds that the Commissioner works out the under-declared sales from the software audit and creates a demand for the tax sought to be evaded. If that is not paid, de-sealing "shall be done after a month" and the premises shall be re-sealed after fifteen days if the default continues. Under rule 150ZER, integration is done in the presence of an FBR team that includes a technical person. ### Worked example (illustrative scenario) A Tier-1 shoe retailer in Rawalpindi, already integrated, is reported through the Tax Asaan app for an invoice that shows as unverified. The Commissioner checks the invoice number and confirms it is not in FBR's system. He writes to the Chief Commissioner, naming a sealing team. The Chief Commissioner allows sealing of the one branch that issued the invoice, not the retailer's other two branches. The Commissioner then passes a penalty order under serial 24. Once the retailer pays it and the demand from the audit, and the software fault is fixed, the de-sealing order is due within 24 hours. Within three working days after opening, an integrator audits the POS machines in all three branches. ### Can I appeal? Rule 150ZEQ(iii) says the registered person may file an appeal against the order. Section 45B of the Act allows a person aggrieved by an order under section 33 to appeal to the Commissioner Inland Revenue (Appeals) within thirty days of receiving it, or directly to the Appellate Tribunal. Rule 150ZER does not mention appeal, but the penalty it relies on is also an order under section 33. Whether the sealing order itself, as distinct from the penalty order, is appealable under section 45B is not stated. ### Common mistakes - **Assuming sealing is automatic.** Both rules require a Chief Commissioner decision that can go either way. - **Paying the penalty but not integrating.** For a non-integrated retailer, rule 150ZER needs both payment and integration of every POS machine. - **Assuming the audit demand is separate from reopening.** For an integrated retailer, rule 150ZEQ ties de-sealing to payment of the penalty and the audit demand. ### What to check in the official text Read Chapter XIV-AD in the Sales Tax Rules, 2006 as amended to 30 June 2025. Rule 150ZEQ appears inside the text rather than as its own heading in our copy, so read it in the official PDF. It still refers to "Chapter XIV-AA", which the same edition shows as omitted in January 2025; the effect of that stale reference is not settled here. Rule 150ZEP still points to an older provision of the Act whose integration proviso was omitted by the Finance Act, 2025. Check for amendments to the Rules after 30 June 2025. ### Frequently asked #### Can an Inland Revenue officer seal my shop on the spot without approval? Rules 150ZEO and 150ZEP route sealing through the Commissioner and a written decision of the Chief Commissioner Inland Revenue, who also notifies the sealing team. The rules do not describe on-the-spot sealing by an officer acting alone. #### Will all my branches be sealed if one branch issued unverified invoices? Not automatically. Rule 150ZEO(6) says the Chief Commissioner decides whether one or more branches are sealed, depending on the unverified invoices issued by the respective branches. #### How quickly must an integrated retailer's shop be de-sealed? Rule 150ZEQ says the de-sealing order shall be issued within 24 hours of payment of the penalty and the demand created during audit, provided the software bug has been removed and the other stated requirements are met. ### Citations - [Sales Tax Rules, 2006, section 150ZEO (Procedure for sealing of business premises of integrated tier-1 retailers)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zeo-procedure-for-sealing-of-business-premises-of-integrated-tier-1-retailers), as amended to 2025-06-30: "the Commissioner Inland Revenue shall seek the approval of the Chief Commissioner Inland Revenue in writing for sealing of the retailer’s business premises besides mentioning the team of officers and officials that shall carry out the process of sealing of the said business premises" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZEP (Procedure for sealing of business premises of non-integrated tier-1 retailers)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zep-procedure-for-sealing-of-business-premises-of-non-integrated-tier-1-retailers), as amended to 2025-06-30: "The Chief Commissioner Inland Revenue concerned shall issue an order in writing for allowing or disallowing the sealing of such business premises after recording the reasons therein" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, Rule 150ZEQ (Chapter XIV-AD), procedure for de-sealing of business premises of integrated tier-1 retailers](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZER (Procedure for de-sealing of business premises of non-integrated tier-1 retailers)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zer-procedure-for-de-sealing-of-business-premises-of-non-integrated-tier-1-retailers), as amended to 2025-06-30: "The business premises of non-integrated tier-1 retailer shall remain sealed till the payment of penalty and integration of all POS machines installed in all its branches or outlets;" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, Section 33, Table, S. No. 24 and S. No. 25A](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 45B (Appeals)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#45b-appeals), as amended to 2026-06-30: "within thirty days of the date of receipt of such decision or order prefer appeal to the Commissioner Inland Revenue (Appeals)" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Can my shop be sealed for not registering or paying advance tax under the traders' scheme? Source: https://qanoondigest.com/faq/retail-shops/shop-sealed-traders-scheme-registration-default Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Serial 3A of the Table in section 182 of the Income Tax Ordinance says a trader or shopkeeper required to register who fails to register, or fails to pay advance tax under a section 99B special procedure scheme, shall have the shop sealed for seven days for the first default and twenty one days for each later default. **Applies to:** Traders and shopkeepers in Pakistan covered by a special procedure scheme notified under section 99B of the Income Tax Ordinance, 2001. Sealing of a shop is a penalty written directly into the Income Tax Ordinance for traders who stay out of a section 99B scheme. It sits in the Table of offences and penalties in section 182, as serial 3A, which the Finance Act, 2024 inserted. ### What does the law say? Section 182(1) says a person who commits an offence in column (2) of the Table is liable to the penalty in column (3), "in addition to and not in derogation of any punishment to which he may be liable under this Ordinance or any other law". Two entries matter to a shopkeeper who has not joined a traders' scheme: | Serial | Offence (column 2) | Penalty (column 3) | Section referred to (column 4) | | --- | --- | --- | --- | | 3 | Any person who is required to apply for registration under this Ordinance but fails to make an application for registration | Penalty of ten thousand rupees | 181 | | 3A | Any person being a trader or a shopkeeper who is required to apply for registration under this Ordinance but fails to register or fails to pay advance tax as specified in a scheme of special procedure prescribed under section 99B | The shop shall be sealed for seven days for first default and for twenty one days for each subsequent default | 99B | Serial 3 links to section 181, which requires every taxpayer to apply "in the prescribed form and in the prescribed manner for registration". Serial 3A links to section 99B, which lets the Board prescribe, by gazette notification, a special procedure for small traders and shopkeepers in specified cities or territories. ### When does serial 3A apply? Reading the column (2) text, three conditions must be met: 1. The person is a trader or a shopkeeper. 2. The person is required to apply for registration under the Ordinance. 3. The person either fails to register, or fails to pay advance tax as specified in a section 99B scheme. The scheme itself decides which traders, in which cities, must register and what advance tax they pay. The notification setting out any scheme is not part of the corpus held here, so whether a particular shop falls within it cannot be answered from the Ordinance alone. ### How long is the shop sealed? - **First default:** seven days. - **Each subsequent default:** twenty one days. The Table does not say what counts as a separate default (for example, each missed payment, or each notice not complied with), who carries out the sealing, or what procedure is followed. It also does not state a money penalty in serial 3A. If the scheme notification deals with these points, it is not held here. ### Worked example (illustrative scenario) Imran runs a hardware shop in a city named in a section 99B scheme notification. Assume, for the example, that the scheme requires shopkeepers like him to register and pay monthly advance tax. | Event | Serial applied | Result under the Table | | --- | --- | --- | | He fails to register under the scheme | 3A | Shop sealed for 7 days (first default) | | Later he registers but fails to pay the advance tax the scheme requires | 3A | Shop sealed for 21 days (a subsequent default) | | He fails to pay again at a later point | 3A | Shop sealed for 21 days (each subsequent default) | On these assumed facts, the total sealing across the three defaults would be 7 + 21 + 21 = 49 days. Separately, serial 3 provides a penalty of Rs. 10,000 for a person required to apply for registration who fails to make an application. ### Can both serial 3 and serial 3A apply? The Table lists them as separate offences with separate penalties, and section 182(1) says a penalty is "in addition to and not in derogation of" any other punishment under the Ordinance. The Ordinance does not say in so many words whether a failure to register under a 99B scheme attracts both the Rs. 10,000 and the sealing. That question is not resolved here. ### What if my shop is sealed for a sales tax reason instead? Sealing also appears elsewhere, for example for Tier-1 retailers who fail to integrate their point of sale with the Board's computerized system. Those are separate rules with their own conditions and are covered on other pages. Serial 3A is only about section 99B schemes. ### Common mistakes - **Thinking sealing is only a sales tax penalty.** Serial 3A puts it in the Income Tax Ordinance for 99B scheme defaults. - **Assuming every unregistered shop can be sealed under serial 3A.** The entry is tied to a scheme prescribed under section 99B. - **Assuming the second sealing is also seven days.** Every default after the first is twenty one days. ### What to check in the official text Read serials 3 and 3A of the Table in section 182(1) of the Income Tax Ordinance amended to 30 June 2026, section 181, and section 99B as printed in the section 99 area. Check the section 99B notification that applies to your city for who must register, what advance tax is due, and any procedure it sets out. That notification is not held in this corpus. ### Frequently asked #### How long can a shop be sealed for not joining the traders' scheme? Section 182, serial 3A, sets seven days for the first default and twenty one days for each subsequent default. It applies to a trader or shopkeeper required to register who fails to register, or fails to pay advance tax as specified in a section 99B scheme. #### Is there also a money penalty for not registering? Serial 3 of the same Table sets a penalty of ten thousand rupees for any person required to apply for registration under the Ordinance who fails to make an application. The Table lists serial 3 and serial 3A as separate entries. #### Does sealing apply to every shopkeeper who has not registered? Serial 3A is tied to section 99B. It covers a trader or shopkeeper who fails to register or pay advance tax as specified in a scheme of special procedure prescribed under that section, so it depends on whether the notified scheme covers that shop. ### Citations - [Income Tax Ordinance, 2001, section 182 (Offences and penalties)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182-offences-and-penalties), as amended to 2026-06-30: "fails to register or fails to pay advance tax as specified in a scheme of special procedure prescribed under section 99B." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 99B (printed within the section 99 entry)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "and assessment in respect of such small traders and shopkeepers, in such cities or territories, as may be specified therein." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 181 (Taxpayer’s registration)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181-taxpayer-s-registration), as amended to 2026-06-30: "shall apply in the prescribed form and in the prescribed manner for registration." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Does taking card payments or having a 1,000 square foot shop still make me a Tier-1 retailer? Source: https://qanoondigest.com/faq/retail-shops/card-machine-shop-size-tier-1-2026 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No, not on their own. The Finance Act, 2026 omitted sub-clauses (f) and (g) of section 2(43A) of the Sales Tax Act, and the Finance Act, 2023 omitted the shop-area limb (e). As amended to 30 June 2026, neither a card machine nor floor area is a Tier-1 test. The remaining limbs still apply. **Applies to:** Shopkeepers who accept debit or credit cards, or whose shops are 1,000 square feet or larger, and who were told this made them Tier-1 retailers. Neither test survives in the law as amended to 30 June 2026. Having a bank card terminal, or a shop of 1,000 square feet or more, used to be enough to make a retailer Tier-1 under section 2(43A) of the Sales Tax Act, 1990. Both limbs have been omitted, the floor-area test in 2023 and the card-machine test in 2026. ### What does the law say? Section 2(43A) defines a Tier-1 retailer as a retailer "falling in any one or more of the following categories". The list has changed several times. Here is what happened to the tests people most often ask about: | Old limb | What it covered (in plain words) | What happened | | --- | --- | --- | | (e) | A retailer whose shop measured 1,000 square feet or more, or 2,000 square feet or more for a furniture retailer | Omitted by section 5 of the Finance Act, 2023 | | (ga) | Jewellery sellers, excluding shops of 300 square feet or less | Omitted by section 5 of the Finance Act, 2023 | | (f) | A retailer who acquired a point of sale for accepting debit or credit card payments from a bank or a digital payment provider authorised by the State Bank of Pakistan | Omitted by section 4 of the Finance Act, 2026 | | (g) | A retailer whose deductible advance income tax on purchases from suppliers over twelve months exceeded a threshold notified by the Board | Omitted by section 4 of the Finance Act, 2026 | Section 4 of the Finance Act, 2026 is short on this point: in clause (43A), "sub-clauses (f) and (g) shall be omitted". Section 1 of that Act brings it into force on 1 July 2026, unless otherwise provided. The consolidated Sales Tax Act to 30 June 2026 prints those sub-clauses as omitted, with footnotes naming the Finance Act, 2026. ### What still makes a shop Tier-1? After these changes, section 2(43A) keeps these limbs: 1. **(a)** a unit of a national or international chain of stores; 2. **(b)** a shop in an air-conditioned shopping mall, plaza or centre, excluding kiosks; 3. **(c)** cumulative electricity bills above Rs. 1,200,000 in the immediately preceding twelve consecutive months; 4. **(d)** a wholesaler-cum-retailer with turnover of more than Rs. 200 million engaged in bulk import and supply of consumer goods to retailers and to the general public; 5. **(gb)** turnover above Rs. 200 million in the immediately preceding twelve consecutive months, declared or worked back from advance income tax that suppliers collect under the Income Tax Ordinance; 6. **(h)** any person or class prescribed by the Board, with a new proviso letting the Board also exclude persons by notification. The withholding-tax idea in old limb (g) did not vanish completely. The new limb (gb) uses the same supplier deductions, but only as a way of working back turnover against a fixed Rs. 200 million figure, rather than a Board-notified threshold. ### Worked example (illustrative figures) Nadia runs a 1,200 square foot ladies' clothing shop on a street in Saddar, Karachi. It is not in a mall, not part of a chain, and it has a card machine from her bank. Her made-up figures: electricity bills of Rs. 480,000 for the last twelve months and turnover of Rs. 28 million. | Test | Nadia's facts | Met? | | --- | --- | --- | | Chain store (a) | Single independent shop | No | | Air-conditioned mall or plaza (b) | Street-level shop | No | | Electricity above Rs. 1,200,000 (c) | Rs. 480,000 | No | | Turnover above Rs. 200 million (d) or (gb) | Rs. 28 million | No | | Board notification (h) | None assumed | No | | Card machine | Has one | Not a test since 1 July 2026 | | Floor area 1,000 sq ft | 1,200 sq ft | Not a test since the Finance Act, 2023 | On these facts, no current limb applies. If Nadia moved the same shop into an air-conditioned plaza, limb (b) would apply regardless of the card machine or the floor area. ### What if ...? **What if my shop is in a mall and I take cards?** You are Tier-1 because of the mall, under limb (b). The card machine is irrelevant to that result. **What if I was registered and integrated because of the card machine?** The Act as amended does not contain a transitional provision for retailers who were Tier-1 only under old limb (f). It does not say whether an existing Tier-1 status, registration or integration ends automatically. The law is silent, so this page does not resolve it. **What if the Board names card-accepting retailers again?** Limb (h) lets the Board prescribe any other person or class of persons as Tier-1. Any such notification is outside this corpus. ### Common mistakes - **Relying on guidance written before July 2026.** Many explanations still list the card-machine test. It was omitted by the Finance Act, 2026. - **Measuring the shop.** Floor area has not been a Tier-1 test since the Finance Act, 2023. - **Assuming "not Tier-1" means "no sales tax".** A retailer outside Tier-1 is generally charged sales tax through the monthly electricity bill under section 3(9). - **Forgetting integration for those who remain Tier-1.** The proviso to section 23(6) still requires all Tier-1 retailers to integrate their outlets with the Board's computerized system from the date and in the manner the Board prescribes. ### What to check in the official text Compare clause (43A) of section 2 in the Sales Tax Act as amended to 30 June 2026 with section 4 of the Finance Act, 2026 and section 5 of the Finance Act, 2023. Then check whether the Board has issued any notification under limb (h) that prescribes or excludes your class of retailer. ### Frequently asked #### When did the card machine test stop applying? Section 4 of the Finance Act, 2026 omitted sub-clauses (f) and (g) of section 2(43A), and section 1 of that Act brings it into force on 1 July 2026 unless otherwise provided. The Sales Tax Act as amended to 30 June 2026 shows both sub-clauses as omitted. #### My shop is 1,500 square feet. Is it Tier-1? Not because of its size. The floor-area limb, sub-clause (e), was omitted by the Finance Act, 2023. The shop can still be Tier-1 under another limb, such as being in an air-conditioned mall or plaza, or having turnover above Rs. 200 million. #### If I was Tier-1 only because of my card machine, what happens now? On the current wording, a card machine no longer places a shop in Tier-1. The Act does not contain a transitional rule for retailers who were Tier-1 only under the omitted sub-clause (f), so it does not say how an existing registration or integration is treated. ### Citations - [Finance Act, 2026, section 4 (Amendments of the Sales Tax Act, 1990 (VII of 1990))](https://qanoondigest.com/acts/finance-act/finance-act-2026#4-amendments-of-the-sales-tax-act-1990-vii-of-1990), as amended to 2026: "(ii) sub-clauses (f) and (g) shall be omitted;" Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Finance Act, 2026, section 1 (Short title and commencement)](https://qanoondigest.com/acts/finance-act/finance-act-2026#1-short-title-and-commencement), as amended to 2026: "It shall, unless otherwise provided, come into force on the first day of July, 2026." Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Finance Act, 2023, section 5 (Amendments of the Sales Tax Act, 1990)](https://qanoondigest.com/acts/finance-act/finance-act-2023#5-amendments-of-the-sales-tax-act-1990), as amended to 2023: "(c) in clause (43A), sub-clauses (e) and (ga) shall be omitted;" Official source: https://download1.fbr.gov.pk/Docs/20236261762031274FinanceAct,2023.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "(a) a retailer operating as a unit of a national or international chain of stores;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "tax shall be charged from retailers, other than those falling in Tier-1, through their monthly electricity bills" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "all Tier-1 retailers shall integrate their retail outlets with Board’s computerized system for real-time reporting of sales." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Does taking card payments or having a 1,000 square foot shop still make me a Tier-1 retailer? Source: https://qanoondigest.com/faq/retail-shops/card-machine-shop-size-tier-1 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No. Neither test is in section 2(43A) of the Sales Tax Act as amended to 30 June 2026. The 1,000 square foot shop-size limb (e) was omitted by the Finance Act, 2023, and the debit or credit card point of sale limb (f) was omitted by the Finance Act, 2026, from 1 July 2026. Other limbs may still apply. **Applies to:** Shopkeepers who accept card payments or run a large shop floor and were told, under older versions of the law, that this alone made them Tier-1 retailers. Neither accepting card payments nor having a shop of 1,000 square feet makes a retailer Tier-1 under the Sales Tax Act, 1990 as amended to 30 June 2026. Both tests once sat in clause (43A) of section 2, and both have been removed: the shop-size test by the Finance Act, 2023 and the card-payment test by the Finance Act, 2026. ### What did the old law say? The Sales Tax Act as amended to 30 June 2022 listed these limbs in section 2(43A), on top of the chain store, mall, electricity bill and wholesaler-cum-retailer tests: - **(e)** "a retailer, whose shop measures one thousand square feet in area or more or two thousand square feet in area or more in the case of retailer of furniture". - **(f)** "a retailer who has acquired point of sale for accepting payment through debit or credit cards from banking companies or any other digital payment service provider authorized by State Bank of Pakistan". - **(g)** a retailer whose deductible withholding tax under the Income Tax Ordinance on purchases from suppliers, over the preceding twelve consecutive months, exceeded a threshold specified by the Board. - **(ga)** a person supplying articles of jewellery of precious metal, excluding a person whose shop measures three hundred square feet in area or less. Because the definition covers a retailer falling in "any one or more" of the categories, any single one of these limbs was enough. ### What changed, and when? | Limb | 30 June 2022 edition | 30 June 2025 edition | 30 June 2026 edition | Removed by | | --- | --- | --- | --- | --- | | (e) shop 1,000 sq ft, or 2,000 sq ft for furniture | Present | Omitted | Omitted | Finance Act, 2023, section 5 | | (f) card point of sale | Present | Present | Omitted | Finance Act, 2026, section 4 | | (g) withholding tax on purchases above a Board threshold | Present | Present | Omitted | Finance Act, 2026, section 4 | | (ga) jewellers above 300 sq ft | Present | Omitted | Omitted | Finance Act, 2023, section 5 | | (gb) turnover above Rs. 200 million | Not present | Not present | Present | Inserted by Finance Act, 2026, section 4 | Section 5 of the Finance Act, 2023 says "in clause (43A), sub-clauses (e) and (ga) shall be omitted". Section 4 of the Finance Act, 2026 says "sub-clauses (f) and (g) shall be omitted" and inserts the new turnover limb (gb). The Finance Act, 2026 comes into force on 1 July 2026 unless otherwise provided. ### What tests remain? As amended to 30 June 2026, section 2(43A) covers: - (a) a unit of a national or international chain of stores; - (b) a retailer in an air-conditioned shopping mall, plaza or centre, excluding kiosks; - (c) cumulative electricity bills above Rs. 1,200,000 over the preceding twelve consecutive months; - (d) a wholesaler-cum-retailer with turnover above two hundred million, engaged in bulk import and supply of consumer goods; - (gb) a retailer with turnover above Rs. 200 million, declared or worked back from advance income tax collected by suppliers; - (h) any other person or class prescribed by the Board, which may now also exclude persons by gazette notification. Shop size and card acceptance are not mentioned in any of them. ### Worked example (illustrative figures) Imran owns a furniture showroom of 2,400 square feet on GT Road, Gujranwala. It is a street-level building, not an air-conditioned mall. He has a bank card machine. His electricity bills total Rs. 780,000 for twelve months and his turnover is Rs. 90 million. These figures are made up. | Edition | Limbs that fit | Tier-1? | | --- | --- | --- | | 30 June 2022 | (e): 2,400 sq ft is at least 2,000 sq ft for a furniture retailer. (f): card machine | Yes | | 30 June 2025 | (f): card machine. (e) had gone | Yes | | 30 June 2026 | None. Rs. 780,000 is below Rs. 1,200,000, and Rs. 90 million is below Rs. 200 million | No, on these facts | The showroom's status turns on the edition in force for the period being looked at. Under the current text, only the remaining limbs, or a Board notification under (h), could make it Tier-1. ### What if my shop is in an air-conditioned plaza? Then size and card machines are beside the point. Sub-clause (b) still makes a retailer operating in an air-conditioned shopping mall, plaza or centre Tier-1, however small the shop, unless it is a kiosk. ### Common mistakes - **Relying on old guidance.** Many checklists still list shop area and card machines. Both limbs are gone. - **Thinking removal of the card limb ends every Tier-1 duty.** A shop that fits another limb is still Tier-1, with the integration duty under the proviso to section 23(6). - **Assuming the change applies to past months automatically.** The amending text does not state backward effect, and the clause does not address earlier periods. ### What to check in the official text Compare clause (43A) of section 2 across the Sales Tax Act editions amended to 30 June 2022, 30 June 2025 and 30 June 2026, and read section 5 of the Finance Act, 2023 and section 4 of the Finance Act, 2026, which made the omissions. Also check whether the Board has notified any person or class under sub-clause (h), since such a notification could bring a class of shops back into Tier-1 on its own terms. Board notifications are not held in this corpus. ### Frequently asked #### Can I be Tier-1 just because I have a bank card machine? Not under the law as amended to 30 June 2026. Sub-clause (f) of section 2(43A), which covered a retailer who acquired a point of sale for debit or credit card payments, was omitted by section 4 of the Finance Act, 2026. A shop with a card machine can still be Tier-1 under another limb, such as a mall location or the turnover test. #### When did the 1,000 square foot rule stop applying? Section 5 of the Finance Act, 2023 omitted sub-clause (e) of section 2(43A), the shop-size limb, together with sub-clause (ga) on jewellers. The edition of the Sales Tax Act amended to 30 June 2025 no longer contains either limb. #### Does the omission reach back to earlier tax periods? The amending Acts shown here simply omit the sub-clauses and do not state any backward effect. The Finance Act, 2026 comes into force on 1 July 2026 unless otherwise provided. How periods before that date are treated is not addressed in the clause itself. ### Citations - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "a retailer falling in any one or more of the following categories, namely:-" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2025-06-30#2-definitions), as amended to 2025-06-30: "(f) a retailer who has acquired point of sale for accepting payment through debit or credit cards from banking companies or any other digital payment service provider authorized by State Bank of Pakistan;" Official source: https://download1.fbr.gov.pk/Docs/202586148252375SalesTaxActupdatedupto2025-26.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2022-06-30#2-definitions), as amended to 2022-06-30: "(e) a retailer, whose shop measures one thousand square feet in area or more" Official source: https://download1.fbr.gov.pk/Docs/20227191074612108SalesTaxAct,1990withIndexupdatedupto30.06.2022.pdf - [Finance Act, 2023, section 5 (Amendments of the Sales Tax Act, 1990)](https://qanoondigest.com/acts/finance-act/finance-act-2023#5-amendments-of-the-sales-tax-act-1990), as amended to 2023: "(c) in clause (43A), sub-clauses (e) and (ga) shall be omitted;" Official source: https://download1.fbr.gov.pk/Docs/20236261762031274FinanceAct,2023.pdf - [Finance Act, 2026, section 4 (Amendments of the Sales Tax Act, 1990 (VII of 1990))](https://qanoondigest.com/acts/finance-act/finance-act-2026#4-amendments-of-the-sales-tax-act-1990-vii-of-1990), as amended to 2026: "(ii) sub-clauses (f) and (g) shall be omitted;" Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "all Tier-1 retailers shall integrate their retail outlets with Board’s computerized system for real-time reporting of sales." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Why is more tax charged on my shop's electricity bill if I am not on the Active Taxpayers List? Source: https://qanoondigest.com/faq/retail-shops/non-atl-shop-electricity-bill-higher-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under the Income Tax Ordinance amended to 30 June 2026, being off the Active Taxpayers' List does not raise the section 235 tax on a shop's electricity bill. Rule 1 of the Tenth Schedule increases withholding rates by hundred percent for non-listed persons, but rule 10, clause (i), excludes tax under section 235. Any extra charge comes from somewhere else. **Applies to:** Shopkeepers in Pakistan with a commercial electricity connection who are not on the income tax Active Taxpayers' List, for bills in tax year 2027 (1 July 2026 to 30 June 2027). Many shopkeepers assume that anyone off the Active Taxpayers' List pays double income tax on everything, including the electricity bill. For the income tax collected on a commercial electricity bill under section 235, the consolidated Ordinance says otherwise. ### What does the law say? Four provisions fit together here. **Section 235** makes the person preparing the electricity bill collect advance tax on the bill of a commercial, industrial or domestic consumer, at the rates in Division IV of Part IV of the First Schedule. The Explanation to section 235(2) says the bill means the bill "inclusive of sales tax and all incidental charges". **Section 100BA** says the collection or deduction of advance tax from a person not appearing on the active taxpayers' list "shall be determined in accordance with the rules in the Tenth Schedule", and that the Tenth Schedule overrides anything contrary in the Ordinance. **Rule 1 of the Tenth Schedule** says that where tax is to be deducted or collected under any provision of the Ordinance from a person not on the list, "the rate of tax required to be deducted or collected, as the case may be, shall be increased by hundred percent of the rate" specified in the Ordinance. Read alone, this would double the section 235 rate. **Rule 10 of the Tenth Schedule** then says the provisions of the Schedule do not apply to the tax collectible or deductible under the sections it lists. Clause (i) of that list reads "tax deducted under section 235". It carries no footnote showing it was omitted, so it is part of the law as amended to 30 June 2026. The result: the non-ATL increase in rule 1 does not reach the section 235 charge on a shop's bill. ### How does it work in practice? The electricity company works out section 235 tax on a commercial bill using the Division IV table, whatever the owner's filing status. For tax year 2027 the table reads: | Gross amount of bill | Tax | |---|---| | Up to Rs. 500 | Rs. 0 | | Exceeds Rs. 500 but does not exceed Rs. 20,000 | 10% of the amount | | Exceeds Rs. 20,000 | Rs. 1,950 plus 12% of the amount exceeding Rs. 20,000 (commercial consumers) | Getting onto the list does not take a shop out of section 235 either. The proviso to section 235(1) removes the charge only for "a domestic consumer of electricity" whose name is on the list. A commercial connection is not covered by that proviso. The list itself comes from section 181A, which gives the Board the power to institute the active taxpayers' list and says it "shall be regulated as may be prescribed". The rules that set who goes on the list are in the Income Tax Rules, 2002, which this corpus holds only as amended to 24 November 2023. ### Worked example (illustrative figures) Two cloth shops sit side by side in Anarkali, Lahore. Asif is on the Active Taxpayers' List. Bilal is not. In August 2026 each receives a commercial bill of Rs. 30,000, inclusive of sales tax and charges. 1. Both bills exceed Rs. 20,000, so the third row applies. 2. Amount above Rs. 20,000: Rs. 30,000 minus Rs. 20,000 = Rs. 10,000. 3. 12% of Rs. 10,000 = Rs. 1,200. 4. Section 235 tax = Rs. 1,950 plus Rs. 1,200 = Rs. 3,150. 5. Rule 10(i) keeps the Tenth Schedule out, so Bilal's section 235 tax is also Rs. 3,150. If Bilal's bill still shows more tax than Asif's, the difference is not explained by section 235 and rule 1 of the Tenth Schedule. ### What else could make a non-filer's bill higher? The Ordinance does not answer this directly, but the corpus points to places to look. - **Sales tax further tax.** Section 3(1A) of the Sales Tax Act, 1990 charges a further tax of four percent where taxable supplies are made to a person who has not obtained a sales tax registration number or who is not an active taxpayer. "Active taxpayer" there is a sales tax concept defined in section 2(1A) of that Act, not the income tax list. The subsection is subject to section 8(6) and to notifications excluding particular supplies, and those notifications are not in this corpus. - **Sales tax on retailers through the bill.** Section 3(9) of the Sales Tax Act charges retailers other than Tier-1 retailers through their monthly bills at five percent where the bill does not exceed Rs. 20,000 and seven and a half percent above that. This depends on being a non-Tier-1 retailer, not on income tax filing status. - **Section 99A.** Tax on commercial connections of retailers other than Tier-1 retailers can be set by an income tax general order under section 99A. Section 99A(4) says section 100BA and rule 1 of the Tenth Schedule do not apply to that tax unless the order provides for it. The order is not held in this corpus. ### What if I am off the list for other purchases? Rule 10 carves out only the sections it names. Other tax collected from a shopkeeper who is not on the list can still be increased. For example, the Table in rule 1 of the Tenth Schedule sets 2.5% for tax under section 236H on purchases from distributors and wholesalers, against 0.5% in Division XV for listed persons. ### Common mistakes - **Assuming every withholding doubles for non-filers.** Rule 1 is general, but rule 10 excludes listed sections, and section 235 is one of them. - **Expecting the list to remove tax from a shop bill.** The section 235(1) proviso covers domestic consumers only. - **Mixing up the two lists.** The income tax list under section 181A and the sales tax "active taxpayer" status under the Sales Tax Act are separate, and each has its own consequences. ### What to check in the official text Read section 235, section 100BA and section 181A of the Income Tax Ordinance as amended to 30 June 2026, Division IV of Part IV of the First Schedule, and rules 1 and 10 of the Tenth Schedule. For the sales tax side, read section 3(1A), section 3(9) and section 2(1A) of the Sales Tax Act, 1990 as amended to 30 June 2026. Any notification under section 3(1A) or general order under section 99A that applies to your connection needs to be read separately, as this corpus does not hold them. ### Frequently asked #### Does the section 235 rate double for a shop that is not on the Active Taxpayers' List? Not under the consolidated Ordinance to 30 June 2026. Rule 1 of the Tenth Schedule raises withholding rates by hundred percent for persons off the list, but rule 10 says the Schedule does not apply to the tax listed there, and clause (i) is tax under section 235. #### Will getting onto the Active Taxpayers' List remove income tax from my shop's bill? No. The proviso to section 235(1) that removes the charge for people on the list covers only a domestic consumer. A commercial connection stays inside section 235 at the Division IV rates whether or not the owner is on the list. #### Then why is my bill higher than my neighbour's? The Ordinance does not explain a difference based on income tax filing status. Possible sources are sales tax charges under section 3 of the Sales Tax Act, such as the further tax in section 3(1A) or the retailer charge in section 3(9), or a section 99A general order, which this corpus does not hold. ### Citations - [Income Tax Ordinance, 2001, section 235 (Electricity consumption)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#235-electricity-consumption), as amended to 2026-06-30: "the provisions of sub-section (1) shall not apply to a domestic consumer of electricity if his name appears on the Active Taxpayers’ List." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "shall be determined in accordance with the rules in the Tenth Schedule." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (Rate of deduction or collection of tax) and rule 10, clause (i)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "tax deducted under section 235;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 181A (Active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181a-active-taxpayers-list), as amended to 2026-06-30: "The Board shall have the power to institute active taxpayers’ list." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division IV (Electricity Consumption), clause (1) Table](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "where taxable supplies are made to a person who has not obtained registration number" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Does my retail shop need sales tax registration, or does paying through the electricity bill cover it? Source: https://qanoondigest.com/faq/retail-shops/do-retail-shops-need-sales-tax-registration Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 14(1)(b) of the Sales Tax Act, 1990 requires a retailer liable to sales tax to register, but it excludes a retailer required to pay sales tax through its electricity bill under section 3(9). A small shop outside Tier-1 is therefore not required to register as a retailer. A Tier-1 retailer, or a shop that also wholesales or imports, is. **Applies to:** Owners of retail shops in Pakistan deciding whether the Sales Tax Act, 1990 requires them to obtain sales tax registration. Whether a shop must register for sales tax turns on which charging rule applies to it. A shop that pays through its electricity bill is carved out of the retailer registration rule. A Tier-1 retailer is not, and neither is a shop that does other business the Act lists. ### What does the law say? Section 14(1) of the Sales Tax Act, 1990 requires every person making taxable supplies in Pakistan in the course of a taxable activity, and falling in one of the listed categories, to be registered if not already registered. The categories are: | Clause | Category | |---|---| | (a) | A manufacturer who is not running a cottage industry | | (b) | A retailer liable to pay sales tax under the Act or rules, **excluding** a retailer required to pay sales tax through his electricity bill under section 3(9) | | (c) | An importer | | (d) | An exporter who intends to obtain a sales tax refund on zero-rated supplies | | (e) | A wholesaler, dealer or distributor | | (f) | A person required to register under another Federal or Provincial law for a duty or tax collected as if it were sales tax | Clause (b) is the one that decides the question for most shopkeepers. ### How does the electricity bill exclusion work? Section 3(9) charges sales tax "from retailers, other than those falling in Tier-1, through their monthly electricity bills". Section 14(1)(b) then leaves those same retailers out of the registration requirement. So for a retailer that is not Tier-1 and deals only in retail, paying through the bill replaces registration as a retailer. A Tier-1 retailer is in a different position. Section 3(9A) says Tier-1 retailers pay sales tax at the rate applicable to the goods they sell. They are "liable to pay sales tax under the Act" and are not paying under section 3(9), so section 14(1)(b) requires them to register. Section 2(43A) sets the Tier-1 categories, including a unit of a chain of stores, a shop in an air-conditioned mall, plaza or centre (kiosks excluded), a retailer whose electricity bills over the preceding twelve consecutive months exceed Rs. 1,200,000 in total, and a retailer with turnover above two hundred million rupees. ### Worked example (illustrative scenario) Three shops in Sialkot: 1. **Rafiq's kiryana shop.** A standalone shop on a local bazaar street, selling only to households. Its bills total about Rs. 180,000 a year. None of the section 2(43A) categories fits, so it pays through its bill under section 3(9) and section 14(1)(b) does not require it to register as a retailer. 2. **Sana's clothing shop in an air-conditioned mall.** Section 2(43A)(b) makes it Tier-1. It pays tax under section 3(9A), is outside the electricity bill scheme, and section 14(1)(b) requires registration. 3. **Imran's hardware shop that also supplies other shops.** At the counter he is a small retailer, but supplying stock to other retailers is wholesale business. Section 14(1)(e) requires a wholesaler, dealer or distributor to register, and the electricity bill exclusion in clause (b) does not extend to clause (e). The names and facts are invented. The outcome in each case follows the clause cited. ### What if the shop is liable but does not register? The Act has three escalating tools: - **Compulsory registration.** Section 14(2A), added by the Finance Act, 2025, lets the Commissioner Inland Revenue, after inquiry and a hearing, compulsorily register a person who is liable but has not applied. - **Utility disconnection.** Section 14AB lets the Board, through a Sales Tax General Order, direct gas and electricity distribution companies to disconnect "any person, including tier-1 retailers" who fails to register, and to restore the connection once the person registers. - **Bank account bar.** Section 14AC applies where the Commissioner believes a person is supplying taxable goods without registration, has given three consecutive opportunities of being heard, and the person has still not registered. The Commissioner can suspend the bank account for three working days, repeat that twice more at one-week intervals, and then bar the accounts permanently. The bar is removed within two working days of registration. ### What if a small shop wants to register anyway? The Act is not explicit. Section 14(2) allows persons "not engaged in making of taxable supplies" to apply where they need registration for imports, exports, or under any provision of the Act or another Federal law. That is not a general option for a section 3(9) retailer. Section 14(3) leaves the manner of registration to rules the Board prescribes. This page does not say that voluntary registration is or is not available to a retailer paying through the electricity bill. ### Common mistakes - **Thinking the electricity bill tax covers every activity.** The exclusion is only in clause (b). A shop that is also a wholesaler, distributor or importer falls under clause (c) or (e). - **Assuming a shop never becomes Tier-1.** Crossing Rs. 1,200,000 in electricity bills over twelve consecutive months, or moving into an air-conditioned mall, brings it within section 2(43A) and out of the exclusion. - **Ignoring online sales.** Section 14(1A) requires sellers of digitally ordered goods to register, but it also excludes retailers paying through electricity bills under section 3(9). - **Treating a kiosk in a mall as Tier-1.** Section 2(43A)(b) excludes kiosks from the mall category, though another category could still apply. ### What to check in the official text Read section 14, including sub-sections (1), (1A), (2), (2A) and (3), and sections 14AB and 14AC, which the site file prints within section 14. Then read section 3(9) and 3(9A) and the Tier-1 definition in section 2(43A) of the Sales Tax Act as amended to 30 June 2026. Board notifications adding or excluding persons from Tier-1 under section 2(43A)(h), and Sales Tax General Orders under section 14AB, are not held in this corpus. ### Frequently asked #### My shop pays retail sales tax in the electricity bill. Do I also have to register? Not as a retailer. Section 14(1)(b) excludes a retailer required to pay sales tax through his electricity bill under section 3(9). Registration can still be required under another clause of section 14(1), for example if the shop also acts as a wholesaler, dealer, distributor or importer. #### Can a small shop register voluntarily? Section 14 does not contain a general voluntary registration clause for a retailer paying through the electricity bill. Section 14(2) lets persons not making taxable supplies apply where they need registration for imports, exports or another legal requirement. Whether a section 3(9) retailer may register by choice is not stated in the Act. #### What happens if a shop that must register does not? Section 14(2A) lets the Commissioner compulsorily register it after a hearing. Section 14AB lets the Board direct gas and electricity companies to disconnect a person, including a Tier-1 retailer, who fails to register, and section 14AC allows suspension and then a permanent bar on the person's bank accounts. ### Citations - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "a retailer who is liable to pay sales tax under the Act or rules made thereunder, excluding such retailer required to pay sales tax through his electricity bill under sub-section (9) of section 3;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "Tier-1 retailers shall pay sales tax at the rate as applicable to the goods sold under relevant provisions of this Act or a notification issued there under" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "a retailer operating in an air-conditioned shopping mall, plaza or centre, excluding kiosks;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 14AB, Discontinuance of gas and electricity connections](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 14AC, Bar on operations of Bank Accounts](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Does a retail shop need sales tax registration, and what happens if it does not register? Source: https://qanoondigest.com/faq/retail-shops/sales-tax-registration-for-retail-shop Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 14(1)(b) of the Sales Tax Act, a retailer liable to pay sales tax must register, except one paying through the electricity bill under section 3(9). A retailer who should register but does not faces Rs. 50,000 or 5 percent of the tax involved, possible prosecution, and utility, bank, property and sealing measures. **Applies to:** Shopkeepers and retail traders in Pakistan, especially those who may be Tier-1 retailers, who want to know whether the Sales Tax Act, 1990 requires them to register. Whether a shop must register depends on how it pays sales tax. The Sales Tax Act, 1990 splits retailers into two groups: Tier-1 retailers, who pay tax on their sales like any other registered business, and all other retailers, who pay through their shop's electricity bill. Only the first group is caught by the retailer limb of the registration rule. ### What does the law say about which retailers must register? Section 14(1) lists the categories of persons making taxable supplies who must register if not already registered. Clause (b) covers "a retailer who is liable to pay sales tax under the Act or rules made thereunder", and then carves out any retailer "required to pay sales tax through his electricity bill under sub-section (9) of section 3". Section 3(9) says tax "shall be charged from retailers, other than those falling in Tier-1, through their monthly electricity bills". The rate is five percent where the monthly bill amount does not exceed Rs. 20,000 and seven and a half percent where it does. The electricity supplier deposits that amount. Put together: | Type of shop | How sales tax is paid | Registration under s.14(1)(b) | | --- | --- | --- | | Tier-1 retailer (as defined in section 2(43A)) | On its sales, under section 3(9A) | Required | | Any other retailer | Through the monthly electricity bill, section 3(9) | Excluded from clause (b) | Other limbs of section 14(1) can still apply to a shop. A shopkeeper who is also an importer (clause (c)) or a wholesaler, dealer or distributor (clause (e)) is caught by those clauses on their own terms. Section 14(2A) lets the Commissioner compulsorily register a person liable to register, after giving an opportunity of being heard. ### What happens if a shop that must register does not? The Act has several layers. **Penalty.** Serial 7 of the table in section 33 covers any person required to apply for registration who fails to apply before making taxable supplies. The penalty is Rs. 50,000 or 5 percent of the amount of tax involved, whichever is higher. The proviso adds that if the person fails to register within sixty days of the commencement of taxable activity, he is further liable, on conviction by a Special Judge, to imprisonment of up to three years, a fine up to the amount of tax involved, or both. **Tax fraud.** Section 2(37) lists "making of taxable supplies without getting registration under this Act" as clause (k) of the definition of tax fraud, where it is done knowingly, intentionally or dishonestly to cause loss of tax. **Gas and electricity.** Section 14AB, printed within the section 14 entry in the consolidated text, lets the Board, through a Sales Tax General Order, direct distribution companies to discontinue the gas and electricity connections of any person, including Tier-1 retailers, who fails to register. Restoration is notified once the person registers. **Bank accounts.** Section 14AC, also printed within the section 14 entry, applies after the Commissioner has given three consecutive opportunities of being heard and the person still has not registered. The Commissioner can have the bank account suspended for three working days, repeat that twice more with a week between, and then bar the account permanently. The bar is lifted within two working days of registration. **Property.** Under section 14AD, if the person still has not registered within fifteen days of the permanent bank bar, a committee including a Chamber of Commerce or trade association member hears the person and can recommend a bar on transfer of immoveable property. **Sealing and seizure.** Section 14AE, subject to prior action under sections 14AC and 14AD, lets the Chief Commissioner seal the business premises, seize moveable property, or appoint a receiver to manage the taxable activity. This needs a public notice, an open-court hearing before a committee, and publication on the Board's website and in a newspaper. The order is reversed within two working days of registration. Sections 14AC, 14AD and 14AE each say they come into force on a date the Board notifies. Those notifications are not in this corpus. ### Worked example (illustrative figures) Rabia runs a clothing shop in an air-conditioned mall in Islamabad, so she is a Tier-1 retailer under section 2(43A)(b). She has not registered. 1. Say the tax involved on her unregistered sales is Rs. 400,000. 2. 5 percent of Rs. 400,000 = Rs. 20,000. 3. Rs. 20,000 is lower than Rs. 50,000, so the serial 7 penalty is Rs. 50,000. If the tax involved were Rs. 2,000,000 instead, 5 percent would be Rs. 100,000. That is higher than Rs. 50,000, so the penalty would be Rs. 100,000. In both cases the tax itself remains payable, and prosecution is possible if more than sixty days have passed since she started trading. Her neighbour Imran runs a small street-level grocery that is not Tier-1. He pays sales tax through his electricity bill under section 3(9) and is excluded from clause (b). ### What if my suppliers charge me extra because I am unregistered? Section 3(1A) charges further tax at four percent of the value, on top of the normal rate, where taxable supplies are made to a person who has not obtained a registration number or is not an active taxpayer. The Federal Government can exclude supplies from this by notification. ### Common mistakes - **Assuming every shop must register.** Clause (b) of section 14(1) expressly excludes retailers who pay through the electricity bill. - **Assuming no shop needs to register.** A Tier-1 retailer is outside the exclusion. So is a shopkeeper who also imports or wholesales. - **Thinking the penalty is always Rs. 50,000.** Serial 7 takes the higher of Rs. 50,000 and 5 percent of the tax involved. ### What to check in the official text Read section 14, including the text of sections 14AB and 14AC printed within it, then sections 14AD and 14AE, and serial 7 of the section 33 table in the Sales Tax Act as amended to 30 June 2026. Check section 2(43A) to see whether your shop is Tier-1. Confirm whether the Board has notified the commencement dates for sections 14AC, 14AD and 14AE, and any Sales Tax General Order under section 14AB. These are not held here. ### Frequently asked #### Does a small corner shop have to register for sales tax? Not under section 14(1)(b) if it is a retailer that pays sales tax through its monthly electricity bill under section 3(9). That route covers retailers other than Tier-1 retailers. A Tier-1 retailer is outside the exclusion and must register. #### What is the penalty for not registering? Serial 7 of the section 33 table sets a penalty of Rs. 50,000 or 5 percent of the amount of tax involved, whichever is higher. If the person does not register within sixty days of starting the taxable activity, the same entry allows imprisonment of up to three years, a fine up to the tax involved, or both, on conviction by a Special Judge. #### Can FBR cut off my shop's electricity for not registering? Section 14AB lets the Board, through a Sales Tax General Order, direct gas and electricity distribution companies to disconnect any person, including Tier-1 retailers, who fails to register. The same section says the Board shall notify restoration once the person registers. ### Citations - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "a retailer who is liable to pay sales tax under the Act or rules made thereunder, excluding such retailer required to pay sales tax through his electricity bill under sub-section (9) of section 3;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "tax shall be charged from retailers, other than those falling in Tier-1, through their monthly electricity bills" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 33, Table, serial 7](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 14AD (Bar on transfer of Immoveable Property)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14ad-bar-on-transfer-of-immoveable-property), as amended to 2026-06-30: "The Commissioner shall have the powers to direct the property registering authority, through an order in writing, to bar transfer of immoveable property of any person who fails to obtain registration after lapse of fifteen days." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 14AE (Other measures for non-registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14ae-other-measures-for-non-registration), as amended to 2026-06-30: "Subject to prior action under section 14AC and 14AD, any person who fails to get registered for the purposes of this Act, the Chief Commissioner shall have the powers to" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "(k) making of taxable supplies without getting registration under this Act." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Why is income tax charged on my shop's commercial electricity bill and how much is it? Source: https://qanoondigest.com/faq/retail-shops/income-tax-on-shop-electricity-bill Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 235 of the Income Tax Ordinance, 2001 makes the electricity company collect advance income tax on commercial bills. For tax year 2027 the rate is nil up to Rs. 500, 10 percent up to Rs. 20,000, and Rs. 1,950 plus 12 percent of the excess. The Tenth Schedule doubles the rate for persons not on the Active Taxpayers' List. **Applies to:** Shopkeepers and other businesses with a commercial electricity connection in Pakistan, for bills in tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? Section 235(1) of the Income Tax Ordinance, 2001 says advance tax "shall be collected" at the rates in Division IV of Part IV of the First Schedule "on the amount of electricity bill of a commercial or industrial or domestic consumer". Section 235(2) makes the person preparing the bill charge the tax in the same way as the electricity charges themselves. So the tax on your shop's bill is income tax collected in advance by the electricity company, not a charge for electricity. The only built-in exception in section 235(1) is for a domestic consumer whose name is on the Active Taxpayers' List. A shop's commercial connection is not domestic, so that proviso does not help it. The Explanation under section 235(2) sets the base: the bill means the electricity bill "inclusive of sales tax and all incidental charges". The table is applied to that gross figure. ### How much is it for tax year 2027? Division IV of Part IV of the First Schedule, as printed in the Ordinance amended to 30 June 2026, sets these rates for commercial and industrial consumers "from gross amount of bills": | Gross amount of monthly bill | Commercial consumer | Industrial consumer | |---|---|---| | Up to Rs. 500 | Rs. 0 | Rs. 0 | | Exceeds Rs. 500 but not Rs. 20,000 | 10% of the amount | 10% of the amount | | Exceeds Rs. 20,000 | Rs. 1,950 plus 12% of the amount exceeding Rs. 20,000 | Rs. 1,950 plus 5% of the amount exceeding Rs. 20,000 | These are the rates in force for bills in tax year 2027 (1 July 2026 to 30 June 2027) unless a later amendment changes them. One oddity in the printed table: 10% of a Rs. 20,000 bill is Rs. 2,000, while the top band starts from a fixed Rs. 1,950. This page reproduces the figures exactly as printed rather than correcting them. ### What if my name is not on the Active Taxpayers' List? Section 100BA says the collection of advance tax from a person not on the Active Taxpayers' List "shall be determined in accordance with the rules in the Tenth Schedule", and that Schedule overrides anything contrary in the Ordinance. Rule 1 of the Tenth Schedule says that where tax is to be collected from such a person, "the rate of tax required to be deducted or collected ... shall be increased by hundred percent of the rate specified in this Ordinance". For the 10 percent band, that gives 20 percent. For the top band, the rule talks about the "rate" but the charge is a fixed Rs. 1,950 plus 12 percent. The Schedule does not say whether the fixed amount is doubled along with the percentage, so this page does not work out a figure for that band. ### Worked example (illustrative figures) Three shops in Multan, all on commercial connections. The bill figures are gross amounts including sales tax and incidental charges, as the Explanation to section 235(2) requires. **Shop A: grocery, on the Active Taxpayers' List, gross bill Rs. 15,000.** 1. Rs. 15,000 is above Rs. 500 and not above Rs. 20,000, so 10 percent applies. 2. 10% of Rs. 15,000 = **Rs. 1,500**. **Shop B: electronics, on the list, gross bill Rs. 32,000.** 1. The bill exceeds Rs. 20,000, so the commercial top band applies. 2. Amount above Rs. 20,000: Rs. 32,000 - Rs. 20,000 = Rs. 12,000. 3. 12% of Rs. 12,000 = Rs. 1,440. 4. Tax: Rs. 1,950 + Rs. 1,440 = **Rs. 3,390**. **Shop C: same bill as Shop A, but not on the list.** 1. The 10 percent rate is increased by hundred percent under Tenth Schedule rule 1, giving 20 percent. 2. 20% of Rs. 15,000 = **Rs. 3,000**, twice Shop A's charge. ### What if I am a retailer outside Tier-1? Section 99A lets the Federal Government or the Board, through an income tax general order, collect tax from retailers other than Tier-I retailers and specified service providers on commercial electricity connections, at rates set in that order, "in addition to or in lieu of" the advance tax under section 235(1). Section 99A(3) says section 235(1) keeps applying to these persons unless the general order specifically exempts them, and section 99A(4) says section 100BA and Tenth Schedule rule 1 do not apply to tax collectible under section 99A unless the general order provides for it. No such general order is in this corpus, so this page does not state its rates. This income tax is separate from the sales tax that the Sales Tax Act, 1990 collects on the same bill from non-Tier-1 retailers. ### What if my income is exempt or already taxed? Section 235(3) says the advance tax is not collected from a person who produces a certificate from the Commissioner that his income for the tax year is exempt, or that he has already discharged his advance tax liability, or whose entire income is subject to the final or minimum tax regime under other provisions of the Ordinance. Whether the tax you do pay can be adjusted later is covered on the related page about section 235(4). ### Common mistakes - **Thinking filers are exempt on shop bills.** The Active Taxpayers' List proviso in section 235(1) covers domestic consumers only. - **Working the rate on the bill before sales tax.** The Explanation to section 235(2) includes sales tax and incidental charges in the bill. - **Treating it as the same thing as the retailer sales tax.** The bill-based sales tax on small retailers is a different levy under the Sales Tax Act, 1990. - **Applying the domestic rates.** Division IV has a separate clause (2) for domestic consumption (nil where the monthly bill is less than Rs. 25,000, 7.5 percent at Rs. 25,000 or more); it does not apply to a commercial connection. ### What to check in the official text Read section 235(1) to (4), section 100BA, rule 1 of the Tenth Schedule and Division IV of Part IV of the First Schedule. Section 99A allows income tax general orders affecting retailers' electricity bills; check whether one is in force, as none is included here. ### Frequently asked #### My shop is on the Active Taxpayers' List. Why is income tax still on the bill? The proviso to section 235(1) that removes the charge for people on the Active Taxpayers' List applies only to a domestic consumer. A commercial connection stays inside section 235 whatever the owner's filing status; being on the list only avoids the Tenth Schedule increase. #### Is the tax worked out on the bill before or after sales tax? After. The Explanation to section 235(2) says the electricity consumption bill means the bill inclusive of sales tax and all incidental charges, and the Division IV table is applied to the gross amount of the bill. #### How much more does a shopkeeper not on the Active Taxpayers' List pay? Rule 1 of the Tenth Schedule increases the rate of collection by hundred percent for persons not on the list. On a bill in the 10 percent band that means 20 percent. The rule does not spell out how it applies to the fixed Rs. 1,950 in the top band. ### Citations - [Income Tax Ordinance, 2001, section 235 (Electricity consumption)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#235-electricity-consumption), as amended to 2026-06-30: "electricity consumption bill referred to in sub-section (2) means electricity bill inclusive of sales tax and all incidental charges." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division IV (Electricity Consumption), clause (1) Table](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "shall be determined in accordance with the rules in the Tenth Schedule." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (Rate of deduction or collection of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 99A (tax collected from retailers other than Tier-I retailers on commercial electricity connections)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much input tax does a Tier-1 retailer lose if its outlets are not integrated? Source: https://qanoondigest.com/faq/retail-shops/input-tax-cut-non-integrated-outlets Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 8B(6) of the Sales Tax Act, 1990 says that if a Tier-1 retailer does not integrate a retail outlet during a tax period, or even part of it, the adjustable input tax for the whole of that tax period is reduced by 60%. Only 40% of the input tax that would otherwise be adjustable remains. **Applies to:** Registered Tier-1 retailers under the Sales Tax Act, 1990 with one or more retail outlets that were not integrated with FBR's computerized system for any part of a monthly tax period. ### What does the law say? Section 8B of the Sales Tax Act, 1990 limits how much input tax a registered person can set against output tax. Subsection (6) is aimed at Tier-1 retailers. If a Tier-1 retailer "does not integrate his retail outlet" as required, during a tax period or any part of it, "the adjustable input tax for whole of that tax period shall be reduced by 60%". Three features of the wording matter: - **Any outlet.** The trigger is a single retail outlet that is not integrated. - **Any part of the period.** The words "or part thereof" mean the outlet need not be out of integration for the full month. - **The whole period.** The reduction is applied to adjustable input tax for the whole tax period, not to a daily or per-outlet share. A tax period is one month under section 2(43), unless the Board specifies otherwise. So in practice the cut is applied month by month. ### How does it work in practice? A registered Tier-1 retailer pays sales tax at the rate that applies to the goods it sells, as section 3(9A) provides, and reduces its output tax by the input tax it paid on purchases. Section 8B(6) shrinks that input tax figure for any month in which an outlet was not integrated. The integration duty itself is in the proviso to section 23(6): from the date and in the manner the Board prescribes, all Tier-1 retailers shall integrate their retail outlets with the Board's computerized system for real-time reporting of sales. Section 8B has other limits that can apply in the same month: - **The 90% cap in section 8B(1).** Input tax above 90% of output tax is not adjustable, except for fixed assets or capital goods. A proviso added by the Finance Act, 2026 lets the Board, by notification, reduce or enhance this limit based on compliance with POS and other electronic systems. - **Board-set limits in section 8B(4).** The Board may prescribe other limits or use automated risk management to defer input tax. ### Worked example (illustrative figures) A home appliances retailer in Islamabad is a Tier-1 retailer with three outlets. In the September tax period, one outlet's POS was not integrated for five days. The other two were integrated all month. All figures are invented. | Step | Working | Amount | |---|---|---| | Output tax for September | Illustrative figure | Rs. 1,800,000 | | Input tax paid on purchases | Illustrative figure | Rs. 1,200,000 | | 90% cap under section 8B(1) | 90% x Rs. 1,800,000 | Rs. 1,620,000 | | Input tax within the cap | Rs. 1,200,000 is below Rs. 1,620,000 | Rs. 1,200,000 | | Reduction under section 8B(6) | 60% x Rs. 1,200,000 | Rs. 720,000 | | Adjustable input tax | Rs. 1,200,000 - Rs. 720,000 | Rs. 480,000 | | Sales tax payable | Rs. 1,800,000 - Rs. 480,000 | Rs. 1,320,000 | Had all three outlets been integrated all month, the tax payable would have been Rs. 1,800,000 - Rs. 1,200,000 = Rs. 600,000. The five-day gap at one outlet costs Rs. 1,320,000 - Rs. 600,000 = **Rs. 720,000** of extra tax for the month, before any penalty. In this example the input tax sits below the 90% cap, so the order in which the two limits are applied makes no difference. The Act does not say which comes first where input tax exceeds the cap, and this page does not settle that. ### What if the outlet stays non-integrated for several months? The reduction applies to each tax period in which an outlet was not integrated for all or part of the period. Separately, serial 25A of the section 33 table imposes penalties of Rs. 500,000, Rs. 1 million, Rs. 2 million and Rs. 3 million for successive defaults, and the premises can be sealed. ### What if the retailer has no input tax that month? Then there is nothing for section 8B(6) to reduce. The penalty and sealing provisions still apply to the failure to integrate. ### Common mistakes - **Reducing only the outlet's share.** The text reduces adjustable input tax "for whole of that tax period". - **Thinking a few days do not count.** "Part thereof" covers any part of the period. - **Assuming the reduced amount carries forward.** The carry forward in section 10(1) refers to input tax not adjustable under section 8B(1). Section 8B(6) is silent on carry forward. - **Reading 60% as the amount you keep.** The input tax is reduced **by** 60%, so 40% remains adjustable. ### What to check in the official text Section 8B(6) still refers to integration "in the manner as prescribed under sub-section (9A) of section 3". In the edition amended to 30 June 2026, the proviso to section 3(9A) is shown as omitted by the Finance Act, 2025, and the integration duty now appears in the proviso to section 23(6). The Act has not updated the cross-reference, and this page does not resolve what effect that has. Also check any Board notification under the new proviso to section 8B(1) that changes the input tax limit for POS compliance; such notifications are not held on this site. ### Frequently asked #### Is the 60% cut only on the input tax of the non-integrated outlet? Section 8B(6) speaks of 'the adjustable input tax for whole of that tax period', not the input tax of one outlet. The text does not limit the reduction to the outlet that was not integrated. #### Does one day without integration trigger the cut? The subsection applies where the outlet is not integrated 'during a tax period or part thereof', and the reduction applies to the whole tax period. The text sets no minimum number of days. #### Can the lost input tax be carried forward? The first proviso to section 10(1) carries forward input tax that is not adjustable under section 8B(1). It does not mention section 8B(6), and section 8B(6) itself says nothing about carry forward or refund of the reduced amount. ### Citations - [Sales Tax Act, 1990, section 8B (Adjustable input tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8b-adjustable-input-tax), as amended to 2026-06-30: "In case a Tier-1 retailer does not integrate his retail outlet in the manner as prescribed under sub-section (9A) of section 3, during a tax period or part thereof, the adjustable input tax for whole of that tax period shall be reduced by" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "Notwithstanding anything contained in this Act, Tier-1 retailers shall pay sales tax at the rate as applicable to the goods sold under relevant provisions of this Act or a notification issued there under" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "all Tier-1 retailers shall integrate their retail outlets with Board’s computerized system for real-time reporting of sales." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 10 (Refund of input tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#10-refund-of-input-tax), as amended to 2026-06-30: "such excess input tax may be carried forward to the next tax period, along with the input tax as is not adjustable in terms of sub-section (1) of section 8B, and shall be treated as input tax for that period" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 33, Table, serial 25A](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "means a period of one month or such other period as the" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Is POS integration with FBR compulsory for every Tier-1 retailer? Source: https://qanoondigest.com/faq/retail-shops/pos-integration-compulsory-tier-1-retailers Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, in principle. The proviso to section 23(6) of the Sales Tax Act says all Tier-1 retailers shall integrate their retail outlets with the Board's computerized system for real-time reporting of sales. The start date, mode and manner are whatever the Board prescribes, and the Board can exclude persons from Tier-1 by notification. **Applies to:** Shopkeepers who fall within the Tier-1 retailer definition of the Sales Tax Act, 1990 and want to know their duty to connect their point of sale to FBR. The law makes integration compulsory for Tier-1 retailers, but it hands the timing and method to the Board. The proviso to section 23(6) of the Sales Tax Act, 1990 says that "from such date, and in such mode and manner, as prescribed by the Board, all Tier-1 retailers shall integrate their retail outlets with Board's computerized system for real-time reporting of sales." ### What does the law say? **The integration duty.** Section 23 deals with tax invoices. The Finance Act, 2025 added two sub-sections: - **Section 23(5)** lets the Board, by notification in the official Gazette, require any person or class of persons to integrate their electronic invoicing system with the Board's Computerized System for real time reporting of sales, in the mode and manner and from the date the notification specifies. - **Section 23(6)** says a licensed integrator shall integrate the electronic invoicing system of those registered persons as prescribed. Its proviso then applies the duty to all Tier-1 retailers. **The tax rate.** Section 3(9A) says Tier-1 retailers pay sales tax at the rate applicable to the goods sold under the Act or a notification. The integration wording used to be a proviso to this sub-section. The Finance Act, 2025 omitted that proviso and moved the duty into section 23. **Monitoring more generally.** Section 40C(1) lets the Board, by notification, specify any registered person or class, or any goods, for which monitoring or tracking of production, sales, clearances, stocks or related activity "may be implemented through electronic or other means as may be prescribed". Section 40C is a general power. The specific Tier-1 duty sits in section 23(6). ### What happens if a Tier-1 retailer does not integrate? The Act attaches three consequences: | Provision | Consequence | | --- | --- | | Section 8B(6) | Adjustable input tax for the whole tax period is reduced by 60% where the outlet is not integrated during that period or part of it | | Section 33, S. No. 25A | Rs. 500,000 for the first default; Rs. 1 million for a second default after fifteen days of the order for the first; Rs. 2 million for a third; Rs. 3 million for a fourth; and the business premises are liable to be sealed by an officer of Inland Revenue in the manner prescribed | | Section 33, S. No. 25A, proviso | If the retailer integrates before the penalty for the second default is imposed, the Commissioner shall waive the penalty for the first default | Serial 25A was widened by the Finance Act, 2025 to cover a person who "fail to issue electronic invoices after integration" as well. ### Worked example (illustrative figures) Khan Electronics has a shop in an air-conditioned plaza in Rawalpindi, so it is Tier-1 under the air-conditioned mall or plaza limb of the Tier-1 definition. Assume the Board's prescribed date has passed and the shop was not integrated for part of March. Its made-up March figures: output tax Rs. 900,000 and adjustable input tax Rs. 700,000. **Step 1: the input tax cut.** Section 8B(6) reduces adjustable input tax for the whole tax period by 60%. 60% of Rs. 700,000 = Rs. 420,000. Input tax allowed = Rs. 700,000 minus Rs. 420,000 = Rs. 280,000. **Step 2: tax payable.** Rs. 900,000 minus Rs. 280,000 = Rs. 620,000, instead of Rs. 900,000 minus Rs. 700,000 = Rs. 200,000. **Step 3: penalty exposure.** A first default under serial 25A carries Rs. 500,000. If Khan Electronics integrates before a second-default penalty is imposed, the proviso requires the Commissioner to waive that first Rs. 500,000. Section 8B(1) separately caps input tax at 90% of output tax. Here that cap is 90% of Rs. 900,000 = Rs. 810,000, and Rs. 280,000 is below it, so the cap does not change the result. ### What if ...? **What if the Board has not prescribed the date or manner for me?** The proviso to section 23(6) runs "from such date, and in such mode and manner, as prescribed by the Board". The Board's notification is what switches the duty on. The Tier-1 chapter of the Sales Tax Rules, 2006, Chapter XIV-AA, was omitted by S.R.O. 69(I)/2025 dated 29 January 2025, and any later notification is not held here. **What if I have several branches?** The duty is to integrate "their retail outlets", in the plural. The Act does not exempt any branch of a Tier-1 retailer. **What if the Board excludes my class of business?** A proviso added to the Tier-1 definition by the Finance Act, 2026 lets the Board exclude any person or class of persons from the Tier-1 definition by notification. An excluded person is not a Tier-1 retailer, so the section 23(6) proviso would not reach it. ### Common mistakes - **Looking for the duty in section 3(9A).** Since the Finance Act, 2025, it is in section 23(6). Note that section 8B(6) still refers to integration "in the manner as prescribed under sub-section (9A) of section 3". The Act has not updated that cross-reference, so how section 8B(6) now links to section 23(6) is not spelled out in the text. - **Treating a card machine as integration.** A bank card terminal is not the Board's computerized system for real-time reporting, and since 1 July 2026 it is not a Tier-1 test either. - **Assuming integration is optional until audit.** The input tax reduction in section 8B(6) applies for any tax period in which the outlet is not integrated, even for part of the period. ### What to check in the official text Read section 23(5) and (6), section 3(9A), section 8B(6), section 40C and serial 25A of the section 33 table in the Sales Tax Act as amended to 30 June 2026. The penalty table is printed only in the official PDF. Then check the Board's notification that sets the date, mode and manner of integration for Tier-1 retailers, which is not part of this corpus. ### Frequently asked #### Where in the law is the duty for Tier-1 retailers to integrate? In the proviso to section 23(6) of the Sales Tax Act. Until the Finance Act, 2025, the same wording sat in a proviso to section 3(9A). The Finance Act, 2025 omitted that proviso from section 3(9A) and added sub-sections (5) and (6) to section 23. #### What if a Tier-1 retailer does not integrate? Section 8B(6) reduces adjustable input tax for the whole tax period by 60% if a Tier-1 retailer does not integrate during that period or part of it. Serial 25A of the section 33 table sets penalties of Rs. 500,000 for a first default rising to Rs. 3 million for a fourth, and the premises are liable to be sealed. #### Does the law say which POS software or device to use? No. Section 23(6) leaves the mode and manner to the Board, and section 23(5) lets the Board specify integration by notification. The detailed Tier-1 chapter of the Sales Tax Rules, 2006 (Chapter XIV-AA) was omitted in January 2025, and any replacement notification is not held in this corpus. ### Citations - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "all Tier-1 retailers shall integrate their retail outlets with Board’s computerized system for real-time reporting of sales." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "Tier-1 retailers shall pay sales tax at the rate as applicable to the goods sold under relevant provisions of this Act or a notification issued there under" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 40C (Monitoring or Tracking by Electronic or other means)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#40c-monitoring-or-tracking-by-electronic-or-other-means), as amended to 2026-06-30: "monitoring or tracking of production, sales, clearances, stocks or any other related activity may be implemented through electronic or other means as may be prescribed" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8B (Adjustable input tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8b-adjustable-input-tax), as amended to 2026-06-30: "In case a Tier-1 retailer does not integrate his retail outlet in the manner as prescribed under sub-section (9A) of section 3, during a tax period or part thereof, the adjustable input tax for whole of that tax period shall be reduced by" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 33, table of offences and penalties, S. No. 25A](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, Chapter XIV-AA, omitted by Notification No. S.R.O 69(I)/2025 dated 29th January, 2025](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf --- ## Is POS integration with FBR compulsory for every Tier-1 retailer? Source: https://qanoondigest.com/faq/retail-shops/tier-1-retailer-pos-integration-rule Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. The proviso to section 23(6) of the Sales Tax Act, 1990 says that from the date, and in the mode and manner, prescribed by the Board, all Tier-1 retailers shall integrate their retail outlets with the Board's computerized system for real-time reporting of sales. The Act makes no size exception within Tier-1. **Applies to:** Shop owners who fall in any Tier-1 category in section 2(43A) of the Sales Tax Act, such as chain store units, shops in air-conditioned malls, and retailers above the electricity bill or turnover limits. Yes, integration is compulsory for every Tier-1 retailer. The proviso to section 23(6) of the Sales Tax Act, 1990, as amended to 30 June 2026, says all Tier-1 retailers shall integrate their retail outlets with the Board's computerized system for real-time reporting of sales. The Board decides the date from which this applies and the mode and manner of integrating. ### What does the law say? Section 23 deals with tax invoices. Sub-section (5) lets the Board, by notification, require any person or class of persons to integrate their electronic invoicing system with the Board's computerized system for real-time reporting of sales. Sub-section (6) says a licensed integrator shall integrate those registered persons in the prescribed mode and manner. Its proviso then speaks directly to shops: > Provided that from such date, and in such mode and manner, as prescribed by the Board, all Tier-1 retailers shall integrate their retail outlets with Board's computerized system for real-time reporting of sales. Three points come out of the wording: - **"All Tier-1 retailers".** The duty attaches to Tier-1 status, not to size, turnover band or type of goods. A small shop in an air-conditioned plaza is covered as much as a chain store. - **"Retail outlets".** The obligation is outlet by outlet. A retailer with several outlets integrates each of them. - **"From such date, and in such mode and manner, as prescribed by the Board".** The Act sets the duty but leaves the start date and the technical method to the Board. ### How does section 3(9A) fit in? Section 3(9A) says that Tier-1 retailers "shall pay sales tax at the rate as applicable to the goods sold". That is what separates them from smaller retailers, who pay through their electricity bill under section 3(9). Until 2025, section 3(9A) also carried the integration duty. The edition amended to 30 June 2024 has, as a proviso to section 3(9A), exactly the wording that now sits in section 23(6). The footnotes to the 2026 edition record that the proviso to section 3(9A) was omitted by the Finance Act, 2025, and that new sub-sections were added after section 23(4) by the same Act. Two provisions still point to section 3(9A) for the manner of integration: section 8B(6), and serial 25A of the section 33 penalty table. The Act does not explain this cross-reference now that the proviso has moved. This page does not resolve it. It only notes that the duty itself is plainly stated in section 23(6). ### What is the Board's power under section 40C? Section 40C(1) lets the Board, by notification in the official Gazette, specify any registered person or class of registered persons, or any goods, for which monitoring or tracking of production, sales, clearances, stocks or related activity may be implemented through electronic or other means. So there are two routes to electronic oversight of a shop: the specific Tier-1 duty in section 23(6), and the Board's wider power to notify persons or goods for monitoring under section 40C. ### What happens if a Tier-1 retailer does not integrate? | Provision | Consequence | | --- | --- | | Section 8B(6) | Adjustable input tax for the whole tax period is reduced by 60% if the outlet is not integrated during the period or part of it | | Section 33, S. No. 25A | Rs. 500,000 for the first default; Rs. 1 million for the second; Rs. 2 million for the third; Rs. 3 million for the fourth, each later default counted after fifteen days of the order for the previous one | | Section 33, S. No. 25A | The business premises are liable to be sealed by an officer of Inland Revenue in the prescribed manner | | Section 33, S. No. 25A, proviso | If the retailer integrates before the penalty for the second default is imposed, the Commissioner shall waive the first default penalty | ### Worked example (illustrative figures) Sana runs a Tier-1 clothing shop in an air-conditioned plaza in Lahore. In a tax period she claims adjustable input tax of Rs. 400,000. Her outlet was not integrated for ten days of that month. The figures are made up. Step 1: section 8B(6) applies to "a tax period or part thereof", so ten days is enough to trigger it, and the cut applies to the whole period. Step 2: reduction. 60% of Rs. 400,000 = Rs. 240,000. Step 3: input tax left. Rs. 400,000 - Rs. 240,000 = Rs. 160,000. Separately, if a first-default penalty order is made under S. No. 25A, the penalty is Rs. 500,000. If she integrates before a second-default penalty is imposed, the proviso requires the Commissioner to waive that Rs. 500,000. ### What if my shop is not Tier-1? The proviso to section 23(6) does not apply. A retailer outside Tier-1 can still be caught by a Board notification under section 23(5) or section 40C, which can name any person or class of persons. Those notifications are not in this corpus. ### Common mistakes - **Thinking only large chains must integrate.** The proviso says "all Tier-1 retailers". - **Integrating one branch only.** The duty is to integrate "retail outlets". - **Looking for the duty only in section 3(9A).** Since the Finance Act, 2025 it is in section 23(6). ### What to check in the official text Read section 23(5) and (6), section 3(9A), section 8B(6), section 40C and serial 25A of the table in section 33 of the Sales Tax Act as amended to 30 June 2026. Check the Board's rules or notifications fixing the date, mode and manner of integration, and any notification under section 40C naming your class of business. Those are outside this corpus. ### Frequently asked #### Does a small Tier-1 shop get an exemption from integration? The proviso to section 23(6) applies to all Tier-1 retailers and contains no size exception. What the Act does leave to the Board is the date from which integration applies and the mode and manner of integrating. #### Is the integration duty in section 3(9A) or section 23? Both, at different times. Up to the edition amended to 30 June 2024 the duty sat in a proviso to section 3(9A). The Finance Act, 2025 omitted that proviso and added sub-sections (5) and (6) to section 23, whose proviso now carries the same words. Section 8B(6) and the section 33 penalty table still refer to section 3(9A). #### What happens if a Tier-1 retailer does not integrate? Section 8B(6) reduces the adjustable input tax for the whole tax period by 60%. Serial 25A of the section 33 table sets penalties rising from Rs. 500,000 to Rs. 3 million for repeated defaults, and makes the business premises liable to be sealed. ### Citations - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "Provided that from such date, and in such mode and manner, as prescribed by the Board, all Tier-1 retailers shall integrate their retail outlets with Board’s computerized system for real-time reporting of sales." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "Tier-1 retailers shall pay sales tax at the rate as applicable to the goods sold under relevant provisions of this Act or a notification issued there under" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2024-06-30#3-scope-of-tax), as amended to 2024-06-30: "Provided further that from such date, and in such mode and manner, as prescribed by the Board, all Tier-1 retailers shall integrate their retail outlets with Board’s computerized system for real-time reporting of sales." Official source: https://download1.fbr.gov.pk/Docs/20247231874252122SalesTaxAct,1990updatedbyFinanceAct,2024upto30.06.2024--12.07.2024.pdf - [Sales Tax Act, 1990, section 40C (Monitoring or Tracking by Electronic or other means)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#40c-monitoring-or-tracking-by-electronic-or-other-means), as amended to 2026-06-30: "the Board may, by notification in the official Gazette, specify any registered person or class of registered persons or any good or class of goods in respect of which monitoring or tracking of production, sales, clearances, stocks or any other related activity may be implemented through electronic or other means as may be prescribed" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8B (Adjustable input tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8b-adjustable-input-tax), as amended to 2026-06-30: "In case a Tier-1 retailer does not integrate his retail outlet in the manner as prescribed under sub-section (9A) of section 3, during a tax period or part thereof, the adjustable input tax for whole of that tax period shall be reduced by" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 33, Table, S. No. 25A (failure to integrate business)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Does minimum tax on turnover under section 113 apply to a retail shop, and at what rate? Source: https://qanoondigest.com/faq/retail-shops/minimum-tax-on-turnover-retail-shop Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 113 of the Income Tax Ordinance applies to a shop run by a company, or by an individual or association of persons with turnover of Rs. 100 million or more, when normal tax falls below the minimum. For tax year 2027 the rate is 1.25%, or 0.25% for integrated Tier-1 retailers of fast moving consumer goods. **Applies to:** Shopkeepers and retail businesses in Pakistan whose income tax on profit is low or nil because of losses, exemptions, credits or deductions, and whose turnover may reach the section 113 threshold. Minimum tax under section 113 of the Income Tax Ordinance, 2001 is a floor. When a business's tax worked out on its profit comes to less than a set percentage of its turnover, the business pays the percentage instead. For many small shops the key point is the threshold: a sole trader or partnership is not covered at all unless turnover reaches Rs. 100 million. ### What does the law say? Section 113(1) applies to: - a resident company, - a permanent establishment of a non-resident company, - an individual having turnover of one hundred million rupees or above in tax year 2017 or any subsequent tax year, and - an association of persons having turnover of one hundred million rupees or above in tax year 2017 or any subsequent tax year. It applies where, because of a loss for the year, a set-off of an earlier loss, an exemption, credits or rebates, or allowances and deductions (including depreciation), no tax is payable or paid, or the tax payable or paid is less than the percentage of turnover in column (3) of the Table in Division IX of Part I of the First Schedule. Where the section applies, section 113(2) treats the person's turnover as income and the person pays minimum tax at the Division IX rate "instead of the actual tax payable under this Ordinance". ### What counts as turnover for a shop? Section 113(3)(a) defines turnover to include gross sales or gross receipts from the sale of goods, exclusive of sales tax and federal excise duty and any trade discounts shown on invoices or bills. It also excludes amounts taken as deemed income and assessed as final discharge of tax liability. The Explanation to section 113(2)(a) adds that turnover covers receipts from all business activities. The Explanation to section 113(1) says "tax payable or paid" for this comparison does not include tax on deemed income assessed as a final discharge of tax liability, or the two additional taxes it names. ### What are the rates for tax year 2027? The Ordinance as amended to 30 June 2026 gives the rates for tax year 2027 (1 July 2026 to 30 June 2027). The Division IX entries most relevant to a retail shop are: | Serial | Person | Minimum tax as percentage of turnover | | --- | --- | --- | | 3(d) | Tier-1 retailers of fast moving consumer goods who are integrated with Board or its computerized system for real time reporting of sales and receipts | 0.25% | | 4 | In all other cases | 1.25% | Serial 3 also lists petroleum agents and distributors registered under the Sales Tax Act, rice mills and dealers, persons with turnover from e-commerce supplies, persons dealing in used vehicles, and flour mills, all at 0.25%. The Finance Act, 2026 omitted entry (a) of serial 3, which had covered distributors of pharmaceutical products, fast moving consumer goods and cigarettes. A shop that does not fit a named entry falls under serial 4. ### Worked example (illustrative figures) Tariq Traders is an association of persons running a large grocery store in Faisalabad. Its turnover for tax year 2027 is Rs. 150,000,000 and, because of heavy deductions, the tax worked out on its taxable income is Rs. 900,000. Both figures are invented. **Step 1: does section 113 apply?** Turnover of Rs. 150,000,000 is above Rs. 100,000,000, so the AOP is within section 113(1). **Step 2: minimum tax at the "all other cases" rate.** Rs. 150,000,000 x 1.25% = Rs. 1,875,000. **Step 3: compare.** Rs. 900,000 is less than Rs. 1,875,000, so the AOP pays Rs. 1,875,000. **Step 4: carry forward.** The excess is Rs. 1,875,000 minus Rs. 900,000 = Rs. 975,000. Under section 113(2)(c), that amount is carried forward for adjustment against tax under the relevant Part of the First Schedule in the two tax years immediately following. **Variation: integrated Tier-1 FMCG retailer.** If the store were a Tier-1 retailer of fast moving consumer goods integrated with the Board's system, serial 3(d) would apply: Rs. 150,000,000 x 0.25% = Rs. 375,000. Since Rs. 900,000 is more than Rs. 375,000, it would pay the normal Rs. 900,000 and no minimum tax would arise. ### What if my shop's turnover is below Rs. 100 million? For an individual or association of persons, section 113(1) reaches only those with turnover of one hundred million rupees or above in tax year 2017 or any subsequent year. The section does not say expressly whether a person who crossed that level in one year remains covered in a later year when turnover falls below it. That point is not resolved here. ### What if the business made a loss? A loss is one of the listed reasons in section 113(1)(a). If a covered shop makes a loss, the proviso to section 113(2)(c) carries forward the entire minimum tax paid, since no tax was otherwise payable. ### Common mistakes - **Assuming every shopkeeper pays 1.25% of sales.** For individuals and AOPs, the Rs. 100 million turnover test comes first. - **Using an old rate.** The footnotes to Division IX show earlier tables that have since been substituted. The current "all other cases" rate is 1.25%. - **Assuming FMCG distributors still get 0.25%.** Entry 3(a) was omitted by the Finance Act, 2026. The 0.25% for FMCG in serial 3(d) is for integrated Tier-1 retailers. - **Assuming a five-year carry forward.** The proviso to section 113(2)(c) now says two tax years. ### What to check in the official text Read section 113, and the Table in Division IX of Part I of the First Schedule with its footnotes, in the Income Tax Ordinance amended to 30 June 2026. Section 5 of the Finance Act, 2026 shows the omission of entry 3(a). If relying on serial 3(d), check Tier-1 status under clause (43A) of section 2 of the Sales Tax Act and whether integration with the Board's system is in place. ### Frequently asked #### Does minimum tax apply to a small shop owned by one person? Only if turnover reaches the threshold. Section 113(1) covers an individual, and an association of persons, having turnover of one hundred million rupees or above in tax year 2017 or any subsequent tax year. A sole trader below that level is outside the section on its words. #### What is the minimum tax rate for a retailer in tax year 2027? Division IX of Part I of the First Schedule sets 1.25% of turnover in all other cases, and 0.25% for Tier-1 retailers of fast moving consumer goods who are integrated with the Board or its computerized system for real time reporting of sales and receipts. #### Can excess minimum tax be adjusted later? Yes, within limits. Section 113(2)(c) carries forward the amount by which minimum tax exceeds the actual tax under clause (1) of Division I or Division II of Part I of the First Schedule, for adjustment in the two tax years immediately following. ### Citations - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "(e) the claiming of allowances or deductions (including depreciation and amortization deductions) no tax is payable or paid by the person for a tax year or the tax payable or paid by the person for a tax year is less than" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IX (Minimum tax under section 113), Table serial 3(d) and serial 4](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2026, section 5 (Amendments of the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2026#5-amendments-of-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2026: "(vi) in Division IX, in the Table, in column (1), against S. No. 3 in column (2), entry (a) shall be omitted;" Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“Tier-1 retailer” means a retailer falling in any one or more of the following categories, namely:-" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Does minimum tax on turnover apply to a retail shop, and at what rate? Source: https://qanoondigest.com/faq/retail-shops/minimum-turnover-tax-retail-shop Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 113 of the Income Tax Ordinance applies to an individual or association of persons running a shop only when turnover is Rs. 100 million or more and normal tax falls below the minimum. For tax year 2027 Division IX sets 0.25% of turnover for integrated Tier-1 retailers of fast moving consumer goods and 1.25% in all other cases. **Applies to:** Shopkeepers in Pakistan trading as individuals or associations of persons, and retail companies, for tax year 2027 (income year 1 July 2026 to 30 June 2027). Minimum tax on turnover is a floor. It matters only when a shop's normal income tax, worked out on profit, comes out lower than a set percentage of its sales. For most small shops run by one owner, it does not apply at all because of the turnover threshold. ### What does the law say? Section 113(1) applies to a resident company, a permanent establishment of a non-resident company, and "an individual (having turnover of hundred million rupees or above in the tax year 2017 or in any subsequent tax year)" and an association of persons on the same test. It bites where, because of a loss, a brought-forward loss, an exemption, credits or rebates, or allowances and deductions, no tax is payable or the tax payable is less than the percentage in Division IX of Part I of the First Schedule applied to the person's turnover from all sources. Where it applies, section 113(2) says the person pays minimum tax computed at the Division IX rates instead of the actual tax. Section 113(3)(a) defines turnover for goods as "the gross sales or gross receipts, exclusive of Sales Tax and Federal Excise duty or any trade discounts shown on invoices, or bills, derived from the sale of goods". ### What rate applies to a shop in tax year 2027? The Division IX Table, as amended to 30 June 2026, gives the rates. The two lines most relevant to retail are: | Serial | Person | Minimum tax as % of turnover | |---|---|---| | 3(d) | Tier-1 retailers of fast moving consumer goods who are integrated with Board or its computerized system for real time reporting of sales and receipts | 0.25% | | 4 | In all other cases | 1.25% | Serial 3 also lists petroleum agents and distributors registered under the Sales Tax Act, rice mills and dealers, e-commerce turnover including online marketplaces, dealers in used vehicles and flour mills, all at 0.25%. Section 5 of the Finance Act, 2026 omitted entry (a) of serial 3, which had covered distributors of pharmaceutical products, fast moving consumer goods and cigarettes. A shop that does not fit a named entry falls into serial 4. ### What changed for retailers in the Second Schedule? Clause (24D) of Part II of the Second Schedule used to set 0.25% minimum tax under section 113 for "distributors, dealers, sub-dealers, wholesalers and retailers" of fast moving consumer goods and several other goods, if they appeared on both Active Taxpayers' Lists. The Finance Act, 2026 substituted the clause. The new clause (24D) sets 0.5% for distributors, dealers, sub-dealers and wholesalers of goods in its Table, and it does not name retailers. As printed, a retailer can no longer point to clause (24D) for a reduced rate. ### Worked example (illustrative figures) Kamran runs a household goods store in Saddar, Rawalpindi, as a sole proprietor. For tax year 2027 his sales, excluding sales tax, are Rs. 140,000,000. After expenses, his normal income tax works out at Rs. 1,200,000 (illustrative). 1. Is the threshold met? Rs. 140,000,000 is above Rs. 100,000,000, so section 113 can apply. 2. Which rate? The store is not an integrated Tier-1 retailer of fast moving consumer goods, so serial 4 applies at 1.25%. 3. Minimum tax: Rs. 140,000,000 x 1.25% = Rs. 1,750,000. 4. Compare: Rs. 1,200,000 is less than Rs. 1,750,000, so Kamran pays Rs. 1,750,000. 5. Excess: Rs. 1,750,000 minus Rs. 1,200,000 = Rs. 550,000. Section 113(2)(c) lets the excess be carried forward and adjusted against tax liability under clause (1) of Division I, or Division II, of Part I of the First Schedule for two tax years immediately after the year it was paid. **Variation: integrated Tier-1 FMCG retailer.** If the store were a Tier-1 retailer of fast moving consumer goods integrated with the Board's system, serial 3(d) would apply: Rs. 140,000,000 x 0.25% = Rs. 350,000. That is less than Rs. 1,200,000, so Kamran would simply pay his normal tax. ### What if my turnover is below Rs. 100 million? For an individual or association of persons, section 113 does not apply. The person pays normal tax on taxable income, subject to any other provisions such as tax collected in advance under section 236H, which is credited against tax due. ### Common mistakes - **Assuming every shopkeeper pays 1.25% of sales.** For individuals and AOPs, the Rs. 100 million turnover test comes first. - **Including sales tax in turnover.** Section 113(3)(a) excludes sales tax, federal excise duty and trade discounts shown on invoices. - **Relying on clause (24D) for retailers.** Since the Finance Act, 2026 the clause covers distributors, dealers, sub-dealers and wholesalers only. - **Claiming 0.25% as any Tier-1 retailer.** Serial 3(d) requires both fast moving consumer goods and integration for real time reporting. - **Using an old carry-forward period.** The consolidated text shows two tax years, after earlier periods of five and three. ### What to check in the official text Read section 113 of the Income Tax Ordinance as amended to 30 June 2026, the Table in Division IX of Part I of the First Schedule, and clause (24D) of Part II of the Second Schedule. Section 5 of the Finance Act, 2026 shows the latest changes to Division IX and clause (24D). Whether a shop is a Tier-1 retailer is decided under the Sales Tax Act, 1990. ### Frequently asked #### My shop's turnover is Rs. 60 million. Does section 113 apply? Not if the shop is run by an individual or an association of persons. Section 113(1) reaches individuals and AOPs only where turnover is one hundred million rupees or above in the tax year. A company is covered without that threshold. #### Which rate applies to an ordinary shop? Serial 4 of the Division IX Table, 'In all other cases', at 1.25% of turnover for tax year 2027. The 0.25% rate in serial 3(d) is only for Tier-1 retailers of fast moving consumer goods integrated with the Board's system for real time reporting of sales and receipts. #### Can a retailer still use the 0.25% rate in clause (24D) of the Second Schedule? The Finance Act, 2026 substituted clause (24D). The earlier version named retailers of fast moving consumer goods and other goods. The new version names distributors, dealers, sub-dealers and wholesalers of listed goods, and does not mention retailers. ### Citations - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "gross receipts, exclusive of Sales Tax and Federal Excise duty or any trade discounts shown on invoices, or bills, derived from the sale of goods" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IX (Minimum tax under section 113), Table S. No. 3(d) and S. No. 4](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part II, clause (24D), as substituted by the Finance Act, 2026](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2026, section 5 (Amendments of the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2026#5-amendments-of-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2026: "(vi) in Division IX, in the Table, in column (1), against S. No. 3 in column (2), entry (a) shall be omitted;" Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf --- ## What is the penalty for issuing a receipt without a valid FBR invoice number or QR code? Source: https://qanoondigest.com/faq/retail-shops/penalty-fake-non-fbr-pos-receipt Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Serial 24 of the section 33 table in the Sales Tax Act, 1990 sets a penalty of Rs. 500,000 or 200% of the tax involved, whichever is higher, for an integrated person who issues an invoice without the prescribed invoice number or QR code. The premises can be sealed, and a Special Judge can order up to two years' imprisonment. **Applies to:** Tier-1 retailers and other registered persons already integrated with FBR's computerized system for real-time reporting of sales. ### What does the law say? Serial 24 of the table under section 33 of the Sales Tax Act, 1990 deals with a person who is integrated with the Board's computerized system for reporting sales and who does any of these: - conducts transactions in a way that avoids monitoring, tracking, reporting or recording; - issues an invoice that does not carry the prescribed invoice number, barcode or QR code; - issues an invoice bearing a duplicate invoice number or a counterfeit barcode or QR code; - defaces the prescribed invoice number, barcode or QR code. The penalty column provides three separate consequences: | Consequence | What serial 24 says | |---|---| | Money penalty | Rs. 500,000 or 200% of the amount of tax involved, whichever is higher | | Prosecution | On conviction by a Special Judge, simple imprisonment up to two years, or an additional fine up to Rs. 2 million, or both | | Sealing | The business premises "shall be liable to be sealed" by an officer of Inland Revenue in the manner prescribed | A person who abets the offence is liable, on conviction by a Special Judge, to simple imprisonment of up to one year, or a fine of up to Rs. 200,000, or both. ### What counts as a valid receipt? Section 23(1), as amended by the Finance Act, 2026, requires a registered person to issue a tax invoice "bearing a verifiable and unique FBR invoice number". A proviso says this condition applies from the time the Board notifies. For integrated persons, rule 150R(13) of the Sales Tax Rules, 2006 lists the particulars of an electronic invoice, including a unique FBR invoice number, a unique and verifiable QR code, the POS software registration number and the FBR digital invoicing logo. Rule 150R(3) adds that no supply shall be made except through integrated outlets or POS machines. A handwritten slip or a receipt from a machine that is not integrated will not carry these particulars. ### How are unverified invoices detected? Rule 150ZEO lists where the information can come from: 1. **Tax Asaan or the POS Dashboard.** A customer or official checks the invoice and it shows as unverified. 2. **Mystery shopping.** Section 56C(2) lets the Board prescribe mystery shopping of invoices from integrated Tier-1 retailers. Under rule 150ZEM, a person or firm authorized by the Board buys from Tier-1 retailers at random, verifies the invoices on FBR's online system, and reports fake or invalid invoices to the Board. 3. **Any other reliable source.** Before declaring an invoice unverified, the Commissioner "shall verify any invoice through invoice number or QR code". If there is evidence of unverified invoices, the Commissioner seeks the Chief Commissioner's written approval to seal. ### Worked example (illustrative figures) Two integrated Tier-1 retailers in Lahore are caught issuing receipts that do not verify. All amounts of tax are invented. **Retailer A:** one receipt, tax involved Rs. 12,000. - 200% of Rs. 12,000 = Rs. 24,000 - Compare with Rs. 500,000: the higher is Rs. 500,000 - Penalty: **Rs. 500,000** **Retailer B:** a software audit shows a batch of unverified sales, tax involved Rs. 900,000. - 200% of Rs. 900,000 = Rs. 1,800,000 - Compare with Rs. 500,000: the higher is Rs. 1,800,000 - Penalty: **Rs. 1,800,000** The break-even point is tax involved of Rs. 250,000, since 200% of Rs. 250,000 is Rs. 500,000. Above that, the percentage figure is the larger one. In both cases sealing and prosecution are separate possibilities. The Act does not define how "tax involved" is measured, for example per invoice or per batch. ### What happens after the shop is sealed? Under the de-sealing rule for integrated retailers in Chapter XIV-AD of the Rules, the Commissioner imposes the serial 24 penalty by order. De-sealing is due within 24 hours of payment of the penalty and the audit demand, once the software bug is removed. A software audit of all POS machines in all branches follows within three working days, and any under-declared sales found create a demand for the tax evaded. The registered person may appeal the order. ### Common mistakes - **Thinking the penalty is 200% only.** Serial 24 takes whichever is higher, so Rs. 500,000 is the floor. - **Treating a defaced QR code as harmless.** Defacing the prescribed invoice number, barcode or QR code is itself listed in serial 24. - **Assuming only the owner is exposed.** Abetting the offence carries its own punishment. - **Selling through a non-integrated counter.** Rule 150R(3) bars supplies other than through integrated POS machines. ### What to check in the official text Read serial 24 in the section 33 table of the Sales Tax Act, 1990 as amended to 30 June 2026, and the Board notification bringing the new section 23(1) invoice-number condition into force, which is not held on this site. In the Sales Tax Rules, 2006 (amended to 30 June 2025), read rules 150R, 150ZEM and 150ZEO. The de-sealing rule for integrated retailers is embedded in the text of our copy rather than set as a heading, so check it in the official PDF. ### Frequently asked #### Is the penalty Rs. 500,000 even for one small receipt? Serial 24 sets Rs. 500,000 or 200% of the tax involved, whichever is higher. Where the tax on the receipt is small, 200% of it will be below Rs. 500,000, so the Rs. 500,000 figure applies. The entry does not scale the minimum down for small amounts. #### Who can be sent to prison under serial 24? The offender can, on conviction by a Special Judge, face simple imprisonment of up to two years, an additional fine of up to Rs. 2 million, or both. A person who abets the offence faces up to one year, a fine of up to Rs. 200,000, or both. #### How does FBR find out about an unverified receipt? Rule 150ZEO lists three routes: a report of an unverified invoice on the Tax Asaan application or POS Dashboard, invoices found physically or through mystery shopping, and any other reliable source. ### Citations - [Sales Tax Act, 1990, Section 33, Table, S. No. 24](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 150ZEO (Procedure for sealing of business premises of integrated tier-1 retailers)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zeo-procedure-for-sealing-of-business-premises-of-integrated-tier-1-retailers), as amended to 2025-06-30: "reported as unverified on “Tax Asaan” application or POS Dashboard;" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZEM (Procedure for mystery shopping)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zem-procedure-for-mystery-shopping), as amended to 2025-06-30: "shall verify the invoices from the online system of FBR and in case of fake or invalid invoice, report the matter to the Board for necessary action as per relevant provisions of the Act and the rules thereunder." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150R (Obligations and requirements)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150r-obligations-and-requirements), as amended to 2025-06-30: "No supply shall be made by the integrated person, except through the integrated outlets, point of sale or electronic invoice issuing machines." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, section 56C (Prize schemes to promote tax culture)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#56c-prize-schemes-to-promote-tax-culture), as amended to 2026-06-30: "The Board may prescribe procedure for “mystery shopping” in respect of invoices issued by tier-1 retailers integrated with FBR online system randomly" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "bearing a verifiable and unique FBR invoice number" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What is the penalty if a Tier-1 retailer does not integrate its POS with FBR? Source: https://qanoondigest.com/faq/retail-shops/penalty-tier-1-not-integrating-pos Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Serial 25A of the section 33 table in the Sales Tax Act, 1990 sets a penalty of Rs. 500,000 for the first default, then Rs. 1 million, Rs. 2 million and Rs. 3 million for later defaults at fifteen-day intervals. The premises can also be sealed. The first penalty is waived if the retailer integrates before the second is imposed. **Applies to:** Tier-1 retailers under the Sales Tax Act, 1990 who are required to integrate their retail outlets with FBR's computerized system and have not registered or have not integrated. ### What does the law say? The penalty sits in the table under section 33 of the Sales Tax Act, 1990, at serial 25A. It covers a person required to integrate his business under section 23 (or the related monitoring provision) who fails to register under the Act, or, if registered, fails to integrate as the law and rules require, or fails to issue electronic invoices after integration. The duty itself is in the proviso to section 23(6): from the date and in the manner the Board prescribes, "all Tier-1 retailers shall integrate their retail outlets with Board’s computerized system for real-time reporting of sales." Serial 25A sets four penalties in a fixed ladder: | Default | Penalty | When it can be imposed | |---|---|---| | First | Rs. 500,000 | On the first default | | Second | Rs. 1,000,000 | After fifteen days of the order for the first default | | Third | Rs. 2,000,000 | After fifteen days of the order for the second default | | Fourth | Rs. 3,000,000 | After fifteen days of the order for the third default | On top of the money penalties, serial 25A says the business premises "shall be liable to be sealed" by an officer of Inland Revenue in the manner prescribed. ### Is there a way to avoid the first penalty? Yes. The proviso to serial 25A says that if the retailer integrates its business with the Board's computerized system before the penalty for the second default is imposed, the Commissioner shall waive the penalty for the first default. The word used is "shall", so the waiver is not left to discretion once the condition is met. The waiver covers only the first penalty. Once the second penalty order is passed, the proviso no longer helps with either amount. ### What does serial 25 add? Serial 25 of the same table, substituted by the Finance Act, 2026, covers any person required to integrate for monitoring, tracking, reporting or recording of sales who fails to register or fails to integrate "within the stipulated time as notified by the Board". It provides: - a penalty of up to Rs. 1 million; - if the offence continues after one month of the first penalty, a second penalty of up to Rs. 5 million; - sealing of the business premises, with or without a penalty. Serial 25 gives maximums ("up to"), while serial 25A gives fixed amounts. The Act does not say which entry is applied to a Tier-1 retailer when both could fit. Rules 150ZEP and 150ZER of the Sales Tax Rules, 2006 refer to serial 25A for non-integrated Tier-1 retailers. ### How does it work in practice? The rules on sealing non-integrated Tier-1 retailers are in Chapter XIV-AD of the Sales Tax Rules, 2006. An officer not below Assistant Commissioner reports the non-integration to the Commissioner, who forwards it to the Chief Commissioner for a written order allowing or disallowing sealing. Rule 150ZER then sets the exit. The Commissioner imposes the serial 25A penalty by order, and the premises "shall remain sealed till the payment of penalty and integration of all POS machines installed in all its branches or outlets". Integration is carried out in front of an FBR team that includes a technical person. A separate cost runs alongside the penalties. Under section 8B(6), if a Tier-1 retailer does not integrate an outlet during a tax period or part of it, adjustable input tax for that whole period is reduced by 60%. ### Worked example (illustrative figures) Rashid runs a Tier-1 clothing store in Faisalabad with two outlets and has not integrated either. The dates are invented; the penalty amounts are those in serial 25A. **Scenario A: he does not integrate.** | Step | Order date (illustrative) | Penalty | |---|---|---| | First default | 1 August | Rs. 500,000 | | Second default | 20 August (more than fifteen days after the first order) | Rs. 1,000,000 | | Third default | 10 September | Rs. 2,000,000 | | Fourth default | 1 October | Rs. 3,000,000 | | Total | | Rs. 6,500,000 | Check: Rs. 500,000 + Rs. 1,000,000 = Rs. 1,500,000; + Rs. 2,000,000 = Rs. 3,500,000; + Rs. 3,000,000 = Rs. 6,500,000. This is before any input tax reduction under section 8B(6) and any sealing. **Scenario B: he integrates on 12 August**, after the first order but before any second penalty is imposed. Under the proviso, the Commissioner shall waive the Rs. 500,000. His penalty under serial 25A falls to nil. ### What if the retailer is not registered at all? Serial 25A also covers a person who "fails to get himself registered under the Act". Being unregistered is not a defence to the integration penalty; it is one of the defaults the entry lists. ### Common mistakes - **Treating the amounts as maximums.** Serial 25A states fixed sums: Rs. 500,000, Rs. 1 million, Rs. 2 million and Rs. 3 million. The "up to" wording belongs to serial 25. - **Expecting a waiver after the second order.** The proviso works only if integration happens before the penalty for the second default is imposed. - **Integrating one outlet only.** Rule 150ZER keeps sealed premises closed until all POS machines in all branches or outlets are integrated. - **Assuming integration ends the matter.** Serial 25A, as amended by the Finance Act, 2025, also penalises failing to issue electronic invoices after integration. ### What to check in the official text Read serials 25 and 25A in the section 33 table of the Sales Tax Act, 1990 as amended to 30 June 2026, and section 23(5) and (6). Check the Board notification that fixes the date and manner of integration for Tier-1 retailers; it is not held on this site. The Sales Tax Rules, 2006 held here are amended only to 30 June 2025, and rule 150ZEP still cross-refers to an older Act provision whose integration proviso was omitted by the Finance Act, 2025. Check for later amendments to Chapter XIV-AD. ### Frequently asked #### Can the first Rs. 500,000 penalty be cancelled? Yes, under the proviso to serial 25A. If the retailer integrates with the Board's computerized system before the penalty for the second default is imposed, the Commissioner shall waive the penalty for the first default. #### What happens after the fourth penalty of Rs. 3 million? Serial 25A lists four penalties and stops there. It does not set a fifth amount. The premises remain liable to sealing, and the text does not say what further penalty, if any, follows a fourth default. #### Does serial 25 or serial 25A apply to a Tier-1 retailer? Both entries describe a person who is required to integrate and fails to register or integrate. Serial 25A names section 23, which carries the Tier-1 integration duty, and the sealing rules refer to serial 25A. The Act does not say how the two entries interact. ### Citations - [Sales Tax Act, 1990, Section 33, Table, S. No. 25A](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 33, Table, S. No. 25](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "all Tier-1 retailers shall integrate their retail outlets with Board’s computerized system for real-time reporting of sales." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 150ZER (Procedure for de-sealing of business premises of non-integrated tier-1 retailers)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zer-procedure-for-de-sealing-of-business-premises-of-non-integrated-tier-1-retailers), as amended to 2025-06-30: "The business premises of non-integrated tier-1 retailer shall remain sealed till the payment of penalty and integration of all POS machines installed in all its branches or outlets;" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, section 8B (Adjustable input tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8b-adjustable-input-tax), as amended to 2026-06-30: "the adjustable input tax for whole of that tax period shall be reduced by" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 150ZEP (Procedure for sealing of business premises of non-integrated tier-1 retailers)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zep-procedure-for-sealing-of-business-premises-of-non-integrated-tier-1-retailers), as amended to 2025-06-30: "recommending initiation of sealing of business premises under S.No. 25A of section 33 of the Act;" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf --- ## What is the penalty if a Tier-1 retailer does not integrate its POS with FBR? Source: https://qanoondigest.com/faq/retail-shops/penalty-tier-1-retailer-not-integrating-pos Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Serial 25A of the section 33 table sets a penalty of Rs. 500,000 for the first default, then Rs. 1 million, Rs. 2 million and Rs. 3 million for later defaults, each at least fifteen days apart. The shop can also be sealed, and section 14AB lets the Board have its gas and electricity cut off. **Applies to:** Retailers who fall within the Tier-1 definition in the Sales Tax Act, 1990 and have not integrated their retail outlets with FBR's computerized system. ### What does the law say? The penalties sit in the table in section 33 of the Sales Tax Act, 1990. Two serial numbers deal with a person who is required to integrate and does not. **Serial 25A** covers a person required to integrate his business as stipulated in the Act who fails to get registered, or, if registered, "fails to integrate in the manner as required under the law and rules made thereunder", or fails to issue electronic invoices after integration. The penalty climbs with each default: | Default | Penalty under serial 25A | Timing in the text | |---|---|---| | First | Rs. 500,000 | First default | | Second | Rs. 1,000,000 | After fifteen days of the order for the first default | | Third | Rs. 2,000,000 | After fifteen days of the order for the second default | | Fourth | Rs. 3,000,000 | After fifteen days of the order for the third default | On top of this, the business premises "shall be liable to be sealed by an officer of Inland Revenue in the manner prescribed". A proviso softens the first step: if the retailer integrates with the Board's Computerized System before the penalty for the second default is imposed, the Commissioner shall waive the first penalty. **Serial 25**, substituted by the Finance Act, 2026, covers a person required to integrate who fails to register or, if registered, fails to integrate "within the stipulated time as notified by the Board". It provides a penalty of up to Rs. 1 million, and a second penalty of up to Rs. 5 million if the offence continues one month after the first penalty. It also says the premises are liable to be sealed with or without a penalty. The duty itself comes from section 23(6), whose proviso says all Tier-1 retailers shall integrate their retail outlets with the Board's computerized system for real-time reporting of sales, from the date and in the manner the Board prescribes. Section 3(9A) sets the rate a Tier-1 retailer pays: the rate applicable to the goods sold. ### How does it work in practice? The penalty is imposed by an order. Each later step in serial 25A counts from the order for the previous default, so the ladder cannot run faster than one step every fifteen days. The sealing procedure, including who reports the default and who approves sealing, is set out in Chapter XIV-AD of the Sales Tax Rules, 2006, which is covered on the sealing and de-sealing page. Two further consequences run alongside the penalty: - **Gas and electricity.** Section 14AB lets the Board, through a Sales Tax General Order, direct gas and electricity distribution companies to discontinue connections of any person, including Tier-1 retailers, who fails to register, and of notified Tier-1 retailers who are registered but not integrated. Once the retailer registers or integrates, the Board shall notify restoration through a Sales Tax General Order. - **Input tax.** Section 8B(6) cuts adjustable input tax by 60% for any tax period in which an outlet was not integrated, even for part of the period. ### Worked example (illustrative figures) A shoe retailer in an air-conditioned mall in Lahore falls within Tier-1 but has not integrated. The dates and figures below are invented to show how serial 25A works. 1. **1 March:** order for the first default. Penalty Rs. 500,000. 2. **The retailer does nothing.** More than fifteen days later, on 20 March, an order for the second default imposes Rs. 1,000,000. The first penalty is no longer eligible for waiver, because the second penalty has now been imposed. 3. **Third default order on 10 April:** Rs. 2,000,000. 4. **Fourth default order on 30 April:** Rs. 3,000,000. Total under serial 25A: Rs. 500,000 + Rs. 1,000,000 + Rs. 2,000,000 + Rs. 3,000,000 = **Rs. 6,500,000**. If instead the retailer had integrated on 10 March, before any second-default order, the Commissioner would have to waive the Rs. 500,000, leaving **nil** under serial 25A. ### What if the retailer is not registered at all? Both serials 25 and 25A cover a person who "fails to get himself registered" as well as one who is registered but not integrated. Section 14AB(a) separately allows gas and electricity disconnection for any person, including Tier-1 retailers, who fails to register. ### What if the retailer integrated but stopped issuing electronic invoices? The words "or fail to issue electronic invoices after integration", added to serial 25A by the Finance Act, 2025, bring that case within the same ladder of penalties. Issuing invoices without the prescribed number or QR code is a separate offence under serial 24. ### Which serial applies, 25 or 25A? The text does not say. Both describe a failure to register or integrate, and the table does not state which takes priority or whether both can be imposed for the same default. The sealing procedure for non-integrated Tier-1 retailers in the Sales Tax Rules refers only to serial 25A. This page does not resolve the overlap. ### Common mistakes - **Treating Rs. 500,000 as the whole exposure.** It is only the first rung. Serial 25A reaches Rs. 3 million for the fourth default, and serial 25 allows up to Rs. 5 million for a continuing offence. - **Assuming the first penalty stays payable after integration.** The serial 25A proviso requires waiver if integration comes before the second-default penalty is imposed. - **Thinking the penalty is the only cost.** Section 8B(6) reduces input tax for every tax period with a non-integrated outlet, and section 14AB allows utility disconnection. - **Assuming a small shop is covered.** These penalties apply to persons required to integrate. Who counts as a Tier-1 retailer is set by the definition in the Act; see the related page on that definition. ### What to check in the official text Read the section 33 table at serials 25 and 25A in the official PDF, because the table is not reproduced cleanly in the parsed text. Check section 23(6) for the integration duty and section 14AB (printed within the section 14 entry) for disconnection. The dates from which particular retailers must integrate are set by Board notifications that this site does not hold, so confirm any date in the notification itself. ### Frequently asked #### Is the first Rs. 500,000 penalty ever waived? Yes. The proviso to serial 25A says that if the retailer integrates with the Board's Computerized System before the penalty for the second default is imposed, the Commissioner shall waive the penalty for the first default. #### Can the shop be sealed before any penalty is imposed? Serial 25, as substituted by the Finance Act, 2026, says the business premises are liable to be sealed with or without imposition of penalty. Serial 25A also makes the premises liable to sealing, in the manner prescribed in the Sales Tax Rules. #### Can FBR cut the shop's electricity for not integrating? Section 14AB lets the Board, through a Sales Tax General Order, direct gas and electricity companies to discontinue the connections of notified Tier-1 retailers who are registered but not integrated. The Board must notify restoration once the retailer integrates. ### Citations - [Sales Tax Act, 1990, Section 33, Table, serial 25A](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 33, Table, serial 25 (as substituted by Finance Act, 2026)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "Notified tier-1 retailers registered but not integrated with the Board’s Computerized System: Provided that upon registration or integration, as the case may be, of the above said persons, the Board shall notify the restoration of their gas or electricity connection through Sales Tax General Order." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "all Tier-1 retailers shall integrate their retail outlets with Board’s computerized system for real-time reporting of sales." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "Notwithstanding anything contained in this Act, Tier-1 retailers shall pay sales tax at the rate as applicable to the goods sold under relevant provisions of this Act or a notification issued there under" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8B (Adjustable input tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8b-adjustable-input-tax), as amended to 2026-06-30: "In case a Tier-1 retailer does not integrate his retail outlet in the manner as prescribed under sub-section (9A) of section 3, during a tax period or part thereof, the adjustable input tax for whole of that tax period shall be reduced by" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What is the penalty for issuing a fake or unverified invoice from an integrated POS? Source: https://qanoondigest.com/faq/retail-shops/penalty-fake-invoice-integrated-pos Law current to: 30 June 2026 (Sales Tax Rules, 2006 as amended to 30 June 2025). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Serial 24 of the section 33 table sets a penalty of Rs. 500,000 or 200% of the tax involved, whichever is higher, for an integrated person who issues an invoice without the prescribed number or QR code. On conviction there can be up to two years' imprisonment, and rule 150ZEO lets the premises be sealed. **Applies to:** Tier-1 retailers and other persons already integrated with FBR's computerized system for real-time reporting of sales under the Sales Tax Act, 1990. ### What does the law say? Serial 24 of the penalty table in section 33 of the Sales Tax Act, 1990 applies to a person who is integrated with the Board or its computerized system for monitoring, tracking, reporting or recording of sales and similar transactions, and who either: - conducts transactions in a way that avoids that monitoring, tracking, reporting or recording, or - issues an invoice that does not carry the prescribed invoice number, barcode or QR code, or bears a duplicate invoice number or a counterfeit barcode or QR code, or defaces the prescribed invoice number, barcode or QR code. The consequences in the table are: | Consequence | What serial 24 says | |---|---| | Penalty | Rs. 500,000 or 200% of the amount of tax involved, whichever is higher | | Prosecution | On conviction by a Special Judge, simple imprisonment up to two years, or additional fine up to Rs. 2 million, or both | | Sealing | The business premises are liable to be sealed by an officer of Inland Revenue in the manner prescribed | | Abettor | On conviction by a Special Judge, simple imprisonment up to one year, or additional fine up to Rs. 200,000, or both | The "manner prescribed" for sealing is in rules 150ZEN and 150ZEO of the Sales Tax Rules, 2006, and de-sealing is in rule 150ZEQ. ### When can an integrated shop be sealed? Rule 150ZEO lets the Commissioner Inland Revenue with territorial jurisdiction start sealing proceedings on information that the retailer issued an invoice without the prescribed invoice number or QR code, with a duplicate number or counterfeit QR code, a defaced invoice, or other evidence of tampering. The information can come from: - an invoice reported as unverified on the Tax Asaan application or the POS Dashboard; - an invoice physically available, or obtained through mystery shopping under section 56C(2); or - any other reliable source. The Commissioner must verify the invoice through its number or QR code before declaring it unverified. Rule 150ZEO(4) then lists the situations in which the Commissioner seeks the Chief Commissioner's written approval to seal: - involvement in issuing unverified invoices; - the store is disconnected from the FBR database for forty eight hours; - invoices from an offline period are not entered in the system within the next twenty four hours; or - the device does not keep a record of invoices during the offline period. The Chief Commissioner allows or disallows sealing, decides whether one or more branches are sealed depending on which branches issued the unverified invoices, and notifies the sealing team. Rule 150ZEO(8), added in February 2025, says the premises "may be sealed on any violation made by registered person". ### How is it de-sealed? Rule 150ZEQ sets the steps: 1. The Commissioner imposes a penalty by order under serial 24. 2. The de-sealing order is issued within 24 hours of payment of the penalty and the demand created during audit, provided any software bug has been removed. 3. The retailer may file an appeal against the order. 4. Within three working days after de-sealing, the Commissioner ensures a software audit, through an integrator, of all POS machines in all branches, and records sales during that period. 5. The Commissioner works out the under-declared sales from that audit and creates a demand for the tax sought to be evaded. 6. If the penalty is not paid, de-sealing happens after a month, and the premises are re-sealed after fifteen days if the default continues. ### Worked example (illustrative figures) Two integrated retailers in Faisalabad are each found to have issued invoices with counterfeit QR codes. The amounts are invented; the penalty formula is serial 24. **Retailer A.** Tax involved on the invalid invoices: Rs. 90,000. 1. 200% of Rs. 90,000 = Rs. 180,000. 2. Compare with Rs. 500,000. The higher figure is Rs. 500,000. 3. Penalty: **Rs. 500,000**. **Retailer B.** Tax involved: Rs. 400,000. 1. 200% of Rs. 400,000 = Rs. 800,000. 2. Compare with Rs. 500,000. The higher figure is Rs. 800,000. 3. Penalty: **Rs. 800,000**. The crossover is Rs. 250,000 of tax involved, where 200% equals Rs. 500,000. Any demand created from the software audit under rule 150ZEQ is in addition to the penalty. ### What if the POS simply lost internet for a day? Rule 150ZEO(4) speaks of disconnection "for forty eight hours" and of offline invoices "not entered in the system in next twenty four hours". A shorter gap whose invoices are entered in time is not one of the listed grounds, but rule 150ZEO(8) allows sealing on "any violation", and the rules do not define that phrase further. ### Common mistakes - **Treating Rs. 500,000 as a cap.** It is a floor. The 200% measure applies when it is higher. - **Assuming only the offending branch can be sealed.** The Chief Commissioner decides how many branches to seal, based on which branches issued unverified invoices. - **Thinking payment ends the matter.** Rule 150ZEQ adds a software audit and a tax demand for under-declared sales. - **Confusing this with non-integration.** A retailer that never integrated falls under serial 25A and rules 150ZEP and 150ZER, not serial 24. ### What to check in the official text Read serial 24 of the section 33 table in the official PDF, since the parsed text does not reproduce the table cleanly. Rule 150ZEQ(ii) conditions de-sealing on the requirements of Chapter XIV-AA of the Sales Tax Rules being fulfilled, but the same edition shows Chapter XIV-AA as omitted by S.R.O. 69(I)/2025 dated 29 January 2025. This page does not resolve that inconsistency; check whether a later notification has corrected the rule. ### Frequently asked #### Is the penalty always Rs. 500,000? No. Serial 24 sets Rs. 500,000 or 200% of the amount of tax involved, whichever is higher. Where the tax involved is more than Rs. 250,000, the 200% figure is the larger one. #### Can a shop be sealed if its POS goes offline? Rule 150ZEO(4) lists a store disconnected from the FBR database for forty eight hours, offline invoices not entered within the next twenty four hours, and a device that does not keep offline records as grounds on which the Commissioner may seek the Chief Commissioner's written approval to seal. #### How does the retailer get the shop de-sealed? Under rule 150ZEQ the Commissioner imposes the serial 24 penalty, and the de-sealing order is issued within 24 hours of payment of that penalty and the demand created during audit. A software audit of all POS machines follows within three working days. ### Citations - [Sales Tax Act, 1990, Section 33, Table, serial 24](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 150ZEN (Application)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zen-application), as amended to 2025-06-30: "issues an invoice which does not carry the prescribed invoice number or barcode or QR code or bears duplicate invoice number or counterfeit barcode or QR code" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZEO (Procedure for sealing of business premises of integrated tier-1 retailers)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zeo-procedure-for-sealing-of-business-premises-of-integrated-tier-1-retailers), as amended to 2025-06-30: "if store becomes disconnected with the FBR data base for forty eight hours, or invoices of offline period not entered in the system in next twenty four hours or device does not keep record of invoices during offline period" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, Rule 150ZEQ (printed within the rule 150ZEP entry)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, section 56C (Prize schemes to promote tax culture)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#56c-prize-schemes-to-promote-tax-culture), as amended to 2026-06-30: "The Board may prescribe procedure for “mystery shopping” in respect of invoices issued by tier-1 retailers integrated with FBR online system randomly" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## A shop did not give me a verifiable FBR invoice. Can I report it and is there a prize? Source: https://qanoondigest.com/faq/retail-shops/report-shop-no-fbr-invoice-prize Law current to: 30 June 2026 (Sales Tax Rules, 2006 as amended to 30 June 2025). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, if the shop is an integrated Tier-1 retailer. Rule 150ZEL of the Sales Tax Rules, 2006 entitles customers who report unverified invoices to prizes. You verify through the Tax Asaan app or FBR's WhatsApp number, then report with your details, and without proof of digital payment the prize is forfeited. **Applies to:** Customers who buy from Tier-1 retailers that have integrated their outlets with FBR's computerized system under the Sales Tax Act, 1990. ### What does the law say? Section 56C of the Sales Tax Act, 1990 lets the Board prescribe prize schemes "to encourage the general public to make purchases only from registered persons issuing tax invoices", and prescribe a procedure for "mystery shopping" of invoices issued by integrated Tier-1 retailers. The Board has done both in Chapter XIV-AC of the Sales Tax Rules, 2006: - **Rule 150ZEK** applies the chapter to customers of Tier-1 retailers who have integrated their outlets with the Board's computerized system, and to mystery shopping of their invoices. - **Rule 150ZEL** sets the prize procedure. - **Rule 150ZEM** sets the mystery shopping procedure. Since a September 2024 amendment, rule 150ZEL(1) makes prizes available to customers "who reports unverified invoices issued by tier-l retailer". Before that, the rule referred to customers picked in a random computerized draw. ### How do I check an invoice? Under rule 150ZEL(2), the customer verifies the electronically generated invoice either through the **Tax Asaan** application or by sending it to a **WhatsApp number** that the Board communicates by order. The rules do not print the number itself. The app or WhatsApp service then shows the invoice status as "Verified" or "unverified". ### What details are needed to report an unverified invoice? Rule 150ZEL(4) says the report is made through the same app or WhatsApp number, with: 1. your name; 2. your CNIC; 3. your mobile number; 4. your IBAN; 5. proof of digital payment; 6. a picture of the unverified invoice; and 7. a GPS-tagged picture of the business premises that issued it. If proof of digital payment is missing, "the right to claim the prize shall stand forfeited". If any particulars are wrong or incomplete, rule 150ZEL(6) puts the onus for any delay in paying the prize on the customer. ### What happens after I report? Rule 150ZEL(5) says an alert is generated in the IRIS login of the Commissioner Inland Revenue, who authenticates the unverified invoice to decide whether the customer is entitled to the prize. Your report can also count against the retailer. Rule 150ZEO lists an invoice reported as unverified on the Tax Asaan application or POS Dashboard as one source of information on which the Commissioner may start sealing proceedings against an integrated Tier-1 retailer. ### Worked example (illustrative scenario) Hina buys a pair of shoes for Rs. 8,500 at a mall outlet in Karachi and pays by debit card. The details are invented. 1. She scans the invoice in the Tax Asaan app. The status shows "unverified". 2. She reports it in the app with her name, CNIC, mobile number and IBAN, the card slip or bank alert as proof of digital payment, a photo of the invoice, and a GPS-tagged photo of the shop front. 3. The report creates an alert for the Commissioner, who checks the invoice. 4. If the Commissioner confirms it, Hina's entitlement to a prize is established. The amount is whatever the Board has decided under rule 150ZEL(9); the rules do not fix it. Had Hina paid Rs. 8,500 in cash and had no proof of digital payment, step 4 would fail: the right to claim the prize would be forfeited. ### What is mystery shopping? Under rule 150ZEM, a person or firm authorized by the Board buys from Tier-1 retailers at random, checks the invoices against FBR's online system, and reports any fake or invalid invoice to the Board for action under the Act and rules. Shoppers do not need to do anything for this; it runs separately from the prize scheme. ### What if the shop is small and not a Tier-1 retailer? Chapter XIV-AC applies only to customers of integrated Tier-1 retailers. The rules in this corpus do not provide a prize or reporting route for purchases from other shops. ### Common mistakes - **Expecting a fixed prize amount.** The rules leave the prize money and denominations to the Board. - **Reporting a cash purchase for a prize.** Proof of digital payment is required, or the prize right is forfeited. - **Sending incomplete details.** Rule 150ZEL(6) puts the delay on the customer if the particulars are wrong or incomplete. - **Assuming "unverified" proves fraud.** Rule 150ZEO requires the Commissioner to verify the invoice through its number or QR code before declaring it unverified. ### What to check in the official text Read section 56C of the Act and rules 150ZEK to 150ZEM of the Sales Tax Rules, 2006 as amended to 30 June 2025. The WhatsApp number and the prize amounts are set by Board orders that this site does not hold, so confirm them from FBR's own announcements. App screens and steps inside Tax Asaan are outside this corpus. ### Frequently asked #### How much is the prize? Rule 150ZEL(9) says the total prize money and the denomination of the prizes are decided by the Board. The rules do not state an amount, and no Board decision on amounts is held on this site. #### I paid cash. Can I still get a prize? No prize can be claimed. The proviso to rule 150ZEL(4) says that if proof of digital payment is not provided, the right to claim the prize stands forfeited. The proviso speaks of the prize, and does not say the report itself is rejected. #### Does the rule cover a shop that gave no invoice at all? The prize chapter applies to customers of integrated Tier-1 retailers and is built around checking an electronically generated invoice. It does not set out a route for reporting a purchase where no invoice was issued. ### Citations - [Sales Tax Act, 1990, section 56C (Prize schemes to promote tax culture)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#56c-prize-schemes-to-promote-tax-culture), as amended to 2026-06-30: "The Board may prescribe prize schemes to encourage the general public to make purchases only from registered persons issuing tax invoices." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 150ZEK (Application)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zek-application), as amended to 2025-06-30: "The provisions of this chapter shall apply to the customers of tier-1 retailers who have integrated their retail outlets with the Board’s computerized system for real- time reporting of sales" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZEL (Procedure for prize scheme)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zel-procedure-for-prize-scheme), as amended to 2025-06-30: "Provided that if the proof of digital payment is not provided by the customer, the right to claim the prize shall stand forfeited." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZEM (Procedure for mystery shopping)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zem-procedure-for-mystery-shopping), as amended to 2025-06-30: "shall verify the invoices from the online system of FBR and in case of fake or invalid invoice, report the matter to the Board for necessary action" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZEO (Procedure for sealing of business premises of integrated tier-1 retailers)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zeo-procedure-for-sealing-of-business-premises-of-integrated-tier-1-retailers), as amended to 2025-06-30: "reported as unverified on “Tax Asaan” application or POS Dashboard;" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf --- ## Does a turnover above Rs. 200 million make my shop Tier-1, and how is a wholesaler-cum-retailer treated? Source: https://qanoondigest.com/faq/retail-shops/retailer-turnover-200-million-tier-1 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. The Finance Act, 2026 added sub-clause (gb) to section 2(43A) of the Sales Tax Act: a retailer with turnover above Rs. 200 million in the preceding twelve consecutive months is Tier-1, whether declared or worked back from section 236G or 236H tax. A wholesaler-cum-retailer now needs the same turnover under sub-clause (d). **Applies to:** Larger single-outlet retailers, and traders who import consumer goods in bulk and sell both wholesale to shops and retail to the public, who want to know whether their turnover makes them Tier-1 retailers. A retailer whose turnover in the immediately preceding twelve consecutive months exceeds Rs. 200 million is a Tier-1 retailer from 1 July 2026. That is sub-clause (gb) of section 2(43A) of the Sales Tax Act, 1990, inserted by the Finance Act, 2026. The same Act narrowed the wholesaler-cum-retailer limb, which now also needs turnover above Rs. 200 million. ### What does the law say? Section 4(1)(e) of the Finance Act, 2026 made three changes to clause (43A) that matter here: 1. In sub-clause (d), after "wholesaler-cum-retailer", it inserted "having turnover more than two hundred million rupees". 2. It omitted sub-clauses (f) and (g). Sub-clause (g) had used a Board-notified threshold of withholding tax under sections 236G or 236H. 3. It inserted a new sub-clause (gb): "a retailer having turnover exceeding two hundred million rupees either by way of declaration or from worked back value of turnover from tax deduction under section 236G or 236H of Income Tax Ordinance, 2001 ... during the immediately preceding twelve consecutive months". The Finance Act, 2026 states that, unless otherwise provided, it comes into force on the first day of July, 2026. ### How do the two turnover limbs differ? | | Sub-clause (d) | Sub-clause (gb) | | --- | --- | --- | | Who | A wholesaler-cum-retailer engaged in bulk import and supply of consumer goods, wholesale to retailers and retail to the general body of consumers | Any retailer | | Turnover condition | More than two hundred million | Exceeding two hundred million rupees | | Period stated | None stated | Immediately preceding twelve consecutive months | | How turnover is shown | Not stated | By declaration, or worked back from section 236G or 236H tax | Before 1 July 2026, sub-clause (d) had no turnover condition at all. Every bulk-importing wholesaler-cum-retailer fell in Tier-1. Now only those above the threshold do, under that limb. Section 2(28) adds a related duty: a person who combines import and retail, or manufacture or production with retail, shall notify and advertise wholesale and retail prices separately and declare the address of retail outlets. ### Where do sections 236G and 236H come in? These are income tax collection provisions in the Income Tax Ordinance, 2001, as amended to 30 June 2026. - **Section 236G** requires every manufacturer or commercial importer, at the time of sale to distributors, dealers and wholesalers, to collect advance tax at the rate in Division XIV of Part IV of the First Schedule. That rate is 0.1% for goods other than fertilizers and 0.7% for fertilizers. - **Section 236H** requires every manufacturer, distributor, dealer, wholesaler or commercial importer, at the time of sale to retailers, to collect advance tax at the rate in Division XV. That rate is 0.5% of the gross amount of sales. For a buyer not appearing in the active taxpayers' list, the Tenth Schedule table sets 2% under section 236G (sales other than fertilizer) and 2.5% under section 236H. Because these taxes are a percentage of what suppliers sold to the retailer, the amount collected points back to the value of the retailer's purchases. The Sales Tax Act uses this as a second route to turnover, next to the retailer's own declaration. ### Worked example (illustrative figures) Tariq runs a single large grocery outlet in Rawalpindi. He declares turnover of Rs. 185 million for the last twelve months. His suppliers' records show they collected Rs. 1,050,000 from him under section 236H in the same period, at the 0.5% rate for a person on the active taxpayers' list. Step 1: relate the tax to the sales it was charged on. Rs. 1,050,000 ÷ 0.5% = Rs. 1,050,000 ÷ 0.005 = Rs. 210,000,000. Step 2: check. Rs. 210,000,000 × 0.005 = Rs. 1,050,000. Correct. Step 3: compare. His declaration (Rs. 185 million) is below Rs. 200 million. The figure from the section 236H tax (Rs. 210 million) is above it. Sub-clause (gb) names both routes with "either ... or". It does not say which prevails when they give different answers, and it does not prescribe the working-back method used above. The example shows only that the rate used changes the answer. Had Tariq been off the active taxpayers' list, the same Rs. 1,050,000 at 2.5% would relate to Rs. 1,050,000 ÷ 0.025 = Rs. 42,000,000. ### What if I am a wholesaler-cum-retailer below Rs. 200 million? Take Shabbir Impex in Karachi (made-up), which imports tinned food in bulk and sells both to shops and to walk-in customers, with turnover of Rs. 150 million. Since 1 July 2026 it is outside sub-clause (d). It is still Tier-1 if any other limb fits: a unit of a chain (a), an air-conditioned mall or plaza (b), electricity bills above Rs. 1,200,000 over twelve months (c), or a Board notification (h). ### Common mistakes - **Treating purchases and sales as the same number.** Section 236G and 236H tax is charged on sales made to the retailer. The Act calls the result "worked back value of turnover" but does not explain how purchases translate into turnover. - **Assuming the old wholesaler-cum-retailer rule.** Turnover now matters for sub-clause (d). - **Looking for the old Board-notified threshold.** Sub-clause (g) was omitted by the Finance Act, 2026. - **Using the tax year.** Sub-clause (gb) speaks of the immediately preceding twelve consecutive months. ### What to check in the official text Read clause (43A) of section 2 of the Sales Tax Act as amended to 30 June 2026 alongside section 4 of the Finance Act, 2026. The consolidated text of sub-clause (d) reads "having turnover more than two hundred million" without the word "rupees", while the Finance Act inserts "having turnover more than two hundred million rupees", so rely on the Finance Act wording. Neither Act defines "turnover" for this clause or sets the working-back method. Also check any Board notification under sub-clause (h), including an exclusion under its new proviso. Those notifications are not in this corpus. ### Frequently asked #### Is the Rs. 200 million turnover test new? Yes. Sub-clause (gb) was inserted into section 2(43A) of the Sales Tax Act by section 4 of the Finance Act, 2026, which came into force on 1 July 2026. The same Act added the Rs. 200 million condition to the wholesaler-cum-retailer limb in sub-clause (d). #### What does worked back value of turnover mean? It refers to turnover worked out from the advance income tax that suppliers collected from the retailer under section 236G or 236H of the Income Tax Ordinance. The Sales Tax Act does not set out the method of working back, so the arithmetic on this page only shows how the rates relate to amounts. #### Is a wholesaler-cum-retailer with Rs. 150 million turnover still Tier-1? Not under sub-clause (d), which since 1 July 2026 covers only a wholesaler-cum-retailer having turnover more than two hundred million. Such a trader can still be Tier-1 under another limb, such as operating in an air-conditioned mall or crossing the electricity bill test. ### Citations - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "engaged in bulk import and supply of consumer goods on wholesale basis to the retailers as well as on retail basis to the general body of the consumers" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Finance Act, 2026, section 4 (Amendments of the Sales Tax Act, 1990 (VII of 1990))](https://qanoondigest.com/acts/finance-act/finance-act-2026#4-amendments-of-the-sales-tax-act-1990-vii-of-1990), as amended to 2026: "(gb) a retailer having turnover exceeding two hundred million rupees either by way of declaration or from worked back value of turnover from tax deduction under section 236G or 236H of Income Tax Ordinance, 2001 (XLIV of 2001) during the immediately preceding twelve consecutive months; and" Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Income Tax Ordinance, 2001, section 236H (Advance tax on sales to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236h-advance-tax-on-sales-to-retailers), as amended to 2026-06-30: "shall collect advance tax at the rate specified in Division XV of Part IV of the First" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236G (Advance tax on sales to distributors, dealers and wholesalers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236g-advance-tax-on-sales-to-distributors-dealers-and-wholesalers), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XIV (section 236G) and Division XV (section 236H)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1, third proviso, Table S. No. 3 (section 236G) and S. No. 4 (section 236H)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How is sales tax collected from a small shop through its electricity bill, at 5% or 7.5%? Source: https://qanoondigest.com/faq/retail-shops/sales-tax-through-shop-electricity-bill Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 3(9) of the Sales Tax Act, 1990 charges retailers that are not Tier-1 through their monthly electricity bill: 5 percent where the bill does not exceed Rs. 20,000 and 7.5 percent where it does. This is on top of normal sales tax on electricity, and the supplier deposits it without adjusting it against its input tax. **Applies to:** Shopkeepers and other retailers who do not fall within the Tier-1 definition in section 2(43A) of the Sales Tax Act, 1990. ### What does the law say? Section 3(9) of the Sales Tax Act, 1990 replaces normal invoice-based sales tax for small retailers with a charge on the shop's electricity bill. It applies to "retailers, other than those falling in Tier-1". The charge is set by the size of the monthly bill: | Monthly bill amount | Rate under section 3(9) | |---|---| | Does not exceed Rs. 20,000 | 5 percent | | Exceeds Rs. 20,000 | 7.5 percent | Three further rules sit in the same sub-section: - **It is on top of electricity sales tax.** The first proviso says the tax "shall be in addition to the tax payable on supply of electricity under sub-sections (1), (1A) and (5)". - **The supplier collects and deposits it.** The electricity supplier "shall deposit the amount so collected directly without adjusting against his input tax". It is not the supplier's own sales tax and cannot be netted off. - **Exclusions go through the Commissioner.** The second proviso says the Commissioner Inland Revenue having jurisdiction shall issue an order to the electricity supplier excluding a person who is a Tier-1 retailer or not a retailer. Section 3(9) opens with "Notwithstanding anything contained in sub-section (1)". So for these retailers the bill-based charge applies despite the general 18 percent rule in sub-section (1). The sub-section does not spell out in so many words how the two interact beyond that opening phrase. ### Who is caught by section 3(9)? Two definitions in section 2 decide it. A "retailer" under section 2(28) is a person supplying goods to the general public for the purpose of consumption. A Tier-1 retailer under section 2(43A) includes chain store units, shops in air-conditioned malls (not kiosks), retailers whose electricity bills over the preceding twelve months exceed Rs. 1,200,000 in total, and retailers or wholesaler-cum-retailers with turnover above two hundred million rupees, among others. A retailer that is not in any Tier-1 category falls under section 3(9). A retailer that is Tier-1 pays under section 3(9A) at the rate applicable to the goods sold, and should be excluded from the bill charge through the Commissioner's order. ### Can the Government change these rates? Yes. Section 3(12) lets the Federal Government, "in lieu of or in addition to" the tax under section 3(9), levy and collect by notification in the official Gazette such amount of tax, at such rates and from such date as it thinks fit, from retailers other than Tier-1 through their monthly electricity bill. It may set different rates or amounts for different classes of persons. Any such notification is not part of this corpus, so the 5 and 7.5 percent figures above are the rates printed in the Act, and the amount on an actual bill may differ if a notification is in force. ### Worked example (illustrative figures) Two shops in Faisalabad, neither of them Tier-1: **Bilal's general store.** Monthly bill amount Rs. 16,000. 1. Rs. 16,000 does not exceed Rs. 20,000, so the rate is 5 percent. 2. 5% of Rs. 16,000 = **Rs. 800** for the month. 3. Over twelve months at the same bill: Rs. 800 x 12 = Rs. 9,600. **Sana's tailoring and fabric shop.** Monthly bill amount Rs. 28,000. 1. Rs. 28,000 exceeds Rs. 20,000, so the rate is 7.5 percent. 2. 7.5% of Rs. 28,000 = **Rs. 2,100** for the month. In both cases this is charged in addition to the ordinary sales tax on the electricity itself, and in addition to any income tax collected on the bill under section 235 of the Income Tax Ordinance, which is a separate law. Section 3(9) does not define "monthly bill amount", so it does not say whether the base is the energy charge alone or the bill including other taxes and charges. The example simply applies the rate to an assumed bill figure. ### What if my monthly bill crosses Rs. 20,000 in some months? The text refers to "the monthly bill amount", so the rate is read month by month. A shop with a Rs. 18,000 bill in March and a Rs. 24,000 bill in June would, on these words, pay 5 percent in March (Rs. 900) and 7.5 percent in June (Rs. 1,800). Separately, if the shop's bills over twelve consecutive months add up to more than Rs. 1,200,000, section 2(43A)(c) makes it a Tier-1 retailer, and section 3(9) stops applying to it. ### Does paying through the bill mean I need no registration? Section 14(1)(b) requires a retailer liable to sales tax to register, "excluding such retailer required to pay sales tax through his electricity bill under sub-section (9) of section 3". The related question on registration and returns covers this in more detail. ### Common mistakes - **Treating 7.5 percent as applying only above Rs. 20,000.** The sub-section chooses one rate by the size of the monthly bill and does not describe slabs. - **Thinking this is an income tax.** Section 3(9) is in the Sales Tax Act. Income tax on commercial electricity bills comes from section 235 of the Income Tax Ordinance, 2001. - **Assuming a non-retail business must bear it.** The second proviso provides for exclusion of a person who is not a retailer through the Commissioner's order to the supplier. - **Expecting to claim it back as input tax.** The supplier deposits it "without adjusting against his input tax", and section 3(9) itself provides no adjustment for the shop either. ### What to check in the official text Read section 3(9) with both provisos, section 3(12), and the definitions in sections 2(28) and 2(43A). Check whether any notification under section 3(12) has changed the rates or amounts for your class of retailer; such notifications are outside this corpus. ### Frequently asked #### Is the 7.5 percent charged only on the part of the bill above Rs. 20,000? Section 3(9) does not describe slabs. It sets 5 percent where the monthly bill amount does not exceed Rs. 20,000 and 7.5 percent where the monthly bill amount exceeds it, so on its words the rate is chosen by the size of the whole bill. The Act does not define what 'bill amount' includes for this purpose. #### Does this replace the normal sales tax on electricity? No. The first proviso to section 3(9) says the tax is in addition to the tax payable on supply of electricity under sections 3(1), 3(1A) and 3(5). The shop pays both on the same bill. #### My premises is an office, not a shop. Should this tax be on my bill? Section 3(9) applies to retailers. Its second proviso says the Commissioner Inland Revenue having jurisdiction shall issue an order to the electricity supplier excluding a person who is either a Tier-1 retailer or not a retailer. ### Citations - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "tax shall be charged from retailers, other than those falling in Tier-1, through their monthly electricity bills, at the rate of five percent where the monthly bill amount does not exceed rupees twenty thousand and at the rate of seven and half percent where the monthly bill amount exceeds the aforesaid amount" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“Tier-1 retailer” means a retailer falling in any one or more of the following categories" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "excluding such retailer required to pay sales tax through his electricity bill under sub-section (9) of section 3;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Income Tax Ordinance, 2001, section 235 (Electricity consumption)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#235-electricity-consumption), as amended to 2026-06-30: "electricity consumption bill referred to in sub-section (2) means electricity bill inclusive of sales tax and all incidental charges." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can a shop charge sales tax on top of the printed retail price of packaged goods? Source: https://qanoondigest.com/faq/retail-shops/sales-tax-printed-retail-price-third-schedule Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer For goods in the Third Schedule, section 3(2)(a) of the Sales Tax Act charges tax at eighteen percent of the retail price, and the manufacturer or importer must print both the retail price and the sales tax on each pack. The Act provides no second charge on top, and section 3B covers tax wrongly collected. **Applies to:** Shoppers and shopkeepers in Pakistan dealing in branded, packaged goods such as drinks, toiletries, cosmetics, biscuits, tea and household appliances that are listed in the Third Schedule to the Sales Tax Act, 1990. Packaged goods in the Third Schedule are taxed differently from most goods. Instead of taxing each sale on the price actually charged, the Sales Tax Act, 1990 fixes the tax once, on the retail price the manufacturer or importer sets, and requires that price and the tax to be printed on the pack. ### What does the law say? Section 3(2)(a) says taxable supplies and imports of goods specified in the Third Schedule "shall be charged to tax at the rate of eighteen per cent of the retail price". If the goods are also in the Eighth Schedule, the Eighth Schedule rates apply instead. The retail price "along with the amount of sales tax shall be legibly, prominently and indelibly printed or embossed by the manufacturer", or by the importer for imported goods, on each article, packet, container, package, cover or label. Section 2(27) defines "retail price", with reference to the Third Schedule, as the price fixed by the manufacturer or importer, inclusive of all duties, charges and taxes other than sales tax, at which the brand or variety is sold to the general body of consumers. Where more than one price is fixed for the same brand or variety, the highest applies. Further provisos allow: - the Board to specify zones or areas for fixing the highest retail price; - the Board to fix the retail price of Third Schedule goods by notification where it deems it necessary; - for imported Third Schedule goods, a floor: the retail price cannot be less than 130 percent of the customs value under section 25 of the Customs Act, 1969, including customs duties and federal excise duty. The first proviso to section 3(2)(a) lets the Federal Government notify a higher rate on the retail price for Third Schedule goods. A note at the end of the Schedule says that where a rate higher than eighteen percent has been notified, it continues after the goods are included in the Schedule. ### Which goods are on the list? The Third Schedule, as amended to 30 June 2026, includes these live serials (several others are marked omitted): | Group | Examples from the Schedule | | --- | --- | | Drinks | Fruit and vegetable juices, aerated waters, syrups and squashes, powder and milky drinks, mineral or bottled water, fermented beverages in retail packing | | Food | Ice cream, tea, branded spices in retail packing, branded biscuits, cooking fats and oils, sugar confectionery, pasta, sauces, jams, milk products and infant preparations, all in retail packing | | Personal care | Toilet soap, detergents, shampoo, toothpaste, shaving cream, perfumery and cosmetics, hair and shaving preparations, toilet and tissue paper | | Household | Electrical goods such as ACs, fridges, TVs and fans, gas appliances, mattresses, paints, crockery, plastic household articles, utensils, sanitaryware and ceramic products | | Vehicles | Lubricants, batteries, tyres and tubes, auto parts and car accessories in retail packing, motorcycles, auto rickshaws | | Other | Cigarettes, shoe polish, cement in retail packing, tiles, DAP, bags and cases, footwear, and certain imported pet food, coffee, chocolates and cereal bars | Serials 56 to 75 were added by the Finance Act, 2026. Several entries carry their own limits, such as "sold in retail packing" or "excluding those sold to automotive manufacturers or assemblers". ### What is the footwear exception? Serial 65 reads "Footwear (all types) except where the manufacturer exclusively sells its products through digitally integrated and POS compliant retail outlets". A manufacturer that sells only through integrated, POS compliant outlets is outside this entry, so its footwear does not fall under the retail-price rule through serial 65. The general rule in section 3(1) is then the starting point. ### Worked example (illustrative figures) A shampoo bottle bought in Multan has a printed retail price of Rs. 500. 1. Sales tax at eighteen percent of the retail price: 18% x Rs. 500 = Rs. 90. 2. The pack should show the retail price of Rs. 500 along with the sales tax of Rs. 90. Together the two printed figures come to Rs. 590. 3. Suppose the shop's bill instead adds "sales tax 18%" to Rs. 590: 18% x Rs. 590 = Rs. 106.20, making Rs. 696.20. That extra Rs. 106.20 is tax charged a second time on an amount that already includes the tax. Section 3(2)(a) charges tax on the retail price once. Section 3B(1) covers any person who collects tax that was not payable, or more than was payable, and passes it on to the consumer: that amount must be paid to the Federal Government. ### What if the pack shows no price or tax? The duty to print falls on the manufacturer, or the importer for imported goods. The Act as read does not set out a separate rule for what a retailer should do with an unmarked Third Schedule item. It does let the Board fix retail prices by notification. ### Common mistakes - **Treating the printed retail price as tax-inclusive.** Section 2(27) excludes sales tax from the retail price. The tax is a separate printed figure. - **Assuming every packaged item is on the list.** Only the goods in the Third Schedule are taxed this way, and the Board can add or remove items by notification under the second proviso to section 3(2)(a). - **Assuming all footwear is covered.** Serial 65 has its own exception for integrated, POS compliant outlets. ### What to check in the official text Read sections 2(27), 3(2)(a) and 3B and the Third Schedule in the Sales Tax Act as amended to 30 June 2026. Check any Board notification adding or removing items, fixing retail prices or specifying zones, and any Federal Government notification of a higher rate. Those notifications are not held in this corpus. ### Frequently asked #### Does the printed retail price already include sales tax? Section 2(27) defines the retail price as inclusive of all duties, charges and taxes other than sales tax. Section 3(2)(a) then requires the retail price along with the amount of sales tax to be printed on the pack. So the pack should show both figures. #### Which goods are in the Third Schedule? As amended to 30 June 2026 the list includes juices, ice cream, soft drinks, bottled water, cigarettes, soap, detergent, shampoo, toothpaste, cosmetics, tea, branded spices, biscuits, cement in retail packing, household electrical and gas appliances, tyres, motorcycles and, since the Finance Act, 2026, items such as vegetable and animal fats and oils in retail packing, sauces, crockery and footwear. #### Why is some footwear outside the Third Schedule? Serial 65 lists footwear of all types except where the manufacturer exclusively sells its products through digitally integrated and POS compliant retail outlets. Footwear from such a manufacturer is not caught by that entry. ### Citations - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "shall be legibly, prominently and indelibly printed or embossed by the manufacturer" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "with reference to the Third Schedule, means the price fixed by the manufacturer" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Third Schedule (see clause (a) of sub-section (2) of section 3), serials 1 to 75](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Third Schedule, serial 65 (Footwear)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3B (Collection of excess sales tax etc)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3b-collection-of-excess-sales-tax-etc), as amended to 2026-06-30: "Any person who has collected or collects any tax or charge, whether under misapprehension of any provision of this Act or otherwise, which was not payable as tax or charge or which is in excess of the tax or charge actually payable" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What sales tax rate does a Tier-1 retailer charge on goods it sells? Source: https://qanoondigest.com/faq/retail-shops/sales-tax-rate-tier-1-retailer Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 3(9A) of the Sales Tax Act, 1990, a Tier-1 retailer charges the rate that applies to each item it sells. For most goods that is 18 percent of the value under section 3(1), for Third Schedule goods 18 percent of the printed retail price under section 3(2)(a), and Eighth Schedule rates where those apply. **Applies to:** Retailers that fall within the Tier-1 definition in section 2(43A) of the Sales Tax Act, 1990, such as chain store outlets and shops in air-conditioned malls. ### What does the law say? A Tier-1 retailer does not have a rate of its own. Section 3(9A) of the Sales Tax Act, 1990 says that, notwithstanding anything else in the Act, "Tier-1 retailers shall pay sales tax at the rate as applicable to the goods sold under relevant provisions of this Act or a notification issued there under". So the rate follows the item on the shelf, not the shop. That sends you back to the general charging rules in section 3: | What is being sold | Rule | Rate and base | |---|---|---| | Ordinary taxable goods | Section 3(1)(a) | 18 percent of the value of the supply | | Goods listed in the Third Schedule | Section 3(2)(a) | 18 percent of the retail price printed on the article or pack | | Goods listed in the Eighth Schedule | Section 3(2)(aa) | The rate and conditions printed in the Eighth Schedule | | Goods listed in the Sixth Schedule | Section 13(1) | Exempt, subject to conditions | | Goods covered by a notification | Section 3(2)(b) | A higher or lower rate the Federal Government notifies | The "value of supply" in section 2(46)(a) is the consideration in money, including Federal and Provincial duties and taxes, "but excluding the amount of tax". The sales tax is worked out on that value and added on top. ### Who counts as a Tier-1 retailer? Section 2(43A) defines a Tier-1 retailer as a retailer in any one or more of these categories, as the text stands at 30 June 2026: - a unit of a national or international chain of stores; - a retailer in an air-conditioned shopping mall, plaza or centre, excluding kiosks; - a retailer whose cumulative electricity bill in the preceding twelve consecutive months exceeds Rs. 1,200,000; - a wholesaler-cum-retailer with turnover of more than two hundred million rupees engaged in bulk import and supply of consumer goods to retailers and to consumers; - a retailer whose turnover in the preceding twelve consecutive months exceeds two hundred million rupees, either by declaration or worked back from tax deducted on its purchases under the Income Tax Ordinance, 2001; and - any other person or class of persons the Board prescribes (the Board may also exclude persons by notification). A retailer outside all of these categories is dealt with under section 3(9) instead, which collects sales tax through the shop's electricity bill. ### How does the Third Schedule work in a shop? The Third Schedule lists goods taxed on their retail price rather than on the shop's selling price. Items listed in the edition amended to 30 June 2026 include fruit juices, ice cream, aerated waters, cigarettes, toilet soap, detergents, shampoo, toothpaste, cosmetics, tea, powder drinks, tissue paper, branded spices, cement in retail packing, bottled water, household electrical and gas appliances, mattresses, paints in retail packing, lubricants, batteries, tyres, motorcycles, branded biscuits, tiles, packed auto parts, cooking oils and fats, confectionery, pasta, sauces and plastic household items sold in retail packing. Section 3(2)(a) requires the manufacturer, or the importer for imported goods, to print or emboss the retail price and the amount of sales tax on each article or pack. Section 2(27) defines "retail price" as the price fixed by the manufacturer or importer, inclusive of all duties, charges and taxes other than sales tax, at which the item is sold to consumers. ### Worked example (illustrative figures) Zainab runs a clothing and household goods outlet in an air-conditioned mall in Lahore, so she falls in the second category above. One customer buys three things: 1. **A kurta, sold for Rs. 5,000 before tax.** It is not in the Third, Sixth or Eighth Schedule. Tax under section 3(1): 18% of Rs. 5,000 = **Rs. 900**. The customer pays Rs. 5,900. 2. **A bottle of shampoo.** Shampoo is serial 8 of the Third Schedule. The pack prints a retail price of Rs. 600 and sales tax of Rs. 108 (18% of Rs. 600). Tax is **Rs. 108**, worked on the printed retail price, not on whatever Zainab charges. 3. **A packet of an item listed in the Sixth Schedule.** Exempt under section 13(1), so **Rs. 0**, provided any conditions attached to that entry are met. Total sales tax on the sale: Rs. 900 + Rs. 108 + Rs. 0 = **Rs. 1,008**. The figures are invented. The rates are the ones printed in sections 3(1) and 3(2)(a). ### What if the goods are also in the Eighth Schedule? Section 3(2)(a) says that where a Third Schedule item is also in the Eighth Schedule, it is charged "at the rates specified therein". Section 3(2)(aa) applies Eighth Schedule rates and conditions to any goods listed there. The Eighth Schedule is a long table with a rate and a condition for each entry, so the rate depends on the exact entry. Check the entry and its condition in the official text before relying on a reduced rate. ### What if the buyer is not registered? Section 3(1A) charges further tax of four percent on taxable supplies made to a person who has not obtained registration or is not an active taxpayer, but it allows the Federal Government to specify by notification supplies on which further tax is not charged. This corpus does not include those notifications, so this page does not say whether further tax is added on a Tier-1 retailer's sales to ordinary customers. ### Common mistakes - **Thinking Tier-1 retailers pay a flat "retail rate".** Section 3(9A) ties the rate to the goods sold, item by item. - **Charging 18 percent on the shop's own price for Third Schedule goods.** Section 3(2)(a) sets the base as the printed retail price. - **Assuming the old reduced-rate proviso still applies.** Footnotes to section 3 record that the proviso under section 3(9A) was omitted by the Finance Act, 2025. - **Treating a mall kiosk as Tier-1 automatically.** Section 2(43A)(b) excludes kiosks from the mall category, though a kiosk could still fall in another category. ### What to check in the official text Read section 3(1), 3(2) and 3(9A), the Tier-1 definition in section 2(43A) and the "retail price" definition in section 2(27). Then find the exact item in the Third, Sixth and Eighth Schedules. Section 3(2)(b) and the provisos to section 3(2)(a) allow notifications that change rates for particular goods; those notifications are not in this corpus and should be checked separately. ### Frequently asked #### Is there a special lower sales tax rate for Tier-1 retailers? Not in the text amended to 30 June 2026. Section 3(9A) says a Tier-1 retailer pays at the rate applicable to the goods sold, and the proviso that used to sit under section 3(9A) was omitted by the Finance Act, 2025. #### What rate applies to shampoo, soap or packaged biscuits sold by a Tier-1 store? These items are listed in the Third Schedule. Section 3(2)(a) charges them at 18 percent of the retail price printed on the pack, unless the item is also in the Eighth Schedule, in which case the Eighth Schedule rate applies. #### Does a Tier-1 retailer charge tax on goods that are exempt? No. Section 13(1) exempts goods listed in the Sixth Schedule from tax, subject to the conditions the Federal Government specifies. Section 3(9A) only requires the rate that applies to the goods, and for exempt goods there is none. ### Citations - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "Tier-1 retailers shall pay sales tax at the rate as applicable to the goods sold under relevant provisions of this Act or a notification issued there under" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“Tier-1 retailer” means a retailer falling in any one or more of the following categories" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Third Schedule (see clause (a) of sub-section (2) of section 3)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Eighth Schedule, Table-1 (see clause (aa) of sub-section (2) of section 3)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 13 (Exemption)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#13-exemption), as amended to 2026-06-30: "supply of goods or import of goods specified in the Sixth Schedule shall" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Why is income tax charged on my shop's electricity bill, and can I adjust or get it refunded? Source: https://qanoondigest.com/faq/retail-shops/income-tax-on-shop-electricity-bill-235 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 235 of the Income Tax Ordinance, electricity companies collect advance tax on commercial bills: for tax year 2027, 10 percent up to Rs. 20,000, then Rs. 1,950 plus 12 percent above that. For non-company shopkeepers, tax on bills up to Rs. 360,000 a year is non-refundable minimum tax; tax on monthly bills above Rs. 30,000 is adjustable. **Applies to:** Individuals and associations of persons running shops on a commercial electricity connection in Pakistan, for bills in tax year 2027 (1 July 2026 to 30 June 2027). The income tax line on a shop's electricity bill is advance tax under section 235 of the Income Tax Ordinance, 2001. The electricity company is only the collector. Whether that tax later reduces your final income tax depends on whether you are a company and on how large your bills are. ### What does the law say? Section 235(1) requires advance tax to be collected at the rates in Division IV of Part IV of the First Schedule on the electricity bill of a commercial or industrial consumer (and of a domestic consumer, who escapes it if on the Active Taxpayers' List). The proviso for people on the list covers domestic consumers only, so a shop's commercial connection is charged whatever the owner's filing status. Section 235(2) makes the person preparing the bill charge the tax "in the manner electricity consumption charges are charged". Its Explanation says the bill means the electricity bill inclusive of sales tax and all incidental charges. ### What are the rates for tax year 2027? The Ordinance is amended to 30 June 2026, so these rates apply to bills in tax year 2027. Clause (1) of Division IV sets this table for commercial and industrial consumers, applied to the gross amount of the bill: | Gross amount of bill | Tax (commercial consumers) | | --- | --- | | Up to Rs. 500 | Rs. 0 | | Exceeds Rs. 500 but not Rs. 20,000 | 10% of the amount | | Exceeds Rs. 20,000 | Rs. 1,950 plus 12% of the amount exceeding Rs. 20,000 | Industrial consumers pay Rs. 1,950 plus 5 percent in the top band. As printed, the table gives Rs. 2,000 of tax on a bill of exactly Rs. 20,000, but Rs. 1,950 plus 12 percent of the excess just above it. The Ordinance does not explain the difference. ### Which part is minimum tax and which part is adjustable? Section 235(4) splits the tax: - **(a)** For a taxpayer other than a company, tax collected up to a bill amount of Rs. 360,000 per annum is minimum tax on income, and no refund is allowed. - **(b)** For a taxpayer other than a company, tax collected on the monthly bill over and above Rs. 30,000 per month is adjustable. - **(c)** For a company, all the tax collected is adjustable against tax liability. Clause (a) treats its part as minimum tax on income and bars any refund of it. Clause (c) describes adjustable tax as adjustable "against tax liability", which is the tax worked out in the return. Clause (a) is framed per year and clause (b) per month. Rs. 360,000 a year equals Rs. 30,000 a month over twelve months, but the Ordinance does not spell out how "tax collected on" the part of a bill above Rs. 30,000 is measured, or how months above and below Rs. 30,000 are combined. ### Worked example (illustrative figures) Bilal is an individual who runs a hardware shop in Peshawar. His commercial electricity bill, including sales tax, is Rs. 50,000 every month of tax year 2027. 1. Tax each month: Rs. 1,950 + 12% x (Rs. 50,000 - Rs. 20,000) = Rs. 1,950 + Rs. 3,600 = Rs. 5,550. 2. Tax for the year: 12 x Rs. 5,550 = Rs. 66,600. 3. For a sense of the split, apply the table to the first Rs. 30,000 of each bill: Rs. 1,950 + 12% x Rs. 10,000 = Rs. 3,150 a month, or Rs. 37,800 a year. On that reading, Rs. 37,800 is minimum tax under section 235(4)(a). 4. The rest, Rs. 66,600 - Rs. 37,800 = Rs. 28,800 (12% x Rs. 20,000 x 12), would be adjustable under section 235(4)(b). Step 3 is one reading of the clauses, shown to give a sense of scale. The Ordinance does not prescribe this arithmetic. A second shopkeeper, Saima, has a bill of Rs. 15,000 a month. Her tax is 10% x Rs. 15,000 = Rs. 1,500 a month, Rs. 18,000 a year. Her annual bills total Rs. 180,000, within Rs. 360,000, and no month exceeds Rs. 30,000, so all of it falls under clause (a) as minimum tax with no refund. ### What if the shopkeeper is not on the Active Taxpayers' List? Rule 1 of the Tenth Schedule increases the rate of tax to be collected from persons not on the Active Taxpayers' List by hundred percent. For a commercial bill in the 10 percent band that means 20 percent. The separate page on non-ATL shop bills covers this in more detail. ### Common mistakes - **Thinking filer status removes the tax.** The Active Taxpayers' List proviso in section 235(1) applies only to domestic consumers. - **Expecting a refund of all of it.** Tax on bills up to Rs. 360,000 a year is minimum tax with no refund for non-company taxpayers. - **Working the rate on the bill before sales tax.** The Explanation to section 235(2) uses the bill inclusive of sales tax. ### What to check in the official text Read section 235 and clause (1) of Division IV of Part IV of the First Schedule to the Income Tax Ordinance as amended to 30 June 2026, and rule 1 of the Tenth Schedule. In the consolidated site text, part of section 235(3) is interrupted by text from another section, so read that sub-section in the official PDF. Sales tax collected through a retailer's electricity bill is a separate charge under the Sales Tax Act, covered on its own page. ### Frequently asked #### Can I get a refund of the income tax on my shop's electricity bill? Not for the part treated as minimum tax. Section 235(4)(a) says tax collected up to a bill amount of Rs. 360,000 per annum is minimum tax for a taxpayer other than a company, and no refund shall be allowed. Tax on the monthly bill above Rs. 30,000 is adjustable under section 235(4)(b). #### Is the tax worked out before or after sales tax on the bill? After. The Explanation to section 235(2) says the electricity consumption bill means the bill inclusive of sales tax and all incidental charges. The Division IV table applies to the gross amount of the bill. #### Can I stop the tax being collected at all? Section 235(3) says the tax shall not be collected from a person who produces a certificate from the Commissioner that his income is exempt, or that he has already discharged his advance tax liability, or that his entire income is subject to the final or minimum tax regime under another provision. ### Citations - [Income Tax Ordinance, 2001, section 235 (Electricity consumption)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#235-electricity-consumption), as amended to 2026-06-30: "in the case of a taxpayer other than a company, tax collected upto bill amount of" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division IV (Electricity Consumption), clause (1) Table](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (Rate of deduction or collection of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Why does my supplier collect advance tax under section 236H when I buy stock, and at what rate? Source: https://qanoondigest.com/faq/retail-shops/section-236h-advance-tax-retailer-purchases Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 236H of the Income Tax Ordinance requires manufacturers, distributors, dealers, wholesalers and commercial importers selling to a retailer to collect advance tax. Division XV sets 0.5% of the gross sale, and the Tenth Schedule sets 2.5% if you are not on the Active Taxpayers' List. The retailer gets credit for it that year. **Applies to:** Shopkeepers and retailers in Pakistan who buy stock from manufacturers, distributors, dealers, wholesalers or commercial importers. When a shopkeeper buys stock from a manufacturer, distributor, dealer, wholesaler or commercial importer, the supplier adds income tax to the invoice because section 236H of the Income Tax Ordinance, 2001 obliges the supplier to collect it. The retailer is the one who bears it, but it is not lost: the law treats it as an advance payment of the retailer's own income tax. ### What does the law say? Section 236H(1) says every manufacturer, distributor, dealer, wholesaler or commercial importer, at the time of sale to retailers, and every distributor or dealer to another wholesaler "in respect of the said sectors", shall collect advance tax at the rate specified in Division XV of Part IV of the First Schedule from the person to whom the sale is made. Section 236H(2) says credit for the tax collected "shall be allowed in computing the tax due by the retailer on the taxable income for the tax year in which the tax was collected." The section once named specific sectors (pharmaceuticals, edible oil and ghee, electronics, cement and others). The footnote records that the Finance Act, 2024 omitted that list, so the collection duty on sales to retailers is no longer limited to named sectors. The phrase "in respect of the said sectors", which governs sales by a distributor or dealer to another wholesaler, still appears in the text even though the sector list it points back to has been omitted. The Ordinance does not explain how that phrase now operates. ### What rate applies for tax year 2027? The rates in the Ordinance as amended to 30 June 2026 apply to tax year 2027 (1 July 2026 to 30 June 2027). | Retailer's status | Rate on gross amount of sale | Source | | --- | --- | --- | | On the Active Taxpayers' List | 0.5% | First Schedule, Part IV, Division XV | | Not on the Active Taxpayers' List | 2.5% | Tenth Schedule, rule 1, third proviso, Table serial 4 | Division XV reads: "The rate of collection of tax under section 236H on the gross amount of sales shall be 0.5%." The footnotes show an older version of Division XV that charged 1% on electronics and 0.5% on others. That version has been replaced. Rule 1 of the Tenth Schedule generally increases the rate for persons not on the Active Taxpayers' List by one hundred percent. Its third proviso, however, sets specific rates in a Table, and serial 4 of that Table sets 2.5% for section 236H "on the gross amount of sale to retailers". Any other figure for the 236H rate that is not in these two places is not what the consolidated text says. ### Worked example (illustrative figures) Sadia runs a general store in Gulshan-e-Iqbal, Karachi. In one month she buys stock worth Rs. 800,000 (gross amount of sale on the supplier's invoices, an invented figure). **If she is on the Active Taxpayers' List:** 1. Rate: 0.5%. 2. Rs. 800,000 x 0.5% = Rs. 4,000. **If she is not on the Active Taxpayers' List:** 1. Rate: 2.5%. 2. Rs. 800,000 x 2.5% = Rs. 20,000. The difference in that one month is Rs. 20,000 minus Rs. 4,000 = Rs. 16,000. If her purchases total Rs. 9,600,000 over the tax year, the tax collected at 0.5% is Rs. 48,000. Under section 236H(2), that Rs. 48,000 is credited when her tax for the year is computed. ### What if I am a large retailer? The amount collected under section 236H also matters for sales tax. Clause (gb) of the Tier-1 retailer definition, inserted by the Finance Act, 2026, covers a retailer whose turnover exceeds Rs. 200 million in the preceding twelve months, "either by way of declaration or from worked back value of turnover from tax deduction under section 236G or 236H". Tax collected by suppliers can therefore be used to work out a retailer's turnover. ### What if I buy from another retailer? Section 236H(1) places the duty on manufacturers, distributors, dealers, wholesalers and commercial importers. A purchase from a person outside that list is not covered by the words of the section. ### Common mistakes - **Treating 236H as an extra, final cost.** Section 236H(2) makes it a credit against the retailer's tax for the year. - **Applying the old electronics rate.** The 1% electronics rate is in a footnote of a replaced Division. - **Doubling 0.5% to 1% for non-filers.** The Tenth Schedule Table fixes 2.5% for section 236H, not the general one hundred percent increase. - **Assuming credit covers more than was collected.** Section 236H(2) allows credit for the tax collected under sub-section (1), in the tax year in which it was collected. ### What to check in the official text Read section 236H, Division XV of Part IV of the First Schedule, and rule 1 of the Tenth Schedule with its third proviso Table, all in the Income Tax Ordinance amended to 30 June 2026. For the turnover link to Tier-1 status, read clause (gb) in section 4 of the Finance Act, 2026. The Tenth Schedule rate turns on whether the retailer appears on the Active Taxpayers' List. The list itself is not part of the text held here. ### Frequently asked #### What is the section 236H rate for tax year 2027? Division XV of Part IV of the First Schedule, as amended to 30 June 2026, sets 0.5% of the gross amount of sales. For a retailer not on the Active Taxpayers' List, the third proviso to rule 1 of the Tenth Schedule sets 2.5% on the gross amount of sale to retailers. #### Is section 236H tax a final tax for a shopkeeper? No. Section 236H(2) says credit for the tax collected shall be allowed in computing the tax due by the retailer on the taxable income for the tax year in which it was collected. It is adjusted against the retailer's own liability for that year. #### Is there still a separate higher rate for electronics? Not in the current Division XV. The earlier table with a 1% rate for electronics and 0.5% for others was replaced, and Division XV now states a single rate of 0.5%. ### Citations - [Income Tax Ordinance, 2001, section 236H (Advance tax on sales to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236h-advance-tax-on-sales-to-retailers), as amended to 2026-06-30: "(2) Credit for the tax collected under sub-section (1) shall be allowed in computing the tax due by the retailer on the taxable income for the tax year in which the tax was collected." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XV (Advance tax on sale to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1, third proviso, Table serial 4 (Section 236H)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2026, section 4 (Amendments of the Sales Tax Act, 1990 (VII of 1990))](https://qanoondigest.com/acts/finance-act/finance-act-2026#4-amendments-of-the-sales-tax-act-1990-vii-of-1990), as amended to 2026: "(gb) a retailer having turnover exceeding two hundred million rupees either by way of declaration or from worked back value of turnover from tax deduction under section 236G or 236H of Income Tax Ordinance, 2001 (XLIV of 2001) during the immediately preceding twelve consecutive months; and" Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf --- ## Why does my supplier deduct advance tax under section 236H, and at what rate? Source: https://qanoondigest.com/faq/retail-shops/section-236h-advance-tax-retailers Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 236H of the Income Tax Ordinance requires a manufacturer, distributor, dealer, wholesaler or commercial importer selling to a retailer to collect tax. For tax year 2027 the rate is 0.5% of the gross sale under Division XV, or 2.5% under the Tenth Schedule if the retailer is not on the Active Taxpayers' List. It is credited against tax due. **Applies to:** Shopkeepers and other retailers in Pakistan who buy stock from manufacturers, distributors, dealers, wholesalers or commercial importers, for purchases in tax year 2027 (1 July 2026 to 30 June 2027). When a wholesaler adds a small line of "advance tax" to a shopkeeper's invoice, it is usually section 236H at work. The supplier is acting as a collection point for income tax that the retailer can later count against his own tax. ### What does the law say? Section 236H(1) says every manufacturer, distributor, dealer, wholesaler or commercial importer, at the time of sale to retailers, and every distributor or dealer selling to another wholesaler, "shall collect advance tax at the rate specified in Division XV of Part IV of the First Schedule" from the person to whom the sale is made. Section 236H(2) says credit for the tax collected "shall be allowed in computing the tax due by the retailer on the taxable income for the tax year in which the tax was collected." Division XV of Part IV of the First Schedule sets one rate: "The rate of collection of tax under section 236H on the gross amount of sales shall be 0.5%." For a retailer who is not on the Active Taxpayers' List, section 100BA sends the matter to the Tenth Schedule. The Table under rule 1 of that Schedule lists, at serial 4, "Section 236H" on the "gross amount of sale to retailers" at 2.5%. Section 236H does not appear in the list of excluded sections in rule 10. | Retailer's status | Rate on gross amount of sale (tax year 2027) | Source | |---|---|---| | On the Active Taxpayers' List | 0.5% | Division XV, Part IV, First Schedule | | Not on the Active Taxpayers' List | 2.5% | Tenth Schedule, rule 1, Table serial 4 | ### How does it work in practice? The supplier works out the tax on the gross amount of the sale and collects it from the retailer at the time of sale. For the shopkeeper, the amounts collected across the year are a credit against the income tax worked out on the return for that tax year. The Finance Act, 2024 removed the list of sectors (pharmaceuticals, edible oil, electronics, cement and others) that section 236H(1) used to name. The section now covers sales to retailers generally. The phrase "in respect of the said sectors" still remains in the part about distributors or dealers selling to another wholesaler, even though the list it referred to has gone. The consolidated text does not explain how that phrase now applies. Section 236H deductions have a second use since the Finance Act, 2026. Section 2 of the Sales Tax Act, 1990, in the Tier-1 retailer definition, now includes "a retailer having turnover exceeding two hundred million rupees either by way of declaration or from worked back value of turnover from tax deduction under section 236G or 236H" in the preceding twelve months. The 236H tax on a shopkeeper's purchases can therefore be used to work back turnover for sales tax purposes. ### Worked example (illustrative figures) Rashid runs a grocery store in Faisalabad. In September 2026 he buys stock worth Rs. 800,000 from a distributor. **If Rashid is on the Active Taxpayers' List:** 1. Rate: 0.5%. 2. Rs. 800,000 x 0.5% = Rs. 4,000. **If Rashid is not on the list:** 1. Rate: 2.5%. 2. Rs. 800,000 x 2.5% = Rs. 20,000. The difference for that one month is Rs. 16,000. Whichever amount is collected, section 236H(2) allows it as a credit in computing Rashid's tax for tax year 2027. ### What if my tax for the year is less than the 236H credit? Section 236H(2) allows credit in computing tax due. It does not describe the tax as final or minimum. Whether an excess can be refunded depends on the general refund rules in the Ordinance, which are outside the scope of this page. If Rashid is off the list and does not file, the Tenth Schedule also contains rules on provisional assessment that can follow from tax collected at the higher rate. ### Common mistakes - **Doubling 0.5% to 1% for non-filers.** The Tenth Schedule Table sets a specific 2.5% for section 236H, not the general hundred percent increase. - **Treating 236H as a sales tax.** It is advance income tax under the Income Tax Ordinance. It is separate from any sales tax on the invoice. - **Quoting an old sector-based rate.** Earlier versions of Division XV had different rates for electronics and other goods. The version amended to 30 June 2026 has a single 0.5% rate. - **Confusing 236G with 236H.** Section 236G covers sales to distributors, dealers or wholesalers, with its own rates in Division XIV. Section 236H covers sales to retailers. ### What to check in the official text Read section 236H and section 100BA of the Income Tax Ordinance as amended to 30 June 2026, Division XV of Part IV of the First Schedule, and rule 1 with its Table and rule 10 of the Tenth Schedule. For the sales tax effect, read clause (43A) of section 2 of the Sales Tax Act, 1990 as amended to 30 June 2026. Supplier invoices should show the rate actually applied, which can be checked against these entries. ### Frequently asked #### What is the section 236H rate for tax year 2027? Division XV of Part IV of the First Schedule, as amended to 30 June 2026, sets 0.5% of the gross amount of sales. For a retailer not on the Active Taxpayers' List, the Table in rule 1 of the Tenth Schedule sets 2.5% on the gross amount of sale to retailers. #### Is the 236H deduction a final tax? No. Section 236H(2) says credit for the tax collected is allowed in computing the retailer's tax due on taxable income for the tax year in which it was collected. It counts towards the tax worked out in the retailer's return. #### I heard the rate is now 0.2%. Is that right? The consolidated Ordinance to 30 June 2026 shows only 0.5% in Division XV, and the Finance Act, 2026 held in this corpus does not amend Division XV. A 0.2% figure does appear in Division XIV, but that is the non-filer rate under section 236G for sales to distributors, dealers or wholesalers other than fertilizer. ### Citations - [Income Tax Ordinance, 2001, section 236H (Advance tax on sales to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236h-advance-tax-on-sales-to-retailers), as amended to 2026-06-30: "Credit for the tax collected under sub-section (1) shall be allowed in computing the tax due by the retailer on the taxable income for the tax year in which the tax was collected." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XV (Advance tax on sale to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "The rate of collection of tax under section 236H on the gross amount of sales shall be 0.5%." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1, proviso and Table, S. No. 4 (Section 236H)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "shall be determined in accordance with the rules in the Tenth Schedule." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "a retailer having turnover exceeding two hundred million rupees either by way of declaration or from worked back value of turnover from tax deduction under section 236G or 236H" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What is section 99A, and is the old Rs. 3,000 to Rs. 10,000 fixed tax on shop electricity bills still charged? Source: https://qanoondigest.com/faq/retail-shops/section-99a-tax-through-electricity-connection Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 99A of the Income Tax Ordinance charges tax on commercial electricity connections of retailers other than Tier-1 retailers at rates set in an income tax general order. The 2022 table of Rs. 3,000, Rs. 5,000 and Rs. 10,000 a month was omitted by the Tax Laws (Amendment) Act, 2023, so the Ordinance no longer contains those amounts. **Applies to:** Shopkeepers and other retailers in Pakistan who are not Tier-1 retailers and who have a commercial electricity connection, reading the Income Tax Ordinance as amended to 30 June 2026. In 2022 many shopkeepers saw a fixed monthly income tax of Rs. 3,000 or more on their electricity bills. The provision that set those amounts has since been removed from the Ordinance. Section 99A remains, but in a different form: it now hands the rates to a general order. ### What does the law say? Section 99A, headed "Special provisions relating to payment of tax through electricity connections", is printed inside the section 99 entry of the Income Tax Ordinance amended to 30 June 2026. The current text was substituted by the Tax Laws (Amendment) Act, 2023, and is deemed to have been substituted from 1 July 2022. - **Section 99A(1):** tax "shall be charged and collected from retailers other than Tier-I retailers" as defined in the Sales Tax Act, 1990, and from specified service providers, "on commercial electricity connections at the rates specified in the income tax general order issued in terms of sub-section (2)". - **Section 99A(2):** the Federal Government, or the Board with the approval of the Minister in-charge following approval of the Economic Coordination Committee of the Cabinet, may issue that general order. It may provide the scope, time, payment, recovery, penalty, default surcharge, adjustment or refund; collection on the bill amount or any basis of consumption, "in addition to or in lieu of" advance tax under section 235(1); record keeping, returns and assessment; the collection mechanism; inclusion or exemption of persons; and whether the tax is adjustable, final or minimum. - **Section 99A(3):** section 235(1) continues to apply unless the general order specifically exempts the person. - **Section 99A(4):** section 100BA and rule 1 of the Tenth Schedule do not apply to section 99A tax unless the general order specifically provides otherwise for a person or class. ### What happened to the Rs. 3,000 to Rs. 10,000 table? The fixed amounts came from clause (3) of Division IV of Part IV of the First Schedule. The consolidated Ordinance records the omitted clause in a footnote. It read: | Gross amount of monthly bill | Tax | |---|---| | Does not exceed Rs. 30,000 | Rs. 3,000 | | Exceeds Rs. 30,000 but does not exceed Rs. 50,000 | Rs. 5,000 | | Exceeds Rs. 50,000 but does not exceed Rs. 100,000 | Rs. 10,000 | | Retailers and service providers as notified by the Board in the income tax general order | Up to Rs. 200,000 | Section 3 of the Tax Laws (Amendment) Act, 2023 then provided that "in Division IV, clause (3) shall be omitted". The footnote notes that the Tax Laws (Second Amendment) Ordinance, 2022 had omitted it earlier. The same Act omitted section 235(1A), which had collected the section 99A tax through the bill, with effect from 1 July 2022. As amended to 30 June 2026, neither the Ordinance nor its First Schedule contains a fixed monthly amount for section 99A. ### How does it work in practice? Two charges on a shop's bill need to be kept apart. 1. **Section 235 tax.** This continues on commercial bills at the Division IV rates (nil up to Rs. 500, 10% up to Rs. 20,000, then Rs. 1,950 plus 12% of the excess), unless a section 99A general order exempts the person. 2. **Section 99A tax.** This exists only to the extent a general order under section 99A(2) sets it. The order decides the rates, who is covered and whether the tax is adjustable, final or minimum. No general order under section 99A is held in this corpus. This page therefore cannot say whether an order is currently in force, what amounts it sets, or which retailers it covers. ### Worked example (illustrative scenario) Sadia runs a tailoring and fabric shop in Hyderabad and is not a Tier-1 retailer. Her monthly commercial bill is Rs. 25,000, inclusive of sales tax and charges. 1. **Would the 2022 table apply?** No. The table was omitted, so the Rs. 3,000 row for bills up to Rs. 30,000 is no longer law. 2. **Does section 235 still apply?** Yes, unless a general order exempts her. Rs. 1,950 plus 12% of Rs. 5,000 (Rs. 600) = Rs. 2,550. 3. **Is there section 99A tax as well?** Only if a current general order sets one for her class. That order needs to be checked on its own. ### What about sales tax on the same bill? Section 3(9) of the Sales Tax Act, 1990 is a separate charge. It says tax shall be charged from retailers other than Tier-1 retailers through their monthly electricity bills at five percent where the bill does not exceed Rs. 20,000 and seven and a half percent where it exceeds that. That is sales tax, not income tax, and it is not affected by the omission of the income tax table. ### Common mistakes - **Quoting the 2022 fixed amounts as current law.** They were omitted from Division IV. - **Assuming section 99A replaces section 235.** Section 99A(3) keeps section 235(1) running unless the order exempts the person. - **Assuming the non-filer increase applies.** Section 99A(4) switches off section 100BA and rule 1 of the Tenth Schedule for 99A tax, unless the order says otherwise. - **Mixing up section 99A with the Ninth Schedule.** The Ninth Schedule still printed in the Ordinance refers to an older section 99A for traders in tax years 2015 to 2018. That older section was replaced. ### What to check in the official text Read section 99A (printed within the section 99 entry) and section 235 of the Income Tax Ordinance as amended to 30 June 2026, and the footnote under Division IV of Part IV of the First Schedule recording the omitted clause (3). Section 3 of the Tax Laws (Amendment) Act, 2023 contains the substitution and omission. Any income tax general order issued under section 99A(2) is not held in this corpus and needs to be read on its own. ### Frequently asked #### Is the Rs. 3,000 to Rs. 10,000 monthly tax still in the Ordinance? No. That table sat in clause (3) of Division IV of Part IV of the First Schedule. Section 3 of the Tax Laws (Amendment) Act, 2023 omitted clause (3), and the consolidated Ordinance to 30 June 2026 shows it only as a footnote recording the omitted text. #### What rate does section 99A charge now? Section 99A(1) charges tax at the rates specified in the income tax general order issued under section 99A(2). The Ordinance itself contains no rate for section 99A, and the general order is not held in this corpus. #### Does section 99A replace section 235 tax on my shop bill? Not by itself. Section 99A(3) says section 235(1) continues to apply unless the general order specifically exempts the person. The order may provide collection in addition to or in lieu of section 235 tax. ### Citations - [Income Tax Ordinance, 2001, Section 99A (printed within the section 99 entry)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "The provisions of section 100BA and rule 1 of the Tenth Schedule shall not apply to the tax collectible under this section unless specifically provided" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Tax Laws (Amendment) Act, 2023, section 3 (Amendments of Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/acts-general/tax-laws-amendment-act-2023#3-amendments-of-income-tax-ordinance-2001-xlix-of-2001), as amended to 2023: "in Division IV, clause (3) shall be omitted;" Official source: https://download1.fbr.gov.pk:443/Docs/2023515155193349TaxLawAmendmentsAct2023.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division IV, omitted clause (3) (footnote text)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 235 (Electricity consumption)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#235-electricity-consumption), as amended to 2026-06-30: "electricity consumption bill referred to in sub-section (2) means electricity bill inclusive of sales tax and all incidental charges." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "tax shall be charged from retailers, other than those falling in Tier-1, through their monthly electricity bills" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What is section 99A tax through electricity connections, and is the old Rs. 3,000 to Rs. 10,000 fixed tax still charged? Source: https://qanoondigest.com/faq/retail-shops/section-99a-tax-electricity-connections-retailers Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 99A of the Income Tax Ordinance lets tax be collected from retailers other than Tier-1 retailers on commercial electricity connections, at rates set in an income tax general order. The fixed Rs. 3,000, Rs. 5,000 and Rs. 10,000 table that once sat in the First Schedule was omitted by the Tax Laws (Amendment) Act, 2023. **Applies to:** Shopkeepers and small service providers in Pakistan who run their business from premises with a commercial electricity connection and are not Tier-1 retailers under the Sales Tax Act, 1990. Section 99A is the part of the Income Tax Ordinance, 2001 that allows income tax to be collected from smaller shopkeepers through the commercial electricity bill of their shop. It does not fix the amount itself. The amount, the dates and who is covered are left to an income tax general order, which is not part of the law held on this site. ### What does section 99A say now? Section 99A was substituted by the Tax Laws (Amendment) Act, 2023, and that Act says the substitution is deemed to have taken effect from 1 July 2022. As printed in the Ordinance amended to 30 June 2026, it has four sub-sections: | Sub-section | What it does | | --- | --- | | (1) | A tax is charged and collected from retailers other than Tier-I retailers, and from specified service providers, on commercial electricity connections, at the rates specified in the income tax general order | | (2) | The Federal Government, or the Board with the approval of the Minister in-charge, following approval of the Economic Coordination Committee of the Cabinet, may issue that general order | | (3) | Section 235(1) still applies to the persons it covers, unless the general order specifically exempts them | | (4) | Section 100BA and rule 1 of the Tenth Schedule (the higher rates for people not on the Active Taxpayers' List) do not apply to 99A tax unless the general order says so | The general order under sub-section (2) can deal with scope, time, payment, recovery, penalty, default surcharge, adjustment or refund. It can set the tax on the amount of the bill "or on any basis of consumption", in addition to or in lieu of the section 235 advance tax, at such rates or amounts as it specifies. It can also provide for record keeping and returns, include or exempt classes of persons, and decide whether the tax is adjustable, final or minimum. ### Is the old Rs. 3,000 to Rs. 10,000 fixed tax still charged? Not under the Ordinance itself. That table was clause (3) of Division IV, Part IV of the First Schedule, inserted by the Finance Act, 2022. According to the footnote in the consolidated text, it read: | Gross amount of monthly bill | Tax under the omitted table | | --- | --- | | Does not exceed Rs. 30,000 | Rs. 3,000 | | Exceeds Rs. 30,000 but does not exceed Rs. 50,000 | Rs. 5,000 | | Exceeds Rs. 50,000 but does not exceed Rs. 100,000 | Rs. 10,000 | | Retailers and service providers notified by the Board in the general order | Up to Rs. 200,000 | Section 3 of the Tax Laws (Amendment) Act, 2023 omitted clause (3) of Division IV. The footnote records that it had first been omitted by the Tax Laws (Second Amendment) Ordinance, 2022, dated 22 August 2022. The same Act omitted section 235(1A), the sub-section that had collected this tax "in addition to" normal electricity advance tax. So today the Ordinance contains no fixed rupee amount for section 99A. Whether a general order has set amounts, and what they are, cannot be answered from the text held here. ### How does the normal electricity tax interact with it? Section 235(1) collects advance tax "at the rates specified in Division IV of Part-IV of the First Schedule on the amount of electricity bill of a commercial or industrial" consumer. Clause (1) of Division IV sets these rates on the gross bill: | Gross amount of bill | Tax | | --- | --- | | Up to Rs. 500 | Rs. 0 | | Exceeds Rs. 500 but does not exceed Rs. 20,000 | 10% of the amount | | Exceeds Rs. 20,000 | Rs. 1,950 plus 12% of the amount exceeding Rs. 20,000 for commercial consumers (5% for industrial consumers) | Section 99A(3) keeps this tax running for shops unless the general order exempts them. Section 99A(2)(b) lets the general order collect 99A tax in addition to, or instead of, this amount. ### Worked example (illustrative figures) Rashid runs a garments shop in Saddar, Rawalpindi. He is not a Tier-1 retailer. His commercial electricity bill for one month is Rs. 40,000 (an invented figure). **Section 235 tax under Division IV, clause (1):** 1. The bill exceeds Rs. 20,000, so the third row applies. 2. Amount above Rs. 20,000: Rs. 40,000 minus Rs. 20,000 = Rs. 20,000. 3. 12% of Rs. 20,000 = Rs. 2,400. 4. Tax = Rs. 1,950 + Rs. 2,400 = Rs. 4,350. **Section 99A tax:** the rate is whatever the general order specifies for his class of retailer, which is not held here, so no figure can be given. **For comparison only:** under the omitted clause (3) table, a Rs. 40,000 bill fell in the Rs. 30,000 to Rs. 50,000 band, which carried Rs. 5,000. That table no longer forms part of the Ordinance. ### What if my shop is a Tier-1 retailer? Section 99A(1) excludes Tier-I retailers as defined in the Sales Tax Act, 1990. A Tier-1 shop still faces section 235 on its commercial bill, but not the 99A collection. Whether a shop is Tier-1 depends on clause (43A) of section 2 of the Sales Tax Act. ### What if I also pay sales tax through the electricity bill? The earlier 2022 version of section 99A had a sub-section saying a retailer who paid sales tax through the electricity bill under the Sales Tax Act need not pay 99A tax. That sub-section is not in the current text. The current section 99A leaves adjustment and exemption to the general order. ### Common mistakes - **Treating Rs. 3,000, Rs. 5,000 or Rs. 10,000 as the current law.** Those figures are in the footnote of an omitted clause, not in the operative text. - **Assuming 99A tax replaces section 235 tax automatically.** Section 99A(3) says section 235(1) still applies unless the general order specifically exempts the person. - **Assuming the non-filer double rate applies.** Section 99A(4) switches off section 100BA and rule 1 of the Tenth Schedule for 99A tax, unless the general order provides otherwise. - **Assuming the tax is final.** Whether it is adjustable, final or minimum is for the general order under section 99A(2)(f). Collection under section 235 has its own rules in section 235(4). ### What to check in the official text Read section 99A as printed within the section 99 entry of the Income Tax Ordinance amended to 30 June 2026, section 235, and Division IV of Part IV of the First Schedule with its footnotes. Section 3 of the Tax Laws (Amendment) Act, 2023 shows the substitution of section 99A and the omission of clause (3). The income tax general order issued under section 99A(2), which carries the actual rates and scope, is not held in this corpus and needs to be checked separately. ### Frequently asked #### Is the Rs. 3,000 fixed tax on shop electricity bills still in the Ordinance? No. The table of Rs. 3,000, Rs. 5,000 and Rs. 10,000 was clause (3) of Division IV, Part IV of the First Schedule, and section 3 of the Tax Laws (Amendment) Act, 2023 omitted it. The current section 99A points to rates in an income tax general order instead. #### Does section 99A apply to Tier-1 retailers? No. Section 99A(1) covers retailers other than Tier-I retailers as defined in the Sales Tax Act, 1990, and specified service providers. A Tier-1 retailer is outside this section. #### Does the normal section 235 electricity tax still apply to my shop? Section 99A(3) says section 235(1) continues to apply to the persons it covers unless the general order specifically exempts them. The general order can also provide for 99A tax in addition to, or in lieu of, the section 235 tax. ### Citations - [Income Tax Ordinance, 2001, Section 99A (printed within the section 99 entry)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "be charged and collected from retailers other than Tier-I retailers as defined in the Sales Tax Act, 1990 (VII of 1990) and specified service providers on commercial electricity connections at the rates specified in the income tax general order issued in terms of sub-section (2)." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Tax Laws (Amendment) Act, 2023, section 3 (Amendments of Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/acts-general/tax-laws-amendment-act-2023#3-amendments-of-income-tax-ordinance-2001-xlix-of-2001), as amended to 2023: "(b) in Division IV, clause (3) shall be omitted;" Official source: https://download1.fbr.gov.pk:443/Docs/2023515155193349TaxLawAmendmentsAct2023.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division IV (Electricity Consumption), clause (1) table and omitted clause (3)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 235 (Electricity consumption)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#235-electricity-consumption), as amended to 2026-06-30: "Part-IV of the First Schedule on the amount of electricity bill of a commercial or industrial" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“Tier-1 retailer” means a retailer falling in any one or more of the following categories, namely:-" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What does section 99B allow for small traders and shopkeepers after the Finance Act 2026? Source: https://qanoondigest.com/faq/retail-shops/section-99b-shopkeepers-fixed-tax-scheme Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 99B of the Income Tax Ordinance lets the Board, with the Minister-in-charge's approval, prescribe by gazette notification a special procedure for small traders and shopkeepers in specified cities. Since the Finance Act, 2026 it expressly covers scope, rate and payment of tax including fixed tax, filing of return, audit and assessment. Rates sit in the notification. **Applies to:** Small traders and shopkeepers in Pakistan asking what a section 99B income tax scheme can cover after the Finance Act, 2026, and how it relates to their sales tax position. Section 99B is a power, not a tax. It lets the Federal Board of Revenue set up a separate income tax arrangement for small traders and shopkeepers through a gazette notification. The Finance Act, 2026 widened what that notification can contain, which is why it has come back into discussion. ### What does the law say? Section 99B, headed "Special procedure for small traders and shopkeepers", is printed inside the section 99 entry of the Income Tax Ordinance amended to 30 June 2026. It says that, notwithstanding anything contained in the Ordinance, the Board with the approval of the Minister-in-charge may, by notification in the official Gazette, prescribe special procedure for: - scope, - rate and payment of tax including fixed tax, - filing of return, - audit, and - assessment, "in respect of such small traders and shopkeepers, in such cities or territories, as may be specified therein." ### What did the Finance Act, 2026 change? Before 1 July 2026, the power covered "scope and payment of tax, filing of return and assessment". Clause (14) of section 5 of the Finance Act, 2026 substituted the words "and payment of tax, filing of return" with ", rate and payment of tax including fixed tax, filing of return, audit". | Item | Before Finance Act, 2026 | After Finance Act, 2026 | |---|---|---| | Scope | Yes | Yes | | Rate of tax | Not named | Named | | Payment of tax | Yes | Yes | | Fixed tax | Not named | Named | | Filing of return | Yes | Yes | | Audit | Not named | Named | | Assessment | Yes | Yes | The footnotes also record that the section was inserted by the Finance Supplementary (Second Amendment) Act, 2019, and that the Finance Act, 2021 replaced "Federal Government" with "Board with the approval of the Minister-in-charge". ### What does section 99B not say? The section contains no rate, no fixed amount, no turnover limit, no definition of "small trader" or "shopkeeper", and no list of cities. All of these are left to the notification. No notification issued under section 99B is held in this corpus, so this page cannot state the rates, thresholds, audit terms or covered cities of any scheme. ### Does section 99B change a shopkeeper's sales tax duties? Not on its own terms. Section 99B overrides "anything contained in this Ordinance", which is the Income Tax Ordinance, 2001. Sales tax duties come from the Sales Tax Act, 1990: - Section 14(1)(b) of the Sales Tax Act requires registration by "a retailer who is liable to pay sales tax under the Act or rules made thereunder", excluding a retailer required to pay sales tax through the electricity bill under section 3(9). - Section 3(9) charges retailers other than Tier-1 retailers through their monthly electricity bills. A section 99B notification, being made under the Income Tax Ordinance, is not shown in the corpus as a source of power to alter those provisions. ### How is the scheme enforced? Two provisions of the Income Tax Ordinance refer to section 99B directly. 1. **Sealing.** Serial 3A of the Table in section 182(1), inserted by the Finance Act, 2024, covers a trader or shopkeeper "who is required to apply for registration under this Ordinance but fails to register or fails to pay advance tax as specified in a scheme of special procedure prescribed under section 99B". The shop shall be sealed for seven days for the first default and twenty one days for each subsequent default. 2. **Prosecution.** Section 191B says any person specified in section 99B who is required to apply for registration but fails to do so commits an offence punishable on conviction with imprisonment for a term not exceeding six months, or fine, or both. ### Worked example (illustrative scenario) Tariq sells shoes from a small shop in Peshawar and hears that a fixed income tax scheme for traders has been notified. 1. **Is he covered?** Only if the notification names Peshawar and describes traders like him. He needs the notification text. 2. **How much?** Whatever rate or fixed tax the notification sets. The Ordinance gives no figure. 3. **Can he be audited under the scheme?** Since the Finance Act, 2026 the notification may prescribe audit. Whether it does depends on its text. 4. **Does paying the scheme settle his sales tax?** Section 99B gives no basis for that. His sales tax position is decided under sections 3 and 14 of the Sales Tax Act. 5. **What if he is covered and does not register or pay?** Sealing under serial 3A of section 182, and possible prosecution under section 191B for failing to register. ### Common mistakes - **Quoting a scheme figure as "the section 99B rate".** The section contains no rate. Any figure comes from a notification. - **Reading older commentary.** Material written before July 2026 describes a narrower power without rate, fixed tax or audit. - **Treating the scheme as covering all taxes.** It is an income tax procedure. Sales tax registration and payment remain under the Sales Tax Act. - **Confusing 99A and 99B.** Section 99A is about tax through commercial electricity connections set by an income tax general order. Section 99B is about a special procedure for small traders and shopkeepers set by gazette notification. ### What to check in the official text Read section 99B as printed in the section 99 entry of the Income Tax Ordinance as amended to 30 June 2026, serial 3A of the Table in section 182(1), and section 191B. Clause (14) of section 5 of the Finance Act, 2026 shows the latest change. For sales tax, read sections 3(9) and 14 of the Sales Tax Act, 1990 as amended to 30 June 2026. The gazette notification that sets up any scheme is not held in this corpus and needs to be read on its own. ### Frequently asked #### What exactly did the Finance Act, 2026 add to section 99B? Clause (14) of section 5 of the Finance Act, 2026 replaced "and payment of tax, filing of return" with ", rate and payment of tax including fixed tax, filing of return, audit". The Board's notification power now expressly covers rate, fixed tax and audit, alongside scope, payment, returns and assessment. #### Does a section 99B scheme settle my sales tax as well? Section 99B opens with "Notwithstanding anything contained in this Ordinance", meaning the Income Tax Ordinance. It gives no power over the Sales Tax Act, 1990, where registration and payment by retailers are governed by sections 14 and 3. #### What happens if a covered shopkeeper does not register under the scheme? Serial 3A of the Table in section 182(1) provides sealing of the shop for seven days for the first default and twenty one days for each later default. Section 191B also makes failure to apply for registration an offence punishable with imprisonment up to six months, a fine, or both. ### Citations - [Income Tax Ordinance, 2001, Section 99B (printed within the section 99 entry)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "and assessment in respect of such small traders and shopkeepers, in such cities or territories, as may be specified therein." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2026, section 5 (Amendments of the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2026#5-amendments-of-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2026: "(14) in section 99B, for the expression “and payment of tax, filing of return”, the expression”, rate and payment of tax including fixed tax, filing of return, audit” shall be substituted;" Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Income Tax Ordinance, 2001, section 182 (Offences and penalties)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182-offences-and-penalties), as amended to 2026-06-30: "fails to register or fails to pay advance tax as specified in a scheme of special procedure prescribed under section 99B." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 191B (Prosecution for non-registration)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#191b-prosecution-for-non-registration), as amended to 2026-06-30: "Any person specified in section 99B who is required to apply for registration but fails to do so shall commit an offence" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "a retailer who is liable to pay sales tax under the Act or rules made thereunder, excluding such retailer required to pay sales tax through his electricity bill under sub-section (9) of section 3;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What is the section 99B special procedure for small traders and shopkeepers? Source: https://qanoondigest.com/faq/retail-shops/section-99b-shopkeepers-special-procedure Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 99B of the Income Tax Ordinance lets the Board, with the approval of the Minister-in-charge, prescribe by gazette notification a special procedure for small traders and shopkeepers in specified cities, covering scope, rate and payment of tax including fixed tax, returns, audit and assessment. The actual rates and limits sit in that notification, not in the Ordinance. **Applies to:** Small traders and shopkeepers in Pakistan who want to know whether a special income tax scheme under section 99B of the Income Tax Ordinance, 2001 covers them. Section 99B is an enabling power. It does not itself tax anyone. It lets the Federal Board of Revenue build a separate income tax scheme for small traders and shopkeepers through a notification in the official Gazette, and the details that matter to a shopkeeper (who is covered, how much is paid, how returns work) live in that notification. ### What does the law say? Section 99B, headed "Special procedure for small traders and shopkeepers", is printed inside the section 99 entry of the Income Tax Ordinance amended to 30 June 2026. It says that, notwithstanding anything else in the Ordinance, the Board with the approval of the Minister-in-charge may, by notification in the official Gazette, prescribe special procedure for: - scope, - rate and payment of tax, including fixed tax, - filing of return, - audit, and - assessment, in respect of such small traders and shopkeepers, in such cities or territories, as the notification specifies. The footnotes record its history. The section was inserted by the Finance Supplementary (Second Amendment) Act, 2019. The Finance Act, 2021 replaced "Federal Government" with "Board with the approval of the Minister-in-charge". The Finance Act, 2026 then widened the list: before it, the power covered only "scope and payment of tax, filing of return and assessment". Clause (14) of section 5 of the Finance Act, 2026 added rate, fixed tax and audit. ### How does it work in practice? Three things follow from the text. 1. **Coverage is set by the notification.** The section speaks of "such small traders and shopkeepers" in "such cities or territories" as the notification specifies. The Ordinance does not define "small trader" or "shopkeeper" for this section, and it sets no turnover limit, shop size or city list. Those are for the notification. 2. **The amount is set by the notification.** Since the Finance Act, 2026, the notification may set a rate or a fixed tax. The Ordinance itself contains no figure for a 99B scheme. 3. **The notification overrides the rest of the Ordinance for those it covers.** The section opens with "Notwithstanding anything contained in this Ordinance", so the scheme's rules on returns, audit and assessment can differ from the normal ones. The notification or notifications issued under section 99B are not part of the corpus held on this site. This page therefore cannot say which cities are covered, what the fixed or minimum amount is, or what turnover limit applies. ### How is section 99B different from section 99C? Section 99C is a parallel power. It lets the Board, with the Minister-in-charge's approval, prescribe special procedure for "small businesses, construction businesses, medical practitioners, hospitals, educational institutions and any other sector" the Board specifies. Section 99C covers scope and payment of tax, record keeping, filing of return and assessment. Unlike section 99B after the Finance Act, 2026, section 99C does not expressly mention rate, fixed tax or audit. Section 99A is different again: it concerns tax collected through commercial electricity connections of retailers other than Tier-1 retailers, under an income tax general order. ### What happens if a shopkeeper ignores the scheme? Section 182 gives the scheme teeth. Serial 3A of the Table in section 182(1), inserted by the Finance Act, 2024, applies where a trader or shopkeeper who is required to apply for registration fails to register or fails to pay advance tax "as specified in a scheme of special procedure prescribed under section 99B". The penalty is that the shop shall be sealed for seven days for the first default and twenty one days for each subsequent default. ### Worked example (illustrative scenario) Naveed sells mobile accessories from a small shop in Hall Road, Lahore. He hears that a traders' scheme has been announced. 1. **Does section 99B itself tax him?** No. It only empowers the Board. 2. **Is he covered?** That depends on whether the notification names Lahore, and on how it describes the traders it covers. He needs the notification text. 3. **How much does he pay?** Whatever rate or fixed tax the notification prescribes. Nothing in the Ordinance fixes the figure. 4. **What if he is covered and does not register or pay the advance tax the scheme requires?** Section 182, serial 3A: seven days of sealing for the first default, twenty one days for each later default. ### Common mistakes - **Quoting a scheme rate as "section 99B tax".** Section 99B contains no rate. Any figure comes from a notification, which can change without the Ordinance changing. - **Assuming every shopkeeper is covered.** The scheme covers only the traders and cities the notification specifies. - **Relying on the pre-2026 wording.** Before 1 July 2026 the section did not mention rate, fixed tax or audit. Commentary written earlier may describe a narrower power. - **Confusing 99A, 99B and 99C.** Section 99A is about electricity-bill collection, 99B about small traders and shopkeepers, and 99C about small businesses and listed sectors. ### What to check in the official text Read section 99B and section 99C as printed in the section 99 area of the Income Tax Ordinance amended to 30 June 2026, and serial 3A of the Table in section 182. Clause (14) of section 5 of the Finance Act, 2026 shows the latest change to section 99B. The gazette notification that sets up any scheme, with its cities, coverage, rates and dates, is not held in this corpus and needs to be read on its own. ### Frequently asked #### What rate of tax does the section 99B scheme charge? Section 99B does not state a rate. It lets the Board prescribe the rate, fixed tax, returns, audit and assessment by notification in the official Gazette. The notification is not held in this corpus, so no rate can be quoted from it here. #### What did the Finance Act, 2026 change in section 99B? Clause (14) of section 5 of the Finance Act, 2026 replaced the words "and payment of tax, filing of return" with ", rate and payment of tax including fixed tax, filing of return, audit". The Board's power now expressly covers rate, fixed tax and audit. #### What happens if a shopkeeper covered by a 99B scheme does not register? Serial 3A of the Table in section 182(1) says the shop shall be sealed for seven days for the first default and twenty one days for each subsequent default, where the person fails to register or to pay advance tax as specified in the scheme. ### Citations - [Income Tax Ordinance, 2001, Section 99B (printed within the section 99 entry)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "and assessment in respect of such small traders and shopkeepers, in such cities or territories, as may be specified therein." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2026, section 5 (Amendments of the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2026#5-amendments-of-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2026: "(14) in section 99B, for the expression “and payment of tax, filing of return”, the expression”, rate and payment of tax including fixed tax, filing of return, audit” shall be substituted;" Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Income Tax Ordinance, 2001, section 99C (Special procedure for certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#99c-special-procedure-for-certain-persons), as amended to 2026-06-30: "prescribe special procedure for scope and payment of tax, record keeping, filing of return and assessment in respect of small businesses, construction businesses, medical practitioners, hospitals, educational institutions and any other sector specified by" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 182 (Offences and penalties)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182-offences-and-penalties), as amended to 2026-06-30: "fails to register or fails to pay advance tax as specified in a scheme of special procedure prescribed under section 99B." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## If my shop's electricity bill crosses Rs. 1.2 million in a year, do I become a Tier-1 retailer? Source: https://qanoondigest.com/faq/retail-shops/electricity-bill-rs-1-2-million-tier-1 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 2(43A)(c) of the Sales Tax Act makes a retailer Tier-1 when the cumulative electricity bill for the immediately preceding twelve consecutive months exceeds Rs. 1,200,000. You then leave the section 3(9) electricity-bill regime, and the Commissioner can order the electricity supplier to stop charging you that bill-based sales tax. **Applies to:** Shopkeepers whose sales tax is currently collected through the shop's monthly electricity bill and whose bills are rising towards Rs. 1,200,000 a year. Crossing the line makes you Tier-1, but the line is a twelve-month total, not a single bill. Clause (43A)(c) of section 2 of the Sales Tax Act, 1990 counts the cumulative electricity bill for the immediately preceding twelve consecutive months, and the shop becomes Tier-1 when that total exceeds Rs. 1,200,000 (the Act says "Rupees twelve hundred thousand"). ### What does the law say? **The Tier-1 test.** Section 2(43A) lists the categories of Tier-1 retailer. Sub-clause (c) is "a retailer whose cumulative electricity bill during the immediately preceding twelve consecutive months exceeds Rupees twelve hundred thousand". The figure was originally six hundred thousand. It was changed to twelve hundred thousand by the Tax Laws (Amendment) Act, 2020. **The electricity-bill regime for other retailers.** Section 3(9) says that tax shall be charged from retailers "other than those falling in Tier-1" through their monthly electricity bills: | Monthly bill amount | Rate under section 3(9) | | --- | --- | | Does not exceed Rs. 20,000 | 5 per cent | | Exceeds Rs. 20,000 | 7.5 per cent | The electricity supplier deposits what it collects directly, without adjusting it against its own input tax. The first proviso says this tax is in addition to the ordinary sales tax on the supply of electricity under sub-sections (1), (1A) and (5). **The Commissioner's exclusion order.** The second proviso to section 3(9) says the Commissioner of Inland Revenue having jurisdiction "shall issue order to the electricity supplier regarding exclusion of a person who is either a Tier-1 retailer or not a retailer." **A power to change the rates.** Section 3(12) lets the Federal Government, by notification, levy tax on non-Tier-1 retailers through the monthly electricity bill in lieu of or in addition to section 3(9), at such rates and from such date as it thinks fit. Any such notification is not held in this corpus. ### How does it work in practice? The two regimes do not overlap. A retailer is either Tier-1, in which case section 3(9A) applies and sales tax is paid at the rate applicable to the goods sold, or not Tier-1, in which case section 3(9) collects sales tax through the electricity bill. For a small shop, the bill test works as a rolling check. Each month, the relevant period is the twelve consecutive months immediately before. A shop that runs extra air-conditioners, freezers or lighting can drift over the line without any change in its sales. Registration follows the same split. Section 14(1)(b) requires a retailer liable to pay sales tax to register, "excluding such retailer required to pay sales tax through his electricity bill under sub-section (9) of section 3". A shop that becomes Tier-1 loses that exclusion. ### Worked example (illustrative figures) Rashid runs a cold-drinks and grocery shop in Multan. His monthly bills (made-up figures) for July 2025 to June 2026 were: | Months | Bill each month | Months counted | Total | | --- | --- | --- | --- | | July to September | Rs. 140,000 | 3 | Rs. 420,000 | | October to March | Rs. 70,000 | 6 | Rs. 420,000 | | April to June | Rs. 130,000 | 3 | Rs. 390,000 | | **Twelve months** | | **12** | **Rs. 1,230,000** | Step 1: 3 x 140,000 = 420,000. Step 2: 6 x 70,000 = 420,000. Step 3: 3 x 130,000 = 390,000. Step 4: 420,000 + 420,000 + 390,000 = 1,230,000. Rs. 1,230,000 exceeds Rs. 1,200,000, so on these figures Rashid's shop falls within section 2(43A)(c). Before crossing, every one of his monthly bills was above Rs. 20,000, so section 3(9) charged him at the 7.5 per cent band. Had his April to June bills been Rs. 115,000 instead, the third step would be 3 x 115,000 = 345,000, the total Rs. 1,185,000, and he would stay below the line. ### What if ...? **What if my bill goes back down?** The Act looks at the "immediately preceding twelve consecutive months". It does not say whether a retailer who crossed once stops being Tier-1 when a later twelve-month total falls below Rs. 1,200,000. The law is silent on that point. **What if one meter serves both my shop and my home?** Sub-clause (c) refers to the retailer's cumulative electricity bill. It does not say how a shared meter is split. The Act does not address it. **What if I am not a retailer at all, but my bill is being charged retail tax?** The same second proviso to section 3(9) covers exclusion of a person who is "not a retailer". ### Common mistakes - **Treating one high month as the trigger.** The test is the twelve-month total, not a single bill above Rs. 100,000. - **Confusing the Rs. 20,000 band with the Tier-1 test.** The Rs. 20,000 figure in section 3(9) only picks the 5 or 7.5 per cent rate. It has nothing to do with Tier-1 status. - **Assuming the supplier stops charging automatically.** The Act gives the Commissioner the job of issuing the exclusion order to the electricity supplier. - **Assuming the Tier-1 test is only about electricity.** Any one limb of section 2(43A) is enough, so a shop with low bills can still be Tier-1 because of its location in an air-conditioned plaza or its turnover. ### What to check in the official text Read section 2(43A)(c), section 3(9), 3(9A) and 3(12), and section 14(1)(b) of the Sales Tax Act as amended to 30 June 2026. The Act does not say whether "electricity bill" means the bill including taxes and other charges or only the energy charge. Check any notification the Federal Government has issued under section 3(12), which can change the bill-based rates, because those notifications are not held here. ### Frequently asked #### Is the Rs. 1.2 million test based on one month or the whole year? The whole of the immediately preceding twelve consecutive months. Section 2(43A)(c) looks at the cumulative electricity bill over that period, so you add twelve months of bills together and compare the total with Rs. 1,200,000. #### Who stops the sales tax being charged on my electricity bill once I am Tier-1? The second proviso to section 3(9) says the Commissioner Inland Revenue having jurisdiction shall issue an order to the electricity supplier about excluding a person who is a Tier-1 retailer or not a retailer. The Act does not set out an application form or time limit for that order. #### Does paying tax through the electricity bill mean I do not need sales tax registration? Section 14(1)(b) excludes from compulsory registration a retailer required to pay sales tax through his electricity bill under section 3(9). Once a retailer is Tier-1, section 3(9) no longer covers him, so that exclusion no longer helps. ### Citations - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "(c) a retailer whose cumulative electricity bill during the immediately preceding twelve consecutive months exceeds Rupees" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "the Commissioner of Inland Revenue having jurisdiction shall issue order to the electricity supplier regarding exclusion of a person who is either a Tier-1 retailer or not a retailer." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "excluding such retailer required to pay sales tax through his electricity bill under sub-section (9) of section 3;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## If my shop's electricity bill crosses Rs. 1.2 million in a year, do I become a Tier-1 retailer? Source: https://qanoondigest.com/faq/retail-shops/tier-1-electricity-bill-twelve-lakh-test Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Under section 2(43A)(c) of the Sales Tax Act, 1990, a retailer whose cumulative electricity bill for the immediately preceding twelve consecutive months exceeds Rs. 1,200,000 is a Tier-1 retailer. The shop then leaves the bill-based sales tax of section 3(9) and pays tax on its sales under section 3(9A). **Applies to:** Shopkeepers and retail traders who currently pay sales tax through their shop's monthly electricity bill and want to know when their power bills alone turn them into Tier-1 retailers. A shop becomes a Tier-1 retailer on the electricity test when the total of its electricity bills over the last twelve consecutive months goes above Rs. 1,200,000. The rule is clause (43A)(c) of section 2 of the Sales Tax Act, 1990, as amended to 30 June 2026. Crossing it moves the shop out of the "tax through the electricity bill" system and into the full Tier-1 regime. ### What does the law say? Section 2(43A) defines a Tier-1 retailer as a retailer falling in "any one or more" of a list of categories. Sub-clause (c) covers: > a retailer whose cumulative electricity bill during the immediately preceding twelve consecutive months exceeds Rupees twelve hundred thousand Twelve hundred thousand rupees is Rs. 1,200,000, often called twelve lakh. The footnotes in the consolidated text record that the figure was originally six hundred thousand and was raised to twelve hundred thousand by the Tax Laws (Amendment) Act, 2020. Three features of the wording matter: - **Cumulative.** The bills are added together. No single month's bill decides the test. - **Immediately preceding twelve consecutive months.** The window is the last twelve months in a row, looking back from the point being tested, not a fixed tax year. - **Exceeds.** A total of exactly Rs. 1,200,000 does not cross the line. It must be more. ### How does it link to the tax in my electricity bill? Most small shops never register for sales tax. Instead, section 3(9) collects tax from them through the monthly electricity bill. It says tax "shall be charged from retailers, other than those falling in Tier-1, through their monthly electricity bills", at five per cent where the monthly bill amount does not exceed Rs. 20,000 and seven and a half per cent where it does. The electricity supplier deposits what it collects. Section 14(1)(b) supports this. It requires a retailer liable to sales tax to register, but excludes a retailer "required to pay sales tax through his electricity bill under sub-section (9) of section 3". So the electricity test works as a switch: | Twelve-month bill total | Status under section 2(43A)(c) | How sales tax is paid | | --- | --- | --- | | Rs. 1,200,000 or less | Not Tier-1 on this limb | Through the electricity bill, section 3(9), unless another limb applies | | More than Rs. 1,200,000 | Tier-1 | At the rate applicable to the goods sold, section 3(9A) | Once Tier-1, the shop also falls under the proviso to section 23(6): from the date and in the manner the Board prescribes, all Tier-1 retailers shall integrate their retail outlets with the Board's computerized system for real-time reporting of sales. ### What does the Commissioner's exclusion order do? The second proviso to section 3(9) says the Commissioner of Inland Revenue having jurisdiction "shall issue order to the electricity supplier regarding exclusion of a person who is either a Tier-1 retailer or not a retailer". This is how the electricity company is told to stop charging the bill-based retail sales tax to a particular connection. The proviso covers two groups: a Tier-1 retailer, and a person who is not a retailer at all. The Act does not set out the form of the order, who applies for it, or how quickly it must be issued. Those details, if they exist, are in rules or notifications not held in this corpus. ### Worked example (illustrative figures) Nadeem runs a cold-drinks and grocery shop in Faisalabad with two freezers and an air cooler. His monthly electricity bills (made-up amounts) for July 2025 to June 2026 are: | Months | Bill each month | Months | Subtotal | | --- | --- | --- | --- | | July to September | Rs. 140,000 | 3 | Rs. 420,000 | | October to March | Rs. 70,000 | 6 | Rs. 420,000 | | April to June | Rs. 125,000 | 3 | Rs. 375,000 | Step 1: add the subtotals. Rs. 420,000 + Rs. 420,000 + Rs. 375,000 = Rs. 1,215,000. Step 2: compare with the threshold. Rs. 1,215,000 exceeds Rs. 1,200,000 by Rs. 15,000. Step 3: result. Looking back from July 2026, the shop falls in sub-clause (c) and is a Tier-1 retailer. Now change one fact. If the April to June bills had been Rs. 120,000 each, the third subtotal would be Rs. 360,000 and the total Rs. 420,000 + Rs. 420,000 + Rs. 360,000 = Rs. 1,200,000. That equals the threshold but does not exceed it, so sub-clause (c) would not apply. ### What if my bills drop below the line later? Because the window is the immediately preceding twelve consecutive months, the total moves every month. The Act does not say what happens when a shop that once crossed Rs. 1,200,000 later falls back below it, or whether Tier-1 status, once acquired, continues. It is silent on this, and this page does not fill the gap. ### What if one meter covers my shop and my home? Sub-clause (c) speaks of "a retailer whose cumulative electricity bill" exceeds the limit. It does not say how a shared connection, or several meters serving one shop, should be treated. The law does not answer this directly. ### Common mistakes - **Looking at a single month.** A Rs. 150,000 June bill does not make a shop Tier-1 by itself. Only the twelve-month total counts. - **Using the tax year.** The test runs on the immediately preceding twelve consecutive months, which need not match July to June. - **Assuming the old limit.** Earlier editions used six hundred thousand rupees. The current figure is twelve hundred thousand. - **Forgetting the other limbs.** A shop under the electricity limit can still be Tier-1 because it sits in an air-conditioned mall, is part of a chain, or passes the Rs. 200 million turnover test. ### What to check in the official text Read clause (43A) of section 2 and sub-sections (9), (9A) and (12) of section 3 in the Sales Tax Act as amended to 30 June 2026. Sub-section (12) lets the Federal Government notify other rates or amounts for non-Tier-1 retailers through the electricity bill, so check whether such a notification is in force. Also check the Board's notification fixing the date and manner of integration under section 23(6). Those notifications are not part of this corpus. ### Frequently asked #### Is the Rs. 1,200,000 test based on one month's bill or a whole year? It is a running total. Section 2(43A)(c) looks at the cumulative electricity bill during the immediately preceding twelve consecutive months, so one expensive summer month does not decide the question on its own. The total has to exceed Rs. 1,200,000. #### What happens to the sales tax charged in my electricity bill once I become Tier-1? Section 3(9) charges the bill-based tax only from retailers other than those falling in Tier-1. Its second proviso says the Commissioner of Inland Revenue having jurisdiction shall issue an order to the electricity supplier to exclude a person who is a Tier-1 retailer. The Act does not set a timetable for that order. #### Do the taxes printed on the bill count towards the Rs. 1,200,000? The Act uses the words cumulative electricity bill and does not say whether taxes and duties shown on the bill are included or left out. The section itself does not settle this, so it is a point to confirm with the Board's notifications or your Commissioner. ### Citations - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "a retailer whose cumulative electricity bill during the immediately preceding twelve consecutive months exceeds Rupees" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "the Commissioner of Inland Revenue having jurisdiction shall issue order to the electricity supplier regarding exclusion of a person who is either a Tier-1 retailer or not a retailer." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "excluding such retailer required to pay sales tax through his electricity bill under sub-section (9) of section 3;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "all Tier-1 retailers shall integrate their retail outlets with Board’s computerized system for real-time reporting of sales." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## How is sales tax collected from a small shop through its electricity bill, and is it 5% or 7.5%? Source: https://qanoondigest.com/faq/retail-shops/retail-sales-tax-on-shop-electricity-bill Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 3(9) of the Sales Tax Act, 1990 charges retailers that are not Tier-1 through their monthly electricity bills. The rate is 5 percent where the monthly bill does not exceed Rs. 20,000 and 7.5 percent where it does. It is added on top of the ordinary sales tax on electricity, and section 3(12) lets the Federal Government change it. **Applies to:** Shopkeepers and other retailers who are not Tier-1 retailers under the Sales Tax Act, 1990, and who receive a commercial electricity bill for their shop. Small shops do not charge sales tax item by item the way a large store does. The Sales Tax Act, 1990 collects their sales tax through the shop's monthly electricity bill instead, at one of two rates set by the size of that bill. ### What does the law say? Section 3(9), substituted by the Tax Laws (Second Amendment) Ordinance, 2022 with effect from 1 July 2022, says that notwithstanding section 3(1), tax "shall be charged from retailers, other than those falling in Tier-1, through their monthly electricity bills". It sets two rates: | Monthly electricity bill amount | Rate under section 3(9) | |---|---| | Does not exceed Rs. 20,000 | 5 percent | | Exceeds Rs. 20,000 | 7.5 percent | Three further points sit in the same sub-section: - **Collected by the electricity supplier.** The supplier deposits the amount collected directly, "without adjusting against his input tax". - **On top of ordinary electricity tax.** The first proviso says this tax is in addition to the tax payable on the supply of electricity under sections 3(1), 3(1A) and 3(5). So a shop's bill carries the normal sales tax on electricity and, separately, the retailer's tax under section 3(9). - **Exclusion order.** The second proviso directs the Commissioner Inland Revenue with jurisdiction to order the electricity supplier to exclude a person who is a Tier-1 retailer or is not a retailer at all. ### Can the Government change the 5% and 7.5%? Yes. Section 3(12), added by the same 2022 Ordinance, lets the Federal Government, by notification in the official Gazette, levy and collect tax from retailers other than Tier-1 through their monthly electricity bill "in lieu of or in addition to" the tax under section 3(9). The notification can set the amount, rate, starting date, mode, manner and time of payment, and different rates or amounts for different classes of person. Notifications under section 3(12) are not held in this corpus, so check whether one is in force before relying on the rates in the table above. ### Who counts as a retailer outside Tier-1? Section 2(28) defines a retailer as a person supplying goods to the general public for consumption. Section 2(43A) then lists the Tier-1 categories, which include a unit of a chain of stores, a shop in an air-conditioned mall (kiosks excluded), a retailer whose cumulative electricity bill over the preceding twelve consecutive months exceeds Rs. 1,200,000, and a retailer with turnover above two hundred million rupees. A retailer that falls in none of the categories is dealt with under section 3(9). The electricity test matters here. A shop paying through its bill under section 3(9) moves into Tier-1 under section 2(43A)(c) once its bills over twelve consecutive months add up to more than Rs. 1,200,000. At that point section 3(9) no longer applies and section 3(9A) does. ### Worked example (illustrative figures) Three shops in Multan, none of them Tier-1. The percentage is applied to the monthly bill amount, which is the figure section 3(9) uses to pick the rate (see the note below on what "bill amount" includes). 1. **Grocery shop, bill Rs. 18,000.** Does not exceed Rs. 20,000, so 5 percent. Rs. 18,000 x 5% = **Rs. 900**. 2. **Mobile accessories shop, bill exactly Rs. 20,000.** "Does not exceed" includes the limit itself, so 5 percent. Rs. 20,000 x 5% = **Rs. 1,000**. 3. **Tailor's fabric shop, bill Rs. 26,000.** Exceeds Rs. 20,000, so 7.5 percent. Rs. 26,000 x 7.5% = **Rs. 1,950**. Now the edge of the band. A bill of Rs. 20,500 exceeds Rs. 20,000, so 7.5 percent applies: Rs. 20,500 x 7.5% = **Rs. 1,537.50**. A Rs. 500 larger bill than shop 2 produces Rs. 537.50 more tax, because section 3(9) switches the rate for the whole bill rather than working in slabs. For the Tier-1 test: if the fabric shop's bill were Rs. 26,000 every month, twelve months would total Rs. 312,000. That is well below Rs. 1,200,000, so section 2(43A)(c) does not make it Tier-1. ### What does "monthly bill amount" include? The Act does not say. Section 3(9) uses "monthly bill amount" both for the Rs. 20,000 test and, by implication, as the base for the percentage, but it does not state whether the amount is before or after the other taxes and charges on the bill. This page does not resolve that point. The electricity supplier's own computation, and any notification under section 3(12), would need to be checked. ### What if the shop also sells online? Section 3(7A) says that for taxable supplies of digitally ordered goods, tax withheld under the Eleventh Schedule by the payment intermediary or courier is final discharge of tax liability for retailers other than Tier-1 retailers. Section 14(1A) also leaves retailers paying through electricity bills under section 3(9) out of the registration requirement for sellers of digitally ordered goods. The Eleventh Schedule rates are outside this page. ### Common mistakes - **Treating the retail tax as the normal sales tax on electricity.** The first proviso to section 3(9) makes it an extra charge in addition to that tax. - **Applying 7.5 percent only to the excess over Rs. 20,000.** The wording picks one rate by the size of the bill. - **Assuming the scheme applies forever.** Once twelve months of bills exceed Rs. 1,200,000 in total, section 2(43A)(c) makes the shop Tier-1. - **Confusing this with income tax on the bill.** Advance income tax collected with electricity bills is a separate levy under the Income Tax Ordinance, 2001 and is covered in a separate page. ### What to check in the official text Read section 3(9) and 3(12) of the Sales Tax Act as amended to 30 June 2026, the definitions of "retailer" in section 2(28) and "Tier-1 retailer" in section 2(43A), and the exclusion in section 14(1)(b). Any Federal Government notification under section 3(12), and any Commissioner's exclusion order under the second proviso to section 3(9), sit outside this corpus. ### Frequently asked #### Is the 7.5 percent charged only on the part of the bill above Rs. 20,000? Section 3(9) does not describe slabs. It sets 5 percent where the monthly bill amount does not exceed Rs. 20,000 and 7.5 percent where the monthly bill amount exceeds it, so on its wording the rate is chosen by the size of the whole bill. A bill of exactly Rs. 20,000 falls in the 5 percent band. #### Can the electricity company set this tax off against its own input tax? No. Section 3(9) requires the electricity supplier to deposit the amount collected directly, without adjusting it against its input tax. The supplier acts as the collection point for the retailer's tax. #### What if my shop is not a retail shop at all but the bill shows retail tax? The second proviso to section 3(9) says the Commissioner Inland Revenue having jurisdiction shall issue an order to the electricity supplier to exclude a person who is either a Tier-1 retailer or not a retailer. The Act does not set out the application procedure for that order. ### Citations - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "tax shall be charged from retailers, other than those falling in Tier-1, through their monthly electricity bills, at the rate of five percent where the monthly bill amount does not exceed rupees twenty thousand" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "a retailer whose cumulative electricity bill during the immediately preceding twelve consecutive months exceeds Rupees" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "excluding such retailer required to pay sales tax through his electricity bill under sub-section (9) of section 3" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Can FBR seal my shop for not integrating POS, and how is it de-sealed? Source: https://qanoondigest.com/faq/retail-shops/shop-sealed-for-pos-how-to-desealing Law current to: 30 June 2026 (Sales Tax Rules, 2006 as amended to 30 June 2025). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Rule 150ZEP of the Sales Tax Rules, 2006 lets a Chief Commissioner order sealing of a non-integrated Tier-1 retailer's premises after an officer's report and a Commissioner's inquiry. Under rule 150ZER the shop stays sealed until the serial 25A penalty is paid and every POS machine in every branch is integrated. **Applies to:** Tier-1 retailers under the Sales Tax Act, 1990 who have not registered or have not integrated their retail outlets with FBR's computerized system. ### What does the law say? The Sales Tax Act, 1990 makes the premises of a non-integrated Tier-1 retailer liable to sealing, and the Sales Tax Rules, 2006 set out how. In the section 33 table, **serial 25A** says the business premises of a person who fails to register or integrate "shall be liable to be sealed by an officer of Inland Revenue in the manner prescribed". **Serial 25**, as substituted by the Finance Act, 2026, adds that the premises are liable to be sealed "with or without imposition of penalty". The "manner prescribed" is Chapter XIV-AD of the Sales Tax Rules, 2006: - **Rule 150ZEN(2)** applies the chapter to any person who is required by the Act to integrate as a Tier-1 retailer and fails to register, or if registered, fails to integrate as the law and rules require. - **Rule 150ZEP** sets the sealing steps for non-integrated Tier-1 retailers. - **Rule 150ZER** sets the de-sealing steps. ### How is a shop sealed? Rule 150ZEP lays down four steps. 1. **Officer's report.** An Officer Inland Revenue, not below the rank of Assistant Commissioner, with territorial jurisdiction reports in writing to the Commissioner that the Tier-1 retailer is not integrated in violation of the Act, recommending sealing under serial 25A. 2. **Commissioner's inquiry.** The Commissioner conducts an inquiry and forwards the report to the Chief Commissioner, "citing cogent reasons" for sealing and naming the team of officers and officials who will carry it out. 3. **Chief Commissioner's written order.** The Chief Commissioner issues a written order allowing or disallowing sealing, with reasons recorded. If sealing is allowed, the Chief Commissioner notifies the team immediately. 4. **Reporting.** The sealing order goes to the Member (IR-Operations) for information and a copy to Chief (POS) for record. Where the retailer falls under another field formation, the Commissioner seeks approval from the Chief Commissioner of that jurisdiction, and the Chief Commissioner asks the Board to notify the team. ### How is a shop de-sealed? Rule 150ZER sets the conditions. 1. **Penalty order.** The Commissioner with jurisdiction imposes a penalty by order under serial 25A. Under serial 25A that is Rs. 500,000 for a first default, rising to Rs. 1 million, Rs. 2 million and Rs. 3 million for later defaults. 2. **Payment and full integration.** The premises "shall remain sealed till the payment of penalty and integration of all POS machines installed in all its branches or outlets". 3. **Integration under supervision.** Integration is carried out in the presence of an FBR team formed by the Commissioner, which must include a technical person. 4. **Certificate.** Within three days, the Commissioner gives the Chief Commissioner a written certificate that all POS machines are integrated and free from technical and functional errors. ### Worked example (illustrative scenario) A garments retailer with two outlets in Karachi, both in an air-conditioned mall, has registered but not integrated either outlet. The details are invented. 1. An Assistant Commissioner visits, finds no integrated POS, and reports in writing to the Commissioner recommending sealing under serial 25A. 2. The Commissioner inquires, then sends the report to the Chief Commissioner with reasons and a named team. 3. The Chief Commissioner issues a written order allowing sealing and notifies the team, which seals the premises. 4. The Commissioner passes a penalty order under serial 25A for the first default: Rs. 500,000. 5. The retailer pays Rs. 500,000 and arranges integration of the POS machines at **both** outlets, done in front of the FBR team with its technical member. 6. The Commissioner certifies to the Chief Commissioner within three days that all POS machines are integrated and error free. Integrating only the sealed outlet would not meet rule 150ZER(2), which speaks of all branches or outlets. ### What if the retailer had integrated before the second penalty? The serial 25A proviso says the Commissioner shall waive the first-default penalty if the retailer integrates before the second-default penalty is imposed. Rule 150ZER(2) still speaks of "payment of penalty". The text does not say how a waived penalty interacts with the de-sealing condition, so this page does not settle that point. ### What if the shop was sealed for fake invoices, not non-integration? That is a different route. An integrated retailer found issuing unverified invoices is sealed under rule 150ZEO and de-sealed under rule 150ZEQ, with a penalty under serial 24. See the related page on fake invoices from an integrated POS. ### Common mistakes - **Assuming any officer can seal on the spot.** Rule 150ZEP requires a written report, an inquiry by the Commissioner and a written order of the Chief Commissioner. - **Paying and expecting the shop to reopen.** Payment alone is not enough. Every POS machine in every branch must be integrated. - **Ignoring the gas and electricity risk.** Section 14AB separately allows the Board to have utility connections of non-integrated notified Tier-1 retailers cut, restored once they integrate. - **Looking for an appeal step in rule 150ZER.** Rule 150ZEQ for integrated retailers mentions filing an appeal against the penalty order; rule 150ZER does not. The general appeal provisions of the Act are outside the scope of this page. ### What to check in the official text Read rules 150ZEN, 150ZEP and 150ZER in Chapter XIV-AD of the Sales Tax Rules, 2006 as amended to 30 June 2025, and serials 25 and 25A of the section 33 table in the Sales Tax Act as amended to 30 June 2026. Serial 25 was rewritten by the Finance Act, 2026, after the latest edition of the Rules we hold, so check whether the Board has since amended Chapter XIV-AD. ### Frequently asked #### Who decides whether a non-integrated retailer's shop is sealed? Under rule 150ZEP the Chief Commissioner Inland Revenue issues a written order allowing or disallowing sealing, after recording reasons. The case reaches the Chief Commissioner through an officer's written report and an inquiry by the Commissioner. #### Is paying the penalty enough to reopen the shop? No. Rule 150ZER(2) keeps the premises sealed until the penalty is paid and all POS machines in all branches or outlets are integrated. The integration is done in front of an FBR team that includes a technical person. #### Are all branches sealed or just one? Rule 150ZEP does not say. For integrated retailers, rule 150ZEO(6) lets the Chief Commissioner decide how many branches to seal, but no similar sentence appears in rule 150ZEP. De-sealing, however, needs integration of POS machines in all branches or outlets. ### Citations - [Sales Tax Rules, 2006, section 150ZEN (Application)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zen-application), as amended to 2025-06-30: "fails to get himself registered under the Act, and if registered, fails to integrate in the manner as required under the law and rules made thereunder." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZEP (Procedure for sealing of business premises of non-integrated tier-1 retailers)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zep-procedure-for-sealing-of-business-premises-of-non-integrated-tier-1-retailers), as amended to 2025-06-30: "The Chief Commissioner Inland Revenue concerned shall issue an order in writing for allowing or disallowing the sealing of such business premises after recording the reasons therein" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZER (Procedure for de-sealing of business premises of non-integrated tier-1 retailers)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zer-procedure-for-de-sealing-of-business-premises-of-non-integrated-tier-1-retailers), as amended to 2025-06-30: "The business premises of non-integrated tier-1 retailer shall remain sealed till the payment of penalty and integration of all POS machines installed in all its branches or outlets;" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, Section 33, Table, serial 25A](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 33, Table, serial 25 (as substituted by Finance Act, 2026)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 14 (Registration), Section 14AB, printed within the section 14 entry](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "Notified tier-1 retailers registered but not integrated with the Board’s Computerized System" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## If sales tax is collected through my electricity bill, do I still need to register and file sales tax returns? Source: https://qanoondigest.com/faq/retail-shops/small-retailer-sales-tax-registration-returns Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Generally no. Section 14(1)(b) of the Sales Tax Act, 1990 excludes a retailer who pays sales tax through the electricity bill under section 3(9) from compulsory registration, and rule 14 of the Sales Tax Rules, 2006 excludes non-Tier-1 retailers from filing the STR-7 return. The electricity supplier reports the amount instead. Tier-1 status changes this. **Applies to:** Shopkeepers who are not Tier-1 retailers and have sales tax charged on their commercial electricity bill under section 3(9) of the Sales Tax Act, 1990. ### What does the law say? Two provisions answer the question: one on registration, one on returns. **Registration: section 14(1) of the Sales Tax Act, 1990.** It lists who must register if making taxable supplies in the course of a taxable activity. Clause (b) covers "a retailer who is liable to pay sales tax under the Act or rules made thereunder, excluding such retailer required to pay sales tax through his electricity bill under sub-section (9) of section 3". A retailer whose sales tax is taken through the electricity bill is therefore outside the compulsory registration list for being a retailer. **Returns: rule 14(1) of the Sales Tax Rules, 2006** (edition amended to 30 June 2025). Rule 14(1) sets the monthly return, Form STR-7, for every person registered under the Sales Tax Act or the Federal Excise Act, but it carves out "a retailer not being a tier-1 retailer". So even a non-Tier-1 retailer who happens to hold a registration is excluded by rule 14(1) from the STR-7 return. ### How does the tax get reported, then? Through the electricity supplier. Section 3(9) makes the supplier collect the tax on the retailer's monthly bill and "deposit the amount so collected directly without adjusting against his input tax". The supplier's own STR-7 return has a dedicated line for it: row 18, "Sales Tax u/s 3(9) on electricity supplied to Retailers (non-Adjustable)". The words "non-Adjustable" match the Act: the amount is paid over as it is and is not netted against the supplier's input tax. The shopkeeper does not file anything under section 3(9). The bill is the collection mechanism. ### Worked example (illustrative figures) Imran runs a mobile accessories shop in a street market in Rawalpindi. It is not in a mall, not part of a chain, and its electricity bills for the past twelve months total Rs. 216,000 (Rs. 18,000 a month). 1. **Is it Tier-1?** Rs. 216,000 is well under the Rs. 1,200,000 twelve-month electricity threshold in section 2(43A)(c), and none of the other categories apply. Not Tier-1. 2. **Sales tax.** Each bill of Rs. 18,000 is at or under Rs. 20,000, so section 3(9) charges 5 percent: Rs. 900 a month. 3. **Registration.** Section 14(1)(b) excludes him as a retailer paying through the electricity bill. 4. **Returns.** Rule 14(1) excludes a retailer that is not Tier-1 from filing STR-7. 5. **Reporting.** His Rs. 900 a month appears in the supplier's return under row 18. Now suppose Imran moves to an air-conditioned plaza and takes a regular shop unit, not a kiosk. Section 2(43A)(b) makes him a Tier-1 retailer. From then on section 3(9) no longer applies to him, he pays under section 3(9A) at the rate applicable to each item sold, he is a retailer liable to pay sales tax under section 14(1)(b) without the electricity-bill exclusion, and rule 14(1) no longer excludes him from STR-7. The second proviso to section 3(9) provides for the Commissioner to order the supplier to stop the bill charge for a Tier-1 retailer. ### What if I sell online as well? Section 14(1A), added by the Finance Act, 2025, requires persons selling digitally ordered goods from within Pakistan through an online marketplace, website or app to apply for registration, but it excepts cottage industry and "the retailers who are required to pay sales tax through electricity bills under sub-section (9) of section 3". Separately, section 3(7A)(ii) says the tax withheld under the Eleventh Schedule by the payment intermediary or courier is the final discharge of liability on digitally ordered goods supplied by retailers other than Tier-1 retailers. ### What if I am registered for another reason? Section 14(1) has other clauses. A person who is also an importer (clause (c)), a manufacturer not running a cottage industry (clause (a)), or a wholesaler, dealer or distributor (clause (e)) is required to register under that clause. The electricity-bill exclusion in clause (b) covers only the retailer category. ### Is income tax affected? No. Section 3(9) and section 14 are sales tax provisions. Income tax on the shop's profits, the income tax return, and the advance income tax collected on commercial electricity bills under section 235 of the Income Tax Ordinance, 2001 are all governed by that Ordinance. The section 235 proviso that removes the charge for people on the Active Taxpayers' List is limited to domestic consumers, so a shop's commercial connection is not covered by it. ### Common mistakes - **Assuming "no registration" means "no tax".** The tax is still paid, through the bill. - **Reading "non-Adjustable" as a penalty.** It describes how the supplier treats the amount in its return: it cannot set it off against input tax. - **Assuming Tier-1 status is permanent or never arrives.** The electricity and turnover tests in section 2(43A) look at the preceding twelve consecutive months, so a growing shop can cross into Tier-1. - **Treating the bill sales tax as settling income tax.** It is charged under a different Act. ### What to check in the official text Read section 14(1), (1A) and (2A) of the Sales Tax Act, section 3(9) and 3(9A), and the Tier-1 definition in section 2(43A). In the Sales Tax Rules, 2006 read rule 14(1) and row 18 of Form STR-7. The Rules in this corpus are amended to 30 June 2025, so check for later amendments. ### Frequently asked #### Who files the return for the sales tax on my electricity bill? The electricity supplier does. Section 3(9) makes the supplier deposit the amount directly without adjusting it against its own input tax, and the STR-7 return form carries a separate row 18 for 'Sales Tax u/s 3(9) on electricity supplied to Retailers (non-Adjustable)'. #### What happens to my registration position if my shop becomes Tier-1? The section 3(9) exclusion stops applying. A Tier-1 retailer pays sales tax under section 3(9A) at the rate applicable to the goods sold, so it is a retailer liable to pay sales tax under section 14(1)(b) and is not within that clause's exclusion. Rule 14 of the Sales Tax Rules also stops excluding it from filing the STR-7 return. #### Does the electricity bill sales tax also cover my income tax? No. It is charged under the Sales Tax Act. Income tax is a separate matter under the Income Tax Ordinance, 2001, and section 235 of that Ordinance collects advance income tax on commercial electricity bills as well. ### Citations - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "a retailer who is liable to pay sales tax under the Act or rules made thereunder, excluding such retailer required to pay sales tax through his electricity bill under sub-section (9) of section 3;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "the electricity supplier shall deposit the amount so collected directly without adjusting against his input tax" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 14 (Filing of returns)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#14-filing-of-returns), as amended to 2025-06-30: "shall file the return as specified in the form STR-7" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, Form STR-7 (Sales Tax & Federal Excise Return), row 18: Sales Tax u/s 3(9) on electricity supplied to Retailers (non-Adjustable)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“Tier-1 retailer” means a retailer falling in any one or more of the following categories" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Income Tax Ordinance, 2001, section 235 (Electricity consumption)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#235-electricity-consumption), as amended to 2026-06-30: "the provisions of sub-section (1) shall not apply to a domestic consumer of electricity if his name appears on the Active Taxpayers’ List." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Which goods sold in shops are taxed on the printed retail price, and what did the Finance Act 2026 add? Source: https://qanoondigest.com/faq/retail-shops/third-schedule-retail-price-goods-list Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Goods in the Third Schedule to the Sales Tax Act are taxed under section 3(2)(a) at eighteen percent of the retail price printed by the manufacturer or importer. The list covers juices, soap, shampoo, cosmetics, tea, biscuits and appliances, and the Finance Act, 2026 added serials 56 to 75, including cooking oil, sauces, crockery and footwear. **Applies to:** Shopkeepers in Pakistan who stock branded, packaged goods, and shoppers who want to know which products carry a printed retail price for sales tax. The Third Schedule is the list of goods on which sales tax is worked out from the retail price printed on the pack, not from the invoice value. It matters to a shopkeeper because these are the everyday branded products on the shelves, and because the Finance Act, 2026 added twenty new entries. ### What does the law say? Section 3(2)(a) of the Sales Tax Act, 1990 says taxable supplies and imports of goods in the Third Schedule are charged at eighteen percent of the retail price. Where the same goods are also in the Eighth Schedule, the Eighth Schedule rates apply instead. The manufacturer, or the importer for imported goods, must print or emboss the retail price along with the amount of sales tax "legibly, prominently and indelibly" on each article, packet, container, package, cover or label. Section 2(27) defines "retail price" for Third Schedule goods as the price fixed by the manufacturer or importer, inclusive of all duties, charges and taxes other than sales tax, at which the brand or variety is sold to the general body of consumers. If more than one price is fixed, the highest counts. For imported Third Schedule goods, the retail price cannot be less than 130 percent of the value determined under the Customs Act, 1969, including customs duties and federal excise duty. ### Which goods were already on the list? These serials were in the Third Schedule before the Finance Act, 2026 (serials omitted earlier are left out): | Serial | Goods | | --- | --- | | 1 to 4 | Fruit and vegetable juices; ice cream; aerated waters or beverages; syrups and squashes | | 5 | Cigarettes | | 6 to 11 | Toilet soap; detergents; shampoo; toothpaste; shaving cream; perfumery and cosmetics | | 14 to 16 | Tea; powder drinks; milky drinks | | 17 | Toilet paper and tissue paper | | 18 | Spices sold in retail packing bearing brand names and trade marks | | 21 | Shoe polish and shoe cream | | 33 | Cement sold in retail packing | | 37 | Mineral or bottled water | | 38 | Household electrical goods, including air conditioners, refrigerators, deep freezers, televisions, recorders and players, electric bulbs, tube-lights, electric fans, electric irons, washing machines and telephone sets | | 39 | Household gas appliances, including cooking range, ovens, geysers and gas heaters | | 40 | Foam or spring mattresses and other foam products for household use | | 41 | Paints, distempers, enamels, varnishes, thinners, polishes and similar goods sold in retail packing | | 42 | Lubricating oils, brake fluids, transmission fluid and other vehicular fluids sold in retail packing | | 43, 44 | Storage batteries; tyres and tubes (both excluding those sold to automotive manufacturers or assemblers) | | 45, 46 | Motorcycles; auto rickshaws | | 47 | Biscuits in retail packing with brand name | | 48 | Tiles | | 49 | Auto-parts in retail packing, excluding those sold to automotive manufacturers or assemblers | | 51 | DAP | | 52 to 55 | Imports of pet food for dogs and cats, coffee, chocolates and cereal bars, each sold in retail packing | ### What did the Finance Act 2026 add? Section 4(17) of the Finance Act, 2026 added serials 56 to 75 after serial 55. Most entries apply only when the goods are "sold in retail packing" or "put up for retail sale": | Serial | Goods | | --- | --- | | 56 | Vegetable and animal fats and oils | | 57 | Sugar confectionery | | 58 | Pasta, such as spaghetti, macaroni, noodles, lasagne, gnocchi, ravioli, cannelloni, and couscous | | 59 | Sauces, ketchup, mixed condiments and seasonings, mustard flour and meal, prepared mustard | | 60 | Fermented beverages | | 61 | Petroleum jelly, paraffin wax and other mineral waxes | | 62 | Plastic plates, sheets, film, foil, tape and strip | | 63 | Plastic tableware, kitchenware, furniture, storage items, hygienic or toilet articles and other household articles | | 64 | Trunks, suitcases, briefcases, school satchels, handbags, wallets, purses, travel and sports bags and similar containers | | 65 | Footwear (all types), except where the manufacturer exclusively sells through digitally integrated and POS compliant retail outlets | | 66 | Bathroom accessories and sanitaryware, including taps, showerheads, fittings, mixers and valves | | 67 | Crockery items | | 68 | Car and automobile accessories | | 69 | Milk, fat-filled milk, preparations for infants and other milk products | | 70 | Preparations for use on the hair | | 71 | Shaving and after-shave preparations, personal deodorants, bath preparations, depilatories, other cosmetic or toilet preparations and room deodorisers | | 72 | Toilet or facial tissue, towel or napkin stock and similar household paper | | 73 | Jams, fruit jellies, marmalades, fruit or nut purees and pastes, and other fruit and vegetable preparations | | 74 | Household utensils, including stainless steel, aluminium and melamine utensils and tableware | | 75 | Ceramic products, including wash basins, commodes, tiles and allied ceramic sanitary products | The Note at the end of the Schedule says that where the Federal Government has notified a rate higher than eighteen percent, that higher rate continues after the goods are included in the Third Schedule. ### Worked example (illustrative figures) A Karachi manufacturer of tomato ketchup (serial 59) fixes a retail price of Rs. 400 for a bottle. 1. Sales tax: 18% x Rs. 400 = Rs. 72. 2. The label must show the retail price, Rs. 400, along with the sales tax, Rs. 72. A footwear maker in Lahore that sells only through its own POS-integrated outlets falls within the exception in serial 65. A maker that also sells through ordinary wholesalers does not, because the exception needs the manufacturer to sell "exclusively" through such outlets. ### What if an item is not clearly on the list? Many entries point to "respective headings" of the customs tariff in column (3), so scope depends on the product's classification. The Board can also add or remove goods by Gazette notification under the second proviso to section 3(2)(a), and the Federal Government can notify a higher rate under the first proviso. None of those notifications are held in this corpus, so this page cannot confirm the current position of any item they touch. ### Common mistakes - **Treating "retail packing" as optional.** For most new serials, loose or bulk goods are outside the entry. - **Assuming all footwear is covered.** Serial 65 carves out makers selling exclusively through integrated POS outlets. - **Reading the retail price as tax-inclusive.** Section 2(27) says the retail price includes all duties, charges and taxes other than sales tax, and section 3(2)(a) requires the tax to be printed alongside it. ### What to check in the official text Read the Third Schedule, including its Note, and sections 2(27) and 3(2)(a) of the Sales Tax Act as amended to 30 June 2026, and section 4(17) of the Finance Act, 2026. Check any Board notification including or excluding goods, any Federal Government notification of a higher rate, and the Eighth Schedule where an item appears in both. The customs tariff headings in column (3) decide borderline items. ### Frequently asked #### Is footwear now taxed on the printed retail price? Serial 65, added by the Finance Act, 2026, lists footwear of all types, except where the manufacturer exclusively sells its products through digitally integrated and POS compliant retail outlets. Footwear from such a manufacturer is outside that entry. #### Can the Board add more goods to the Third Schedule without a Finance Act? Yes. A proviso to section 3(2)(a) lets the Board, by notification in the official Gazette, include any taxable supply or import in the Schedule or exclude one from it. Such notifications are not held in this corpus. #### Is the rate always eighteen percent? Section 3(2)(a) sets eighteen percent of the retail price, but goods also listed in the Eighth Schedule are taxed at the rates given there. The Note to the Third Schedule keeps any higher notified rate in place after an item is added. ### Citations - [Sales Tax Act, 1990, Third Schedule (see clause (a) of sub-section (2) of section 3), serials 1 to 75 and Note](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "specified in the Third Schedule shall be charged to tax at the rate of" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Finance Act, 2026, section 4 (Amendments of the Sales Tax Act, 1990 (VII of 1990))](https://qanoondigest.com/acts/finance-act/finance-act-2026#4-amendments-of-the-sales-tax-act-1990-vii-of-1990), as amended to 2026: "in the Third Schedule, in the Table, in column (1), after Serial No. 55, the following new Serial Nos. and entries relating thereto in columns (2) and (3) shall be added, namely:-" Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "with reference to the Third Schedule, means the price fixed by the manufacturer" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## A shop gave me an invoice that does not verify with FBR. Can I report it, and is there a prize? Source: https://qanoondigest.com/faq/retail-shops/report-unverified-shop-invoice-prize Law current to: 30 June 2026 (Sales Tax Rules, 2006 as amended to 30 June 2025). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, where the shop is an integrated Tier-1 retailer. Section 56C of the Sales Tax Act lets the Board run prize schemes, and rule 150ZEL of the Sales Tax Rules entitles customers who report unverified invoices to prizes, provided they send seven listed details. Without proof of digital payment, the right to the prize is forfeited. **Applies to:** Shoppers who bought from a Tier-1 retailer integrated with FBR's computerized system and whose invoice shows as unverified. An invoice that fails verification can be reported, and the reporting customer can qualify for a prize, but only for purchases from a Tier-1 retailer that has integrated its outlets with FBR's system. The prize depends on the report being complete and on the Commissioner confirming the invoice is unverified. ### What does the law say? **The power in the Act.** Section 56C(1) of the Sales Tax Act, 1990 lets the Board prescribe prize schemes "to encourage the general public to make purchases only from registered persons issuing tax invoices". Section 56C(2), added by the Finance Act, 2021, lets the Board prescribe a procedure for "mystery shopping" of invoices issued by Tier-1 retailers integrated with FBR's online system, and says that where a discrepancy is found, all the relevant provisions of the Act apply. **The rules.** The Board used that power in Chapter XIV-AC of the Sales Tax Rules, 2006: - **Rule 150ZEK** limits the chapter to customers of Tier-1 retailers who have integrated their outlets with the Board's computerized system for real-time reporting of sales. - **Rule 150ZEL** is the prize procedure. Sub-rule (1), as substituted in September 2024, entitles customers "who reports unverified invoices issued by tier-1 retailer" to prizes. - **Rule 150ZEM** is the mystery shopping procedure. ### How does a customer verify the invoice? Rule 150ZEL(2) says customers verify the electronically generated invoice either through the "Tax Asaan" application or by WhatsApp, on a number the Board communicates by order. Under rule 150ZEL(3), the app or WhatsApp number tells the customer whether the invoice is "Verified" or "unverified". The WhatsApp number itself is set by a Board order that is not held on this site. ### What must be sent to report an unverified invoice? Rule 150ZEL(4) requires the report to go through the same app or WhatsApp number, with these details: | Detail | Rule 150ZEL(4) clause | |---|---| | Name of the customer | (a) | | CNIC of the customer | (b) | | Mobile number of the customer | (c) | | IBAN of the customer | (d) | | Proof of digital payment | (e) | | Picture of the unverified invoice | (f) | | GPS tagged picture of the business premises that issued it | (g) | The proviso to sub-rule (4) is the one most shoppers miss: if the customer does not provide proof of digital payment, "the right to claim the prize shall stand forfeited". The rule does not define what counts as proof. A cash purchase leaves no digital payment record at all. ### What happens after the report? Rule 150ZEL(5) generates an alert in the IRIS login of the Commissioner Inland Revenue, who authenticates the unverified invoice to decide whether the customer is entitled to the prize. Rule 150ZEO(3) adds that the Commissioner verifies the invoice through its invoice number or QR code before declaring it unverified. Rule 150ZEL(6) says that if the customer's particulars turn out to be incorrect or incomplete at any stage, the onus for delay in paying the prize rests with the customer. Rule 150ZEL(9) leaves the total prize money and the denomination of prizes to the Board. The rules name no amount, and no Board decision on amounts is held here. For the shop, a report can have consequences. Rule 150ZEO(2)(i) lists an invoice "reported as unverified" on Tax Asaan as one source of information on which the Commissioner may start sealing proceedings against an integrated Tier-1 retailer, subject to the Chief Commissioner's approval under rule 150ZEO(4) and (5). ### Worked example (illustrative scenario) Hamza buys shoes for Rs. 8,500 at a chain store outlet in Karachi and pays by debit card. At home he scans the invoice in Tax Asaan and it shows "unverified". 1. Is the chapter engaged? A unit of a national chain of stores is a Tier-1 retailer under section 2(43A)(a) of the Act, and the outlet issues FBR POS invoices, so it is integrated. Rule 150ZEK applies. 2. Hamza reports through Tax Asaan with his name, CNIC, mobile number and IBAN, a screenshot of the card debit as proof of digital payment, a photo of the invoice, and a GPS tagged photo of the shop front: all seven items in rule 150ZEL(4). 3. The Commissioner receives an IRIS alert and checks the invoice number and QR code under rules 150ZEL(5) and 150ZEO(3). 4. If the invoice is confirmed unverified, Hamza is entitled to a prize of whatever amount the Board has fixed under rule 150ZEL(9). Had Hamza paid the Rs. 8,500 in cash, he could still send the other details, but the proviso to rule 150ZEL(4) would forfeit his right to the prize. ### What if the shop is not a Tier-1 retailer? The chapter does not reach it. Rule 150ZEK confines the prize scheme and mystery shopping to customers of integrated Tier-1 retailers. A small shop paying sales tax through its electricity bill is outside the Tier-1 category, so its bills are not the invoices this procedure covers. ### What if the shop gave no invoice at all? Rule 150ZEL is built around an electronically generated invoice that shows as unverified. It does not describe a route for reporting a purchase where no invoice was handed over. Separate rules deal with Tier-1 retailers that fail to integrate; those are covered in the related pages. ### Common mistakes - **Assuming any bill qualifies.** Only invoices from integrated Tier-1 retailers are within rule 150ZEK. - **Paying cash and expecting a prize.** The proviso to rule 150ZEL(4) forfeits the prize without proof of digital payment. - **Skipping the GPS tagged photo.** It is a listed item in clause (g), and incomplete particulars shift the onus for delay to the customer under rule 150ZEL(6). - **Relying on the old draw system.** Before September 2024, rule 150ZEL(1) worked through a random computerized draw of names and CNICs. The current text rewards reporting unverified invoices instead. ### What to check in the official text Read section 56C of the Sales Tax Act as amended to 30 June 2026, then rules 150ZEK to 150ZEM and 150ZEO of the Sales Tax Rules, 2006 as amended to 30 June 2025. The WhatsApp number and the prize amounts are fixed by Board orders that are not part of this corpus and should be checked with FBR directly. ### Frequently asked #### What details does a customer send when reporting an unverified invoice? Rule 150ZEL(4) lists seven: the customer's name, CNIC, mobile number and IBAN, proof of digital payment, a picture of the unverified invoice, and a GPS tagged picture of the business premises that issued it. The report goes through the Tax Asaan application or the WhatsApp number the Board announces. #### Is the prize guaranteed once I report? No. Rule 150ZEL(5) sends an alert to the Commissioner Inland Revenue, who authenticates the unverified invoice to establish whether the customer is entitled to the prize. If the customer's particulars are incorrect or incomplete, rule 150ZEL(6) puts the onus for any delay in paying the prize on the customer. #### What is mystery shopping? Section 56C(2) lets the Board prescribe mystery shopping of invoices issued by integrated Tier-1 retailers. Under rule 150ZEM, a person or firm authorised by the Board buys from Tier-1 retailers at random, checks the invoices on FBR's online system and reports fake or invalid ones to the Board. ### Citations - [Sales Tax Act, 1990, section 56C (Prize schemes to promote tax culture)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#56c-prize-schemes-to-promote-tax-culture), as amended to 2026-06-30: "The Board may prescribe prize schemes to encourage the general public to make purchases only from registered persons issuing tax invoices." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 150ZEL (Procedure for prize scheme)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zel-procedure-for-prize-scheme), as amended to 2025-06-30: "an alert shall be generated in the IRIS login of the Commissioner Inland Revenue and he shall authenticate the unverified invoice to establish the entitlement or otherwise of the customer for the prize" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZEM (Procedure for mystery shopping)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zem-procedure-for-mystery-shopping), as amended to 2025-06-30: "Mystery shopping shall be conducted by a person or the firm, duly authorized by the Board." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZEK (Application)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zek-application), as amended to 2025-06-30: "The provisions of this chapter shall apply to the customers of tier-1 retailers who have integrated their retail outlets" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZEO (Procedure for sealing of business premises of integrated tier-1 retailers)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zeo-procedure-for-sealing-of-business-premises-of-integrated-tier-1-retailers), as amended to 2025-06-30: "The Commissioner Inland Revenue concerned shall verify any invoice through invoice number or QR code before declaring it unverified;" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "a retailer operating as a unit of a national or international chain of stores;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What happens if my POS goes offline and cannot report sales to FBR in real time? Source: https://qanoondigest.com/faq/retail-shops/pos-offline-internet-down-rules Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Rule 150XA of the Sales Tax Rules, 2006 requires an integrated person to report any operational failure of the POS to the Board and the Commissioner within twenty-four hours. Under rule 150ZEO, a store disconnected for forty-eight hours, or offline invoices not entered within the next twenty-four hours, can lead to sealing of the premises. **Applies to:** Tier-1 retailers and other registered persons integrated with FBR's computerized system for real-time reporting of sales whose POS loses connection or stops working. ### What does the law say? Three layers apply when an integrated POS stops reporting. **The reporting duty in the Act.** The proviso to section 23(6) of the Sales Tax Act, 1990 requires all Tier-1 retailers, from the date and in the manner the Board prescribes, to integrate their retail outlets with the Board's computerized system "for real-time reporting of sales". **How the POS must work.** Rule 150R(4) of the Sales Tax Rules, 2006 says the POS machine shall transmit invoice data to the Board's computerized system and receive the unique FBR invoice number, then print a QR code based on that number on the receipt. Rule 150R(3) says no supply shall be made except through integrated outlets or POS machines. **What to do when it fails.** Rule 150XA makes the integrated person responsible for the smooth functioning of the hardware and software, and requires two kinds of report: - to the Board and the concerned Commissioner, within twenty-four hours of any operational failure, damage, disruption or tampering of the system; or - to the Commissioner with jurisdiction, within twenty-four hours, reporting any inoperative invoicing hardware or software with reasons and documentary evidence. ### When can an outage lead to sealing? Rule 150ZEO, as amended in February 2025, lists grounds on which the Commissioner shall seek the Chief Commissioner's written approval to seal an integrated Tier-1 retailer's premises. Alongside unverified invoices, three relate to going offline: | Trigger in rule 150ZEO(4) | Time limit | |---|---| | Store disconnected from the FBR database | Forty-eight hours | | Invoices of the offline period not entered in the system | Within the next twenty-four hours | | Device does not keep a record of invoices during the offline period | No time limit; the failure itself is the ground | The Chief Commissioner then allows or disallows sealing and decides whether one branch or more is affected. Once sealed, reopening under the de-sealing rule for integrated retailers requires an order imposing the penalty under serial 24 of the section 33 table, which is Rs. 500,000 or 200% of the tax involved, whichever is higher. ### How does it work in practice? Read together, the rules describe a sequence rather than a single deadline: 1. The POS loses connection. The rules expect the device to keep recording invoices while offline. 2. Within twenty-four hours of the failure, the retailer reports it under rule 150XA. 3. If the store stays disconnected for forty-eight hours, that is itself a ground for a sealing request. 4. Invoices issued while offline must be entered in the system within the next twenty-four hours. The rules do not say when the twenty-four hours for entering offline invoices starts. Reading it from the end of the offline period is one possibility, but the text does not state it, and this page does not settle it. ### Worked example (illustrative scenario) Sana runs an integrated Tier-1 bakery-and-grocery outlet in Karachi. The times are invented; the time limits are those in the rules. | Event | Time (illustrative) | Rule consequence | |---|---|---| | Internet link fails; POS keeps recording offline | Monday 10:00 | Offline records must be kept | | Latest time to report the failure | Tuesday 10:00 | Twenty-four hours under rule 150XA | | Connection restored | Tuesday 18:00 | Offline period ends after 32 hours | | Offline invoices uploaded | Wednesday 11:00 | 17 hours after reconnection | Check: Monday 10:00 to Tuesday 18:00 is 24 + 8 = 32 hours, below the forty-eight hour trigger. Tuesday 18:00 to Wednesday 11:00 is 6 + 11 = 17 hours, inside twenty-four hours if the clock runs from reconnection. Had the link stayed down until Wednesday 10:00 or later, the store would have been disconnected for forty-eight hours, which is a listed ground for a sealing request. ### What if the POS hardware breaks rather than the internet? Rule 150XA(d) covers this directly: inoperative electronic invoicing hardware or software must be reported to the Commissioner with jurisdiction within twenty-four hours, with reasons and documentary evidence. Rule 150XA(b) places responsibility for smooth functioning of all hardware and software on the integrated person. ### Common mistakes - **Waiting for the connection to return before reporting.** The twenty-four hours in rule 150XA runs from the failure, not from repair. - **Using a device that keeps no offline record.** A device that does not keep invoice records during the offline period is itself a ground under rule 150ZEO. - **Treating 48 hours as a grace period for everything.** The forty-eight hours applies to disconnection. The reporting duty and the offline-invoice entry each carry twenty-four hours. - **Switching to an unintegrated counter.** Rule 150R(3) allows supplies only through integrated outlets or POS machines. ### What to check in the official text Read rules 150R, 150XA and 150ZEO of the Sales Tax Rules, 2006 as amended to 30 June 2025, and section 23 of the Act as amended to 30 June 2026. The rules do not define "operational failure" or say whether a power or internet outage counts, and they name no form or channel for the report. Any Sales Tax General Order or FBR instruction on offline mode is outside this site's corpus. ### Frequently asked #### Is an internet outage itself an offence? The rules do not make an outage an offence. They impose duties around it: rule 150XA requires a report within twenty-four hours of an operational failure, and rule 150ZEO treats 48 hours of disconnection, late entry of offline invoices, or a device that keeps no offline record as grounds on which sealing approval can be sought. #### Can I keep selling while the POS is offline? Rule 150ZEO speaks of 'invoices of offline period' that must be entered in the system within the next twenty-four hours, and of a device keeping a record of invoices during the offline period. That wording assumes offline invoices can exist. The rules do not set out a separate procedure for issuing them. #### Does the shop get sealed automatically after 48 hours? No. Under rule 150ZEO the Commissioner must seek written approval from the Chief Commissioner, who either allows or disallows sealing. The 48-hour disconnection is a ground for that request, not an automatic closure. ### Citations - [Sales Tax Rules, 2006, section 150XA (Responsibilities of the Integrated Persons)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150xa-responsibilities-of-the-integrated-persons), as amended to 2025-06-30: "report to the Board and the concerned Commissioner within twenty-four hours of any operational failure, damage disruptions or tampering of the system;" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZEO (Procedure for sealing of business premises of integrated tier-1 retailers)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zeo-procedure-for-sealing-of-business-premises-of-integrated-tier-1-retailers), as amended to 2025-06-30: "if store becomes disconnected with the FBR data base for forty eight hours, or invoices of offline period not entered in the system in next twenty four hours or device does not keep record of invoices during offline period" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150R (Obligations and requirements)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150r-obligations-and-requirements), as amended to 2025-06-30: "transmit the invoice data to the Board’s Computerized System through secure means and receive the unique FBR invoice number;" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "all Tier-1 retailers shall integrate their retail outlets with Board’s computerized system for real-time reporting of sales." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 33, Table, S. No. 24](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What is a Tier-1 retailer and how do I know if my shop is one? Source: https://qanoondigest.com/faq/retail-shops/what-is-a-tier-1-retailer Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 2(43A) of the Sales Tax Act as amended to 30 June 2026, your shop is Tier-1 if it meets any one test: unit of a chain, shop in an air-conditioned mall or plaza (not a kiosk), electricity bills above Rs. 1,200,000 over twelve months, turnover above Rs. 200 million, or a Board notification naming you. **Applies to:** Shopkeepers and retail traders in Pakistan who sell goods to the general public and want to know whether the Tier-1 rules of the Sales Tax Act, 1990 apply to them. A Tier-1 retailer is a shopkeeper who falls into at least one of the categories listed in clause (43A) of section 2 of the Sales Tax Act, 1990. The list was reshaped by the Finance Act, 2026, which came into force on 1 July 2026, so a test that caught your shop a year ago may no longer exist, and a new turnover test may now apply. ### What does the law say? Section 2(43A) defines a "Tier-1 retailer" as a retailer "falling in any one or more of the following categories". As amended to 30 June 2026, the live categories are: | Limb | Who it covers | | --- | --- | | (a) | A retailer operating as a unit of a national or international chain of stores | | (b) | A retailer operating in an air-conditioned shopping mall, plaza or centre, excluding kiosks | | (c) | A retailer whose cumulative electricity bill during the immediately preceding twelve consecutive months exceeds Rs. 1,200,000 | | (d) | A wholesaler-cum-retailer with turnover of more than Rs. 200 million, engaged in bulk import and supply of consumer goods both wholesale to retailers and retail to the general public | | (gb) | A retailer with turnover exceeding Rs. 200 million in the immediately preceding twelve consecutive months, either declared or worked back from advance income tax that suppliers collected from the retailer | | (h) | Any other person or class of persons prescribed by the Board | Limbs (e), (f), (g) and (ga) no longer appear. They were omitted, (e) and (ga) by the Finance Act, 2023 and (f) and (g) by the Finance Act, 2026. Section 4 of the Finance Act, 2026 also added a proviso to limb (h): the Board "may also exclude any person or class of persons through a notification in the official gazette". A "retailer" itself is defined in section 2(28) as a person supplying goods to the general public for the purpose of consumption. ### How do I test my own shop? Work through the limbs one at a time. You stop as soon as one fits, because one is enough. 1. **Chain store.** Is your shop one unit of a national or international chain of stores? If yes, limb (a) applies. 2. **Location.** Is the shop inside an air-conditioned shopping mall, plaza or centre? If yes, and it is a shop rather than a kiosk, limb (b) applies. Size and sales do not matter for this limb. 3. **Electricity.** Add up the electricity bills for the shop for the last twelve consecutive months. If the total exceeds Rs. 1,200,000, limb (c) applies. 4. **Turnover.** Is your turnover over the last twelve consecutive months above Rs. 200 million, whether you declared it or it can be worked back from advance income tax your suppliers collected from you under the Income Tax Ordinance? If yes, limb (gb) applies. A mixed wholesale and retail importer should also check limb (d). 5. **Board notification.** Has the Board prescribed you, or your class of business, under limb (h)? Board notifications are not part of the text held here. ### What changes once a shop is Tier-1? **How sales tax is paid.** Section 3(9) charges retailers "other than those falling in Tier-1" through their monthly electricity bills. A Tier-1 retailer is outside that route. Section 3(9A) instead says Tier-1 retailers pay sales tax at the rate that applies to the goods sold under the Act or a notification. The general rate in section 3(1) is eighteen per cent of the value of taxable supplies, with other rates set by the Third and Eighth Schedules for particular goods. **Registration.** Section 14(1)(b) requires a retailer liable to pay sales tax to register, but excludes a retailer who pays through his electricity bill under section 3(9). A Tier-1 retailer does not fall within that exclusion. **Integration.** The proviso to section 23(6) says that from the date, and in the mode and manner, prescribed by the Board, all Tier-1 retailers shall integrate their retail outlets with the Board's computerized system for real-time reporting of sales. ### Worked example (illustrative figures) Three shops in Lahore, with made-up facts: | Shop | Facts | Result | | --- | --- | --- | | Ahmed Shoes, Anarkali | Street-level shop, not in a mall, electricity bills total Rs. 540,000 for twelve months, turnover Rs. 35 million, not part of a chain | No limb fits, so not Tier-1 on these facts | | Zara Kids Corner, air-conditioned plaza on MM Alam Road | Small shop, bills total Rs. 300,000, turnover Rs. 12 million | Limb (b) fits. Tier-1, even though small | | Bismillah General Store, Gulberg | Street-level, bills: Rs. 95,000 a month for twelve months | 12 x Rs. 95,000 = Rs. 1,140,000. Below Rs. 1,200,000, so limb (c) does not fit on the bill test alone | For the third shop, a rise to Rs. 105,000 a month would give 12 x Rs. 105,000 = Rs. 1,260,000, which exceeds Rs. 1,200,000, and limb (c) would then apply. ### What if my shop is a kiosk in a mall? Limb (b) excludes kiosks by its own words. That does not make a kiosk exempt from every limb. A kiosk that crosses the turnover test in limb (gb), or that the Board prescribes under limb (h), is still Tier-1. The Act does not define "kiosk". ### Common mistakes - **Thinking all limbs must be met.** The definition uses "any one or more". One is enough. - **Relying on an old checklist.** Shop floor area, card payment machines, jewellery shops and the withholding-threshold test were all limbs at one time and have all been omitted. - **Reading "turnover" too narrowly.** Limb (gb) lets turnover be worked back from advance income tax collected by suppliers, not only what you declare. The Act does not define "turnover" in section 2 or set out the working-back method. ### What to check in the official text Read clause (43A) of section 2 in the Sales Tax Act as amended to 30 June 2026, together with section 4 of the Finance Act, 2026, which made the latest changes. Check whether the Board has issued a notification under limb (h) that names or excludes your class of business, and the notification fixing the date and manner of integration under section 23(6). Those notifications are not held in this corpus. ### Frequently asked #### Do I need to meet all the Tier-1 tests or just one? Just one. Section 2(43A) of the Sales Tax Act defines a Tier-1 retailer as a retailer falling in any one or more of the listed categories. A small shop in an air-conditioned plaza is Tier-1 even if its turnover and electricity bill are low. #### Is a kiosk in a shopping mall a Tier-1 retailer? Not under the mall test. Sub-clause (b) covers retailers in an air-conditioned shopping mall, plaza or centre but expressly excludes kiosks. A kiosk could still be Tier-1 under another limb, such as turnover above Rs. 200 million or a Board notification. #### What changes if my shop is Tier-1? Section 3(9A) makes a Tier-1 retailer pay sales tax at the rate that applies to the goods sold, instead of through the electricity bill under section 3(9). The proviso to section 23(6) also requires Tier-1 retailers to integrate their outlets with the Board's computerized system from the date and in the manner the Board prescribes. ### Citations - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "(b) a retailer operating in an air-conditioned shopping mall, plaza or centre, excluding kiosks;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Finance Act, 2026, section 4 (Amendments of the Sales Tax Act, 1990 (VII of 1990))](https://qanoondigest.com/acts/finance-act/finance-act-2026#4-amendments-of-the-sales-tax-act-1990-vii-of-1990), as amended to 2026: "(gb) a retailer having turnover exceeding two hundred million rupees either by way of declaration or from worked back value of turnover from tax deduction under section 236G or 236H of Income Tax Ordinance, 2001 (XLIV of 2001) during the immediately preceding twelve consecutive months; and" Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "Tier-1 retailers shall pay sales tax at the rate as applicable to the goods sold under relevant provisions of this Act or a notification issued there under" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "all Tier-1 retailers shall integrate their retail outlets with Board’s computerized system for real-time reporting of sales." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "excluding such retailer required to pay sales tax through his electricity bill under sub-section (9) of section 3;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What must a retailer's sales tax invoice show? Source: https://qanoondigest.com/faq/retail-shops/retailer-tax-invoice-required-details Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 23(1) of the Sales Tax Act requires a registered retailer's invoice, in Urdu or English, to show supplier and recipient details, date, goods and quantity, value before tax, sales tax and value after tax, plus a verifiable FBR invoice number from a notified date. Rule 150R adds electronic fields, four of which retailers selling to the public may omit. **Applies to:** Registered retailers in Pakistan, especially Tier-1 retailers and others integrated with FBR's system, and shoppers checking a shop receipt. A retailer's sales tax invoice is governed at two levels. Section 23 of the Sales Tax Act, 1990 sets the basic particulars for every registered person. For retailers integrated with FBR's computerised system, rule 150R of the Sales Tax Rules, 2006 adds a longer list of fields for the electronic invoice printed by the point of sale. ### What does section 23 require? Section 23(1), as amended by section 4(7) of the Finance Act, 2026, requires a registered person making a taxable as well as exempt supply to issue a tax invoice, including an advance receipt invoice, bearing a verifiable and unique FBR invoice number, at the time of supply. The particulars must be in Urdu or English: | Clause | Particular | | --- | --- | | (a) | Name, address and registration number of the supplier | | (b) | Name, address and registration number of the recipient | | (c) | Date of issue | | (d) | Description and quantity of goods | | (e) | Value exclusive of tax | | (f) | Amount of sales tax | | (g) | Value inclusive of tax | Two provisos substituted by the Finance Act, 2026 say the Board may notify persons allowed to issue an advance receipt invoice, and that the FBR invoice number condition applies "from the time as notified by the Board". Other provisos let the Board specify modified invoices for different persons or classes, allow only one tax invoice per taxable supply, and require goods that are transported to have the invoice linked with the e-Bilty. Section 23(2) says no one other than a registered person or a person paying retail tax may issue an invoice under this section. Section 23(6) requires all Tier-1 retailers to integrate their retail outlets with the Board's computerised system for real-time reporting of sales, from the date and in the manner the Board prescribes. ### What must an electronic POS invoice show? Rule 150Q applies Chapter XIV of the Sales Tax Rules to registered persons the Board notifies for integration. Such an "integrated person" must, under rule 150R(4), use a point of sale that issues invoices in the prescribed format, transmits invoice data to the Board and receives the unique FBR invoice number, and prints a QR code based on that number on the receipt. Rule 150R(13) lists the particulars of the electronic invoice: | Group | Fields | | --- | --- | | FBR identifiers | (a) unique FBR invoice number, in the format XXXXXX-DDMMYYHHMMSS-0001; (b) verifiable QR code, 7X7MM; (c) POS or invoicing software registration number; (d) logo of FBR digital invoicing system | | Seller | (e) name; (f) address; (g) registration number | | Recipient | (h) name; (i) address; (j) registration number | | Invoice | (k) date of issue; (l) tax period; (w) invoice reference number | | Goods | (m) description; (n) quantity; (x) HS code; (y) unit of measurement | | Amounts | (o) value exclusive of tax; (p) sales tax rate; (q) amount of sales tax; (r) sales tax withheld at source; (v) total discount | | Other levies | (s) extra tax; (t) further tax; (u) federal excise duty payable in sales tax mode; (z) SRO and serial number applicable | ### What relief do retailers selling to the public get? The proviso to rule 150R(13) says fields (s), (t), (u) and (z), that is extra tax, further tax, federal excise duty in sales tax mode, and the SRO and serial number, "may not apply to a retailer issuing electronic invoices to general public". The relief does not extend to a manufacturer-cum-retailer or an importer-cum-retailer. Every other field in the list stays. Rule 150S(1) requires the integrated person to issue a real-time verifiable electronic invoice for every taxable supply and to keep it on electronic media for six years. Rule 150R(11) requires a signboard at each notified outlet with the FBR logo, the text "Integrated with FBR" and the POS software registration number. ### Worked example (illustrative figures) An integrated Tier-1 household goods store in Multan sells a steam iron to a walk-in customer for Rs. 5,000 before tax. For this example, assume the general rate of eighteen percent applies. 1. Value exclusive of tax, field (o): Rs. 5,000. 2. Sales tax rate, field (p): 18%. 3. Sales tax, field (q): 18% x Rs. 5,000 = Rs. 900. 4. Value inclusive of tax under section 23(1)(g): Rs. 5,000 + Rs. 900 = Rs. 5,900. The receipt also carries the FBR invoice number, QR code, software registration number, FBR logo, store details, date, tax period, description, quantity, HS code and unit. Because the buyer is a member of the general public and the store is not a manufacturer-cum-retailer or importer-cum-retailer, fields (s), (t), (u) and (z) may be left off. If the store failed to issue an invoice, serial 2 of section 33 gives 5% x Rs. 900 = Rs. 45, lower than Rs. 25,000, so the penalty would be Rs. 25,000. ### Common mistakes - **Printing only a tax-inclusive total.** Section 23(1)(e) to (g) and rule 150R(13)(o) and (q) require the value before tax and the tax as separate figures. - **Assuming the retail relief covers every field about taxes.** Only (s), (t), (u) and (z) are relieved; the sales tax rate and amount remain. - **Relying on the rules alone.** The Sales Tax Rules held here are amended to 30 June 2025, before the Finance Act, 2026 changed section 23. ### What to check in the official text Read sections 23 and 33 (serial 2) of the Sales Tax Act as amended to 30 June 2026, section 4(7) of the Finance Act, 2026, and rules 150Q, 150R and 150S of the Sales Tax Rules, 2006 as amended to 30 June 2025. Check the Board notification fixing when the FBR invoice number condition applies, any notification of modified invoices for retailers, and the notification listing persons required to integrate. These are not held in this corpus. ### Frequently asked #### Does a retail receipt need the customer's name and address? Section 23(1)(b) and rule 150R(13)(h) to (j) list the recipient's name, address and registration number. The Act lets the Board specify modified invoices for different classes of persons by notification. Any notification relaxing these fields for walk-in customers is not held in this corpus. #### Which electronic invoice fields can a retailer leave out? The proviso to rule 150R(13) says extra tax, further tax, federal excise duty payable in sales tax mode, and the SRO and serial number may not apply to a retailer issuing electronic invoices to the general public. The relief does not cover a manufacturer-cum-retailer or an importer-cum-retailer. #### What is the penalty for not issuing an invoice? Serial 2 of the section 33 table sets a penalty of Rs. 25,000 or five percent of the amount of tax involved, whichever is higher, for failing to issue an invoice when required under the Act. ### Citations - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "No person other than a registered person or a person paying" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Finance Act, 2026, section 4 (Amendments of the Sales Tax Act, 1990 (VII of 1990))](https://qanoondigest.com/acts/finance-act/finance-act-2026#4-amendments-of-the-sales-tax-act-1990-vii-of-1990), as amended to 2026: "Provided further that the condition of a verifiable and unique FBR invoice number shall be applicable from the time as notified by the Board." Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Sales Tax Rules, 2006, section 150R (Obligations and requirements)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150r-obligations-and-requirements), as amended to 2025-06-30: "Provided that the particulars in respect of serial numbers (s), (t), (u) and (z) may not apply to a retailer issuing electronic invoices to general public other than a manufacturer-cum-retailer or an importer-cum-retailer." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150S (Issuance of electronic invoice and record)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150s-issuance-of-electronic-invoice-and-record), as amended to 2025-06-30: "The integrated person shall issue a real-time verifiable electronic sales tax invoice for every taxable supply and service." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, Rule 150Q (Application), printed within the text of rule 150P](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, Section 33, Table, S. No. 2 (failure to issue an invoice)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What details must a retailer's sales tax invoice contain? Source: https://qanoondigest.com/faq/retail-shops/what-a-retail-sales-invoice-must-show Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 23(1) of the Sales Tax Act requires a registered supplier's invoice, in Urdu or English, to show supplier and recipient details, date, description and quantity, value exclusive of tax, sales tax, and value inclusive of tax, with a verifiable and unique FBR invoice number from the date the Board notifies. Failing to issue one attracts a penalty. **Applies to:** Registered retailers in Pakistan, including Tier-1 retailers, and shoppers who want to know what a proper sales tax invoice from a shop should contain. A sales tax invoice has a fixed list of contents set by section 23 of the Sales Tax Act, 1990. The list applies to every registered person making a taxable supply, including a registered retailer, and the Finance Act, 2026 added a requirement for a verifiable FBR invoice number. ### What does the law say? Section 23(1), as amended by section 4 of the Finance Act, 2026, requires a registered person making a taxable as well as exempt supply to issue a tax invoice, including an advance receipt invoice, bearing a verifiable and unique FBR invoice number, at the time of supply. The particulars must be in Urdu or English. (The consolidated text still prints the older wording, "serially numbered tax invoice", next to the new words. Section 4 of the Finance Act, 2026 shows that the new expression replaced it.) The invoice must contain: | Clause | Particular | | --- | --- | | (a) | Name, address and registration number of the supplier | | (b) | Name, address and registration number of the recipient; for supplies by a manufacturer or importer to an unregistered distributor, the NIC or NTN of that distributor | | (c) | Date of issue | | (d) | Description and quantity of goods (with count, denier and construction for textile yarn and fabric) | | (e) | Value exclusive of tax | | (f) | Amount of sales tax | | (g) | Value inclusive of tax | The provisos add that: - the Board may notify persons allowed to issue an advance receipt invoice within the notified system; - the FBR invoice number condition applies from the time the Board notifies; - the Board may specify modified invoices for different persons or classes; - not more than one tax invoice shall be issued for a taxable supply; - where goods are transported, the invoice must be linked with the e-Bilty (the digital transport document). Section 23(2) says only a registered person or a person paying retail tax may issue an invoice under this section. ### How does it work for a retailer selling to walk-in customers? Clause (b) asks for the recipient's name, address and registration number. A walk-in customer usually has no registration number. The consolidated text keeps an Explanation defining "ordinary consumer" as a person buying goods for his own consumption, not for resale or processing, but the provision that used the term is not visible in the current wording. The Act's answer here is the power to specify modified invoices by notification. Any such notification for retailers is not held in this corpus, so the exact customer details a retail invoice needs cannot be confirmed from the Act alone. For Tier-1 retailers, the proviso to section 23(6) requires integration of retail outlets with the Board's computerized system for real-time reporting of sales, from the date and in the manner the Board prescribes. Section 23(5) lets the Board require any person or class to integrate its electronic invoicing system. ### What records does a registered retailer keep? Section 22(1) requires a registered person making taxable supplies to keep records, in English or Urdu, at the business premises or registered office. They include records of supplies showing description, quantity, value, the buyer's name and address and the tax charged; records of purchases with the supplier's registration number; double entry sales tax accounts; invoices, credit and debit notes, bank statements, inventory records, utility bills, salary bills, cash book and rental agreements; and electronic versions of these. A proviso says persons paying retail tax keep such record as the Board specifies. Section 24 requires records to be retained for six years after the end of the tax period. ### Worked example (illustrative figures) A registered Tier-1 store in Lahore sells two cotton bedsheets at Rs. 2,000 each. For this example, assume they are taxed at the general rate of eighteen percent in section 3(1). 1. Value exclusive of tax: 2 x Rs. 2,000 = Rs. 4,000. 2. Sales tax: 18% x Rs. 4,000 = Rs. 720. 3. Value inclusive of tax: Rs. 4,000 + Rs. 720 = Rs. 4,720. The invoice should show the store's name, address and registration number, the date, "Bedsheet, cotton, 2", Rs. 4,000, Rs. 720 and Rs. 4,720, plus the FBR invoice number once that condition is in force. If the store failed to issue an invoice for this sale, serial 2 gives 5% x Rs. 720 = Rs. 36, which is lower than Rs. 25,000, so the penalty is Rs. 25,000. On sales with tax involved of Rs. 1,000,000, 5 percent is Rs. 50,000, which is higher, so the penalty is Rs. 50,000. ### What if the retailer does not keep records? Serial 8 of the section 33 table covers any person who fails to maintain records required under the Act or rules. The penalty is Rs. 50,000 or 5 percent of the amount of tax involved, whichever is higher. ### Common mistakes - **Showing only a tax-inclusive total.** Clauses (e), (f) and (g) require the value before tax, the tax and the value after tax as three separate figures. - **Issuing two invoices for one sale.** A proviso to section 23(1) allows only one. - **Assuming a small retailer on the electricity bill route issues tax invoices.** Section 23(2) limits invoices to registered persons and persons paying retail tax. ### What to check in the official text Read sections 22, 23 and 24 and serials 2 and 8 of the section 33 table in the Sales Tax Act as amended to 30 June 2026, and section 4 of the Finance Act, 2026 for the new invoice wording. Check the Board notifications on the FBR invoice number start date, modified invoices for retailers and the integration date for Tier-1 retailers. These are not held here. ### Frequently asked #### Can a sales tax invoice be in Urdu? Yes. Section 23(1) requires the particulars to be given in Urdu or English language. Section 22(1) likewise lets a registered person keep records in English or Urdu. #### What is the penalty for not giving an invoice? Serial 2 of the section 33 table sets a penalty of Rs. 25,000 or 5 percent of the amount of tax involved, whichever is higher, for any person who fails to issue an invoice when required under the Act. #### Does every invoice need an FBR invoice number now? Section 23(1), as amended by the Finance Act, 2026, requires a verifiable and unique FBR invoice number. A proviso says that condition applies from the time the Board notifies, and that notification is not held in this corpus. ### Citations - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "bearing a verifiable and unique FBR invoice number" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Finance Act, 2026, section 4 (Amendments of the Sales Tax Act, 1990 (VII of 1990))](https://qanoondigest.com/acts/finance-act/finance-act-2026#4-amendments-of-the-sales-tax-act-1990-vii-of-1990), as amended to 2026: "Provided further that the condition of a verifiable and unique FBR invoice number shall be applicable from the time as notified by the Board." Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Sales Tax Act, 1990, section 22 (Records. ............................................................................ ……....58 23. Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#22-records-58-23-tax-invoices), as amended to 2026-06-30: "(a) records of supplies made shall indicate the description, quantity and value of goods, name and address of the person to whom supplies were made and the amount of the tax charged;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 24 (Retention of record and documents for six years)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#24-retention-of-record-and-documents-for-six-years), as amended to 2026-06-30: "A person, who is required to maintain any record or documents under this Act, shall retain the record and documents for a period of" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 33, Table, serials 2 and 8](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "there shall be charged, levied and paid a tax known as sales tax at the rate of" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## I sell wholesale and to walk-in customers. When am I treated as a Tier-1 retailer? Source: https://qanoondigest.com/faq/retail-shops/wholesaler-cum-retailer-turnover-tier-1 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 2(43A) of the Sales Tax Act as amended to 30 June 2026, a wholesaler-cum-retailer in bulk import and supply of consumer goods is Tier-1 once turnover exceeds Rs. 200 million. Limb (gb) also catches any retailer above Rs. 200 million, declared or worked back from tax collected under section 236G or 236H. **Applies to:** Traders in Pakistan who sell goods in bulk to other shops and also sell over the counter to ordinary customers, such as grocery, cosmetics or crockery wholesalers with a retail counter. A mixed wholesale and retail trader is Tier-1 once turnover passes Rs. 200 million, under either of two limbs of section 2(43A) of the Sales Tax Act, 1990. The Finance Act, 2026 added the turnover condition to the wholesaler-cum-retailer limb (d) and created a new limb (gb) that measures turnover for any retailer, including by working back from advance income tax collected by suppliers. ### What does the law say? **Limb (d): the wholesaler-cum-retailer.** Section 2(43A)(d), as amended, covers "a wholesaler-cum-retailer having turnover more than two hundred million, engaged in bulk import and supply of consumer goods on wholesale basis to the retailers as well as on retail basis to the general body of the consumers". Section 4 of the Finance Act, 2026 inserted the words "having turnover more than two hundred million rupees". Before that, the limb had no turnover floor. **Limb (gb): turnover, declared or worked back.** Section 4 of the Finance Act, 2026 also inserted limb (gb): "a retailer having turnover exceeding two hundred million rupees either by way of declaration or from worked back value of turnover from tax deduction under section 236G or 236H of Income Tax Ordinance, 2001 ... during the immediately preceding twelve consecutive months". **The two income tax sections it points to.** - **Section 236G** requires every manufacturer or commercial importer, at the time of sale to distributors, dealers and wholesalers, to collect advance tax at the rate in Division XIV of Part IV of the First Schedule. - **Section 236H** requires every manufacturer, distributor, dealer, wholesaler or commercial importer, at the time of sale to retailers, to collect advance tax at the rate in Division XV of Part IV of the First Schedule. Both sections allow the buyer credit for the tax collected against tax due for the tax year in which it was collected. ### What are the collection rates? For tax year 2027 (1 July 2026 to 30 June 2027), the First Schedule and Tenth Schedule set these rates: | Section | Rate for a buyer on the active taxpayers' list | Rate for a buyer not on the list (Tenth Schedule) | | --- | --- | --- | | 236G, sales other than fertilizers | 0.1% | 2% | | 236G, fertilizers | 0.7% (0.25% if on both the income tax and sales tax active lists) | Not listed in the Tenth Schedule table | | 236H, sales to retailers | 0.5% of the gross amount of sales | 2.5% of the gross amount of sales | The rate matters for limb (gb). The same amount of tax works back to very different values depending on which rate was applied. ### How does it work in practice? Limb (d) is narrow by its words. It speaks of a trader "engaged in bulk import and supply of consumer goods" to retailers and to the public. The Act does not say whether a trader who buys locally and never imports falls in limb (d). Limb (gb) is wider. It applies to "a retailer", so a mixed trader who does not fit limb (d) can still be caught once turnover exceeds Rs. 200 million over the immediately preceding twelve consecutive months. "Turnover" is not defined in section 2 of the Sales Tax Act, and the Act does not set out how the worked-back value is calculated. ### Worked example (illustrative figures) Haji Traders in Faisalabad buys packaged foods and toiletries from manufacturers and sells to small shops and to walk-in customers. The owner declares turnover of Rs. 150 million for the last twelve months. Its suppliers collected Rs. 1,100,000 under section 236H on sales to it over the same twelve months (made-up figures). **Step 1: the declared figure.** Rs. 150 million does not exceed Rs. 200 million, so declaration alone does not bring it into limb (gb). **Step 2: working back at 0.5%.** If Haji Traders is on the active taxpayers' list, the Division XV rate is 0.5%. Rs. 1,100,000 / 0.005 = Rs. 220,000,000. The gross value of goods sold to it on which the tax was collected is Rs. 220 million. **Step 3: working back at 2.5%.** If it is not on the list, the Tenth Schedule rate is 2.5%. Rs. 1,100,000 / 0.025 = Rs. 44,000,000, or Rs. 44 million. **Step 4: compare.** At 0.5%, the worked-back figure of Rs. 220 million exceeds Rs. 200 million, which is the kind of figure limb (gb) is aimed at. At 2.5%, it does not. The arithmetic in Steps 2 and 3 gives the value of the trader's purchases, not its sales. Limb (gb) calls the result "worked back value of turnover" but does not say whether a mark-up is added or how purchases are converted into turnover. That gap is in the law itself. ### What if ...? **What if my turnover is below Rs. 200 million but my shop is in an air-conditioned market?** Limb (b) covers a retailer operating in an air-conditioned shopping mall, plaza or centre, excluding kiosks, with no turnover test. One limb is enough. **What if I only sell wholesale?** Section 2(43A) defines categories of retailer. A "retailer" under section 2(28) is a person supplying goods to the general public for consumption. A purely wholesale business is outside that definition on its words, so the Tier-1 limbs do not describe it. **What if the Board excludes my trade?** The proviso added to limb (h) by the Finance Act, 2026 lets the Board exclude any person or class of persons by notification. Any such notification is not held here. ### Common mistakes - **Assuming all wholesaler-cum-retailers are Tier-1.** Since 1 July 2026, limb (d) needs turnover of more than Rs. 200 million. - **Watching only declared sales.** Limb (gb) lets turnover be worked back from section 236G and 236H tax, so supplier-collected tax is part of the picture. - **Applying the wrong rate when working back.** The 0.5% and 2.5% rates for section 236H give figures five times apart. ### What to check in the official text Read limbs (d), (gb) and (h) of section 2(43A) of the Sales Tax Act as amended to 30 June 2026 and section 4 of the Finance Act, 2026. For the collection rates, read Divisions XIV and XV of Part IV of the First Schedule and the Tenth Schedule of the Income Tax Ordinance as amended to 30 June 2026, and keep the section 236G and 236H collection records your suppliers give you. ### Frequently asked #### Is every wholesaler who also sells retail now Tier-1? No. Since the Finance Act, 2026, limb (d) of section 2(43A) only covers a wholesaler-cum-retailer having turnover of more than Rs. 200 million, engaged in bulk import and supply of consumer goods. Below that figure, limb (d) does not apply, though another limb such as an air-conditioned plaza location still might. #### How can FBR work out my turnover if I under-declare it? Limb (gb) allows turnover to be taken either by declaration or from the worked back value of turnover from tax deducted under section 236G or 236H of the Income Tax Ordinance over the preceding twelve consecutive months. The Act does not set out the working-back formula. #### Can I still claim the tax my suppliers collected under section 236G or 236H? Yes. Section 236G(2) and section 236H(2) allow credit for the tax collected in computing the tax due on taxable income for the tax year in which it was collected. That credit is separate from the Tier-1 question. ### Citations - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "engaged in bulk import and supply of consumer goods on wholesale basis to the retailers as well as on retail basis to the general body of the consumers" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Finance Act, 2026, section 4 (Amendments of the Sales Tax Act, 1990 (VII of 1990))](https://qanoondigest.com/acts/finance-act/finance-act-2026#4-amendments-of-the-sales-tax-act-1990-vii-of-1990), as amended to 2026: "(i) in sub-clause (d), after the expression, “wholesaler-cum-retailer”, the expression “having turnover more than two hundred million rupees” shall be inserted;" Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Income Tax Ordinance, 2001, section 236G (Advance tax on sales to distributors, dealers and wholesalers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236g-advance-tax-on-sales-to-distributors-dealers-and-wholesalers), as amended to 2026-06-30: "Every manufacturer or commercial importer" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236H (Advance tax on sales to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236h-advance-tax-on-sales-to-retailers), as amended to 2026-06-30: "Credit for the tax collected under sub-section (1) shall be allowed in computing the tax due by the retailer on the taxable income for the tax year in which the tax was collected." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XV (Advance tax on sale to retailers) and Division XIV (Advance tax on sale to distributors, dealers or wholesalers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, table of rates for persons not appearing in the active taxpayers' list, S. No. 3 (section 236G) and S. No. 4 (section 236H)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Why do big stores add Re. 1 to every bill? Is the POS service fee lawful? Source: https://qanoondigest.com/faq/retail-shops/re-1-pos-service-fee-legal Law current to: 30 June 2026 (Sales Tax Rules, 2006 as amended to 30 June 2025). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 76 of the Sales Tax Act lets the Board, with the Federal Minister's approval, levy fees and service charges by notification. The sales tax return form in the Sales Tax Rules has a row for a POS Service Fee of Rs. 1 under SRO 1006(I)/2021, paid into an IRS Common Pool Fund. That SRO is not held here. **Applies to:** Shoppers at large, POS-integrated stores in Pakistan who see a Re. 1 charge on their bill, and Tier-1 retailers who collect and report it. The Re. 1 added to receipts at large integrated stores is described in the law as a POS Service Fee. The Sales Tax Act, 1990 gives the Board a general power to levy fees and service charges, and the monthly sales tax return has a dedicated row for this Rs. 1 fee, which refers to SRO 1006(I)/2021. The SRO itself is not in the corpus this site draws on, so some details cannot be confirmed here. ### What does the law say? **The power to levy a fee.** Section 76(1) says the Board, with the approval of the Federal Minister-in-charge, may by notification in the official Gazette "levy fee and service charges for valuation, in respect of any other service or control mechanism provided by any formation under the control of the Board", at rates specified in the notification. Section 76(2) lets the Board authorise and prescribe how the fees and service charges collected are spent. A footnote records that the words "Board with approval of the Federal Minister-in-charge" replaced "Federal Government" through the Tax Laws (Amendment) Act, 2020. **The return form.** Form STR-7, the sales tax return in the Sales Tax Rules, 2006 as amended to 30 June 2025, has a row 35a below row 35, "Total amount to be paid". Row 35a reads "POS Service Fee at the rate of Rs. 1 per charged vide Notification of SRO No. 1006(I)/2021 to be deposited in IRS Common Pool", followed by the word "Fund" and an account number, with a reference to Annex-C. The row sits outside the sales tax calculation in rows 1 to 35. **The integration it relates to.** The proviso to section 23(6) requires all Tier-1 retailers to integrate their retail outlets with the Board's computerized system for real-time reporting of sales, from the date and in the manner the Board prescribes. The fee's name ties it to point-of-sale (POS) systems of this kind. ### Is the fee lawful? Section 76 is a clear legal basis for the Board to levy fees and service charges by notification, provided the notification is issued with the Federal Minister's approval and published in the Gazette. The return form in the Rules records that such a fee exists at Rs. 1 under SRO 1006(I)/2021. What cannot be confirmed from the corpus: - the text of SRO 1006(I)/2021 and whether it was made under section 76; - who bears the fee, the customer or the retailer, and whether it may be shown on the customer's bill; - what it is charged per. The printed row reads "Rs. 1 per charged", with a word apparently missing, so the unit (for example, per invoice) is not clear from the text; - which retailers must collect it; - whether sales tax applies to the fee itself. These points depend on the SRO, which is not held here. This page does not fill that gap. ### Worked example (illustrative figures) A shopper at an integrated store in Karachi pays a bill of Rs. 2,360 and sees Rs. 2,361 at the till, with Re. 1 shown as a POS fee. Suppose the store issues 30,000 receipts in a month and, as the row's wording suggests but does not state clearly, the fee is Rs. 1 per invoice: 1. Fee collected: 30,000 x Rs. 1 = Rs. 30,000. 2. The store reports Rs. 30,000 in row 35a of its return for that month. 3. Per the row's wording, that amount goes into the IRS Common Pool Fund, not into sales tax payable. If the SRO measures the fee on a different basis, this arithmetic changes. ### What if a shop that is not integrated charges Re. 1? The Act does not describe a POS fee for non-integrated shops. Section 3B(1) covers any person who collects any tax or charge that was not payable and passes it on to the consumer: that amount must be paid to the Federal Government. Whether section 3B would reach a Re. 1 fee charged by a shop not covered by the SRO depends on the SRO's terms, which are not held here. ### Common mistakes - **Treating the Re. 1 as sales tax.** The return form keeps it separate, in row 35a, after the total tax payable. - **Assuming the law is silent.** Section 76 is the fee-levying power, and the return form names the SRO. - **Confusing the fee with the prize scheme.** Rule 150ZEL lets customers verify integrated retailers' invoices through the Tax Asaan app and report unverified ones for prizes. It does not mention the fee. ### What to check in the official text Read section 76 and the proviso to section 23(6) of the Sales Tax Act as amended to 30 June 2026, and row 35a of Form STR-7 in the Sales Tax Rules, 2006. Obtain SRO 1006(I)/2021 from the official Gazette or FBR to confirm who pays the fee, on what basis, and which retailers it covers. ### Frequently asked #### Is the Re. 1 on my bill a tax? The sales tax return form calls it a POS Service Fee, shown in its own row 35a after the total sales tax, federal excise duty and petroleum levy payable. Section 76 of the Sales Tax Act is the provision that allows the Board to levy fees and service charges, as distinct from the tax itself. #### Where does the Re. 1 go? Row 35a of Form STR-7 says the fee is to be deposited in the IRS Common Pool Fund. Section 76(2) lets the Board authorise and prescribe how fees and service charges collected under section 76(1) are spent. #### Does the law say the customer must pay the Re. 1? Not in the text held here. The return form row records the fee and its SRO number, but the SRO that sets out who pays it and on what is not part of this corpus. ### Citations - [Sales Tax Act, 1990, section 76 (Fee and service charges)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#76-fee-and-service-charges), as amended to 2026-06-30: "levy fee and service charges for valuation, in respect of any other service or control mechanism provided by any formation under the control of the Board, including ventures of public-private partnership, at such rates as may be specified in the notification." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, Form STR-7 (sales tax return), row 35a, POS Service Fee](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30), as amended to 2025-06-30: "POS Service Fee at the rate of Rs. 1 per charged vide Notification of SRO No. 1006(I)/2021 to be deposited in IRS Common Pool" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "all Tier-1 retailers shall integrate their retail outlets with Board’s computerized system for real-time reporting of sales." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 150ZEL (Procedure for prize scheme)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zel-procedure-for-prize-scheme), as amended to 2025-06-30: "The customers shall verify the electronically generated invoice of integrated retailers either through" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, section 3B (Collection of excess sales tax etc)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3b-collection-of-excess-sales-tax-etc), as amended to 2026-06-30: "Any person who has collected or collects any tax or charge, whether under misapprehension of any provision of this Act or otherwise, which was not payable as tax or charge" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- # Wholesalers and distributors Withholding on sales to distributors and retailers, sales tax registration and invoicing. ## What is the 236G rate for a distributor on the Active Taxpayers List and for one who is not? Source: https://qanoondigest.com/faq/wholesalers-distributors/section-236g-rate-atl-non-atl Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer For tax year 2027, Division XIV of the First Schedule sets section 236G at 0.1% on goods other than fertilizer and 0.7% on fertilizer, or 0.25% on fertilizer if the buyer is on both Active Taxpayers' Lists. Under section 100BA and the Tenth Schedule, a buyer not on the list pays 2% on goods other than fertilizer. **Applies to:** Distributors, dealers and wholesalers in Pakistan buying goods from manufacturers or commercial importers in tax year 2027. The section 236G rate depends on two things: what the goods are (fertilizer or anything else) and whether the buyer appears on the Active Taxpayers' List. The Income Tax Ordinance, 2001 as amended to 30 June 2026 gives the rates for tax year 2027, which runs from 1 July 2026 to 30 June 2027. ### What does the law say? Section 236G(1) requires every manufacturer or commercial importer selling to distributors, dealers and wholesalers to collect advance tax "at the rate specified in Division XIV of Part IV of the First Schedule". That Division is the starting point for every buyer. Section 100BA(1) then says that the collection of advance income tax in respect of a person not appearing on the Active Taxpayers' List "shall be determined in accordance with the rules in the Tenth Schedule", and section 100BA(2) gives the Tenth Schedule effect notwithstanding anything to the contrary in the Ordinance. So for a buyer off the list, the Tenth Schedule decides the rate. ### What are the rates for tax year 2027? | Buyer and goods | Rate | Where it comes from | | --- | --- | --- | | On the Active Taxpayers' List, goods other than fertilizer | 0.1% | Division XIV, Table, serial 2 | | On the Active Taxpayers' List, fertilizer | 0.7% | Division XIV, Table, serial 1 | | On both the income tax and sales tax Active Taxpayers' Lists, fertilizer | 0.25% | Division XIV, proviso | | Not on the Active Taxpayers' List, goods other than fertilizer | 2% | Tenth Schedule, rule 1, third proviso Table, serial 3 | | Not on the Active Taxpayers' List, fertilizer | See below | Tenth Schedule, rule 1, main words | The proviso to Division XIV reads that the rate on sale to distributors, dealers or wholesalers of fertilizer "shall be 0.25%, if they are already appearing on both the Active Taxpayers' Lists issued under the provisions of the Sales Tax Act, 1990 and the Income Tax Ordinance, 2001". Appearing on only one of the two lists does not meet those words. ### What about fertilizer bought by someone not on the list? Serial 3 of the Tenth Schedule Table applies to the gross amount of sale to distributors, dealers or wholesalers "other than sale of fertilizer". Fertilizer is therefore outside that Table entry. The main words of rule 1 say that where tax is collected from persons not appearing on the Active Taxpayers' List, the rate "shall be increased by hundred percent of the rate specified in this Ordinance". Applied to the 0.7% Division XIV rate, that reading gives 1.4%. The Tenth Schedule does not print a 1.4% figure for fertilizer itself, so this is the arithmetic of rule 1 rather than a stated rate. ### Worked example (illustrative figures) Nadeem Traders in Gujranwala is a wholesaler of cooking utensils and buys from a manufacturer. In one invoice the gross amount of the sale is Rs. 2,500,000. The amount is invented; the rates are the ones above. **If Nadeem Traders is on the Active Taxpayers' List:** 1. Goods are other than fertilizer, so the rate is 0.1%. 2. Rs. 2,500,000 x 0.1% = Rs. 2,500. 3. Invoice total before sales tax and other charges: Rs. 2,500,000 + Rs. 2,500 = Rs. 2,502,500. **If Nadeem Traders is not on the Active Taxpayers' List:** 1. Rate under serial 3 of the Tenth Schedule Table: 2%. 2. Rs. 2,500,000 x 2% = Rs. 50,000. 3. Invoice total before sales tax and other charges: Rs. 2,500,000 + Rs. 50,000 = Rs. 2,550,000. The difference on this one invoice is Rs. 50,000 minus Rs. 2,500 = Rs. 47,500, which is twenty times the ATL amount. **A fertilizer dealer in Sahiwal buying Rs. 1,000,000 of fertilizer:** | Status | Rate | Tax | | --- | --- | --- | | On both Active Taxpayers' Lists | 0.25% | Rs. 2,500 | | On the income tax list only | 0.7% | Rs. 7,000 | | Not on the Active Taxpayers' List (rule 1 reading) | 1.4% | Rs. 14,000 | ### What if I was on the list but filed my return late? Section 100BA(1) still mentions persons on the Active Taxpayers' List who have not filed a return by the due date. A rule 1A in the Tenth Schedule once set separate rates for them, but the footnote records that rule 1A was omitted by the Finance Act, 2026, and the rates it set were for property transactions, not for sales to distributors. In the text as amended to 30 June 2026, rule 1 speaks of persons "not appearing in the active taxpayers' list". ### Common mistakes - **Doubling 0.1% to 0.2% for non-ATL buyers.** That was the old filer and non-filer column, replaced in 2019. The Tenth Schedule Table now fixes 2% for non-fertilizer goods. - **Using 0.25% for fertilizer with only one ATL.** The proviso needs both the Sales Tax Act and Income Tax Ordinance lists. - **Treating the higher rate as a penalty that cannot be credited.** Section 236G(2) allows credit for "tax collected under sub-section (1)" without distinguishing the rate used. ### What to check in the official text Read Division XIV of Part IV of the First Schedule with its proviso, section 100BA, and rule 1 of the Tenth Schedule with the Table in its third proviso, all in the Ordinance amended to 30 June 2026. Whether a buyer appears on either Active Taxpayers' List on the date of sale is a matter of the list itself, which is not part of the text held here. ### Frequently asked #### What is the 236G rate on non-fertilizer goods for tax year 2027? Division XIV of Part IV of the First Schedule sets 0.1% for sales other than fertilizers. For a buyer not on the Active Taxpayers' List, serial 3 of the Table in rule 1 of the Tenth Schedule sets 2% on the gross amount of sale other than sale of fertilizer. #### What is the 236G rate on fertilizer? Division XIV sets 0.7%. Its proviso sets 0.25% where the distributor, dealer or wholesaler appears on both the Active Taxpayers' Lists under the Sales Tax Act, 1990 and the Income Tax Ordinance, 2001. #### Are there still separate filer and non-filer columns in Division XIV? No. The old version of Division XIV had filer and non-filer columns (0.7% and 1.4% for fertilizers, 0.1% and 0.2% for others). The footnote records that it was substituted by the Finance Act, 2019. The higher rate for persons not on the Active Taxpayers' List now comes from the Tenth Schedule. ### Citations - [Income Tax Ordinance, 2001, section 236G (Advance tax on sales to distributors, dealers and wholesalers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236g-advance-tax-on-sales-to-distributors-dealers-and-wholesalers), as amended to 2026-06-30: "dealers and wholesalers, shall collect advance tax at the rate specified in Division XIV of Part IV of the First Schedule, from the aforesaid person to whom such sales have been made." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XIV (Advance tax on sale to distributors, dealers or wholesalers), Table and proviso](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 and third proviso Table, serial 3 (Section 236G)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "(2) The provisions of the Tenth Schedule shall have effect notwithstanding anything to the contrary contained in this Ordinance." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What section 236H rate applies when the retailer I sell to is not on the Active Taxpayers List? Source: https://qanoondigest.com/faq/wholesalers-distributors/section-236h-rate-retailer-not-on-atl Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer For tax year 2027, section 236H tax on sales to a retailer who is not on the Active Taxpayers' List is 2.5% of the gross amount of sale, under the Table in rule 1 of the Tenth Schedule, applied through section 100BA. A retailer on the list pays the normal Division XV rate of 0.5%. **Applies to:** Distributors, dealers, wholesalers and other sellers who collect section 236H tax from retailers in tax year 2027. For the same box of goods, a distributor collects five times as much section 236H tax from a shop that is off the Active Taxpayers' List as from one that is on it. The two rates come from two different places in the Ordinance, which is why they are easy to mix up. ### What does the law say? Section 236H(1) of the Income Tax Ordinance, 2001 requires every manufacturer, distributor, dealer, wholesaler or commercial importer, at the time of sale to retailers, to collect advance tax "at the rate specified in Division XV of Part IV of the First Schedule". Division XV sets that rate at 0.5% "on the gross amount of sales". Section 100BA(1) then says that collection of advance income tax in respect of a person not appearing on the Active Taxpayers' List "shall be determined in accordance with the rules in the Tenth Schedule". Section 100BA(2) gives the Tenth Schedule effect notwithstanding anything to the contrary in the Ordinance. The third proviso to rule 1 of the Tenth Schedule has a table of fixed rates for persons not on the list. Serial 4 reads: Section 236H, "On the gross amount of sale to retailers", 2.5%. | Retailer's status | Source of the rate | Rate for tax year 2027 | | --- | --- | --- | | On the Active Taxpayers' List | First Schedule, Part IV, Division XV | 0.5% | | Not on the Active Taxpayers' List | Tenth Schedule, rule 1, third proviso, serial 4 | 2.5% | Tax year 2027 runs from 1 July 2026 to 30 June 2027. ### Worked example (illustrative figures) Sheikh Brothers, a wholesaler of cooking oil and soap in Peshawar, issues two invoices on the same day for Rs. 250,000 each. Noor General Store is on the Active Taxpayers' List. Khan Traders, a small shop, is not. The amounts are invented; the rates are the ones above. **Invoice to Noor General Store (on the list)** 1. Gross amount of sale: Rs. 250,000. 2. Rate: 0.5%. 3. Tax collected: Rs. 250,000 x 0.5% = Rs. 1,250. 4. Invoice total with tax: Rs. 251,250. **Invoice to Khan Traders (not on the list)** 1. Gross amount of sale: Rs. 250,000. 2. Rate: 2.5%. 3. Tax collected: Rs. 250,000 x 2.5% = Rs. 6,250. 4. Invoice total with tax: Rs. 256,250. The difference on one invoice is Rs. 6,250 minus Rs. 1,250 = Rs. 5,000. If Sheikh Brothers sells Rs. 3,000,000 a month to shops off the list, it collects Rs. 75,000 on those sales, against Rs. 15,000 had the same shops been on the list. ### What if the shopkeeper did not need to file a return? Rule 2 of the Tenth Schedule deals with this. Where the person required to collect is satisfied that a person not on the list "was not required to file a return of income", it must, before collecting, give the Commissioner a written electronic notice with: - the name, CNIC or NTN and address of the person; - the nature and amount of the transaction; and - the reason it is considered that the person was not required to file. The Commissioner then has thirty days to accept the contention or, if there are reasonable grounds to believe a return was required, to direct collection under rule 1. If no order is passed within thirty days, the Commissioner is deemed to have accepted the contention. ### What if the retailer later files a return? The higher tax is still tax collected under section 236H, and section 236H(2) allows the retailer credit for it in computing its tax for the tax year in which it was collected. Rule 4(3) of the Tenth Schedule also provides that where returns are filed, the tax collected under rule 1 "shall be adjustable against the tax payable in the return filed for the relevant tax year". ### What does the distributor have to report? Rule 7 of the Tenth Schedule says that where the withholding agent fails to give "complete or accurate particulars of persons not appearing on active taxpayers' list" in its withholding statement, the Commissioner "shall initiate proceedings" against the withholding agent within thirty days of the statement being filed. So the rate matters for the invoice, and the buyer's details matter for the statement. ### Common mistakes - **Doubling 0.5% to 1%.** The general rule in rule 1 increases a rate by one hundred percent, but the Table under the third proviso fixes 236H at 2.5% for a retailer off the list. - **Using 2.5% for every sale to a small shop.** The rate depends on the buyer's status on the Active Taxpayers' List, not on the size of the shop. - **Leaving buyer details out of the statement.** Rule 7 targets incomplete particulars of buyers off the list. ### What to check in the official text Read section 236H, Division XV of Part IV of the First Schedule, section 100BA and rules 1, 2 and 7 of the Tenth Schedule in the Income Tax Ordinance amended to 30 June 2026. Check each buyer's status on the Active Taxpayers' List at the time of sale. ### Frequently asked #### What is the 236H rate for a retailer not on the Active Taxpayers List? Serial 4 of the Table under the third proviso to rule 1 of the Tenth Schedule sets 2.5% on the gross amount of sale to retailers. This applies for tax year 2027 under the Ordinance amended to 30 June 2026. #### What is the normal 236H rate? Division XV of Part IV of the First Schedule sets 0.5% on the gross amount of sales. That is the rate for a retailer who is on the Active Taxpayers' List. #### Can the distributor skip the higher rate if the shopkeeper did not need to file a return? Rule 2 of the Tenth Schedule lets the collector, if satisfied the person was not required to file a return, give the Commissioner an electronic notice before collecting. The Commissioner has thirty days to accept or to direct collection under rule 1, and silence for thirty days is treated as acceptance. ### Citations - [Income Tax Ordinance, 2001, section 236H (Advance tax on sales to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236h-advance-tax-on-sales-to-retailers), as amended to 2026-06-30: "(2) Credit for the tax collected under sub-section (1) shall be allowed in computing the tax due by the retailer on the taxable income for the tax year in which the tax was collected." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XV (Advance tax on sale to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 and its third proviso, Table serial 4 (Section 236H)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rules 2, 4 and 7 (persons not required to file, adjustment where returns are filed, and particulars in the withholding statement)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "(2) The provisions of the Tenth Schedule shall have effect notwithstanding anything to the contrary contained in this Ordinance." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is 236G and 236H tax final, or can I adjust it against my income tax and claim a refund of any excess? Source: https://qanoondigest.com/faq/wholesalers-distributors/adjust-236g-236h-tax-claim-refund Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It is not final. Sections 236G(2) and 236H(2) allow credit for the tax collected against the buyer's tax for the tax year in which it was collected, and section 168 treats it as tax paid. Credit that cannot be used for that year is refunded under section 170, on an application made within three years. **Applies to:** Distributors, dealers, wholesalers and retailers in Pakistan who have paid advance tax under section 236G or 236H when buying stock. Advance tax under sections 236G and 236H is a payment towards the buyer's own income tax for the year. A wholesaler who pays it to a manufacturer, or a retailer who pays it to a distributor, claims it back as a credit when the year's tax is worked out. Where the credit is larger than the tax, the Income Tax Ordinance, 2001 provides a refund route. ### What does the law say? Four provisions of the Ordinance, as amended to 30 June 2026, fit together. - **Section 236G(2)** allows credit for tax collected on sales to a distributor, dealer or wholesaler "in computing the tax due by the distributor, dealer or wholesaler on the taxable income for the tax year in which the tax was collected." - **Section 236H(2)** gives the same credit to the retailer from whom tax was collected under section 236H(1). - **Section 168(1)(b)** treats tax collected under Chapter XII, where both sections sit, as "tax paid by the person from whom the tax was collected". Section 168(2) allows it as a tax credit for the tax year in which it was collected. - **Section 170(1)** lets a taxpayer who has paid more than the amount properly chargeable apply to the Commissioner for a refund of the excess. Section 168(5) joins these up: a tax credit for a year that cannot be credited for that year "shall be refunded to the taxpayer in accordance with section 170." ### Is it ever treated as final tax? Section 168(3) lists the final taxes for which no credit is allowed. In the text amended to 30 June 2026 that list covers provisions such as section 152(1E), section 156(3) and section 236Z(7). Sections 236G and 236H are not on it, and their own sub-section (2) grants credit in plain terms. ### Worked example (illustrative figures) The traders and amounts below are invented. The rates are the real tax year 2027 rates in Division XIV (0.1% for goods other than fertilizers) and Division XV (0.5%) of Part IV of the First Schedule. **Wholesaler with more credit than tax.** Bilal Traders, a Faisalabad wholesaler of household goods, buys Rs. 60,000,000 of stock from manufacturers in tax year 2027. 1. Section 236G collected at 0.1%: Rs. 60,000,000 x 0.1% = Rs. 60,000. 2. Tax computed on Bilal Traders' taxable income for the year (assumed): Rs. 45,000. 3. Credit available: Rs. 60,000. 4. Rs. 45,000 minus Rs. 60,000 = minus Rs. 15,000. Nothing is payable for the year. 5. The unused Rs. 15,000 falls under section 168(5) and is dealt with under section 170. **Retailer with less credit than tax.** Kamran General Store in Sialkot buys Rs. 12,000,000 of goods from distributors in the same year. 1. Section 236H collected at 0.5%: Rs. 12,000,000 x 0.5% = Rs. 60,000. 2. Tax computed on the store's taxable income (assumed): Rs. 95,000. 3. Rs. 95,000 minus Rs. 60,000 = Rs. 35,000 still payable. There is no refund. The "tax due" in step 2 of each case is whatever the Ordinance charges for the year. Sections 236G and 236H do not themselves explain how their credit interacts with the minimum tax on turnover under section 113; the related pages on minimum tax set out that section's own rules. ### How does a refund claim work? | Step | What section 170 says | | --- | --- | | Application | In the prescribed form and verified in the prescribed manner (170(2)(a) and (b)) | | Time limit | Within three years of the later of the assessment order date for that tax year or the date the tax was paid (170(2)(c)) | | Use of the excess | First against any other tax due under the Ordinance, then against other outstanding tax liabilities, and the rest is refunded (170(3)) | | Decision | A written order within sixty days of receiving the application, after an opportunity of being heard (170(4)) | | Refusal or delay | Appeal under Part III of the same Chapter, against the order or against a failure to pass one in time (170(5)) | ### What if I am not on the Active Taxpayers' List? Rule 1 of the Tenth Schedule sets higher rates for buyers not on the list: 2% for section 236G on goods other than fertilizer, and 2.5% for section 236H. That is still tax collected under sub-section (1) of each section, and sub-section (2) allows credit for it without reference to the rate. A buyer who is off the list pays far more up front, so the chance of an excess credit, and a refund claim, is higher. ### What if the stock is resold in the next tax year? Both sections tie the credit to "the tax year in which the tax was collected". Goods bought in June and sold in August still carry their 236G or 236H credit into the year of purchase, not the year of sale. ### Common mistakes - **Booking 236G or 236H as a cost of goods and forgetting it.** Section 168(1)(b) makes it tax paid, which is claimed as a credit. - **Assuming unused credit rolls into next year.** Section 168(5) sends unused credit to a refund under section 170. It does not provide a carry forward. - **Missing the three-year window.** Section 170(2)(c) sets the time limit for the application. - **Claiming credit for tax the seller never collected.** Credit is for tax actually collected under sub-section (1). ### What to check in the official text Read sections 236G, 236H, 168 and 170 of the Ordinance amended to 30 June 2026, and Divisions XIV and XV of Part IV of the First Schedule for the rates. Section 170 refers to a prescribed form and manner of verification, which are set in rules. The online filing steps on FBR's system are outside the text covered here. ### Frequently asked #### Is 236G or 236H tax a final tax? No. Each section's sub-section (2) allows credit for the tax collected in computing the buyer's tax for the year of collection. Neither section is on the list of final taxes in section 168(3), for which no credit is allowed. #### What happens if my 236G or 236H credit is more than my tax for the year? Section 168(5) says a credit that cannot be used for the year shall be refunded in accordance with section 170. Section 170(3) first applies the excess against other tax due under the Ordinance and other outstanding tax liabilities, and refunds what remains. #### How long do I have to apply for the refund? Section 170(2) requires the application within three years of the later of the date the Commissioner issued the assessment order for that tax year and the date the tax was paid. The application must be in the prescribed form and verified in the prescribed manner. ### Citations - [Income Tax Ordinance, 2001, section 236G (Advance tax on sales to distributors, dealers and wholesalers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236g-advance-tax-on-sales-to-distributors-dealers-and-wholesalers), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236H (Advance tax on sales to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236h-advance-tax-on-sales-to-retailers), as amended to 2026-06-30: "(2) Credit for the tax collected under sub-section (1) shall be allowed in computing the tax due by the retailer on the taxable income for the tax year in which the tax was collected." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "(b) the amount of any tax collected under Division II of this Part 4[or Chapter XII] or deducted under Division III of this Part 5[or Chapter XII] shall be treated as tax paid by the person from whom the tax was collected or deducted." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 170 (Refunds)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#170-refunds), as amended to 2026-06-30: "(1) A taxpayer who has paid tax in excess of the amount which the taxpayer is properly chargeable under this Ordinance may apply to the Commissioner for a refund of the excess." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XIV (Advance tax on sale to distributors, dealers or wholesalers) and Division XV (Advance tax on sale to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1, Table, S. No. 3 (section 236G) and S. No. 4 (section 236H)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can FBR register me and assess sales tax from my 236G purchase data if I have not registered? Source: https://qanoondigest.com/faq/wholesalers-distributors/fbr-assess-sales-tax-from-236g-data Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 14(2A) of the Sales Tax Act, 1990 lets the Commissioner compulsorily register a wholesaler who should have registered, after a hearing. If that person then ignores a return notice, section 11D(5) lets an officer assess sales tax on the value addition, using information from the purchase data collected under section 236G of the Income Tax Ordinance. **Applies to:** Unregistered wholesalers, dealers and distributors in Pakistan who buy from manufacturers or commercial importers that collect advance tax under section 236G. Every time a manufacturer or commercial importer sells to a distributor, dealer or wholesaler, section 236G of the Income Tax Ordinance, 2001 requires it to collect advance income tax from the buyer. That collection leaves a record of who bought what, and for how much. Since the Finance Act, 2025, the Sales Tax Act, 1990 expressly lets an officer use that record against a trader who is liable to register for sales tax but has not done so. ### What does the law say? Four provisions work together. **Section 236G of the Income Tax Ordinance.** Sub-section (1) says every manufacturer or commercial importer, at the time of sale to distributors, dealers and wholesalers, shall collect advance tax at the rate in Division XIV of Part IV of the First Schedule. Sub-section (2) allows credit for that tax against the buyer's income tax for the tax year in which it was collected. It is an income tax, not a sales tax payment. **Section 14 of the Sales Tax Act.** Section 14(1)(e) lists "a wholesaler, dealer or distributor" among the persons required to register if they make taxable supplies. Section 14(2A), added by the Finance Act, 2025, says that if such a person does not apply, the Commissioner or an authorised officer, after inquiry, "shall compulsorily register such person after providing an opportunity of being heard." **Section 26(2A) of the Sales Tax Act.** An officer may, by written notice, require a person who has failed to file a return to file it within fifteen days of service of the notice, or a longer or shorter period the notice specifies or the officer allows. **Section 11D(5) of the Sales Tax Act.** Also added by the Finance Act, 2025, it applies to a person "who is liable to be registered under clause (25) of section 2 based on tax withheld under section 236G" and who does not furnish a return upon notice. For that person, an officer "may assess sales tax liability on the value addition on reasonable grounds including information obtained from the purchase data under section 236G". ### How does it work in practice? Read in order, the Act describes this path: 1. **Liability exists already.** Clause (25) of section 2 defines a registered person as one who is registered "or is liable to be registered". A wholesaler making taxable supplies is inside that definition whether or not it has applied. 2. **Compulsory registration.** Under section 14(2A), the Commissioner or an authorised officer makes an inquiry, gives the person an opportunity of being heard, and then registers the person. Section 14(3) leaves the detailed procedure to what the Board prescribes. 3. **Return notice.** An officer can issue a notice under section 26(2A) to file the missing returns. 4. **Assessment.** If no return is furnished upon notice, section 11D(5) allows an assessment of sales tax on value addition. Section 11D(1) also allows penalty and default surcharge to be charged with a best judgment assessment. Section 11D(5) opens with "Notwithstanding anything contained in this section", so it operates alongside the general best judgment rules in the same section rather than depending on them. ### Worked example (illustrative figures) Adeel runs an unregistered wholesale business in Faisalabad supplying packaged edible goods to shops. The figures below are invented. 1. Manufacturers' records under section 236G show Adeel bought goods worth Rs. 48,000,000 in a year. 2. The Commissioner registers him compulsorily under section 14(2A) after a hearing he does not attend. 3. An officer issues a notice under section 26(2A). Adeel files nothing within fifteen days. 4. The officer, on the grounds recorded in the order, takes Adeel's resale value as Rs. 52,800,000. The value addition is Rs. 52,800,000 minus Rs. 48,000,000 = Rs. 4,800,000. 5. Applying the rate of eighteen per cent in section 3(1): Rs. 4,800,000 x 18% = Rs. 864,000. 6. Penalty and default surcharge may be added under section 11D(1). The Act does not set a margin or formula for value addition. The Rs. 52,800,000 figure in step 4 is an assumption for this example only. ### What if I was never actually a wholesaler? Section 14(2A) requires an inquiry and an opportunity of being heard before compulsory registration, and that hearing is where the person can contest liability. Section 236G itself applies only to sales to distributors, dealers and wholesalers, so the purchase data reflects how the seller classified the buyer. Clause (47) of section 2 defines a wholesaler as a person who carries on, "whether regularly or otherwise", the business of buying and selling goods by wholesale. Whether a particular buyer meets that definition is a question of fact the Act leaves to the proceedings. ### What if I file after the assessment? Section 11D(3) says that where a best judgment assessment was made because of a default under clause (a) of sub-section (1), and the person files the return within sixty days of the order and pays the tax with default surcharge and penalty, the show cause notice and the assessment "shall abate". Sub-section (3) names only clause (a) of sub-section (1). The Act does not say in terms whether it also covers an assessment made under sub-section (5). ### Common mistakes - **Treating 236G tax as a substitute for sales tax.** Section 236G(2) gives credit against income tax only. It does not discharge a sales tax liability. - **Assuming no registration means no liability.** Clause (25) of section 2 already treats a person liable to register as a registered person, while its proviso denies that person every benefit of registration, including input tax. - **Overlooking the tax fraud definition.** Clause (37) of section 2 defines tax fraud as knowingly, intentionally or dishonestly causing loss of tax, and lists "making of taxable supplies without getting registration under this Act" as one example. Section 26(2A) allows a return notice within fifteen years in cases of tax fraud and five years in other cases. ### What to check in the official text Read sections 3(1), 11D, 14 and 26 and clauses (25), (37) and (47) of section 2 of the Sales Tax Act as amended to 30 June 2026, and section 236G and Division XIV of Part IV of the First Schedule to the Income Tax Ordinance as amended to 30 June 2026. The Act also leaves the procedure for registration and any conditions for determining a minimum liability to the Board. Board notifications and general orders on those points are not in this corpus, so confirm them separately. ### Frequently asked #### Does paying 236G advance tax count as registering for sales tax? No. Section 236G of the Income Tax Ordinance is an income tax collection, and credit for it is allowed against income tax. Sales tax registration is a separate duty under section 14 of the Sales Tax Act, which lists wholesalers, dealers and distributors. #### How does FBR work out my sales tax if I never filed a return? Section 11D(5) of the Sales Tax Act lets an officer assess sales tax on the value addition on reasonable grounds, including information from 236G purchase data. The Act does not fix a margin or formula for that value addition, so the figure depends on the grounds the officer records. #### Can I avoid the assessment by filing the return later? Section 11D(3) says a best judgment assessment made for not filing a return abates if the return is filed within sixty days of the order and the tax, default surcharge and penalty are paid. Sub-section (3) refers to defaults under clause (a) of sub-section (1), and the Act does not say in terms whether it also covers an assessment made under sub-section (5). ### Citations - [Sales Tax Act, 1990, section 11D (Best judgment Assessment)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#11d-best-judgment-assessment), as amended to 2026-06-30: "an officer of inland revenue may assess sales tax liability on the value addition on reasonable grounds including information obtained from the purchase data under section 236G of Income Tax Ordinance, 2001 (XLIX of 2001)" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "having reason to believe that a person is liable to register, he shall compulsorily register such person after providing an opportunity of being heard." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Income Tax Ordinance, 2001, section 236G (Advance tax on sales to distributors, dealers and wholesalers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236g-advance-tax-on-sales-to-distributors-dealers-and-wholesalers), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Sales Tax Act, 1990, section 26 (* Return)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#26-return), as amended to 2026-06-30: "to furnish the return or returns within fifteen days from the date of service of such notice" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "making of taxable supplies without getting registration under this Act" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Can further tax be offset against input tax, and can a buyer claim further tax charged to it as input tax? Source: https://qanoondigest.com/faq/wholesalers-distributors/further-tax-input-tax-adjustment Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No on both counts. Section 7(1) of the Sales Tax Act, 1990 lets a registered person deduct input tax from output tax excluding further tax under section 3(1A), so the supplier pays further tax in full. The buyers who are charged it, unregistered or non-active persons, are barred from claiming input tax by section 8(3) and rule 12A. **Applies to:** Registered distributors and wholesalers in Pakistan who charge further tax, and traders who have been charged further tax by a supplier. Further tax under section 3(1A) of the Sales Tax Act, 1990 is the extra four percent a registered supplier charges on taxable supplies to a buyer who is unregistered or not an active taxpayer. Distributors ask two follow-up questions about it: can the supplier set it off against input tax, and can the buyer who paid it claim it back? The Act answers the first directly and answers the second through the rules on who may claim input tax. ### What does the law say about the supplier's side? Section 7(1) is the provision that lets a registered person deduct input tax. It allows input tax paid or payable during the tax period, for taxable supplies made or to be made, to be deducted "from the output tax excluding the amount of further tax under sub-section (1A) of section 3." The words "excluding the amount of further tax" were inserted by the Finance Act, 2014. Their effect on the text is that output tax is split into two parts: | Part of output tax | Can input tax reduce it? | | --- | --- | | Sales tax at the normal rate under section 3 | Yes, under section 7(1), subject to the other provisions section 7(1) itself refers to | | Further tax under section 3(1A) | No, it is excluded from the output tax input tax is set against | So the further tax a distributor collects in a month is payable in full, whatever its input tax for that month. ### What does the law say about the buyer's side? Section 3(1A) charges further tax only on supplies to two kinds of buyer. The Act and Rules deal with each: - **An unregistered buyer.** Section 8(3) says "No person other than a registered person shall make any deduction or reclaim input tax". A person who is liable to register but has not done so is still barred: the proviso to clause (25) of section 2 says such a person "shall not be entitled to any benefit available to a registered person". - **A registered buyer who is not active.** Rule 12A(2) of the Sales Tax Rules, 2006 says a non-active taxpayer shall not be entitled to "claim input tax or refund". Rule 12A(4) adds that where a buyer enters an invoice issued by a non-active supplier, no input tax credit is admissible against it. The definition of input tax in clause (14) of section 2 covers "tax levied under this Act on supply of goods to the person", and it does not single out further tax either way. In practice the question does not arise for an eligible claimant, because a registered and active buyer should not have been charged further tax at all. ### Worked example (illustrative figures) Rehman Distributors in Sialkot is registered and active. In one month, with invented figures: 1. Sales to registered, active shops: value Rs. 3,000,000. Sales tax at 18% = Rs. 540,000. 2. Sales to unregistered shops: value Rs. 1,000,000. Sales tax at 18% = Rs. 180,000. Further tax at 4% = Rs. 40,000. 3. Output tax other than further tax: Rs. 540,000 + Rs. 180,000 = Rs. 720,000. 4. Admissible input tax on purchases, after any disallowance under section 8 and any other limit: Rs. 650,000. 5. Net sales tax: Rs. 720,000 minus Rs. 650,000 = Rs. 70,000. 6. Further tax payable in full: Rs. 40,000. 7. Total payable for the month: Rs. 70,000 + Rs. 40,000 = Rs. 110,000. If admissible input tax had been Rs. 750,000 instead, step 5 would give nil with Rs. 30,000 of input tax left over, and the Rs. 40,000 of further tax in step 6 would still be payable. ### What if the buyer registers later? Section 59 lets a person who later registers treat as input tax "the tax paid" on goods bought from a registered person against a section 23 invoice within thirty days before applying, if the goods are verifiable unsold stock on the relevant date. Section 59 speaks only of the tax paid. It does not say whether the further tax portion of such an invoice counts. The corpus does not settle that point. ### What if further tax was charged by mistake? If a supplier charges further tax to a buyer who was registered and active at the time of supply, the Act does not contain a provision dealing with that specific error. The general provisions on debit and credit notes are not written with further tax in mind, and this page does not say how they would apply, because the corpus does not address the point directly. ### Common mistakes - **Netting further tax against input tax in the return.** Section 7(1) excludes it from the output tax that input tax reduces. - **A non-active buyer claiming it as input tax.** Rule 12A(2) bars a non-active taxpayer from claiming input tax altogether, not only further tax. - **Assuming registration later recovers all past further tax.** Section 59 covers only tax on stock bought within thirty days before the application, and is silent on further tax. ### What to check in the official text Read sections 3(1A), 7, 8 and 59 and clauses (14) and (25) of section 2 of the Sales Tax Act as amended to 30 June 2026, and rule 12A of the Sales Tax Rules, 2006 as amended to 30 June 2025. Check whether any Board special order or Federal Government notification under section 7 applies to your class of business, since those are not held in this corpus. ### Frequently asked #### If my input tax is higher than my output tax, do I still pay further tax? Section 7(1) of the Sales Tax Act lets input tax be deducted from output tax excluding further tax. On that text, further tax is not reduced by input tax, so excess input tax does not wipe it out. #### My supplier charged me further tax. Can I claim it back as input tax? Further tax is charged only when the buyer is unregistered or not an active taxpayer. An unregistered person cannot claim input tax under section 8(3), and a non-active taxpayer cannot under rule 12A(2) of the Sales Tax Rules, 2006. #### What if I register later? Section 59 treats tax paid on verifiable unsold stock bought from a registered person within thirty days before the registration application as input tax. The section speaks of the tax paid and does not say whether the further tax portion is included. ### Citations - [Sales Tax Act, 1990, section 7 (Determination of tax liability)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#7-determination-of-tax-liability), as amended to 2026-06-30: "excluding the amount of further tax under sub-section (1A) of section 3." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "there shall be charged, levied and paid a further tax at the rate of" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "shall not be entitled to any benefit available to a registered person under any of the provisions of this Act or the rules made thereunder" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8 (Tax credit not allowed)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8-tax-credit-not-allowed), as amended to 2026-06-30: "(3) No person other than a registered person shall make any deduction or reclaim input tax in respect of taxable supplies made or to be made by him." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 12A (Non-active taxpayer)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#12a-non-active-taxpayer), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, section 59 (Tax paid on stocks acquired before registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#59-tax-paid-on-stocks-acquired-before-registration), as amended to 2026-06-30: "shall be treated as input tax, provided that such goods were purchased by him from a registered person against an invoice issued under section 23 during a period of thirty days before making an application for registration" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Can a distributor carry forward minimum tax paid above its normal tax to later years? Source: https://qanoondigest.com/faq/wholesalers-distributors/carry-forward-excess-minimum-tax-distributor Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 113(2)(c) carries forward minimum tax paid above the tax payable under the normal rates, and adjusts it against normal tax liability in later years. Since the Finance Act, 2025 the second proviso allows this for the two tax years immediately after the year the tax was paid, down from three. **Applies to:** Distributors, dealers and wholesalers in Pakistan that paid minimum tax on turnover under section 113 because it was higher than their normal income tax. A distributor with a large turnover and a small margin can end up paying minimum tax under section 113 of the Income Tax Ordinance, 2001 that is well above the tax on its actual profit. The Ordinance does not treat all of that difference as lost. Section 113(2)(c) lets the excess be carried into later years, but only for a short time. ### What does the law say? Section 113(2)(c), as amended to 30 June 2026, has three parts: 1. **The main rule.** 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". 2. **First proviso.** If minimum tax was paid because no tax was payable or paid for the year, for example because of a loss, the entire minimum tax paid is carried forward. 3. **Second proviso.** The amount is carried forward and adjusted against tax liability for **two** tax years immediately succeeding the tax year for which it was paid. An Explanation added by the Finance Act, 2023 confirms that "the aforesaid Part" means clause (1) of Division I or Division II of Part I of the First Schedule. Division I clause (1) holds the normal rates for individuals and associations of persons; Division II holds the rates for companies. ### How has the time limit changed? The footnotes to the consolidated Ordinance record the history of the second proviso. The Finance Act, 2021 set five tax years. The Finance Act, 2022 replaced "five" with "three". The Finance Act, 2025, section 10, replaced "three" with "two". That Act came into force on 1 July 2025 unless it provided otherwise. The amending text does not say whether the shorter period applies to excess minimum tax already being carried forward from years before the change. This page does not resolve that point. ### Worked example (illustrative figures) Hamza Distributors is a sole proprietor in Lahore trading in hardware, which is not in the clause (24D) Table, so the Division IX rate "in all other cases" of 1.25% applies. Turnover and normal tax figures are invented; only the rate is real, and the same rate is assumed for later years. **Tax year 2027** 1. Turnover: Rs. 200,000,000. 2. Minimum tax: Rs. 200,000,000 x 1.25% = Rs. 2,500,000. 3. Tax under Division I on taxable income (assumed): Rs. 1,600,000. 4. Minimum tax paid instead: Rs. 2,500,000. 5. Excess carried forward: Rs. 2,500,000 minus Rs. 1,600,000 = Rs. 900,000. **Tax year 2028** 6. Turnover: Rs. 220,000,000, so minimum tax is Rs. 220,000,000 x 1.25% = Rs. 2,750,000. 7. Tax under Division I (assumed): Rs. 3,800,000, which is higher than the minimum, so section 113 does not bite this year. 8. Adjust the carried-forward Rs. 900,000: Rs. 3,800,000 minus Rs. 900,000 = Rs. 2,900,000. 9. Rs. 2,900,000 is still above the Rs. 2,750,000 minimum for the year, and the whole Rs. 900,000 is used. If normal tax in tax year 2028 had been lower and only part of the Rs. 900,000 had been used, the remainder could be carried to tax year 2029, the second and last year the proviso allows. ### What if the adjustment would take tax below that year's minimum? Suppose normal tax in tax year 2028 had been Rs. 3,000,000. Deducting the full Rs. 900,000 would leave Rs. 2,100,000, which is less than that year's Rs. 2,750,000 minimum. Section 113(2)(c) says the excess is adjusted against tax liability under Division I, and section 113(1) applies where tax payable falls below the minimum because of credits or other listed reasons. The text does not say expressly how these two rules interact in that case. This page does not resolve it. ### What if the distributor made a loss? Under the first proviso, if a loss meant no tax was payable at all and the distributor paid, say, Rs. 2,500,000 of minimum tax, the whole Rs. 2,500,000 is carried forward, subject to the same two-year limit. ### Common mistakes - **Relying on the older three or five year periods.** The second proviso now reads "two". - **Treating carried-forward minimum tax as a refund.** Section 113(2)(c) provides for adjustment against later normal tax, not a refund. - **Adjusting it against minimum tax.** The clause directs adjustment against tax liability under clause (1) of Division I or Division II of Part I. - **Mixing it up with section 153 minimum tax.** Section 113(2)(c) deals with tax paid under section 113(1). Tax deducted under section 153 has its own rule in section 153(3). ### What to check in the official text Read section 113 of the Ordinance as amended to 30 June 2026, including all three parts of sub-section (2)(c) and its footnotes, Division IX of Part I of the First Schedule for the rate that applies to you, and section 10 of the Finance Act, 2025 for the change from three years to two. ### Frequently asked #### Against what can the carried-forward minimum tax be adjusted? Section 113(2)(c) adjusts it against tax liability under the same Part of the First Schedule. Its Explanation says that means clause (1) of Division I or Division II of Part I, the normal rates for individuals, associations of persons and companies. #### What if the distributor had a loss and paid only minimum tax? The first proviso to section 113(2)(c) says that where minimum tax is paid because no tax is payable or paid for the year, the entire amount of minimum tax paid is carried forward in the same way. #### Is excess minimum tax refunded? Section 113(2)(c) provides for carry forward and adjustment, not a refund. It allows adjustment for two tax years after the year of payment and gives no further year. ### Citations - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "Provided further that the amount under this clause shall be carried forward an.d adjusted against tax liability for 3[ ] 4[two] . tax years immediately succeeding the tax year for which the amount was paid.]" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IX (Minimum tax under section 113), Table, S. No. 4](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2025, section 10 (Amendments in the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2025#10-amendments-in-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2025: "(17) in section 113, in sub-section (2), in clause (c), in the second proviso, for the word "three", the word "two" shall be substituted;" Official source: https://download1.fbr.gov.pk/Docs/2025629106147620FInanceAct2025.pdf --- ## If my minimum tax on turnover is more than my normal tax, can I carry the excess forward? Source: https://qanoondigest.com/faq/wholesalers-distributors/excess-minimum-tax-carry-forward-distributor Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 113(2)(c) of the Income Tax Ordinance says minimum tax paid in excess of the tax payable at normal rates is carried forward for adjustment against tax liability. The second proviso limits this to the two tax years immediately after the year it was paid. In a year with no tax payable, the entire minimum tax is carried forward. **Applies to:** Distributors, dealers and wholesalers covered by section 113 whose low margins make minimum tax on turnover higher than tax on their profit. Minimum tax that exceeds your normal tax is not lost straight away. Section 113(2)(c) of the Income Tax Ordinance, 2001 lets you carry the excess into later years and set it against tax at the normal rates. The window is short: two tax years. ### What does the law say? Section 113(2)(c) applies where tax paid under sub-section (1) exceeds the actual tax payable under Part I, clause (1) of Division I, or Division II of the First Schedule. In that case "the excess amount of tax paid shall be carried forward for adjustment against tax liability under the aforesaid Part of the subsequent tax year". Two provisos follow: 1. **Loss or nil-tax years.** 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". 2. **Time limit.** The amount is carried forward and adjusted against tax liability for two tax years immediately succeeding the tax year for which it was paid. An Explanation, added by the Finance Act, 2023, says "the aforesaid Part" means clause (1) of Division I or Division II of Part I of the First Schedule. Those are the normal rate tables, so the excess is set against tax computed at normal rates. The footnotes to section 113 show how the window has shrunk. The Finance Act, 2021 proviso allowed five years. The Finance Act, 2022 substituted "five", and the Finance Act, 2025 substituted "three", leaving two. ### Why does this matter for distributors? Distributors often work on thin margins, so tax on profit can be well below a percentage of turnover. For tax year 2027 the Division IX rate "In all other cases" is 1.25% of turnover. A distributor paying that rate year after year may build up excess amounts that it can use only if, within two years, its normal tax rises above its minimum tax. ### Worked example (illustrative figures) Noor Distribution (Pvt) Ltd in Peshawar is a resident company distributing building hardware. Its turnover and normal tax below are invented. The minimum tax rate used is 1.25% from Division IX, assumed to stay the same in later years for the sake of the example; later Finance Acts may change it. **Tax year 2027** - Turnover Rs. 400,000,000. Minimum tax: 400,000,000 × 1.25% = Rs. 5,000,000. - Normal tax on profit: Rs. 3,200,000. - Minimum tax applies. Excess: 5,000,000 - 3,200,000 = Rs. 1,800,000. - Available for tax years 2028 and 2029. **Tax year 2028** - Turnover Rs. 380,000,000. Minimum tax: 380,000,000 × 1.25% = Rs. 4,750,000. - Normal tax on profit: Rs. 4,000,000. - Minimum tax applies again. New excess: 4,750,000 - 4,000,000 = Rs. 750,000, available for 2029 and 2030. - The example makes no adjustment of the 2027 excess this year. Section 113 does not say expressly whether a carried-forward amount can reduce tax in a year in which minimum tax itself applies. **Tax year 2029** - Turnover Rs. 400,000,000. Minimum tax: Rs. 5,000,000. - Normal tax on profit: Rs. 8,000,000, higher than minimum tax. - Adjustment: 1,800,000 (from 2027, last year it can be used) + 750,000 (from 2028) = Rs. 2,550,000. - Tax after adjustment: 8,000,000 - 2,550,000 = Rs. 5,450,000, which is still above that year's minimum tax of Rs. 5,000,000. If the company's 2029 normal tax had also been below minimum tax, the unused 2027 amount would reach the end of its two-year window. ### What if ...? **What if I made a loss?** Under the first proviso the whole minimum tax paid is carried forward, not just an excess, since no tax was payable at normal rates. **What if the adjustment would take my tax below minimum tax?** Section 113(2)(c) does not state whether an adjustment may reduce a later year's tax below that year's minimum tax. The example above avoids the point. The law is unclear on it here. **What if the excess arose before the Finance Act, 2025?** The section as amended says two years. It contains no transitional rule for amounts paid when the limit was three or five years. ### Common mistakes - **Assuming a refund.** Section 113(2)(c) provides adjustment against later tax, not a refund. - **Counting from the wrong year.** The two years are those immediately succeeding the tax year for which the amount was paid. - **Using old guidance.** Pages written before the Finance Act, 2025 describe a three-year window. - **Treating the excess as a general credit.** It is adjusted against tax liability under clause (1) of Division I or Division II of Part I, the normal rate tables. ### What to check in the official text Read section 113(2)(c), both provisos and the Explanation, with the footnotes showing the Finance Acts of 2021, 2022, 2023 and 2025. Check the Division IX Table in Part I of the First Schedule for the rate that applies to your business, and any reduced rate in the Second Schedule. ### Frequently asked #### How many years can excess minimum tax be carried forward? Two. The second proviso to section 113(2)(c) says the amount shall be carried forward and adjusted against tax liability for two tax years immediately succeeding the tax year for which it was paid. The footnotes show this period was five, then three, and was cut to two by the Finance Act, 2025. #### What happens to excess not used within two years? The section allows adjustment only for the two tax years immediately succeeding the year of payment. It contains no rule for using the amount after that period, and it does not provide a refund of it. #### Can I carry forward the whole minimum tax if I made a loss? Yes. The first proviso to section 113(2)(c) says that if minimum tax was paid because no tax was payable or paid for the year, the entire amount paid under sub-section (1) is carried forward in the same way. ### Citations - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "the excess amount of tax paid shall be carried forward for adjustment against tax liability under the aforesaid Part of the subsequent tax year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "if tax is paid under sub-section (1) due to the fact that no tax is 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" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IX (Minimum tax under section 113), Table, S. No. 4](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What happens to a distributor who fails to collect or deposit 236G or 236H tax? Source: https://qanoondigest.com/faq/wholesalers-distributors/failure-to-collect-236h-distributor-liability Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 161 makes the seller who fails to collect 236G or 236H tax, or collects it but does not pay it over, personally liable for that tax. If the buyer later pays it, section 161(1B) replaces recovery with default surcharge at 12% a year. Section 162 also lets the Commissioner recover the tax from the buyer. **Applies to:** Manufacturers, commercial importers, distributors, dealers and wholesalers in Pakistan who must collect advance tax under section 236G or 236H when they sell. When a law makes a seller collect tax from its buyer, the seller becomes a collecting agent for the state. The Income Tax Ordinance, 2001 attaches consequences to getting that wrong, and they fall mainly on the seller rather than on the buyer who was meant to bear the tax. ### Who has to collect the tax? Section 236G(1) requires every manufacturer or commercial importer to collect advance tax when selling to distributors, dealers and wholesalers. Section 236H(1) requires every manufacturer, distributor, dealer, wholesaler or commercial importer to collect advance tax when selling to retailers, and every distributor or dealer to collect it when selling to another wholesaler "in respect of the said sectors". The rates are in Divisions XIV and XV of Part IV of the First Schedule. For section 236H the Division XV rate is 0.5% of the gross amount of sales. Section 160 then requires tax collected under Chapter XII, which contains both sections, to be paid to the Commissioner "within the time and in the manner as may be prescribed". ### What does section 161 do to the seller? Section 161(1) covers two failures: 1. failing to collect tax as required under Chapter XII; or 2. having collected it, failing to pay it to the Commissioner as section 160 requires. In either case "the person shall be personally liable to pay the amount of tax to the Commissioner", who may pass an order and recover it. The protections and adjustments around that liability are: - **Hearing first.** Section 161(1A) bars recovery unless the person has had an opportunity of being heard. - **Buyer has since paid.** Section 161(1B) says that if, at the time of recovery, the tax has meanwhile been paid by the buyer, no recovery is made from the seller. The seller instead pays default surcharge at twelve per cent per annum from the date it failed to collect to the date the tax was paid. - **Right to recover from the buyer.** Section 161(2) entitles a seller made liable for failing to collect to recover the tax from the person it should have been collected from. - **Amendment of the order.** Section 161(3) lets the Commissioner amend a recovery order found erroneous and prejudicial to revenue, again after a hearing. ### Can FBR go after the buyer instead? Section 162(1) lets the Commissioner pass an order and recover the uncollected amount directly "from the person from whom the tax should have been collected". Section 162(2) adds that recovery from the buyer does not absolve the person who failed from other legal action or from default surcharge. ### Is there a penalty? S. No. 15 of the table in section 182(1) applies to any person who fails to collect or deduct tax as required, or fails to pay collected tax as required under section 160. Chapter XII is among the provisions listed against it. The penalty is forty thousand rupees or 10% of the amount of tax, whichever is higher. ### Worked example (illustrative figures) Rehman Distributors in Gujranwala sells Rs. 8,000,000 of goods to retailers on the Active Taxpayers' List during a quarter of tax year 2027 and collects no 236H tax. All figures are invented; the rates are the ones cited on this page. 1. Tax that should have been collected at 0.5%: Rs. 8,000,000 x 0.5% = Rs. 40,000. 2. Personal liability under section 161(1): Rs. 40,000. 3. Penalty under S. No. 15: the higher of Rs. 40,000 or 10% x Rs. 40,000 = Rs. 4,000. The penalty is Rs. 40,000. Now suppose the retailers had already paid the Rs. 40,000 themselves, six months after the date Rehman Distributors failed to collect it. Section 161(1B) then stops recovery of the tax from the distributor and substitutes default surcharge: 4. Rs. 40,000 x 12% x 6/12 = Rs. 2,400. ### What if the tax was collected but not deposited? This is the second limb of section 161(1). The seller holds money that section 168 treats as the buyer's tax paid, so the buyer is entitled to credit for it. The seller is personally liable for the full amount and falls within the same penalty entry, which names failure to pay under section 160. ### Common mistakes - **Treating 236H as the retailer's problem.** The duty to collect is on the seller, and section 161 makes the seller personally liable. - **Assuming a later payment by the buyer ends the matter.** Section 161(1B) stops recovery of the tax but leaves default surcharge running from the date of failure. - **Collecting and holding the tax.** Collection without payment under section 160 is a separate failure under section 161(1)(b). - **Ignoring buyers not on the Active Taxpayers' List.** The Tenth Schedule sets a higher rate for them, so the amount at risk is larger. The related page on that rate explains it. ### What to check in the official text Read sections 160, 161, 162, 182 and 236H of the Ordinance amended to 30 June 2026, and Division XV of Part IV of the First Schedule. Section 236H(1) still refers to sales by a distributor or dealer to another wholesaler "in respect of the said sectors", although the list of sectors it once referred to was omitted by the Finance Act, 2024. The text does not say what that phrase now covers. The time and manner of payment under section 160 are prescribed in rules and are not covered on this page. ### Frequently asked #### Can FBR recover uncollected 236H tax from both the distributor and the retailer? Section 161 makes the distributor personally liable, and section 162 separately allows the Commissioner to recover the amount from the person from whom it should have been collected. Section 162(2) says recovery from the buyer does not absolve the person who failed from other legal action or default surcharge. #### What if the retailer has already paid the tax itself? Section 161(1B) says no recovery of the tax is then made from the distributor. The distributor instead pays default surcharge at twelve per cent per annum from the date it failed to collect to the date the tax was paid. #### Is there a penalty as well as the tax? Yes. S. No. 15 of the table in section 182 sets a penalty of forty thousand rupees or 10% of the amount of tax, whichever is higher, for failing to collect tax under Chapter XII or failing to pay collected tax under section 160. ### Citations - [Income Tax Ordinance, 2001, section 236H (Advance tax on sales to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236h-advance-tax-on-sales-to-retailers), as amended to 2026-06-30: "(1) Every manufacturer, distributor, dealer, wholesaler or commercial importer 2[ ] at the time of sale to retailers 3[, and every distributor or dealer to another wholesaler in respect of the said sectors], shall collect advance tax" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 160 (Payment of tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#160-payment-of-tax-collected-or-deducted), as amended to 2026-06-30: "shall be paid to the Commissioner by the person making the collection or deduction within the time and in the manner as may be prescribed." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 161 (Failure to pay tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#161-failure-to-pay-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be personally liable to pay the amount of tax to the Commissioner 4[who may 5[pass an order to that effect and] proceed to recover the same.]" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 162 (Recovery of tax from the person from whom tax was not collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#162-recovery-of-tax-from-the-person-from-whom-tax-was-not-collected-or-deducted), as amended to 2026-06-30: "the Commissioner may 3[pass an order to that effect and] recover the amount not collected or deducted from the person from whom the tax should have been collected or to whom the payment was made." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 182(1), Table, S. No. 15 (failure to collect or deduct tax or to pay it under section 160)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XV (Advance tax on sale to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What happens to a distributor who fails to collect or deposit 236H tax from retailers? Source: https://qanoondigest.com/faq/wholesalers-distributors/failure-to-collect-236h-consequences Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 161 of the Income Tax Ordinance makes a distributor that fails to collect section 236H tax, or collects it but does not pay it to the Commissioner, personally liable for that tax. Section 205(3) adds default surcharge at 12 per cent per annum on the unpaid amount until it is paid. **Applies to:** Distributors, dealers, wholesalers, manufacturers and commercial importers who sell to retailers and must collect advance tax under section 236H. A distributor that sells to retailers is a collecting agent under section 236H. If it does not collect the tax, or collects it and keeps it, the Income Tax Ordinance, 2001 treats the tax as the distributor's own debt. It also charges default surcharge for the time the money was not with the Commissioner. ### What does the law say? Four provisions work together. **Section 236H** requires every manufacturer, distributor, dealer, wholesaler or commercial importer, at the time of sale to retailers, to collect advance tax at the rate in Division XV of Part IV of the First Schedule. For tax year 2027 that rate is 0.5% of the gross amount of sales. **Section 160** says tax collected under Chapter XII (which contains section 236H) "shall be paid to the Commissioner by the person making the collection or deduction within the time and in the manner as may be prescribed". **Section 161(1)** covers two failures: - (a) failing to collect tax as required under Division II of Part V of Chapter X or Chapter XII; or - (b) having collected the tax, failing to pay it to the Commissioner as required under section 160. In either case "the person shall be personally liable to pay the amount of tax to the Commissioner", who may pass an order to that effect and recover it. **Section 205(3)** says a person who fails to collect tax as required under Chapter XII, or fails to pay tax collected by the due date under section 160, is liable for default surcharge at 12 per cent per annum on the unpaid amount. It runs from the date the amount was required to be collected to the date it is paid to the Commissioner. ### How does it work in practice? The safeguards and side-routes in section 161 matter as much as the main rule: - **Hearing first.** Section 161(1A) bars recovery until the distributor has had an opportunity of being heard. - **Retailer already paid.** Section 161(1B) says that if the tax has meanwhile been paid by the retailer, nothing is recovered from the distributor. Default surcharge still applies at 12 per cent per annum from the date of failure to the date the tax was paid. - **Right to recover.** Section 161(2) entitles the distributor, once made liable, to recover the tax from the retailer from whom it should have been collected. - **Commissioner's alternative.** Section 162(1) lets the Commissioner recover the uncollected amount directly from the retailer. Section 162(2) says that does not absolve the person who failed to deduct from default surcharge or other legal action. Note that sub-section (2) is worded for failures "to deduct" under Division III or Chapter XII. - **Amended orders.** Section 161(3) lets the Commissioner amend a recovery order that is erroneous and prejudicial to revenue, again only after a hearing. ### Worked example (illustrative figures) Zafar Distributors in Faisalabad supplies soap and detergent to about 200 kiryana shops. In one month it invoices Rs. 20,000,000 to retailers and forgets to add 236H tax. **Step 1: the tax that should have been collected.** 20,000,000 × 0.5% = Rs. 100,000. **Step 2: personal liability.** Under section 161(1)(a), after a hearing, the Commissioner can order Zafar Distributors to pay Rs. 100,000 itself. **Step 3: default surcharge.** Suppose the amount is paid six months after the sales. Section 205(3) charges 12 per cent per annum. As a simple pro-rata illustration: 100,000 × 12% × 6 ÷ 12 = Rs. 6,000. Section 205(3) states the rate and the start and end dates; it does not set out a day-count method, so the exact figure depends on the actual dates. **Step 4: recovering from shops.** Section 161(2) lets Zafar Distributors recover the Rs. 100,000 from the retailers concerned. Whether that is practical with 200 small customers is a commercial question the law does not answer. ### What if ...? **What if I collected the tax but paid it late?** That is section 161(1)(b). You are personally liable for any amount not paid, and section 205(3) runs default surcharge from the date the amount was required to be collected until it reaches the Commissioner. **What if the retailer claims credit for tax I never deposited?** Section 236H(2) gives the retailer credit for tax "collected". Whether a retailer's credit is affected by the collector's failure to deposit is not addressed in sections 161 or 236H. **What if the Commissioner's order is wrong?** Section 161(1A) guarantees a hearing before recovery. Appeal routes are in other parts of the Ordinance and are not covered on this page. ### Common mistakes - **Treating 236H as the retailer's problem.** The duty to collect is on the seller, and section 161 makes the seller liable. - **Thinking late payment only costs surcharge.** Unpaid collected tax is also recoverable in full under section 161(1)(b). - **Assuming a paid-up retailer ends the matter.** Under section 161(1B) default surcharge still runs for the period of default. - **Computing tax on the net price.** Division XV applies to the gross amount of sales. ### What to check in the official text Read sections 160, 161, 162 and 205(3) together with section 236H. Section 160 leaves the time and manner of payment to be prescribed; those requirements are in the Income Tax Rules, 2002 and are not set out here. Penalties under other provisions of the Ordinance are a separate matter and are not covered on this page. ### Frequently asked #### Can the distributor recover the tax from the retailer afterwards? Yes. Section 161(2) says a person made personally liable for failing to collect is entitled to recover the tax from the person from whom it should have been collected. Section 162 separately lets the Commissioner recover the uncollected amount from that person. #### What if the retailer has already paid the tax itself? Section 161(1B) says that if, at the time of recovery, it is established that the tax has meanwhile been paid by that person, no recovery is made from the distributor. The distributor is still liable for default surcharge at 12 per cent per annum from the date it failed to collect to the date the tax was paid. #### Can the Commissioner recover without hearing the distributor? No. Section 161(1A) says no recovery under sub-section (1) shall be made unless the person has been given an opportunity of being heard. The same applies to amending a recovery order under section 161(3). ### Citations - [Income Tax Ordinance, 2001, section 236H (Advance tax on sales to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236h-advance-tax-on-sales-to-retailers), as amended to 2026-06-30: "Credit for the tax collected under sub-section (1) shall be allowed in computing the tax due by the retailer" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 160 (Payment of tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#160-payment-of-tax-collected-or-deducted), as amended to 2026-06-30: "shall be paid to the Commissioner by the person making the collection or deduction within the time and in the manner as may be prescribed." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 161 (Failure to pay tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#161-failure-to-pay-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be personally liable to pay the amount of tax to the Commissioner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 162 (Recovery of tax from the person from whom tax was not collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#162-recovery-of-tax-from-the-person-from-whom-tax-was-not-collected-or-deducted), as amended to 2026-06-30: "recover the amount not collected or deducted from the person from whom the tax should have been collected or to whom the payment was made." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 205 (Default surcharge)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#205-default-surcharge), as amended to 2026-06-30: "12 per cent per annum on the amount unpaid computed for the period commencing on the date the amount was required to be collected or deducted and ending on the date on which it was paid to the Commissioner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XV (Advance tax on sale to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do sections 236G and 236H still apply only to listed sectors like pharma, FMCG and cement, or to all goods? Source: https://qanoondigest.com/faq/wholesalers-distributors/236g-236h-all-goods-or-listed-sectors Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer As amended to 30 June 2026, sections 236G and 236H no longer name any sectors. The footnotes to the consolidated Ordinance record that the Finance Act, 2024 omitted the list, which ran from pharmaceuticals and edible oil to cement, textile and foam. Both sections now read as covering sales generally, though 236H still refers to 'the said sectors'. **Applies to:** Manufacturers, commercial importers, distributors, dealers, wholesalers and retailers in any line of goods in Pakistan. Until 2024, a trader could check whether sections 236G and 236H touched its business by reading a list of sectors in the section itself. That list is gone. For tax year 2027 the sections read without any sector restriction, which means a trader in stationery, crockery or spare parts has to read them the same way as one in cement or cooking oil. ### What did the sections used to say? Clause (35) of section 8 of the Finance Act, 2024 sets out the expression it omitted from section 236G(1): "of pharmaceuticals, poultry and animal feed, edible oil and ghee, auto-parts, tyres, varnishes, chemicals, cosmetics, IT equipment, electronics, sugar, cement, iron and steel products, fertilizer, motorcycles, pesticides, cigarettes, glass, textile, beverages, paint or foam sector," Clause (36) omits the same list from section 236H(1), with one difference: it does not include "fertilizer". The footnotes to both sections in the Ordinance amended to 30 June 2026 reproduce these words and record that they were "omitted by the Finance Act, 2024". Note that "FMCG" was never one of the listed words. The list named product groups such as edible oil and ghee, cosmetics and beverages. ### What do the sections say now? With the list removed, section 236G(1) reads: every manufacturer or commercial importer, at the time of sale to distributors, dealers and wholesalers, "shall collect advance tax at the rate specified in Division XIV of Part IV of the First Schedule". The site text shows the gap where the list used to be as "3[ ]". Section 236H(1) reads: every manufacturer, distributor, dealer, wholesaler or commercial importer, at the time of sale to retailers, "and every distributor or dealer to another wholesaler in respect of the said sectors", shall collect advance tax at the Division XV rate. Neither section now names a product. On their words, they apply to sales of goods by the named sellers to the named buyers whatever the goods are. ### Do the rate schedules still separate goods? Only in one respect. Division XIV of Part IV of the First Schedule, which sets the 236G rate, still has two categories: | Category of sale | Rate under Division XIV | | --- | --- | | Fertilizers | 0.7% | | Other than fertilizers | 0.1% | A proviso sets 0.25% for fertilizer sold to buyers on both the sales tax and income tax Active Taxpayers' Lists. Division XV, which sets the 236H rate, has a single rate: 0.5% "on the gross amount of sales". The earlier version with a separate 1% rate for electronics was substituted by the Finance Act, 2021. ### Worked example (illustrative figures) Awan Crockery House in Rawalpindi is a wholesaler that buys dinner sets directly from a local manufacturer and sells them to shops. Crockery was never on the omitted list. For tax year 2027, with invented amounts and both buyers on the Active Taxpayers' List: 1. It buys Rs. 2,000,000 of crockery from the manufacturer. Section 236G at 0.1%: Rs. 2,000,000 x 0.1% = Rs. 2,000, collected by the manufacturer from Awan Crockery House. 2. It sells Rs. 600,000 of crockery to a retail shop. Section 236H at 0.5%: Rs. 600,000 x 0.5% = Rs. 3,000, collected by Awan Crockery House from the shop. Before the Finance Act, 2024, crockery sat outside the listed sectors. As the sections now read, nothing in their words takes crockery out. ### What is the problem with "the said sectors"? The second limb of section 236H(1), inserted by the Finance Act, 2015, covers sales by "every distributor or dealer to another wholesaler in respect of the said sectors". "The said sectors" pointed back to the list earlier in the same sub-section. The Finance Act, 2024 omitted that list but, as the consolidated text shows, left this phrase in place. So the phrase now refers to sectors that the section no longer names. The text does not say whether the second limb: - now covers distributor or dealer sales to wholesalers in all goods, the same as the first limb; or - covers nothing, because there are no "said sectors" left to refer to. The Ordinance does not resolve this, and this page does not resolve it either. A distributor or dealer selling to other wholesalers is dealing with wording that is, on its face, unclear. ### Common mistakes - **Relying on an old sector list.** Guidance written before the Finance Act, 2024 describes a narrower section. - **Assuming 236H has a sector-based rate.** Division XV has one rate of 0.5%. Only Division XIV for 236G still separates fertilizer. - **Reading "the said sectors" as settled.** It is leftover wording, and its effect after the omission is not stated in the text. ### What to check in the official text Read sections 236G and 236H with their footnotes in the Income Tax Ordinance amended to 30 June 2026, and clauses (35) and (36) of section 8 of the Finance Act, 2024. Read Divisions XIV and XV of Part IV of the First Schedule for the current rates. Check for any later amendment, clarification or notification that deals with the words "the said sectors". ### Frequently asked #### Is section 236G still limited to sectors like cement, sugar and pharmaceuticals? No. The footnote to section 236G(1) in the Ordinance amended to 30 June 2026 records that the expression naming those sectors was omitted by the Finance Act, 2024. The section now reads 'Every manufacturer or commercial importer at the time of sale to distributors, dealers and wholesalers'. #### Was FMCG ever one of the listed sectors? The word FMCG does not appear in the omitted list. The list named specific product groups such as edible oil and ghee, cosmetics, beverages and electronics, and all of it was removed by the Finance Act, 2024. #### Does fertilizer still get separate treatment? Yes, but through the rate schedule, not the sector list. Division XIV of Part IV of the First Schedule sets 0.7% for fertilizers and 0.1% for other goods under section 236G, while Division XV sets a single 0.5% rate under section 236H. ### Citations - [Income Tax Ordinance, 2001, section 236G (Advance tax on sales to distributors, dealers and wholesalers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236g-advance-tax-on-sales-to-distributors-dealers-and-wholesalers), as amended to 2026-06-30: "(1) Every manufacturer or commercial importer 3[ ] at the time of sale to distributors," Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236H (Advance tax on sales to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236h-advance-tax-on-sales-to-retailers), as amended to 2026-06-30: "at the time of sale to retailers 3[, and every distributor or dealer to another wholesaler in respect of the said sectors], shall collect advance tax at the rate specified in Division XV of Part IV of the First" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2024, Finance Act, 2024, section 8 (amendments of the Income Tax Ordinance, 2001), clauses (35) and (36): omission of the sector expression from sections 236G(1) and 236H(1)](https://qanoondigest.com/acts/finance-act/finance-act-2024), as amended to 2024 Official source: https://download1.fbr.gov.pk/Docs/2024630146346801FinanceAct-2024.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XIV (Advance tax on sale to distributors, dealers or wholesalers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XV (Advance tax on sale to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do 236G and 236H now apply to every kind of goods, or only to the old list of sectors? Source: https://qanoondigest.com/faq/wholesalers-distributors/236g-236h-apply-to-all-goods Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer The sector lists are gone. Section 8 of the Finance Act, 2024 omitted the words naming pharmaceuticals, edible oil, electronics, cement and other sectors from section 236G(1) and section 236H(1). As amended to 30 June 2026, neither section limits itself to named sectors, though section 236H(1) still contains the leftover phrase 'in respect of the said sectors'. **Applies to:** Manufacturers, commercial importers, distributors, dealers and wholesalers in Pakistan dealing in any kind of goods. A common belief among traders is that sections 236G and 236H only bite on a fixed list of industries such as pharmaceuticals, FMCG, cement and electronics. That was true of the old wording. The consolidated Income Tax Ordinance, 2001 as amended to 30 June 2026 shows that the lists were taken out by the Finance Act, 2024, so both sections now apply by reference to who is selling to whom, not what is being sold. ### What does the law say now? Section 236G(1) reads: every manufacturer or commercial importer, at the time of sale to distributors, dealers and wholesalers, shall collect advance tax at the Division XIV rate. There is no mention of any sector. Section 236H(1) reads: every manufacturer, distributor, dealer, wholesaler or commercial importer, at the time of sale to retailers, and every distributor or dealer to another wholesaler "in respect of the said sectors", shall collect advance tax at the Division XV rate. In the consolidated text, a blank footnote marker sits right after "commercial importer" in each section. The footnotes attached to those markers show what used to be there. ### What did the old sector lists say? The footnote to section 236G records that this expression was "omitted by the Finance Act, 2024" (inner amendment markers left out): > of pharmaceuticals, poultry and animal feed, edible oil and ghee, auto-parts, tyres, varnishes, chemicals, cosmetics, IT equipment, electronics, sugar, cement, iron and steel products, fertilizer, motorcycles, pesticides, cigarettes, glass, textile, beverages, paint or foam sector, The footnote to section 236H records a similar list, also omitted by the Finance Act, 2024. That list does not include fertilizer. The Finance Act, 2024 itself confirms this. In section 8, which amends the Income Tax Ordinance, clause (35) says that in section 236G(1) the expression naming those sectors "shall be omitted", and clause (36) does the same for section 236H(1). | Section | Before the Finance Act, 2024 | As amended to 30 June 2026 | | --- | --- | --- | | 236G(1) | Sales by manufacturers or commercial importers of listed sectors | Sales by any manufacturer or commercial importer | | 236H(1) | Sales to retailers by manufacturers, distributors, dealers, wholesalers or commercial importers of listed sectors | Sales to retailers by any of them | ### From when does the wider scope apply? Section 1(2) of the Finance Act, 2024 says it comes into force "on the first day of July, 2024" unless specified otherwise. Clauses (35) and (36) of section 8 do not specify a different date in the text held here. On that basis the omission took effect from 1 July 2024. The rates for tax year 2027 are those in the Ordinance as amended to 30 June 2026. ### What is left unexplained? Section 236H(1) still contains the words "and every distributor or dealer to another wholesaler in respect of the said sectors". The footnote records that these words were inserted by the Finance Act, 2015. "The said sectors" referred back to the sector list earlier in the same sub-section. That list has been omitted, but the phrase pointing to it was not. The Ordinance does not say whether this part of section 236H(1) now covers a distributor's sales to another wholesaler in every sector, in no sector, or in some other set of sectors. This page does not resolve the question. A reader affected by it should know that the text is incomplete on this point. ### Worked example (illustrative figures) Two businesses in Lahore buy from manufacturers in July 2026. Both are on the Active Taxpayers' List. - Hamza Enterprises distributes ceramic tiles, which were never in the old section 236G list. - Bilal & Sons distributes cooking oil, which was in the old list as "edible oil and ghee". Each buys goods worth Rs. 1,500,000 (invented figure). Under the current section 236G(1) both are buying from a manufacturer, so both pay at the Division XIV rate for goods other than fertilizer: 1. Rate: 0.1%. 2. Rs. 1,500,000 x 0.1% = Rs. 1,500 each. Under the pre-2024 wording, the tile purchase would have been outside the section because tiles were not a listed sector. Under the current wording the answer is the same for both. ### What still depends on the kind of goods? Only the rate, not whether the section applies. Division XIV of Part IV of the First Schedule sets 0.7% for fertilizers and 0.1% for goods other than fertilizers under section 236G. Division XV sets a single 0.5% rate under section 236H. The rates and the higher Tenth Schedule rates are on the related pages. ### Common mistakes - **Relying on an old sector list.** Guides written before 1 July 2024 describe a limited scope that the Finance Act, 2024 removed. - **Assuming "not listed" means "not covered".** The current sections name no sectors at all. - **Assuming the leftover phrase has a settled meaning.** It does not, on the face of the Ordinance. ### What to check in the official text Read sections 236G and 236H with their footnotes in the Ordinance amended to 30 June 2026, and clauses (35) and (36) of section 8 of the Finance Act, 2024. Any later notification or clarification on "the said sectors" is not part of the text held here. ### Frequently asked #### Which sectors did section 236G used to name? The omitted expression, recorded in the footnote to section 236G, read pharmaceuticals, poultry and animal feed, edible oil and ghee, auto-parts, tyres, varnishes, chemicals, cosmetics, IT equipment, electronics, sugar, cement, iron and steel products, fertilizer, motorcycles, pesticides, cigarettes, glass, textile, beverages, paint or foam sector. The Finance Act, 2024 omitted it. #### From when do 236G and 236H apply without a sector list? Section 1(2) of the Finance Act, 2024 says it comes into force on 1 July 2024 unless specified otherwise. Clauses (35) and (36) of its section 8, which omit the sector lists, do not state a different date in the text held here. #### What does 'in respect of the said sectors' in section 236H mean now? The Ordinance does not say. The phrase governs sales by a distributor or dealer to another wholesaler, and the sector list it referred back to has been omitted. The consolidated text leaves this unresolved. ### Citations - [Income Tax Ordinance, 2001, section 236G (Advance tax on sales to distributors, dealers and wholesalers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236g-advance-tax-on-sales-to-distributors-dealers-and-wholesalers), as amended to 2026-06-30: "(1) Every manufacturer or commercial importer 3[ ] at the time of sale to distributors," Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236H (Advance tax on sales to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236h-advance-tax-on-sales-to-retailers), as amended to 2026-06-30: "(1) Every manufacturer, distributor, dealer, wholesaler or commercial importer 2[ ] at the time of sale to retailers 3[, and every distributor or dealer to another wholesaler in respect of the said sectors]," Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2024, section 8 (Amendments of The Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2024#8-amendments-of-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2024 Official source: https://download1.fbr.gov.pk/Docs/2024630146346801FinanceAct-2024.pdf - [Finance Act, 2024, section 1 (Short title and commencement)](https://qanoondigest.com/acts/finance-act/finance-act-2024#1-short-title-and-commencement), as amended to 2024: "(2) It shall, unless specified otherwise, come into force on the first day of July, 2024." Official source: https://download1.fbr.gov.pk/Docs/2024630146346801FinanceAct-2024.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XIV (Advance tax on sale to distributors, dealers or wholesalers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Will I lose input tax if I pay my supplier in cash or pay a credit invoice late? Source: https://qanoondigest.com/faq/wholesalers-distributors/cash-payment-supplier-input-tax-section-73 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, it can. Section 73(1) of the Sales Tax Act, 1990 requires payment through a banking instrument from the buyer's business account where payments to one supplier exceed Rs. 50,000 in aggregate in a tax period. Section 73(2) denies input tax if that is not done, and credit purchases must be paid within 180 days of the tax invoice. **Applies to:** Registered wholesalers, distributors and dealers who buy stock from registered suppliers in cash or on credit terms. Many wholesale markets run on cash and long credit. Section 73 of the Sales Tax Act, 1990 is where that habit meets the sales tax system: a buyer who pays a supplier the wrong way, or too late, can lose the input tax on the purchase even though the invoice is genuine. ### What does section 73 require? Section 73(1) says that, notwithstanding anything in the Act or any other law, payment for a transaction exceeding fifty thousand rupees "in aggregate to a single supplier in a tax period", excluding payment against a utility bill, shall be made by crossed cheque, crossed bank draft, crossed pay order or another crossed banking instrument. The instrument must show transfer of the amount of the sales tax invoice in favour of the supplier from the business bank account of the buyer. The words "in aggregate to a single supplier in a tax period" were inserted by the Finance Act, 2024. So the Rs. 50,000 figure is tested on the total paid to one supplier in the month, not invoice by invoice. Two provisos follow: - **Online transfers and credit cards.** Online transfer from the buyer's business account to the supplier's business account, and credit card payments, are treated as banking channel transactions if they are verifiable from the bank statements of both buyer and supplier. - **Set-offs.** Adjusting amounts payable and receivable with the same party counts as payment only if sales tax has been charged and paid by both parties, and the registered person sought the Commissioner's prior approval. ### What happens if I do not follow it? Section 73(2) says the buyer "shall not be entitled to claim input tax credit, adjustment or deduction, or refund, repayment or draw-back or zero-rating of tax" if payment is made otherwise than as sub-section (1) prescribes. For a credit transaction, the payment must be transferred in that manner within one hundred and eighty days of issuance of the tax invoice. Section 73(3) adds a condition on where the money lands. It must be deposited in the business bank account of the supplier, otherwise the supplier cannot claim input tax or refunds. The Explanation defines "business bank account" as an account used for business transactions and declared to the Commissioner through Form STR-1 or change of particulars in the registration database. Section 7(1) makes the right to deduct input tax subject to section 73, which is how a payment problem becomes an input tax problem. ### How does section 22 connect to this? Section 22(1)(e) lists "banking instruments in terms of section 73" among the records a registered person must keep, alongside invoices and bank statements. Section 22(1A) lets the Board require a registered person or class of persons, by notification, to declare and use only a specified number of business bank accounts for purchase and sale payments and for paying tax. ### Worked example (illustrative figures) Kashif Enterprises, a registered wholesaler of stationery in Lahore, buys from two registered suppliers in one month. The amounts are invented; the Rs. 50,000 and 180 day limits come from section 73. | Supplier | Payments in the month | Method | Aggregate | Within section 73(1)? | | --- | --- | --- | --- | --- | | Supplier A | Rs. 20,000 and Rs. 25,000 | Cash | Rs. 45,000 | Yes, aggregate does not exceed Rs. 50,000 | | Supplier B | Rs. 30,000 and Rs. 40,000 | Cash | Rs. 70,000 | No, aggregate exceeds Rs. 50,000 in cash | Step by step: 1. Supplier A: Rs. 20,000 + Rs. 25,000 = Rs. 45,000. This does not exceed Rs. 50,000, so section 73(1) does not require a banking instrument. 2. Supplier B: Rs. 30,000 + Rs. 40,000 = Rs. 70,000. This exceeds Rs. 50,000, so section 73(1) required payment through the banking channel from the business account. 3. Because Supplier B was paid in cash, section 73(2) is engaged for those purchases. Section 73 does not say how the lost input tax is split when some payments to the same supplier were in cash and some through the bank. The text refers to "the amount" paid otherwise than prescribed. A credit case: an invoice dated 10 January 2027 must be paid through the banking channel within one hundred and eighty days of issue. Counting from the day after the invoice, the 180th day is 9 July 2027. ### What if I sell to unregistered customers? Section 73(4) is a separate rule. It limits input tax attributable to supplies made to persons who are not registered, above an amount the Board prescribes with Federal Government approval. The related page on selling to unregistered persons covers it. ### Common mistakes - **Testing each invoice separately.** Since the Finance Act, 2024, the Rs. 50,000 figure is the aggregate paid to a single supplier in a tax period. - **Paying from a personal account.** Section 73(1) requires payment from the buyer's business bank account. - **Paying into any account the supplier names.** Section 73(3) requires deposit in the supplier's declared business bank account. - **Settling by contra without approval.** A set-off counts only with the Commissioner's prior approval and tax paid on both sides. ### What to check in the official text Read sections 7, 22 and 73 of the Sales Tax Act, 1990 as amended to 30 June 2026. Any Board notification under section 22(1A) limiting the number of business bank accounts, and any amount prescribed under section 73(4), are instruments this site does not hold. Whether a particular transfer is verifiable from both bank statements is a question of the actual records. ### Frequently asked #### Does paying by bank transfer or card count as payment through a bank? Yes. The first proviso to section 73(1) treats online transfer from the buyer's business account to the supplier's business account, and credit card payments, as banking channel transactions, provided they are verifiable from the bank statements of both buyer and supplier. #### How long can a credit invoice stay unpaid before input tax is at risk? Section 73(2) says payment on a credit transaction must be transferred in the prescribed manner within one hundred and eighty days of issuance of the tax invoice. Payment outside that window does not meet the condition for claiming input tax. #### Can I set off what a supplier owes me against what I owe the supplier? The second proviso to section 73(1) treats such adjustments as valid payment only if sales tax has been charged and paid by both parties and the registered person obtained the Commissioner's prior approval before making the adjustment. ### Citations - [Sales Tax Act, 1990, section 73 (Certain transactions not admissible)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#73-certain-transactions-not-admissible), as amended to 2026-06-30: "Provided that online transfer of payment from the business account of buyer to the business account of supplier as well as payments through credit card shall be treated as transactions through the banking channel" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 22 (Records. ............................................................................ ……....58 23. Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#22-records-58-23-tax-invoices), as amended to 2026-06-30: "the Board may require, by notification in the official Gazette, a registered person or class of registered persons to declare and use only as many number of business bank accounts as may be specified by the Board" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 7 (Determination of tax liability)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#7-determination-of-tax-liability), as amended to 2026-06-30: "(2) A registered person shall not be entitled to deduct input tax from output tax unless,-" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Do wholesalers and distributors have to issue electronic invoices integrated with FBR? Source: https://qanoondigest.com/faq/wholesalers-distributors/electronic-invoicing-wholesalers-fbr-integration Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Only once the Board notifies them. Section 23(3) and (5) of the Sales Tax Act, 1990 let the Board require electronic invoices and real-time integration with its computerized system by Gazette notification. A notified 'integrated person' must then follow rules 150R and 150S of the Sales Tax Rules, 2006, and faces penalties under section 33 for non-compliance. **Applies to:** Wholesalers, dealers and distributors registered for sales tax under the Sales Tax Act, 1990, and especially those the Board has notified for electronic invoicing. A registered wholesaler or distributor has always had to issue a sales tax invoice. The newer question is whether that invoice has to be electronic and reported to FBR in real time. The Sales Tax Act, 1990 answers this in two layers: the Act gives the Board the power, and a Board notification decides who is covered and from when. ### What does the law say? Section 23 of the Sales Tax Act, 1990, as amended to 30 June 2026, contains three powers that matter here: - **Section 23(3):** a registered person making a taxable supply shall, subject to conditions the Board specifies by Gazette notification, issue electronic invoices. - **Section 23(5):** the Board, through a Gazette notification, "may require any person or class of persons to integrate their electronic invoicing system with the Board’s Computerized System for real time reporting of sales", from a date specified in that notification. - **Section 23(6):** a licensed integrator shall integrate the electronic invoicing system of the persons referred to in sub-section (5), in the mode and manner prescribed. The Finance Act, 2026 also changed section 23(1) so that a tax invoice is to bear "a verifiable and unique FBR invoice number". A proviso says that condition applies "from the time as notified by the Board". Chapter XIV of the Sales Tax Rules, 2006 (as amended to 30 June 2025) then sets out what a notified person, called an "integrated person", must do. ### What does an integrated distributor have to do? Rule 150R lists the main obligations: 1. Register, install and integrate electronic invoicing hardware and software with the Board's computerized system, in the manner set by a Sales Tax General Order. 2. Give the Board details of outlets, points of sale or electronic invoicing machines. 3. Make no supply "except through the integrated outlets, point of sale or electronic invoice issuing machines". 4. Use a system that transmits each invoice to the Board, receives the unique FBR invoice number, and prints a QR code on it. 5. Issue electronic invoices for exempt items as well. 6. Bear the cost of integration. 7. Display an "Integrated with FBR" signboard at each notified outlet or point of sale. Rule 150R(5) says Annexure-C of the sales tax return is auto-filled from the electronic invoices. Rule 150R(13) lists the particulars the electronic invoice carries, including the buyer's name, address and registration number, HS code, quantity, value exclusive of tax, sales tax, further tax and tax withheld. Rule 150S requires "a real-time verifiable electronic sales tax invoice for every taxable supply and service", with the invoice, debit notes and credit notes kept on electronic media for six years. ### Can the deadline be extended? Rule 150V lets the Commissioner Inland Revenue having jurisdiction allow an extension of up to sixty days in aggregate, in fifteen-day intervals, for integration or compliance. During that time, the rule says the integrated person "shall continue to issue paper invoices". ### What happens if a notified distributor does not comply? Rule 150X says an integrated person who tampers with the system, sells otherwise than as the Chapter prescribes, or breaches any of its provisions is subject to penalty under section 33. Serial 25A of the Table in section 33 covers a person required to integrate under section 23 who fails to register, fails to integrate as required, or fails to issue electronic invoices after integration. The penalties rise with each default: | Default | Penalty under S. No. 25A | | --- | --- | | First default | Rs. 500,000 | | Second default, after fifteen days of the order for the first | Rs. 1,000,000 | | Third default, after fifteen days of the order for the second | Rs. 2,000,000 | | Fourth default, after fifteen days of the order for the third | Rs. 3,000,000 | The same entry also says the business premises "shall be liable to be sealed" by an officer of Inland Revenue in the manner prescribed. ### Worked example (illustrative figures) Qureshi Distributors in Faisalabad is a registered distributor of household goods. Assume the Board has notified its class of persons under section 23(5), and the notified date has passed. The business keeps issuing handwritten invoices. 1. First default recorded: penalty Rs. 500,000. 2. Still not compliant fifteen days after that order: second penalty Rs. 1,000,000. 3. Total so far: Rs. 500,000 + Rs. 1,000,000 = Rs. 1,500,000. 4. If the default continued through a third and fourth order: Rs. 1,500,000 + Rs. 2,000,000 + Rs. 3,000,000 = Rs. 6,500,000, plus possible sealing. The business name and dates are invented. The amounts are the ones printed in serial 25A. ### What if I am not on any notification? Then the integration duties in rules 150R and 150S are not triggered for you by the Act alone, because they apply to the person notified by the Board. Your ordinary invoicing duty under section 23(1) still applies: a serially numbered tax invoice at the time of supply with the particulars the section lists. ### Common mistakes - **Assuming the rules apply to everyone from one fixed date.** The Act leaves the class of persons and the start date to Board notifications. - **Treating exempt sales as outside the system.** Rule 150R(9) brings exempt items into electronic invoicing for an integrated person. - **Reading the waiver in S. No. 25A as general.** Its proviso says "if the retailer integrates" before the second penalty, the first penalty shall be waived. The entry does not say whether this covers a distributor or wholesaler. ### What to check in the official text Read section 23 and serial 25A of the section 33 Table in the Sales Tax Act, 1990, and rules 150R, 150S, 150V and 150X of the Sales Tax Rules, 2006, together with the rest of Chapter XIV. The Gazette notifications under section 23(3) and (5), the Sales Tax General Orders on the manner of integration, and the notified date for the FBR invoice number condition in section 23(1) are not held on this site. Confirm them separately before relying on a start date. ### Frequently asked #### Is every registered distributor automatically required to integrate with FBR? The Act does not impose integration on everyone by itself. Section 23(5) says the Board may require any person or class of persons to integrate through a notification in the official Gazette, from a date specified in it. Those notifications are not part of the text held on this site. #### Does an integrated distributor still issue electronic invoices for exempt goods? Yes. Rule 150R(9) says that in case of supply of exempt items, the electronic invoices shall also be issued through the system integrated with the Board's computerized system. #### Who pays for the integration equipment and software? Rule 150R(10) says the cost for integration, including equipment and electronic invoicing or point of sale software, shall be borne by the integrated person. ### Citations - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "may require any person or class of persons to integrate their electronic invoicing system with the Board’s Computerized System for real time reporting of sales in such mode and manner and from such date as may be specified therein" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 150R (Obligations and requirements)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150r-obligations-and-requirements), as amended to 2025-06-30: "No supply shall be made by the integrated person, except through the integrated outlets, point of sale or electronic invoice issuing machines." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150S (Issuance of electronic invoice and record)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150s-issuance-of-electronic-invoice-and-record), as amended to 2025-06-30: "The integrated person shall issue a real-time verifiable electronic sales tax invoice for every taxable supply and service." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150V (Extension in due date of Integration)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150v-extension-in-due-date-of-integration), as amended to 2025-06-30: "Provided that such integrated person shall continue to issue paper invoices until such time as extended by the Commissioner." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150X (Consequences of non-compliance or contravention)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150x-consequences-of-non-compliance-or-contravention), as amended to 2025-06-30: "shall be subject to penalty under section 33 and any restriction under any provisions of the Act or the rules made thereunder." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, Section 33, Table, S. No. 25A (failure to integrate or to issue electronic invoices after integration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## As a distributor, do I have to collect section 236H advance tax when I sell to shopkeepers, and at what rate? Source: https://qanoondigest.com/faq/wholesalers-distributors/distributor-collect-236h-from-retailers Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 236H(1) of the Income Tax Ordinance requires every manufacturer, distributor, dealer, wholesaler or commercial importer to collect advance tax at the time of sale to retailers. For tax year 2027, Division XV sets 0.5% of gross sales, and the Tenth Schedule sets 2.5% where the retailer is not on the Active Taxpayers' List. **Applies to:** Distributors, dealers and wholesalers in Pakistan who sell goods to shopkeepers and other retailers. A distributor who sells to shopkeepers is on the collecting side of section 236H. The same business that pays advance tax to its own manufacturer becomes, in its turn, a collector of section 236H when it sells stock on to retailers. This page covers the distributor's duty. The retailer's side of the same transaction is covered in the retail shops section of this site. ### What does the law say? Section 236H(1) of the Income Tax Ordinance, 2001 says that every manufacturer, distributor, dealer, wholesaler or commercial importer, at the time of sale to retailers, shall collect advance tax at the rate specified in Division XV of Part IV of the First Schedule from the person to whom the sale is made. The same sub-section also covers "every distributor or dealer to another wholesaler in respect of the said sectors", words inserted by the Finance Act, 2015. Section 236H(2) gives the retailer the benefit: credit for the tax collected "shall be allowed in computing the tax due by the retailer on the taxable income for the tax year in which the tax was collected." So the distributor is the one who must collect, at the time of sale, and the retailer is the one who bears the tax and later takes credit for it. ### What rate does the distributor collect? These are the rates for tax year 2027 (1 July 2026 to 30 June 2027) in the Ordinance amended to 30 June 2026. | Retailer's status | Rate | Source | | --- | --- | --- | | On the Active Taxpayers' List | 0.5% of the gross amount of sales | First Schedule, Part IV, Division XV | | Not on the Active Taxpayers' List | 2.5% of the gross amount of sale to retailers | Tenth Schedule, rule 1, third proviso Table, serial 4 | Division XV reads: "The rate of collection of tax under section 236H on the gross amount of sales shall be 0.5%." The higher rate applies through section 100BA, which makes the Tenth Schedule govern collection from persons not appearing on the Active Taxpayers' List, notwithstanding anything else in the Ordinance. An older version of Division XV had a separate 1% rate for electronics. The footnote records that it was substituted by the Finance Act, 2021, and the current Division states one rate. ### Worked example (illustrative figures) Ali Distributors supplies biscuits and snacks to shops in Rawalpindi. On one delivery round it sells to three shops. The amounts are invented; the rates are the ones cited above. | Shop | Gross amount of sale | On ATL? | Rate | 236H collected | | --- | --- | --- | --- | --- | | Shop A | Rs. 120,000 | Yes | 0.5% | Rs. 600 | | Shop B | Rs. 80,000 | No | 2.5% | Rs. 2,000 | | Shop C | Rs. 200,000 | Yes | 0.5% | Rs. 1,000 | | Total | Rs. 400,000 | | | Rs. 3,600 | Step by step: 1. Shop A: Rs. 120,000 x 0.5% = Rs. 600. 2. Shop B: Rs. 80,000 x 2.5% = Rs. 2,000. 3. Shop C: Rs. 200,000 x 0.5% = Rs. 1,000. 4. Total collected: Rs. 600 + Rs. 2,000 + Rs. 1,000 = Rs. 3,600. Shop B pays more than three times what Shop A pays in tax, although its purchase is smaller, because it is not on the Active Taxpayers' List. Each shop can claim credit for the amount collected from it under section 236H(2). ### What if the shopkeeper was not required to file a return? Rule 2 of the Tenth Schedule deals with this. Where the person collecting the tax is satisfied that a person not appearing on the Active Taxpayers' List was not required to file a return of income, the collector shall, before collecting, give the Commissioner an electronic notice setting out the person's name, CNIC or NTN and address, the nature and amount of the transaction, and the reason. The Commissioner has thirty days to pass an order. If the Commissioner has reasonable grounds to believe the person was required to file, the Commissioner may direct collection at the rule 1 rate. If no order is passed within thirty days, the contention is treated as accepted. ### What if I sell to another wholesaler, not a shop? Section 236H(1) also covers a distributor or dealer selling "to another wholesaler in respect of the said sectors". The Finance Act, 2024 omitted the list of sectors that this phrase used to point back to, and the Ordinance does not explain how the leftover phrase now operates. The related page on which goods are covered sets out what the footnotes show. ### Common mistakes - **Assuming only the manufacturer collects.** Section 236H(1) names distributors, dealers and wholesalers as collectors when they sell to retailers. - **Charging 1% for non-ATL retailers.** The Tenth Schedule Table fixes 2.5% for section 236H, not a doubling of 0.5%. - **Using an old sector list.** Since the Finance Act, 2024, section 236H(1) names no sectors. - **Treating the tax as the distributor's income.** It is collected from the retailer and, under section 236H(2), belongs to the retailer's tax computation. ### What to check in the official text Read section 236H and section 100BA, Division XV of Part IV of the First Schedule, and rules 1 and 2 of the Tenth Schedule, in the Ordinance amended to 30 June 2026. What happens if a distributor does not collect or deposit the tax is covered on the related page on failure to collect 236H. Whether a particular shop is on the Active Taxpayers' List at the date of sale is a matter of the list itself, which is not part of the text held here. ### Frequently asked #### Does a distributor have to collect 236H on every sale to a shop? Section 236H(1) applies to sales by a manufacturer, distributor, dealer, wholesaler or commercial importer to retailers, and since the Finance Act, 2024 it names no sectors. The Ordinance sets no minimum invoice value in section 236H or Division XV. #### What rate does a distributor collect under 236H for tax year 2027? Division XV of Part IV of the First Schedule sets 0.5% of the gross amount of sales. If the retailer is not on the Active Taxpayers' List, serial 4 of the Table in rule 1 of the Tenth Schedule sets 2.5%. #### Can a distributor skip the 2.5% rate for a small shop that is not required to file? Rule 2 of the Tenth Schedule lets the collector notify the Commissioner electronically, before collecting, why the person was not required to file a return. The Commissioner has thirty days to decide, and silence for thirty days is treated as acceptance. ### Citations - [Income Tax Ordinance, 2001, section 236H (Advance tax on sales to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236h-advance-tax-on-sales-to-retailers), as amended to 2026-06-30: "(2) Credit for the tax collected under sub-section (1) shall be allowed in computing the tax due by the retailer on the taxable income for the tax year in which the tax was collected." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XV (Advance tax on sale to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1, third proviso Table, serial 4 (Section 236H)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 2 (Persons not required to file return or statement)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "(2) The provisions of the Tenth Schedule shall have effect notwithstanding anything to the contrary contained in this Ordinance." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can a distributor adjust all its input tax, or does the 90% limit in section 8B apply? Source: https://qanoondigest.com/faq/wholesalers-distributors/input-tax-90-percent-limit-distributors Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer The 90% limit applies. Section 8B(1) of the Sales Tax Act, 1990 says a registered person shall not adjust input tax above ninety per cent of the output tax for that tax period. Fixed assets and capital goods are outside the cap, and section 8B(2) and (3) allow the disallowed amount to be adjusted or refunded yearly, subject to conditions. **Applies to:** Distributors, wholesalers and dealers registered for sales tax under the Sales Tax Act, 1990 who claim input tax on their purchases. A distributor that buys and resells taxable goods usually has input tax close to its output tax, because its margin is thin. That makes section 8B of the Sales Tax Act, 1990 matter more to a distributor than to most businesses: in a month where input tax is above 90% of output tax, part of it cannot be adjusted in that month. ### What does the law say? Section 8B(1) says that, notwithstanding anything else in the Act, in relation to a tax period a registered person "shall not be allowed to adjust input tax in excess of ninety per cent of the output tax for that tax period". A tax period is one month unless the Board specifies otherwise. Three provisos follow: 1. The restriction "shall not apply in case of fixed assets or Capital goods". 2. The Board may, by notification in the official Gazette, exclude any person or class of persons from sub-section (1). 3. Added by the Finance Act, 2026: the Board may, by notification, reduce or enhance the limit for any registered person on the basis of compliance or non-compliance with production monitoring, digital invoicing, e-bilty, POS or any other electronic system the Board prescribes. Section 7(1) is the general right to deduct input tax from output tax, and it is expressly subject to sections 8 and 8B. So section 8B works as a ceiling on top of the normal section 7 entitlement. ### How does the disallowed input tax come back? Section 8B(2) allows adjustment or refund of input tax not allowed under sub-section (1), on these conditions: - **Companies audited under the Companies Ordinance, 1984:** a statement furnished with the annual audited accounts, certified by the auditors, showing value additions less than the limit in sub-section (1). - **Other registered persons:** conditions and restrictions specified by the Board by notification in the official Gazette. Section 8B(3) says this adjustment or refund "shall be made on yearly basis in the second month following the end of the financial year of the registered person." For a sole proprietor or partnership distributor, the route therefore depends on a Board notification. The Act itself does not set out those conditions. ### What other powers does the Board have over the limit? Section 8B(4) lets the Board prescribe any other limit of input tax adjustment for any person or class of persons. Words added by the Finance Act, 2025 also let the Board use a data based automated risk management system to defer certain input tax or fix higher or lower limits. A registered person may contest such action by filing an application and documents with the Commissioner, who shall decide within thirty days. ### Worked example (illustrative figures) Rehman Traders, a registered distributor of packaged food in Multan, has these figures for one month. The amounts are invented; the 90% limit is the one in section 8B(1). | Item | Amount | | --- | --- | | Output tax on sales for the month | Rs. 1,000,000 | | Input tax on stock purchased for resale | Rs. 950,000 | | Input tax on a new delivery van bought as a capital asset | Rs. 0 (see note) | Step by step: 1. Ceiling under section 8B(1): 90% x Rs. 1,000,000 = Rs. 900,000. 2. Input tax on stock: Rs. 950,000, which is above the ceiling. 3. Input tax adjustable this month: Rs. 900,000. 4. Tax payable for the month: Rs. 1,000,000 - Rs. 900,000 = Rs. 100,000. 5. Input tax held back: Rs. 950,000 - Rs. 900,000 = Rs. 50,000, which can only come back through the yearly route in section 8B(2) and (3). Note: the van is shown at nil because section 8(1)(i) bars input tax on vehicles falling in Chapter 87 of the First Schedule to the Customs Act, 1969, unless acquired for sale or re-sale. The fixed asset proviso in section 8B only lifts the 90% ceiling; it does not make an inadmissible item admissible. ### What if my input tax is below 90% of output tax? Then section 8B(1) does not bite for that month. If output tax is Rs. 1,000,000 and input tax is Rs. 700,000, the full Rs. 700,000 is within the Rs. 900,000 ceiling. ### What if I forgot to claim input tax in the month of purchase? The proviso to section 7(1) says that where a registered person did not deduct input tax within the relevant period, he may claim it in the return for any of the six succeeding tax periods. The Act does not say how a late claim interacts with the 90% ceiling of the later month, other than that section 7 is subject to section 8B. ### Common mistakes - **Treating the 10% as a permanent cost.** Section 8B(2) provides a yearly adjustment or refund route, though for non-audited persons it depends on Board conditions. - **Assuming distributors are exempt from section 8B.** The Act has no distributor exclusion. Any exclusion would come from a Board notification under the second proviso. - **Applying the ceiling to capital goods.** The first proviso keeps fixed assets and capital goods outside the 90% cap. - **Ignoring the new compliance link.** Since the Finance Act, 2026, the Board may raise or lower the limit for a person based on digital invoicing, e-bilty or POS compliance. ### What to check in the official text Read sections 7 and 8B of the Sales Tax Act, 1990 as amended to 30 June 2026. Any Board notification excluding a class of persons from section 8B(1), setting conditions under section 8B(2)(ii), or prescribing a different limit under section 8B(4) is an SRO that this site does not hold, so confirm the current notifications for your trade separately. Section 7(1) also says output tax for input tax deduction excludes the amount of further tax; section 8B does not say whether its 90% figure is measured the same way. ### Frequently asked #### Is a distributor automatically excluded from the 90% input tax limit? Section 8B(1) applies to every registered person in a tax period. The second proviso lets the Board exclude a person or class of persons by notification in the official Gazette, and any such exclusion for distributors would be in a notification that is not part of the text held here. #### Does the 90% limit apply to a delivery vehicle or warehouse racking? The first proviso to section 8B(1) says the restriction does not apply in case of fixed assets or capital goods. Whether input tax on a particular asset is admissible at all is a separate question under section 8, which bars input tax on vehicles, furniture and office equipment not bought for resale. #### Is the 10% that is held back lost for good? Not necessarily. Section 8B(2) allows adjustment or refund of the disallowed input tax, for audited companies on an auditor's certificate with the annual accounts and for others on conditions the Board notifies. Section 8B(3) says this is done yearly, in the second month after the end of the financial year. ### Citations - [Sales Tax Act, 1990, section 8B (Adjustable input tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8b-adjustable-input-tax), as amended to 2026-06-30: "shall not be allowed to adjust input tax in excess of ninety per cent of the output tax for that tax period" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 7 (Determination of tax liability)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#7-determination-of-tax-liability), as amended to 2026-06-30: "Provided that where a registered person did not deduct input tax within the relevant period, he may claim such tax in the return for any of the six succeeding tax periods." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8 (Tax credit not allowed)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8-tax-credit-not-allowed), as amended to 2026-06-30: "(3) No person other than a registered person shall make any deduction or reclaim input tax in respect of taxable supplies made or to be made by him." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Does the 90% input tax limit in section 8B apply to distributors? Source: https://qanoondigest.com/faq/wholesalers-distributors/input-tax-90-percent-limit-section-8b Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, unless the Board has excluded you. Section 8B(1) of the Sales Tax Act, 1990 says a registered person cannot adjust input tax above ninety per cent of output tax for a tax period. It names no exception for distributors. The unadjusted part carries forward under section 10, and a yearly adjustment route exists under section 8B(2). **Applies to:** Distributors, wholesalers and dealers registered under the Sales Tax Act, 1990 who deduct input tax from output tax in their monthly sales tax returns. A distributor's margin is thin, so the input tax on stock bought from manufacturers is often close to the output tax on sales. Section 8B of the Sales Tax Act, 1990 stops that input tax from wiping out the whole monthly liability: at least ten per cent of output tax is paid in cash each tax period, unless an exception applies. ### What does section 8B say? Section 8B(1) opens with "Notwithstanding anything contained in this Act" and says that, in relation to a tax period, a registered person "shall not be allowed to adjust input tax in excess of ninety per cent of the output tax for that tax period". The subsection applies to "a registered person". It does not carve out distributors, wholesalers or any trade. A footnote records that some words after "a registered person" were omitted by the Finance Act, 2022; the consolidated text does not reproduce what they were. Three provisos follow: - **Capital goods.** The restriction "shall not apply in case of fixed assets or Capital goods". - **Exclusion by the Board.** The Board may, by notification in the official Gazette, exclude any person or class of persons from subsection (1). - **Compliance-linked limits.** Added by the Finance Act, 2026, the Board may by notification reduce or enhance the limit for any registered person based on compliance or non-compliance with production monitoring, digital invoicing, e-bility, POS or any other electronic system the Board prescribes. Section 8B(4) adds that the Board may prescribe any other limit for any person or class of persons, and may use a data-based automated risk management system to defer input tax or fix higher or lower limits. A registered person may contest such action by application to the Commissioner, who is to decide within thirty days. Section 7(1) confirms the link: the right to deduct input tax is "Subject to the provisions of section 8 and 8B". ### How does it work in practice? Each month, the distributor works out output tax on its taxable supplies and the input tax it is otherwise entitled to under sections 7 and 8. If input tax is more than 90% of output tax, only the 90% figure is adjusted that month. The rest does not vanish: - **Carry forward under section 10.** The first proviso to section 10(1) says excess input tax on supplies other than zero-rated or exports may be carried forward to the next tax period, "along with the input tax as is not adjustable in terms of sub-section (1) of section 8B", and is treated as input tax for that period. - **Yearly adjustment or refund under section 8B(2) and (3).** A registered person whose accounts are audited under the Companies Ordinance, 1984 may be allowed adjustment or refund on furnishing a statement with annual audited accounts, certified by the auditors, showing value additions below the limit. Other registered persons, such as a sole proprietor or a partnership distributor, are subject to conditions the Board specifies by notification. Section 8B(3) says the adjustment or refund is made yearly, in the second month following the end of the registered person's financial year. Section 8B(5) refers an auditor found guilty of misconduct in giving that certificate to the Council under the Chartered Accountants Ordinance, 1961. ### Worked example (illustrative figures) Rehman Traders, a registered FMCG distributor in Faisalabad, has these figures for one month. The amounts are invented; the 90% limit is from section 8B(1). | Step | Amount | |---|---| | Output tax on the month's taxable supplies | Rs. 1,200,000 | | Input tax on stock purchases, all admissible under sections 7 and 8 | Rs. 1,140,000 | | 90% of output tax (1,200,000 x 90 / 100) | Rs. 1,080,000 | | Input tax adjusted this month (lower of 1,140,000 and 1,080,000) | Rs. 1,080,000 | | Sales tax payable (1,200,000 - 1,080,000) | Rs. 120,000 | | Input tax not adjusted (1,140,000 - 1,080,000) | Rs. 60,000 | Check: 1,080,000 + 60,000 = 1,140,000, and 1,080,000 + 120,000 = 1,200,000. The Rs. 60,000 is carried to the next tax period under the section 10 proviso and treated as input tax for that period. The Act does not spell out the order of calculation, but because the carried amount is "treated as input tax for that period", it forms part of the next month's input tax to which the 90% test is again applied. ### What if ...? **What if I am a wholesaler-cum-retailer?** Section 2(43A)(d) treats as a Tier-1 retailer a wholesaler-cum-retailer with turnover above two hundred million, "engaged in bulk import and supply of consumer goods on wholesale basis to the retailers as well as on retail basis to the general body of the consumers". Section 8B(6) says that if a Tier-1 retailer does not integrate its retail outlet as the Act requires during a tax period or part of it, its adjustable input tax for the whole of that period is reduced by 60%. **What if the Board has excluded distributors?** An exclusion under the second proviso would be a Board notification. No such notification is part of the text held on this site, so this page cannot say whether any distributor or class of distributors is currently excluded. **What if my sales include further tax?** Section 7(1) lets input tax be deducted from output tax "excluding the amount of further tax". Section 8B itself does not say whether further tax is counted in the "output tax" used for the 90% test. The text does not settle that point. ### Common mistakes - **Treating the capped amount as lost.** Section 10 carries it forward; section 8B(2) and (3) give a yearly route. - **Applying the cap to inadmissible input tax.** Section 8B limits input tax that is otherwise adjustable. Input tax barred by section 8, such as tax on fake invoices, is not adjustable at any percentage. - **Assuming the six-period window extends the cap.** The proviso to section 7(1) lets missed input tax be claimed in any of the six succeeding tax periods. It concerns timing of a claim, not the 90% limit. ### What to check in the official text Read sections 7, 8B and 10 of the Sales Tax Act, 1990 as amended to 30 June 2026, and section 2(43A) if you also sell at retail. Any Board notification excluding persons from section 8B(1), changing the limit for a person, or setting conditions under section 8B(2)(ii) for non-company distributors is outside the text held here. ### Frequently asked #### Is the input tax above 90% lost for good? No. The first proviso to section 10(1) says input tax not adjustable under section 8B(1) may be carried forward to the next tax period and is treated as input tax for that period. Section 8B(2) and (3) also provide a yearly adjustment or refund route, subject to conditions. #### Does the 90% cap apply to input tax on a warehouse machine or other capital goods? The first proviso to section 8B(1) says the restriction does not apply in case of fixed assets or capital goods. Whether a particular purchase counts as a fixed asset or capital good depends on the facts and the Act's wider text. #### Can the Board change the 90% figure for one distributor? Yes. A proviso added by the Finance Act, 2026 lets the Board, by notification, reduce or enhance the limit for any registered person based on compliance with digital invoicing, e-bility, POS, production monitoring or other prescribed electronic systems. Section 8B(4) also lets the Board prescribe other limits and use automated risk management to defer input tax. ### Citations - [Sales Tax Act, 1990, section 8B (Adjustable input tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8b-adjustable-input-tax), as amended to 2026-06-30: "shall not be allowed to adjust input tax in excess of ninety per cent of the output tax for that tax period" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8B (Adjustable input tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8b-adjustable-input-tax), as amended to 2026-06-30: "Provided further that the Board may by notification in the official Gazette, exclude any person or class of persons from the purview of sub- section (1)" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 10 (Refund of input tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#10-refund-of-input-tax), as amended to 2026-06-30: "such excess input tax may be carried forward to the next tax period, along with the input tax as is not adjustable in terms of sub-section (1) of section 8B, and shall be treated as input tax for that period" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 7 (Determination of tax liability)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#7-determination-of-tax-liability), as amended to 2026-06-30: "where a registered person did not deduct input tax within the relevant period, he may claim such tax in the return for any of the six succeeding tax periods." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "engaged in bulk import and supply of consumer goods on wholesale basis to the retailers as well as on retail basis to the general body of the consumers" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What is further tax, and is the extra 4% on sales to unregistered buyers still charged in 2026-27? Source: https://qanoondigest.com/faq/wholesalers-distributors/further-tax-4-percent-unregistered-buyers Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Further tax is an extra sales tax under section 3(1A) of the Sales Tax Act, 1990. As amended to 30 June 2026, it is still four percent of the value of taxable supplies to a buyer without registration or not an active taxpayer, on top of the normal rate, unless a notification excludes the supply. **Applies to:** Registered wholesalers and distributors in Pakistan who sell taxable goods to unregistered shops and other unregistered or non-active buyers. Further tax is the extra sales tax a registered supplier charges when the buyer of taxable goods is not registered, or is registered but not an active taxpayer. For a wholesaler supplying small shops, most of which are unregistered, it is often the largest line on the invoice after the ordinary sales tax. The question in 2026-27 is whether it still applies, and the text of the Act answers that. ### What does the law say? Section 3(1A) of the Sales Tax Act, 1990, as amended to 30 June 2026, says that where taxable supplies are made to a person who has not obtained a registration number, or who is not an active taxpayer, "there shall be charged, levied and paid a further tax" at the rate of four percent of the value, in addition to the rates in sub-sections (1), (1B), (2), (5) and (6) of section 3 and section 4. Three parts of the sub-section matter most: | Part of section 3(1A) | What it does | | --- | --- | | Rate | Four percent of the value. The footnote records that "four" replaced "three" through the Finance Act, 2023 | | Opening words | The sub-section is "subject to" section 8(6) and any notification issued under it | | Proviso | The Federal Government may, by notification in the official Gazette, specify taxable supplies on which further tax shall not be charged | The ordinary rate in section 3(1) is eighteen percent of the value of taxable supplies. Further tax is charged on top of that. ### Is it still charged in 2026-27? The consolidated Act amended to 30 June 2026 still contains sub-section (1A) with the rate of four percent. It covers the period from 1 July 2026 unless the law is changed later. If you have read that further tax was abolished, the Act as consolidated to 30 June 2026 does not show that change. What the Act does allow is exclusion by notification. The proviso lets the Federal Government name taxable supplies on which further tax is not charged. Those notifications are not in this corpus, so this page cannot say which supplies, if any, are currently excluded. ### How does it work in practice? **Who charges it.** The supplier, a registered person, charges further tax on the invoice, because section 3(3)(a) puts the liability to pay the tax on the person making the supply. **No input tax set-off.** Section 7(1) lets a registered person deduct input tax from output tax "excluding the amount of further tax under sub-section (1A) of section 3". Input tax can reduce the ordinary sales tax, but not the further tax. The full four percent is paid over. **The buyer cannot reclaim it.** Section 8(3) says no person other than a registered person shall make any deduction or reclaim input tax. An unregistered shopkeeper therefore carries both the ordinary sales tax and the further tax as part of the cost of the goods. **Goods that cannot be sold to unregistered persons at all.** Section 8(6) lets the Board, with the approval of the Federal Minister-in-charge, notify goods which a registered person cannot supply to any person who is not registered. Section 3(1A) is expressly subject to that power. Notifications under section 8(6) are not held in this corpus. ### Worked example (illustrative figures) Bilal Distributors in Multan, a registered distributor, supplies taxable goods worth Rs. 500,000 (value excluding tax) to an unregistered general store in August 2026. The amounts are invented; the rates are from section 3. 1. Ordinary sales tax at 18%: Rs. 500,000 x 18% = Rs. 90,000. 2. Further tax at 4%: Rs. 500,000 x 4% = Rs. 20,000. 3. Invoice total: Rs. 500,000 + Rs. 90,000 + Rs. 20,000 = Rs. 610,000. Suppose this is Bilal's only sale for the month and the input tax on the goods sold is Rs. 70,000. 4. Output tax excluding further tax: Rs. 90,000. Less input tax Rs. 70,000 = Rs. 20,000. 5. Add further tax, which input tax cannot reduce: Rs. 20,000. 6. Total payable for the month: Rs. 20,000 + Rs. 20,000 = Rs. 40,000. If the same goods went to a registered, active buyer, step 2 would not arise and the invoice would total Rs. 590,000. ### What if the goods are charged on retail price? Section 3(2)(a) charges Third Schedule goods on the retail price printed on the pack. Section 3(1A) says further tax is "four percent of the value" in addition to the rate in sub-section (2). The sub-section does not spell out a separate base for Third Schedule goods, and this page does not resolve that point. Check the text and any notification before applying it. ### Common mistakes - **Treating further tax as abolished.** The Act amended to 30 June 2026 still levies it at four percent. Only a notification under the proviso takes a supply outside it. - **Netting it against input tax.** Section 7(1) excludes further tax from the input-output deduction. - **Charging it only to unregistered buyers.** Since the Finance Act, 2022 the sub-section also covers a buyer who "is not an active taxpayer". See the related page on registered buyers who are not on the Active Taxpayers List. ### What to check in the official text Read section 3(1A) with sections 7(1), 8(3) and 8(6) of the Sales Tax Act amended to 30 June 2026. Before charging or not charging further tax on a particular product, check for a Federal Government notification under the proviso to section 3(1A) and for any Board notification under section 8(6). Neither kind of notification is held in this corpus. ### Frequently asked #### Has further tax been abolished for 2026-27? Not in the Act. Section 3(1A) of the Sales Tax Act as amended to 30 June 2026 still levies further tax at four percent. The Federal Government can exclude specific supplies by notification in the Gazette, and any such notification is not held in this corpus. #### Can I set my input tax against further tax? No. Section 7(1) lets a registered person deduct input tax from output tax excluding the amount of further tax under section 3(1A). Further tax is paid in full on top of the net output tax. #### Can my unregistered customer claim back the further tax? No. Section 8(3) says no person other than a registered person shall make any deduction or reclaim input tax, so an unregistered buyer bears the further tax as a cost. ### Citations - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "where taxable supplies are made to a person who has not obtained registration number" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 7 (Determination of tax liability)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#7-determination-of-tax-liability), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8 (Tax credit not allowed)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8-tax-credit-not-allowed), as amended to 2026-06-30: "(3) No person other than a registered person shall make any deduction or reclaim input tax in respect of taxable supplies made or to be made by him." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Do I charge further tax if my buyer is registered for sales tax but not on the Active Taxpayers List? Source: https://qanoondigest.com/faq/wholesalers-distributors/further-tax-registered-buyer-not-active Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 3(1A) of the Sales Tax Act, 1990 charges further tax at four percent where taxable supplies are made to a person who has not obtained registration or who is not an active taxpayer. A registered buyer who falls off the active taxpayers list kept under section 21A and rule 12A is treated like an unregistered one. **Applies to:** Registered wholesalers and distributors in Pakistan whose customers hold a sales tax registration number but may not be active taxpayers. A buyer who shows you a sales tax registration number may still be a buyer on whom further tax is charged. Section 3(1A) of the Sales Tax Act, 1990 was widened in 2022 so that it reaches two kinds of buyer: one with no registration number, and one who "is not an active taxpayer". The dispute at the counter is usually about the second kind. ### What does the law say? Section 3(1A), as amended to 30 June 2026, says that where taxable supplies are made "to a person who has not obtained registration number or he is not an active taxpayer", further tax is charged at four percent of the value, in addition to the ordinary rate. The footnote to the sub-section records that the words about an active taxpayer were inserted by the Finance Act, 2022. The Act defines "active taxpayer" in clause (1A) of section 2. It means a registered person who does not fall in any of these categories: | Clause | Category that makes a registered person not active | | --- | --- | | (a) | Blacklisted, or registration suspended, under section 21 | | (b) | Fails to file the sales tax return under section 26 by the due date for two consecutive tax periods | | (c) | Fails to file an income tax return under section 114, or a statement under section 115, of the Income Tax Ordinance, 2001 by the due date | | (d) | Fails to file a quarterly or annual withholding tax statement under section 165 of the Income Tax Ordinance, 2001 | Section 21A gives the Board power to maintain the active taxpayers list in the manner prescribed by rules, and lets those rules impose restrictions on a person who ceases to be an active taxpayer. ### How does a registered buyer become non-active? Rule 12A(1) of the Sales Tax Rules, 2006 says a registered person who does not fulfil the conditions in the definition "shall automatically become a non-active taxpayer" and his name shall be removed from the list. The Rules consolidated to 30 June 2025 still refer to "clause (1) of section 2"; the Act's footnote shows that the clause was renumbered as (1A) by the Finance Act, 2025. The Rules also take names off the list in registration cases. Rule 5(4) says a person who does not complete biometric verification at a NADRA e-Sahulat Centre within a month of registration shall be taken off the sales tax Active Taxpayer List. Rule 5(6) does the same where a document uploaded at registration is found non-genuine and is not replaced within fifteen days, subject to approval by the Member (IR-Operations). So a buyer can hold a genuine registration number and still be off the list, for example because two monthly returns were filed late or the annual income tax return was missed. ### What restrictions apply to a non-active taxpayer? Rule 12A(2) says a non-active taxpayer is not entitled to: - file Goods Declarations for import or export; - issue sales tax invoices; - claim input tax or refund; - avail any concession under the Act or rules. Rule 12A(3) adds that no person shall make any purchases from a non-active taxpayer, and rule 12A(4) says no input tax credit is admissible on an invoice from a non-active supplier entered in the buyer's return. For the seller, the practical point is the one in section 3(1A): a supply to a non-active buyer attracts the four percent further tax, just as a supply to an unregistered buyer does. ### Worked example (illustrative figures) Naveed Traders, a registered distributor in Peshawar, supplies taxable goods worth Rs. 800,000 (excluding tax) to a registered retailer in September 2026. The retailer filed its July and August 2026 sales tax returns late, so it falls in clause (b) of section 2(1A) and is not an active taxpayer. The figures are invented; the rates are from section 3. 1. Ordinary sales tax at 18%: Rs. 800,000 x 18% = Rs. 144,000. 2. Buyer not active, so further tax at 4%: Rs. 800,000 x 4% = Rs. 32,000. 3. Invoice total: Rs. 800,000 + Rs. 144,000 + Rs. 32,000 = Rs. 976,000. Under rule 12A(2)(c) the buyer cannot claim input tax while non-active, so the Rs. 176,000 of tax on this invoice is a cost to it for as long as that status lasts. ### What if the buyer is restored? Rule 12B, printed within rule 12A in the consolidated Rules, says a non-active taxpayer may be restored if it files the missing return or statement with any tax due, the RTO or LTO recommends restoration after any audit or investigation it considers necessary, and the Board issues an order. Further tax under section 3(1A) turns on the buyer's status for the supply in question. The Act does not say how a seller should verify that status on a given date; the online lookup tools are outside this corpus. ### What if I am the one who becomes non-active? The rules then work against you. Rule 12A(2)(b) bars you from issuing sales tax invoices, rule 12A(3) bars others from buying from you, and rule 12A(4) denies your customers input tax on your invoices. Your registered customers therefore have a direct reason to check your status too. ### Common mistakes - **Treating a registration number as proof of active status.** Section 3(1A) looks at active status as well as registration. - **Thinking only sales tax lapses count.** Clause (c) of section 2(1A) makes a missed income tax return or statement enough, and clause (d) covers withholding statements under section 165 of the Ordinance. - **Assuming status is fixed.** Rule 12A makes removal automatic, and rule 12B allows restoration by Board order. ### What to check in the official text Read section 3(1A), clause (1A) of section 2 and section 21A of the Sales Tax Act amended to 30 June 2026, and rules 5, 12A and 12B of the Sales Tax Rules, 2006 as amended to 30 June 2025. Check also for any Federal Government notification under the proviso to section 3(1A) excluding particular supplies from further tax; none is held in this corpus. ### Frequently asked #### My buyer has a sales tax registration number. Why should I charge further tax? Section 3(1A) covers a buyer who has not obtained a registration number or who is not an active taxpayer. A registration number alone does not take the supply outside further tax if the buyer is not an active taxpayer. #### When does a registered person stop being an active taxpayer? Clause (1A) of section 2 lists the categories: blacklisted or suspended under section 21, not filing sales tax returns by the due date for two consecutive tax periods, not filing the income tax return or statement by the due date, or not filing withholding statements under section 165 of the Income Tax Ordinance. Rule 12A says such a person automatically becomes non-active. #### Can a non-active buyer claim input tax on my invoice? Rule 12A(2) says a non-active taxpayer is not entitled to claim input tax or refund. The further tax on the invoice is therefore a cost to that buyer while it stays non-active. ### Citations - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "where taxable supplies are made to a person who has not obtained registration number" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "(b) fails to file the return under section 26 by the due date for two consecutive tax periods;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 21A (Active taxpayers list)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#21a-active-taxpayers-list), as amended to 2026-06-30: "The Board shall have the power to maintain active taxpayers list in the manner as may be prescribed by rules and such rules may provide for the restrictions and limitations to be imposed on a person who ceases to be an active taxpayer." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 12A (Non-active taxpayer)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#12a-non-active-taxpayer), as amended to 2025-06-30: "(3) No person, including government departments, autonomous bodies and public sector organizations, shall make any purchases from a non-active taxpayer." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, Rule 12B (Restoration as an active taxpayer), printed within rule 12A in the consolidated Rules](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 5 (46Application for registration)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#5-46application-for-registration), as amended to 2025-06-30: "In case of failure to visit or failure of verification, the registered person’s name shall be taken off the sales tax Active Taxpayer List." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf --- ## Can my input tax be reduced because I sell to unregistered shopkeepers? Source: https://qanoondigest.com/faq/wholesalers-distributors/input-tax-cut-sales-unregistered-persons Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It can. Section 73(4) of the Sales Tax Act, 1990 bars input tax attributable to taxable supplies made to unregistered persons above an amount the Board prescribes with Federal Government approval, subject to listed exceptions. Separately, section 8(1)(m) bars input tax, pro rata, on supplies to unregistered distributors where invoices lack the NIC or NTN required by section 23. **Applies to:** Registered wholesalers and distributors in Pakistan whose customers are mostly unregistered shops or unregistered distributors. A distributor whose customers are mostly small unregistered shops can lose part of its input tax, not only charge extra tax. Two separate provisions of the Sales Tax Act, 1990 do this. Section 73(4) looks at the total supplies made to unregistered persons. Section 8(1)(m) looks at supplies to unregistered distributors whose identity is missing from the invoice. ### What does section 73(4) say? Section 73(4), as amended to 30 June 2026, says a registered person "shall not be entitled to deduct input tax" which is attributable to taxable supplies exceeding, in aggregate, "the amount in a financial year or in a tax period, as may be prescribed by the Board, with the approval of Federal Government" as are made to a person who is not a registered person under the Act. Three points follow from the text: 1. **The limit is not in the Act.** Its footnote records that the Finance Act, 2025 substituted the words about an amount prescribed by the Board with Federal Government approval. The figure itself is set outside the Act, and it is not held in this corpus. 2. **The limit can be annual or per tax period.** The sub-section refers to "a financial year or ... a tax period". 3. **The disallowed amount is input tax attributable to those supplies.** The sub-section does not set out a method of attribution, and it does not say in terms whether the bar covers all input tax on supplies to unregistered persons once the amount is crossed or only the part attributable to the excess. The wording "exceeding, in aggregate" points towards the excess, but this page does not settle the point. ### Which buyers are not counted? The proviso to section 73(4) says the bar does not apply to supplies made to: | Clause | Buyers excluded from the bar | | --- | --- | | (a) | Federal, provincial or local Government departments, authorities, etc. not engaged in making taxable supplies | | (b) | Foreign missions, diplomats and privileged persons | | (c) | All other persons not engaged in supply of taxable goods | | (d) | Persons or classes of persons specified by the Board through notification in the official Gazette, subject to its conditions | Clause (c) is broad: it covers buyers who are unregistered but do not themselves supply taxable goods. A typical retail shop reselling taxable goods does supply taxable goods, so clause (c) does not help with most shopkeeper customers. Board notifications under clause (d) are not held in this corpus. ### What does section 8(1)(m) add? Section 8(1)(m) bars input tax on "the input goods or services attributable to supplies made to un-registered distributor, on pro-rata basis, for which sale invoices do not bear the NIC number or NTN as the case may be, of the recipient as stipulated in section 23." Section 23(1)(b) is the invoice rule it points to. It requires the invoice to show the recipient's name, address and registration number and, "in case of supplies by manufacturer or importer to unregistered distributor, the NIC or NTN of such unregistered distributors". The two sections fit together this way: - The NIC or NTN requirement in section 23(1)(b) is worded for supplies by a manufacturer or importer to an unregistered distributor. - Section 8(1)(m) applies to the registered person making supplies to an unregistered distributor, and the missing NIC or NTN on those invoices is what triggers the bar. - A distributor that also imports, or that sells to unregistered sub-distributors, should read both sections against its own invoices. Section 3(1A) sits alongside all of this: supplies to an unregistered person also carry further tax at four percent, covered on a separate page. ### Worked example (illustrative figures) Zubair Enterprises, a registered distributor in Rawalpindi, makes these taxable supplies in October 2026. All amounts are invented. | Buyer | Value excluding tax | | --- | --- | | Registered, active retailers | Rs. 4,000,000 | | Unregistered shops that resell the goods | Rs. 5,000,000 | | A government hospital not making taxable supplies | Rs. 1,000,000 | | Total | Rs. 10,000,000 | Its input tax for the month is Rs. 1,500,000. 1. The Rs. 1,000,000 to the hospital falls in clause (a) of the proviso, so it is not counted for section 73(4). 2. Supplies to unregistered persons that count: Rs. 5,000,000. 3. If input tax is attributed by value, the share linked to those supplies is Rs. 1,500,000 x 5,000,000 / 10,000,000 = Rs. 750,000. The Act does not prescribe this method; value is used here only to show the size of the amount at stake. 4. Whether any of that Rs. 750,000 is disallowed depends on the amount prescribed by the Board and on the reading of "exceeding, in aggregate" above. Neither can be settled from the Act alone. Separately, if Rs. 800,000 of the October supplies had gone to an unregistered sub-distributor on invoices without its NIC or NTN, section 8(1)(m) would bar input tax attributable to those supplies on a pro rata basis. ### Common mistakes - **Quoting a fixed rupee limit as if it were in the Act.** Section 73(4) leaves the amount to the Board with Federal Government approval. - **Counting government supplies as unregistered sales.** Clause (a) of the proviso takes government departments not making taxable supplies out of the bar. - **Treating the NIC as optional.** Where section 23(1)(b) requires the NIC or NTN of an unregistered distributor, its absence triggers section 8(1)(m). - **Forgetting the rest of section 73.** Sub-sections (1) to (3) separately deny input tax where payments above Rs. 50,000 in aggregate to a single supplier in a tax period are not made through the banking channel. ### What to check in the official text Read section 73 in full, section 8(1)(m) and section 23(1)(b) of the Sales Tax Act amended to 30 June 2026, and section 3(1A) for further tax. Before relying on any figure, find the Board's prescription of the amount under section 73(4) and any notification under clause (d) of its proviso. Neither is held in this corpus. ### Frequently asked #### How much can I sell to unregistered shops before input tax is cut? Section 73(4) leaves the figure to the Board, with the approval of the Federal Government, as an amount in a financial year or a tax period. That prescribed amount is not in the Act and is not held in this corpus, so this page does not state one. #### Are sales to government offices counted as sales to unregistered persons? The proviso to section 73(4) says the bar does not apply to supplies to Federal, provincial or local Government departments and authorities not engaged in making taxable supplies. It also excludes foreign missions and diplomats, other persons not engaged in supply of taxable goods, and persons the Board notifies. #### What is the NIC or NTN rule for unregistered distributors? Section 23(1)(b) requires a manufacturer's or importer's invoice to an unregistered distributor to show that distributor's NIC or NTN. Section 8(1)(m) bars input tax, on a pro rata basis, attributable to supplies to unregistered distributors where the invoices do not carry it. ### Citations - [Sales Tax Act, 1990, section 73 (Certain transactions not admissible)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#73-certain-transactions-not-admissible), as amended to 2026-06-30: "(c) all other persons not engaged in supply of taxable goods;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8 (Tax credit not allowed)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8-tax-credit-not-allowed), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "name, address and registration number of the recipient and in case of supplies by manufacturer or importer to unregistered distributor, the NIC or NTN of such unregistered distributors, as the case may." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "where taxable supplies are made to a person who has not obtained registration number" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What happens to my input tax if my supplier is suspended, blacklisted or found issuing fake invoices? Source: https://qanoondigest.com/faq/wholesalers-distributors/blacklisted-supplier-fake-invoice-input-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 21(3) of the Sales Tax Act, 1990 says invoices of a suspended supplier are not entertained for input tax while the suspension lasts. Once the supplier is blacklisted, input tax claimed on its invoices, before or after blacklisting, is to be rejected by a self-speaking appealable order after a hearing. Section 8 separately bars input tax on fake invoices. **Applies to:** Registered wholesalers, distributors and dealers who claimed input tax on invoices from a supplier later suspended, blacklisted or accused of issuing fake invoices. A wholesaler can do everything right on its own side and still lose input tax because of what its supplier did. The Sales Tax Act, 1990 links the buyer's claim to the supplier's standing in three places: suspension and blacklisting under section 21, the input tax bars in section 8, and joint liability under section 8A. ### What does section 21 say about a suspended or blacklisted supplier? Section 21(2) lets the Commissioner, where satisfied that a registered person issued fake invoices, did not comply with the real-time invoicing integration requirements in section 23(5) and (6) or the electronic monitoring and tracking provisions, or otherwise committed tax fraud, issue an order of suspension and blacklisting or suspend the registration, following the procedure the Board prescribes. The words on invoicing integration and monitoring were inserted by the Finance Act, 2026. Section 21(2A), inserted by the Finance Act, 2025, requires the Commissioner to issue a show cause notice within ten days of the suspension order. After the reply and a hearing, the Commissioner may revoke the suspension or issue an appealable speaking order for blacklisting within thirty days of receiving the reply. Section 21(3) sets out the effect on buyers: - **During suspension:** invoices issued by the suspended person "shall not be entertained" for sales tax refund or input tax credit. - **After blacklisting:** refund or input tax credit claimed against that person's invoices, "whether prior or after such black listing", shall be rejected through a self-speaking appealable order, after the person is given an opportunity of being heard. Section 21(4) separately lets the Board, the Commissioner or an authorised officer, after recording reasons in writing, block refunds or input tax adjustments of a person believed to be issuing fake or flying invoices, claiming fraudulent input tax, or not physically existing. ### How does section 8 apply? Section 8(1) bars input tax on "fake invoices" (clause (d)), on goods or services where the supplier has not deposited the sales tax in the Government treasury (clause (ca)), and on purchases where CREST shows a discrepancy or the input tax is not verifiable in the supply chain (clause (caa)). These bars apply whether or not the supplier has been formally suspended. ### Am I jointly liable for the supplier's unpaid tax? Section 8A makes a buyer jointly and severally liable with the supplier for unpaid tax only where the buyer "is in the knowledge or has reasonable grounds to suspect" that some or all of the tax on that supply, or any previous or subsequent supply of the goods, would go unpaid. Words added by the Finance Act, 2015 place "the burden to prove" on the department. The Board may exempt transactions by notification. ### What procedure do the Sales Tax Rules set? Rule 12 of the Sales Tax Rules, 2006 (as amended to 30 June 2025) sets the procedure: 1. The Commissioner may suspend through the system, without prior notice, on grounds including non-existence at the given address, refusal of access or records, and non-filing of returns for three consecutive months. 2. During suspension, no input tax adjustment or refund is allowed to any other registered person on the strength of invoices issued by the suspended person, whether issued before or after the suspension. 3. A blacklisting order must state the period for which input tax claimed on the blacklisted person's invoices is inadmissible. 4. Offices circulate a system list of the blacklisted person's invoices. The officer with jurisdiction over each buyer then issues a show cause notice under section 21(3) and decides by a self-speaking appealable order after a hearing. Rule 12A adds that a non-active taxpayer cannot issue sales tax invoices or claim input tax, and a buyer entering such an invoice in its return sees a message that no input tax credit is admissible. ### Worked example (illustrative figures) Sadiq Distributors in Peshawar claimed input tax on invoices from Supplier X as follows. The amounts are invented. | Month | Supplier X status | Input tax claimed | | --- | --- | --- | | January | Registered, active | Rs. 60,000 | | February | Registered, active | Rs. 40,000 | | March | Suspended from 5 March | Rs. 25,000 | Supplier X is later blacklisted. 1. March claim: section 21(3) says invoices of a suspended person are not entertained during suspension, so Rs. 25,000 is not entertained. 2. January and February claims: once Supplier X is blacklisted, section 21(3) covers invoices "whether prior or after", so Rs. 60,000 + Rs. 40,000 = Rs. 100,000 is open to rejection, but only through a self-speaking appealable order after Sadiq Distributors is heard. 3. Total exposed: Rs. 25,000 + Rs. 100,000 = Rs. 125,000. ### What if the rules and the Act give different time limits? They do. Rule 12(a)(vi) gives the Commissioner seven days after suspension to issue a show cause notice, and rule 12(b)(iii) allows ninety days from the notice of hearing for the blacklisting order. Section 21(2A) of the Act, inserted by the Finance Act, 2025, says ten days for the notice and thirty days from receipt of the reply for the order. The Act is the later and higher instrument, but this site does not resolve how the two are applied in practice. ### Common mistakes - **Assuming old invoices are safe.** Section 21(3) reaches invoices issued before blacklisting. - **Assuming rejection is automatic.** Section 21(3) requires an appealable order after a hearing, so the buyer can respond and appeal. - **Assuming the buyer must prove innocence under section 8A.** The Act places the burden on the department. ### What to check in the official text Read sections 8, 8A, 21 and 23 of the Sales Tax Act, 1990 as amended to 30 June 2026, and rules 12 and 12A of the Sales Tax Rules, 2006. Whether a supplier is currently active, suspended or blacklisted is shown in FBR's systems, which are not part of the text held here. ### Frequently asked #### Can input tax on invoices issued before my supplier was blacklisted be rejected? Yes. Section 21(3) says that once a person is blacklisted, input tax claimed against invoices issued by him, whether prior or after blacklisting, shall be rejected through a self-speaking appealable order after affording an opportunity of being heard. #### Am I liable for tax my supplier did not pay? Section 8A makes the buyer jointly and severally liable only where the buyer knew or had reasonable grounds to suspect the tax would go unpaid. Since the Finance Act, 2015, the burden to prove that is on the department. #### What happens to input tax during a suspension that is later revoked? Section 21(3) bars input tax on the suspended person's invoices during the period of suspension. The Act and rule 12 provide for revoking the suspension after a hearing, but neither states in so many words how a buyer's claims for the suspension period are then treated. ### Citations - [Sales Tax Act, 1990, section 21 (De-registration, blacklisting and suspension of registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#21-de-registration-blacklisting-and-suspension-of-registration), as amended to 2026-06-30: "During the period of suspension of registration, the invoices issued by such person shall not be entertained for the purposes of sales Tax refund or input tax credit" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8 (Tax credit not allowed)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8-tax-credit-not-allowed), as amended to 2026-06-30: "(3) No person other than a registered person shall make any deduction or reclaim input tax in respect of taxable supplies made or to be made by him." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8A (Joint and several liability of registered persons in supply chain where tax unpaid)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8a-joint-and-several-liability-of-registered-persons-in-supply-chain-where-tax-unpaid), as amended to 2026-06-30: "such person as well as the person making the taxable supply shall be jointly and severally liable for payment of such unpaid amount of tax" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 12 (Blacklisting and suspension of registration)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#12-blacklisting-and-suspension-of-registration), as amended to 2025-06-30: "(v) no input tax adjustment/refund shall be admissible to the registered person during the currency of suspension." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 12A (Non-active taxpayer)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#12a-non-active-taxpayer), as amended to 2025-06-30: "(c) claim input tax or refund; or" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "may require any person or class of persons to integrate their electronic invoicing system with the Board’s Computerized System for real time reporting of sales" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Is 236G or 236H tax a final cost, or can I adjust it against my income tax and get a refund of any excess? Source: https://qanoondigest.com/faq/wholesalers-distributors/236g-236h-adjustable-refund Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It is adjustable, not a final cost. Sections 236G(2) and 236H(2) allow credit for the tax collected against the buyer's tax for the tax year in which it was collected, and section 168 treats it as tax paid. Where the credit exceeds the tax due, section 170 lets the taxpayer apply to the Commissioner for a refund of the excess. **Applies to:** Distributors, dealers, wholesalers and retailers in Pakistan from whom tax has been collected under section 236G or section 236H. Advance tax under sections 236G and 236H is an advance payment of the buyer's own income tax, not a separate charge that is simply lost. For a trader working on thin margins, the amounts collected over a year on purchases can add up to more than the tax the Ordinance finally charges on the year's income. When that happens, the law provides a route to get the excess back. ### What does the law say? Four provisions of the Income Tax Ordinance, 2001, as amended to 30 June 2026, work together. - **Section 236G(2)** allows credit for tax collected on sales to a distributor, dealer or wholesaler "in computing the tax due by the distributor, dealer or wholesaler on the taxable income for the tax year in which the tax was collected." - **Section 236H(2)** does the same for tax collected from a retailer. - **Section 168(1)(b)** says tax collected under Chapter XII, where sections 236G and 236H sit, "shall be treated as tax paid by the person from whom the tax was collected". Section 168(2) allows a tax credit for it in the tax year in which it was collected. - **Section 170(1)** lets a taxpayer who has paid tax in excess of the amount properly chargeable apply to the Commissioner for a refund of the excess. Section 168(5) links the two ends: a tax credit for a tax year that cannot be credited for that year "shall be refunded to the taxpayer in accordance with section 170." ### Is it ever a final tax? Section 168(3) lists the final taxes for which no credit is allowed. In the text as amended to 30 June 2026, sections 236G and 236H are not on that list. Their own sub-section (2) grants credit in terms. ### Worked example (illustrative figures) Zubair Traders is a wholesaler of household goods in Multan and is on the Active Taxpayers' List. All figures below are invented for tax year 2027; the rate is the real Division XIV rate for goods other than fertilizer. 1. Purchases from manufacturers during the year: Rs. 80,000,000. 2. Section 236G collected at 0.1%: Rs. 80,000,000 x 0.1% = Rs. 80,000. 3. Tax computed on Zubair Traders' taxable income for tax year 2027 (assumed): Rs. 50,000. 4. Credit for 236G tax collected: Rs. 80,000. 5. Tax payable after credit: Rs. 50,000 minus Rs. 80,000 = minus Rs. 30,000. 6. Excess credit of Rs. 30,000 cannot be used against tax for the year. Under section 168(5), that Rs. 30,000 is dealt with under section 170. If the computed tax had been Rs. 110,000 instead, Zubair Traders would owe Rs. 110,000 minus Rs. 80,000 = Rs. 30,000, and there would be no refund. The "tax due" in step 3 is whatever the Ordinance charges for the year, and other provisions can affect it. The related pages on minimum tax for distributors explain how a turnover-based minimum can change that figure. ### How does the refund work? Section 170 sets the process: | Step | What section 170 says | | --- | --- | | Application | In the prescribed form, verified in the prescribed manner (170(2)(a) and (b)) | | Time limit | Within three years of the later of the assessment order date for that tax year or the date the tax was paid (170(2)(c)) | | Use of the excess | First against any other tax due under the Ordinance, then against other outstanding taxes, and the remainder is refunded (170(3)) | | Decision | A written order within sixty days of the application, after an opportunity of being heard (170(4)) | | If refused or delayed | Appeal under Part III of the same Chapter of the Ordinance (170(5)) | Section 170A adds that, commencing from tax year 2021, the Board may process and issue a refund to a taxpayer who has filed a return without requiring a refund application, to the extent the tax credit is verified by the Board's computerised system, with payment made electronically to the taxpayer's notified bank account. ### What if I am not on the Active Taxpayers' List? The higher Tenth Schedule rate (2% for section 236G on non-fertilizer goods, 2.5% for section 236H) is still tax collected under sub-section (1) of those sections. Sections 236G(2) and 236H(2) allow credit for tax collected under sub-section (1) without distinguishing the rate. A buyer off the list pays much more up front, so an excess over the year's tax is more likely. ### What if the tax was collected in one year and the goods sold in the next? The credit belongs to "the tax year in which the tax was collected", under both sections. It is not moved to the year in which the stock is resold. ### Common mistakes - **Adding 236G or 236H to the cost of goods and forgetting it.** It is tax paid under section 168(1)(b), claimable as credit in the return. - **Assuming excess credit carries forward automatically.** The Ordinance route for unused credit is a refund under section 170, as section 168(5) says. - **Missing the three-year window.** Section 170(2)(c) fixes the time limit for the application. - **Claiming credit without the collection being made.** The credit is for tax actually collected under sub-section (1). ### What to check in the official text Read sections 236G, 236H, 168, 170 and 170A of the Ordinance amended to 30 June 2026. The prescribed refund form and the verification manner referred to in section 170(2) are in rules that are not covered on this page, and the steps on FBR's online system are outside the text held here. ### Frequently asked #### Is 236G or 236H a final tax? No. Both sections say credit for the tax collected shall be allowed in computing the buyer's tax due for the tax year in which it was collected. Neither section appears in the list of final taxes in section 168(3) that are denied credit. #### How long do I have to apply for a refund of excess 236G or 236H tax? Section 170(2) requires the application within three years of the later of the date the Commissioner issued the assessment order for that tax year or the date the tax was paid. It must be in the prescribed form and verified in the prescribed manner. #### How quickly must the Commissioner decide a refund application? Section 170(4) requires a written order within sixty days of receiving the application, after giving the taxpayer an opportunity of being heard. Section 170(5) allows an appeal against the order, or against a failure to pass one within that time. ### Citations - [Income Tax Ordinance, 2001, section 236G (Advance tax on sales to distributors, dealers and wholesalers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236g-advance-tax-on-sales-to-distributors-dealers-and-wholesalers), as amended to 2026-06-30: "(2) Credit for tax collected under sub-section (1) shall be allowed in computing the tax due by the distributor, dealer or wholesaler on the taxable income for the tax year in which the tax was collected." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236H (Advance tax on sales to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236h-advance-tax-on-sales-to-retailers), as amended to 2026-06-30: "(2) Credit for the tax collected under sub-section (1) shall be allowed in computing the tax due by the retailer on the taxable income for the tax year in which the tax was collected." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "(b) the amount of any tax collected under Division II of this Part 4[or Chapter XII] or deducted under Division III of this Part 5[or Chapter XII] shall be treated as tax paid by the person from whom the tax was collected or deducted." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 170 (Refunds)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#170-refunds), as amended to 2026-06-30: "(1) A taxpayer who has paid tax in excess of the amount which the taxpayer is properly chargeable under this Ordinance may apply to the Commissioner for a refund of the excess." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 170A (Electronic processing and electronic issuance of Refunds by the Board)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#170a-electronic-processing-and-electronic-issuance-of-refunds-by-the-board), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What happens if a distributor files the monthly sales tax return late or pays the tax late? Source: https://qanoondigest.com/faq/wholesalers-distributors/sales-tax-return-late-penalty-distributor Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 33 of the Sales Tax Act, 1990, as amended in 2026, a late return costs Rs. 50,000, or Rs. 2,000 a day if filed within ten days of the due date. Late payment costs Rs. 50,000 or 5% of the tax, whichever is higher, or Rs. 5,000 a day within ten days, plus section 34 default surcharge. **Applies to:** Wholesalers, dealers and distributors registered for sales tax who file the monthly return under section 26 of the Sales Tax Act, 1990. A late monthly return and a late payment of sales tax are two separate offences in the Sales Tax Act, 1990, each with its own entry in the section 33 Table. Unpaid tax also attracts default surcharge under section 34. For a distributor, a run of late returns can also cost active taxpayer status. ### What does the law say about filing and paying? Section 26(1) requires every registered person to furnish, not later than the due date, a true, complete and correct return in the prescribed form, "indicating the purchases and the supplies made during a tax period, the tax due and paid and such other information, as may be prescribed". A tax period is one month unless the Board specifies otherwise. Section 2(9) defines the due date for a return as the 15th day of the month following the end of the tax period, or another date the Board notifies, and allows different dates for different parts of the return. Rule 18(9) of the Sales Tax Rules, 2006 says that where the due date is prescribed as the 15th, "the tax due shall be deposited by the 15th and the return shall be submitted electronically by 18th of the same month". Rule 18(1) requires the return to be filed electronically. ### What are the penalties? The section 33 Table, with the figures substituted by the Finance Act, 2026: | S. No. | Offence | Penalty | | --- | --- | --- | | 1 | Fails to furnish a return within the due date | Rs. 50,000. If filed within ten days of the due date: Rs. 2,000 for each day of default | | 5 | Fails to deposit tax due, or any part, in the time or manner laid down | Rs. 50,000 or 5% of the tax involved, whichever is higher. If paid within ten days of the due date: Rs. 5,000 for each day of default | Serial 5 carries two more provisos. No penalty is imposed for a miscalculation made for the first time during a year. And if tax is still unpaid sixty days after a notice from an officer not below Assistant Commissioner, the defaulter is further liable, on conviction by a Special Judge, to imprisonment up to three years, a fine up to the tax involved, or both. ### What is default surcharge? Section 34(1) says a registered person who does not pay tax due in time "shall, in addition to the tax due, pay default surcharge". Section 34(1)(a) sets the rate at twelve percent per annum or KIBOR plus three percent per annum, whichever is higher, on the tax due. Section 34(2)(b) says that for non-payment the period runs from the 16th day of the month following the due date of the tax period to the day before the tax is actually paid. The Explanation says tax due does not include the penalty. ### Worked example (illustrative figures) Siddiqui Distributors in Sialkot owes sales tax of Rs. 400,000 for a month. The name and amounts are invented; the penalty figures and the 12% floor are from sections 33 and 34. **Case A: return and payment each 6 days late.** 1. Return penalty (serial 1 proviso): 6 x Rs. 2,000 = Rs. 12,000. 2. Payment penalty (serial 5 proviso): 6 x Rs. 5,000 = Rs. 30,000. 3. Total penalties: Rs. 42,000. 4. Default surcharge at the 12% floor, spread evenly over the year: Rs. 400,000 x 12% x 6 / 365 = Rs. 789 (rounded). **Case B: return and payment each 25 days late.** 1. Return penalty (serial 1): Rs. 50,000. 2. Payment penalty (serial 5): 5% of Rs. 400,000 = Rs. 20,000, so the Rs. 50,000 floor applies. 3. Total penalties: Rs. 100,000. 4. Default surcharge at the 12% floor: Rs. 400,000 x 12% x 25 / 365 = Rs. 3,288 (rounded). If KIBOR plus 3% is above 12% for the period, section 34 uses that higher rate. The Act gives an annual rate but does not spell out a day-count method; the daily proportion above is only for illustration. The day count also depends on which due date applies, which is covered in the last section. ### What if I miss two months in a row? Section 2(1A) excludes from the definition of active taxpayer a registered person who "fails to file the return under section 26 by the due date for two consecutive tax periods". Active status matters elsewhere in the Act. For example, the Eleventh Schedule sets lower withholding for active taxpayers than for other suppliers. ### What if FBR sends a notice to file? Section 26(2A) lets an officer require a person who has failed to file to furnish the return within fifteen days of the notice, or another period specified or allowed. ### Common mistakes - **Using pre-2026 amounts.** The Finance Act, 2026 raised both entries. - **Thinking a return filed with nil payment avoids serial 5.** Filing and paying are separate offences. - **Treating the per-day rate as open-ended.** It applies only within ten days of the due date. After that, the fixed or percentage penalty applies. ### What to check in the official text Read sections 2(9), 26, 26AB and 34 and serials 1 and 5 of the section 33 Table in the Sales Tax Act, 1990 as amended to 30 June 2026, and rule 18 of the Sales Tax Rules, 2006. The Act defines the due date as the 15th unless the Board notifies otherwise, while rule 18(9) sets the 18th for submitting the return. The Table does not say which date it measures a late return from, so confirm the current date for your category of person. Board notifications changing due dates are not held on this site. ### Frequently asked #### Is the Rs. 2,000 a day penalty capped? The proviso to serial 1 applies only where the return is filed within ten days of the due date, so at most ten days of Rs. 2,000 can arise under it. After that, the main entry of Rs. 50,000 applies. The Table does not state a separate cap. #### Is there a penalty for a first miscalculation of tax? The second proviso to serial 5 says no penalty shall be imposed when any miscalculation is made for the first time during a year. Default surcharge under section 34 is a separate charge and that proviso does not mention it. #### Can I get more time to file? Section 26AB lets a registered person apply in writing to the Commissioner by the due date. The Commissioner may extend time for absence from Pakistan, sickness or other misadventure, or other reasonable cause, ordinarily by no more than fifteen days. ### Citations - [Sales Tax Act, 1990, section 26 (* Return)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#26-return), as amended to 2026-06-30: "indicating the purchases and the supplies made during a tax period, the tax due and paid and such other information, as may be prescribed" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 18 (Electronic filing of Sales Tax return)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#18-electronic-filing-of-sales-tax-return), as amended to 2025-06-30: "the tax due shall be deposited by the 15th and the return shall be submitted electronically by 18th of the same month" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, Section 33, Table, S. Nos. 1 and 5 (as amended by the Finance Act, 2026)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 34 (Default Surcharge)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#34-default-surcharge), as amended to 2026-06-30: "he shall, in addition to the tax due, pay default surcharge at the rate mentioned below" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "fails to file the return under section 26 by the due date for two consecutive tax periods" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 26AB, Extension of time for furnishing returns](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What minimum tax on turnover applies to distributors under section 113 for tax year 2027? Source: https://qanoondigest.com/faq/wholesalers-distributors/minimum-tax-turnover-distributors-2027 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer For tax year 2027 most distributors pay minimum tax under section 113 at 1.25% of turnover, the Division IX rate for all other cases, because the Finance Act, 2026 omitted the 0.25% entry for distributors. Clause (24D) of the Second Schedule gives 0.5% to distributors of listed goods, such as pharmaceuticals and packaged food, if on both active taxpayers' lists. **Applies to:** Distributors, dealers, sub-dealers and wholesalers that are companies, or individuals and AOPs with turnover of Rs. 100 million or more. For tax year 2027 (1 July 2026 to 30 June 2027) the general minimum tax for a distributor is 1.25% of turnover. The lower rate of 0.25% that distributors of pharmaceuticals, fast moving consumer goods and cigarettes used to have was removed by the Finance Act, 2026. In its place, clause (24D) of the Second Schedule offers 0.5% for a listed set of goods, but only to distributors on both active taxpayers' lists. ### What does the law say? Section 113(1) of the Income Tax Ordinance, 2001 applies to a resident company, a permanent establishment of a non-resident company, and an individual or association of persons having turnover of one hundred million rupees or above in tax year 2017 or any subsequent tax year. It bites where, for any reason (a loss, set-off of old losses, exemptions, credits, or allowances and deductions), the tax payable is less than the percentage of turnover in Division IX of Part I of the First Schedule. When it applies, section 113(2) treats turnover as income, and the person pays minimum tax at the Division IX rate "instead of the actual tax payable". Turnover under section 113(3)(a) means gross sales or gross receipts, exclusive of sales tax, federal excise duty and trade discounts shown on invoices or bills. ### What changed for distributors in 2026? Before 1 July 2026, serial number 3 of the Division IX Table began with "(a) Distributors of pharmaceutical products, fast moving consumer goods and cigarettes" at 0.25%. Section 5 of the Finance Act, 2026 says that entry "(a) shall be omitted", and section 1 brings the Act into force on 1 July 2026 unless otherwise provided. The same section of the Finance Act, 2026 substituted clause (24D) of Part II of the Second Schedule. The old clause gave 0.25% to distributors, dealers, sub-dealers, wholesalers and retailers of fast moving consumer goods, fertilizer, mobile phones, sugar, electronics, cement, steel and edible oil. The new clause, as printed in the Finance Act, 2026, reads: > "(24D) The rate of minimum tax under sub-section (1) of section 113, shall be 0.5% in the case of distributors, dealers, sub-dealers, wholesalers of goods specified in the following Table, subject to the conditions that beneficiaries of reduced rate are appearing on the active taxpayers’ lists issued under the provisions of the Sales Tax Act, 1990 and the Income Tax Ordinance, 2001 (XLIX of 2001):" Retailers, cement, steel and edible oil are no longer named. ### What rates apply for tax year 2027? | Distributor type | Rate of turnover | Source | | --- | --- | --- | | Distributor of goods in the clause (24D) Table, on both active taxpayers' lists | 0.5% | Second Schedule, clause (24D) | | Petroleum agents and distributors registered under the Sales Tax Act, 1990 | 0.25% | Division IX, S. No. 3(b) | | Rice mills and dealers | 0.25% | Division IX, S. No. 3(c) | | Any other distributor, including one not on both lists | 1.25% | Division IX, S. No. 4, "In all other cases" | The clause (24D) Table has 14 entries: pharmaceutical; fertilizer; cigarette; sugar; locally manufactured mobile phones; fresh and frozen food in canned or packaged form; electronics; beverages and dairy products; pasta, cereals, biscuits, nuts, snacks and similar packaged food items; condiments and baking items in bottled or packaged form; skincare and cosmetics, haircare, oral care, baby care; cleaning agents; toilet paper, paper towels, facial tissues, napkins and similar products; and trash bags, aluminum foil, air freshener and insect sprays. ### Worked example (illustrative figures) Three distributors in Hyderabad each have turnover of Rs. 300,000,000 for tax year 2027, net of sales tax. In each case assume normal tax on profit is lower than minimum tax, so section 113 applies. | Distributor | Rate | Arithmetic | Minimum tax | | --- | --- | --- | --- | | Biscuits and snacks, on both active taxpayers' lists | 0.5% | 300,000,000 × 0.5% | Rs. 1,500,000 | | Biscuits and snacks, on the income tax list only | 1.25% | 300,000,000 × 1.25% | Rs. 3,750,000 | | Cement dealer, on both lists | 1.25% | 300,000,000 × 1.25% | Rs. 3,750,000 | For comparison, the first distributor at the old 0.25% rate would have paid 300,000,000 × 0.25% = Rs. 750,000. The listed-goods rate has doubled, and missing one active taxpayers' list multiplies it by two and a half. ### What if ...? **What if my normal tax is higher than minimum tax?** Section 113 applies only where tax payable is less than the Division IX percentage of turnover. If normal tax is higher, you pay normal tax. **What if minimum tax exceeds normal tax?** The excess can be carried forward under section 113(2)(c) for two tax years. That is covered on a separate page. **What if I distribute several kinds of goods?** Clause (24D) applies to distributors "of goods specified in the following Table". It does not say how to treat a distributor whose turnover mixes listed and unlisted goods. ### Common mistakes - **Relying on the 0.25% rate.** Entry 3(a) was omitted from 1 July 2026. - **Assuming cement, steel or edible oil still qualify.** They are not in the new clause (24D) Table. - **Ignoring the two-list condition.** Clause (24D) needs both active taxpayers' lists. - **Including sales tax in turnover.** Section 113(3)(a) excludes it. ### What to check in the official text Read section 113 and the Division IX Table. Our copy of serial number 1 of that Table is partly illegible across pages 529 and 530 of the official PDF, so this page does not state which persons are listed there; check it against the PDF. Also read clause (24D) with its Table, and section 5 of the Finance Act, 2026. Section 113 does not itself explain how it interacts with withholding taxes that other provisions treat as minimum tax, and this page does not resolve that. ### Frequently asked #### Does section 113 apply to a small distributor run by one person? Only if turnover reaches the threshold. Section 113(1) applies to an individual or an association of persons having turnover of one hundred million rupees or above in tax year 2017 or any later tax year. A resident company is covered whatever its turnover. #### Which goods qualify for the 0.5% rate? The Table in clause (24D) lists pharmaceutical, fertilizer, cigarette, sugar, locally manufactured mobile phones, packaged and canned food, electronics, beverages and dairy products, packaged snacks and similar foods, condiments and baking items, personal care products, cleaning agents, paper products, and trash bags, foil, air fresheners and insect sprays. #### Do cement, steel and edible oil distributors still get a reduced rate? Not under clause (24D) as substituted by the Finance Act, 2026. The earlier clause named cement, steel and edible oil, but the new Table does not, so those distributors fall to the 1.25% rate for all other cases unless another entry applies. ### Citations - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "minimum tax computed on the basis of rates as specified in Division IX of Part I of First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IX (Minimum tax under section 113), Table](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part II, clause (24D)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2026, section 5 (Amendments of the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2026#5-amendments-of-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2026: "(vi) in Division IX, in the Table, in column (1), against S. No. 3 in column (2), entry (a) shall be omitted;" Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Finance Act, 2026, section 1 (Short title and commencement)](https://qanoondigest.com/acts/finance-act/finance-act-2026#1-short-title-and-commencement), as amended to 2026: "It shall, unless otherwise provided, come into force on the first day of July, 2026." Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf --- ## What is the minimum tax on turnover for distributors and wholesalers in tax year 2027? Source: https://qanoondigest.com/faq/wholesalers-distributors/minimum-tax-turnover-distributors-tax-year-2027 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 113 makes a company, or an individual or AOP with turnover of Rs. 100 million or more, pay tax of at least a percentage of turnover. For tax year 2027, the Finance Act 2026 removed the 0.25% distributor entry, so the general 1.25% applies, reduced to 0.5% under clause (24D) for listed goods if on both Active Taxpayers' Lists. **Applies to:** Distributors, dealers, sub-dealers and wholesalers in Pakistan that are companies, or individuals and associations of persons with turnover of one hundred million rupees or more. Distributors often work on thin margins, so their tax on profit can be small compared with their sales. Section 113 of the Income Tax Ordinance, 2001 puts a floor under that tax by linking it to turnover. For tax year 2027 (1 July 2026 to 30 June 2027), the Finance Act, 2026 changed the rate most distributors face. ### Who does section 113 apply to? Section 113(1) covers: - every resident company and permanent establishment of a non-resident company; and - an individual or association of persons "having turnover of hundred million rupees or above in the tax year 2017 or in any subsequent tax year". The section applies where, because of a loss, a brought-forward loss, an exemption, credits or rebates, or allowances and deductions, the tax payable for the year is nil or less than the Division IX percentage of turnover. The Explanation to sub-section (1) leaves out final tax on deemed income and tax under sections 4B and 4C when measuring the tax payable. The wording "in the tax year 2017 or in any subsequent tax year" does not say in terms whether crossing Rs. 100 million in one year brings a person within the section for later years with lower turnover. This page does not resolve that. ### What counts as turnover? Section 113(3)(a) defines turnover for goods as gross sales or gross receipts, exclusive of sales tax, federal excise duty and trade discounts shown on invoices or bills, and excluding amounts taxed as final discharge of tax liability. Section 113(2)(a) adds an Explanation that turnover covers receipts from all business activities. ### What are the rates for tax year 2027? Division IX of Part I of the First Schedule, as amended to 30 June 2026, includes these entries relevant to traders: | S. No. in Division IX | Persons | Rate of turnover | | --- | --- | --- | | 2 | Oil refineries, motorcycle dealers registered under the Sales Tax Act, 1990, oil marketing companies | 0.5% | | 3 | Petroleum agents and distributors registered under the Sales Tax Act, 1990; rice mills and dealers; Tier-1 retailers of fast moving consumer goods integrated with the Board; e-commerce turnover; used vehicle traders; flour mills | 0.25% | | 4 | In all other cases | 1.25% | Until 30 June 2026, entry (a) of S. No. 3 read "Distributors of pharmaceutical products, fast moving consumer goods and cigarettes" at 0.25%. The Finance Act, 2026 omitted that entry. A distributor that is not named elsewhere in the table now falls in S. No. 4 at 1.25%. S. No. 1 of the table (0.75% in the extracted text) is only partly legible in the copy of the source this page relies on. A fertilizer dealer or distributor should read S. No. 1 in the official PDF before relying on any rate. ### What does clause (24D) reduce it to? Clause (24D) of Part II of the Second Schedule, as substituted by the Finance Act, 2026, sets minimum tax under section 113(1) at **0.5%** for distributors, dealers, sub-dealers and wholesalers of the goods in its Table, on condition that they appear on the Active Taxpayers' Lists under both the Sales Tax Act, 1990 and the Income Tax Ordinance, 2001. The Table lists: 1. Pharmaceutical 2. Fertilizer 3. Cigarette 4. Sugar 5. Locally manufactured mobile phones 6. Fresh and frozen food in canned or packaged form 7. Electronics 8. Beverages and dairy products 9. Pasta, cereals, biscuits, nuts, snacks and similar packaged food items 10. Condiments and baking items in bottled or packaged form 11. Skincare and cosmetics, haircare, oral care, baby care 12. Cleaning agents like laundry detergents, dishwashing soaps and floor cleaners 13. Toilet paper, paper towels, facial tissues, napkins and similar products 14. Trash bags, aluminum foil, air freshener and insect sprays The clause it replaced set 0.25% and named cement, steel and edible oil, and retailers. Those do not appear in the new clause. ### Worked example (illustrative figures) Siddiqui Distributors, a sole proprietor in Karachi, has tax year 2027 turnover of Rs. 250,000,000 after excluding sales tax. Tax on taxable income under the normal rates is assumed at Rs. 900,000. Only the rates are real. **Case A: sells packaged snacks and beverages, on both Active Taxpayers' Lists.** 1. Clause (24D) rate: 0.5%. 2. Minimum tax: Rs. 250,000,000 x 0.5% = Rs. 1,250,000. 3. Normal tax of Rs. 900,000 is less, so section 113(2)(b) makes Rs. 1,250,000 payable. **Case B: sells hardware items not in the clause (24D) Table.** 1. Division IX, S. No. 4: 1.25%. 2. Minimum tax: Rs. 250,000,000 x 1.25% = Rs. 3,125,000. 3. Rs. 3,125,000 is payable instead of Rs. 900,000. In both cases the difference over normal tax (Rs. 350,000 in Case A, Rs. 2,225,000 in Case B) is dealt with under section 113(2)(c), explained on the related carry-forward page. ### Common mistakes - **Using the old 0.25% distributor rate for tax year 2027.** That entry was omitted by the Finance Act, 2026. - **Claiming 0.5% while on only one list.** Clause (24D) requires both Active Taxpayers' Lists. - **Including sales tax in turnover.** Section 113(3)(a) excludes it. ### What to check in the official text Read section 113, Division IX of Part I of the First Schedule and clause (24D) of Part II of the Second Schedule, all as amended to 30 June 2026, and the Finance Act, 2026 amendments to both. Confirm whether your goods fall in a clause (24D) Table entry; the clause does not define its descriptions further. ### Frequently asked #### Does minimum tax under section 113 apply to a small distributor? Section 113(1) applies to every resident company, and to an individual or association of persons having turnover of one hundred million rupees or above in tax year 2017 or any subsequent tax year. An individual distributor below that level in those years is outside it. #### Do distributors still get the 0.25% minimum tax rate? Not under Division IX. The Finance Act, 2026 omitted entry (a) of S. No. 3, which covered distributors of pharmaceutical products, fast moving consumer goods and cigarettes at 0.25%. The reduced rate now available is 0.5% under clause (24D), for listed goods and subject to both Active Taxpayers' Lists. #### Is sales tax part of turnover for minimum tax? No. Section 113(3)(a) defines turnover as gross sales or receipts exclusive of sales tax and federal excise duty and of trade discounts shown on invoices or bills. ### Citations - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "(b) the person shall pay as income tax for the tax year (instead of the actual tax payable under this Ordinance),6[minimum tax computed on the basis of rates as specified in Division IX of Part I of First Schedule];" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IX (Minimum tax under section 113), Table, S. Nos. 2, 3 and 4](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part II, clause (24D)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2026, Amendments to the First Schedule, Part I, Division IX, S. No. 3, entry (a), and substitution of Second Schedule clause (24D)](https://qanoondigest.com/acts/finance-act/finance-act-2026), as amended to 2026 Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf --- ## Do I as a distributor or wholesaler have to collect section 236H advance tax when I sell to shopkeepers? Source: https://qanoondigest.com/faq/wholesalers-distributors/distributor-collect-236h-tax-from-retailers Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 236H(1) of the Income Tax Ordinance requires every manufacturer, distributor, dealer, wholesaler or commercial importer to collect advance tax at the time of sale to retailers, and every distributor or dealer on sales to another wholesaler. Division XV sets the rate at 0.5% of the gross amount of sales, and the retailer gets credit for it. **Applies to:** Distributors, dealers and wholesalers in Pakistan who sell goods to shopkeepers and other retailers, or to other wholesalers. A distributor sits in the middle of two advance taxes. When it buys from a manufacturer, section 236G tax is collected from it. When it sells onward to shopkeepers, section 236H turns it into the collector: it adds advance tax to its invoice, keeps the money for the government, and passes it on. ### What does section 236H say? Section 236H(1) of the Income Tax Ordinance, 2001 lists who must collect and when: - every manufacturer, distributor, dealer, wholesaler or commercial importer, "at the time of sale to retailers"; and - "every distributor or dealer to another wholesaler". They "shall collect advance tax at the rate specified in Division XV of Part IV of the First Schedule, from the aforesaid person to whom such sales have been made." Section 236H(2) then gives the buyer credit: tax collected under sub-section (1) "shall be allowed in computing the tax due by the retailer on the taxable income for the tax year in which the tax was collected." ### What rate applies? Division XV of Part IV of the First Schedule, as amended to 30 June 2026, reads: "The rate of collection of tax under section 236H on the gross amount of sales shall be 0.5%." That is the rate for tax year 2027 (1 July 2026 to 30 June 2027). There is now a single rate; an earlier version of Division XV had a separate 1% rate for electronics, and that version was substituted by the Finance Act, 2021. A retailer who is not on the Active Taxpayers' List is charged a higher rate under the Tenth Schedule. That is covered on the related page on the rate for retailers off the list. ### Who counts as a retailer? Section 236H does not define "retailer", and the definitions in section 2 of the Ordinance as amended to 30 June 2026 do not define it either. The word therefore has no statutory definition for this section in the consolidated text. A general store, a pharmacy counter or a hardware shop selling to the public would be the ordinary examples, but the Ordinance itself does not draw the line, and this page does not draw it for it. ### Worked example (illustrative figures) Rana Distributors supplies biscuits and soft drinks to shops in Gujranwala. On 10 August 2026 it sells goods worth Rs. 400,000 to Bismillah Karyana Store, which is on the Active Taxpayers' List. The amounts are invented; the rate is the Division XV rate. 1. Gross amount of the sale: Rs. 400,000. 2. Rate under Division XV: 0.5%. 3. Tax to collect: Rs. 400,000 x 0.5% = Rs. 2,000. 4. The shop pays Rs. 400,000 for the goods plus Rs. 2,000 of section 236H tax. If Rana Distributors sells Rs. 12,000,000 of goods to retailers in August 2026, the 236H tax it collects that month is Rs. 12,000,000 x 0.5% = Rs. 60,000. Section 160 requires that amount to be paid to the Commissioner "within the time and in the manner as may be prescribed". The deadline and payment method are set by the rules, not by section 160 itself. For the shop, the Rs. 2,000 is not a cost that disappears. Under section 236H(2), and the general rule in section 168(2), it is allowed as a credit in computing the shop's tax for the tax year in which it was collected. ### What if I sell to another wholesaler? The second limb of section 236H(1) covers "every distributor or dealer to another wholesaler". A distributor or dealer selling to a wholesaler collects at the Division XV rate. A wholesaler selling to another wholesaler is not named in that limb. That limb still carries the words "in respect of the said sectors", which refer back to a sector list that the Finance Act, 2024 omitted; the related page on listed sectors explains why this wording is unclear. ### What if I do not collect it? Section 161(1) makes a person who fails to collect tax as required under Chapter XII, or who collects it and does not pay it under section 160, "personally liable to pay the amount of tax to the Commissioner". Section 161(2) lets that person recover the tax from the person from whom it should have been collected. The related page on failure to collect covers this in more detail. ### Common mistakes - **Treating 236H as the retailer's tax to deposit.** Section 236H(1) puts the duty to collect on the seller: the manufacturer, distributor, dealer, wholesaler or commercial importer. - **Charging 0.5% on the profit margin.** Division XV applies the rate "on the gross amount of sales". - **Using the old 1% electronics rate.** Division XV was substituted by the Finance Act, 2021 and now has one rate. - **Assuming the distributor can claim credit for 236H it collected.** Section 236H(2) gives the credit to the retailer from whom it was collected, not to the collector. ### What to check in the official text Read section 236H and Division XV of Part IV of the First Schedule in the Income Tax Ordinance amended to 30 June 2026, together with sections 160 and 161. Check the Income Tax Rules for the time and manner of payment that section 160 refers to, and check the buyer's status on the Active Taxpayers' List before applying the rate. ### Frequently asked #### What rate of 236H tax does a distributor collect from a retailer? Division XV of Part IV of the First Schedule sets the rate under section 236H at 0.5% of the gross amount of sales for tax year 2027. A higher rate applies where the retailer is not on the Active Taxpayers' List. #### Does a wholesaler collect 236H when selling to another wholesaler? Section 236H(1) names every distributor or dealer selling to another wholesaler. It does not name a wholesaler selling to another wholesaler, so that sale is covered only if the buyer is a retailer. #### What happens to the 236H tax after the distributor collects it? Section 160 requires the person making the collection to pay it to the Commissioner within the time and in the manner prescribed. The retailer then gets credit for it under section 236H(2) and section 168. ### Citations - [Income Tax Ordinance, 2001, section 236H (Advance tax on sales to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236h-advance-tax-on-sales-to-retailers), as amended to 2026-06-30: "(2) Credit for the tax collected under sub-section (1) shall be allowed in computing the tax due by the retailer on the taxable income for the tax year in which the tax was collected." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XV (Advance tax on sale to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 160 (Payment of tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#160-payment-of-tax-collected-or-deducted), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 161 (Failure to pay tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#161-failure-to-pay-tax-collected-or-deducted), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do wholesalers and distributors have to issue electronic sales tax invoices integrated with FBR? Source: https://qanoondigest.com/faq/wholesalers-distributors/electronic-sales-tax-invoice-distributors Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Only once the Board notifies them. Section 23(3) and 23(5) of the Sales Tax Act, 1990 let the Board require electronic invoices and real-time integration with its Computerized System. A notified distributor must then sell only through integrated machines under rule 150R, and failure attracts serial 25A of the section 33 Table, starting at Rs. 500,000. **Applies to:** Registered wholesalers, dealers and distributors of taxable goods, and those who may be notified by the Board for electronic invoicing. A registered distributor in Lahore or a wholesaler in Karachi can be required to issue every sales tax invoice through a system that reports each sale to the Federal Board of Revenue in real time. The duty is not automatic for everyone: it switches on when the Board names a person or class of persons by notification. ### What does the law say? Section 23 of the Sales Tax Act, 1990 contains three powers that together make up electronic invoicing: - **Section 23(3)** says a registered person making a taxable supply shall, subject to conditions, restrictions and limitations the Board specifies by notification, issue electronic invoices. - **Section 23(5)**, added by the Finance Act, 2025, lets the Board require any person or class of persons to integrate their electronic invoicing system with the Board's Computerized System for real-time reporting of sales, from a date the notification specifies. - **Section 23(6)** says a licensed integrator shall integrate the systems of the persons referred to in section 23(5). Section 23(1) was also substituted by the Finance Act, 2026 so that a tax invoice, including an advance receipt invoice, bears "a verifiable and unique FBR invoice number". A proviso says that condition applies from the time the Board notifies. The detail sits in Chapter XIV of the Sales Tax Rules, 2006, substituted in January 2025. The first rule of that chapter says the Board shall notify, in the official Gazette, the registered persons or classes covered. Once notified, a distributor becomes an "integrated person". ### What does an integrated distributor have to do? Rule 150R sets the operating duties: 1. Register, install and integrate the electronic invoicing hardware and software with the Board's system in the manner set by a Sales Tax General Order (rule 150R(1)). 2. Give the Board details of outlets, points of sale or invoicing machines (rule 150R(2)). 3. Make no supply except through the integrated outlets, points of sale or machines (rule 150R(3)). 4. Use a system that transmits invoice data, receives the unique FBR invoice number and prints a QR code (rule 150R(4)). 5. Issue electronic invoices for exempt items through the same system (rule 150R(9)). 6. Bear the cost of equipment and software (rule 150R(10)) and display an "Integrated with FBR" signboard (rule 150R(11)). Rule 150R(5) says Annexure-C of the sales tax return is auto-filled from these electronic invoices. Rule 150R(13) lists 26 particulars the invoice must carry, including the HS code, unit of measurement, sales tax withheld at source and further tax. Rule 150S then requires a real-time verifiable electronic invoice for every taxable supply, with debit and credit notes also issued electronically. All of these are kept for six years on electronic media. ### Can the deadline be extended? Yes, within limits. Rule 150V lets the Commissioner Inland Revenue having jurisdiction allow up to sixty days in aggregate, in fifteen-day intervals, for integration or compliance. During that time the distributor continues to issue paper invoices. ### What happens if a notified distributor does not comply? Rule 150X says an integrated person who tampers with the system, sells otherwise than as the chapter prescribes, or contravenes it, is subject to penalty under section 33. The matching entry is serial 25A of the section 33 Table. It covers a person required to integrate as stipulated under section 23 (or the other provision named in that entry) who fails to register, fails to integrate, or, after words added by the Finance Act, 2025, fails to issue electronic invoices after integration. | Default | Penalty under S. No. 25A | | --- | --- | | First default | Rs. 500,000 | | Second default, after fifteen days of the order for the first | Rs. 1,000,000 | | Third default, after fifteen days of the order for the second | Rs. 2,000,000 | | Fourth default, after fifteen days of the order for the third | Rs. 3,000,000 | The same entry says the business premises are liable to be sealed. A proviso waives the first penalty if a retailer integrates before the penalty for the second default is imposed. That proviso refers to a retailer, and the Table does not say whether it extends to a wholesaler or distributor. ### Worked example (illustrative figures) Rehman Distributors in Multan is notified for integration and is given a date. It does not integrate. 1. An order is made for the first default: Rs. 500,000. 2. Fifteen days after that order it still has not integrated. Second default: Rs. 1,000,000. 3. Running total after two orders: Rs. 500,000 + Rs. 1,000,000 = **Rs. 1,500,000**. 4. If a third order follows fifteen days later, Rs. 2,000,000 is added, bringing the total to Rs. 3,500,000. The dates and the business are invented. The amounts are those printed in serial 25A. ### Common mistakes - **Treating integration as optional once notified.** Rule 150R(3) bars any supply except through integrated points. - **Assuming exempt lines can go on a paper bill.** Rule 150R(9) routes exempt items through the integrated system too. - **Confusing serial 25A with serial 2.** Serial 2 is the general penalty for not issuing an invoice at all. Serial 25A is specific to integration and electronic invoicing. - **Assuming the site can confirm who is notified.** The Board's notifications and Sales Tax General Orders under Chapter XIV are not in this corpus. ### What to check in the official text Read section 23 of the Sales Tax Act, 1990 as amended to 30 June 2026, and serial 25A of the section 33 Table in the official PDF, since the Table is printed as a grid. Then read Chapter XIV (rules 150R to 150X and the application rule before them) of the Sales Tax Rules, 2006, which this site holds as amended to 30 June 2025. Confirm whether a Board notification names your class of persons, and the date it sets, from the notification itself. ### Frequently asked #### Is every registered distributor already required to integrate with FBR? The Act does not say so directly. Section 23(5) lets the Board require any person or class of persons to integrate by notification, and the application rule at the start of Chapter XIV of the Sales Tax Rules, 2006 says the Board shall notify the persons covered. Those notifications are not held on this site, so whether a particular distributor is covered has to be checked against them. #### Do exempt goods also need an electronic invoice? For an integrated person, rule 150R(9) says electronic invoices for exempt items shall also be issued through the integrated system. Section 23(1), as substituted by the Finance Act, 2026, also refers to a tax invoice for exempt supplies bearing a unique FBR invoice number, from a time the Board notifies. #### Who pays for the integration equipment and software? Rule 150R(10) says the cost of integration, including equipment and electronic invoicing or point of sale software, shall be borne by the integrated person. ### Citations - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "The Board through notification in the official Gazette, may require any person or class of persons to integrate their electronic invoicing system with the Board’s Computerized System for real time reporting of sales" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 150R (Obligations and requirements)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150r-obligations-and-requirements), as amended to 2025-06-30: "(3) No supply shall be made by the integrated person, except through the integrated outlets, point of sale or electronic invoice issuing machines." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150S (Issuance of electronic invoice and record)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150s-issuance-of-electronic-invoice-and-record), as amended to 2025-06-30: "The integrated person shall issue a real-time verifiable electronic sales tax invoice for every taxable supply and service." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150V (Extension in due date of Integration)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150v-extension-in-due-date-of-integration), as amended to 2025-06-30: "Provided that such integrated person shall continue to issue paper invoices until such time as extended by the Commissioner." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150X (Consequences of non-compliance or contravention)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150x-consequences-of-non-compliance-or-contravention), as amended to 2025-06-30: "shall be subject to penalty under section 33 and any restriction under any provisions of the Act or the rules made thereunder." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, Section 33, Table, S. No. 25A (failure to integrate or to issue electronic invoices after integration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What is the penalty for not issuing a sales tax invoice or issuing an invoice without authority? Source: https://qanoondigest.com/faq/wholesalers-distributors/penalty-not-issuing-sales-tax-invoice Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under the section 33 Table of the Sales Tax Act, 1990, as amended by the Finance Act, 2026, failing to issue an invoice when section 23 requires one costs Rs. 25,000 or 5% of the tax involved, whichever is higher. Issuing an invoice without authority costs Rs. 50,000 or 10% of the tax involved, whichever is higher. **Applies to:** Wholesalers, dealers and distributors who sell taxable goods, whether registered for sales tax or not. A distributor who sells taxable goods without handing over a proper invoice, or a trader who prints invoices showing sales tax without being registered, commits separate offences under the Sales Tax Act, 1990. Both are listed in the Table in section 33, and both penalties were raised by the Finance Act, 2026. ### What does the law say? Section 23(1) requires a registered person making a taxable supply to issue a serially numbered tax invoice at the time of supply, carrying particulars such as the names, addresses and registration numbers of supplier and recipient, the description and quantity of goods, the value exclusive of tax, the sales tax and the value inclusive of tax. The same section adds that "not more than one tax invoice shall be issued for a taxable supply", and section 23(2) says only a registered person or a person paying retail tax may issue an invoice under the section. The section 33 Table then attaches penalties: | S. No. | Offence (column 1) | Penalty (column 2) | | --- | --- | --- | | 2 | Any person who fails to issue an invoice when required under this Act | Rs. 25,000 or 5% of the amount of the tax involved, whichever is higher | | 3 | Any person who un-authorizedly issues an invoice in which an amount of tax is specified | Rs. 50,000 or 10% of the amount of the tax involved, whichever is higher | The footnotes in the consolidated Act record that the Finance Act, 2026 substituted "twenty-five thousand rupees or five per cent" in serial 2, and the words "fifty" and "ten" in serial 3. ### How does it work in practice? The penalty is the higher of a fixed rupee floor and a percentage of "the amount of the tax involved". For small invoices the floor decides the amount. For large ones the percentage takes over. - Serial 2 bites on a registered seller who makes a supply and does not issue the invoice section 23 requires. - Serial 3 bites on anyone who issues an invoice showing sales tax without the authority to do so, for example a trader who is not registered. The Act does not define "tax involved" for serial 2. Where the sale was declared and the tax paid despite the missing invoice, the Table does not say whether the tax involved is the tax on that sale or something else. That question is not resolved here. ### Worked example (illustrative figures) The traders, sales and tax amounts below are invented. The floors and percentages are the ones in serials 2 and 3. **Case A: small sale, no invoice.** Butt Traders in Gujranwala supplies goods on which the sales tax is Rs. 360,000 and issues no invoice. 1. 5% of Rs. 360,000 = Rs. 18,000. 2. Floor = Rs. 25,000. 3. Higher of the two: **Rs. 25,000**. **Case B: large sale, no invoice.** The sales tax on the supply is Rs. 1,800,000. 1. 5% of Rs. 1,800,000 = Rs. 90,000. 2. Floor = Rs. 25,000. 3. Higher of the two: **Rs. 90,000**. **Case C: unauthorised invoice.** An unregistered wholesaler in Hyderabad issues an invoice showing sales tax of Rs. 700,000. 1. 10% of Rs. 700,000 = Rs. 70,000. 2. Floor = Rs. 50,000. 3. Higher of the two: **Rs. 70,000**. If the invoice in Case C had shown tax of Rs. 200,000, 10% would be Rs. 20,000, so the Rs. 50,000 floor would apply instead. ### What if the invoice is for a sale that never happened? That is a different and much heavier offence. Serial 29, added by the Finance Act, 2026, covers a registered person who issues a tax invoice for a transaction that is simulated or fictitious, or for which no actual supply has taken place, as established after notice and adjudication. The penalty is "equal to the face value" of the invoice or invoices. The Board then places the issuer's name and registration number on a publicly accessible simulated invoice issuers register, and input tax claimed by buyers on those invoices is reversed. Serial 31 then reaches the buyer: a registered person who claimed input tax on invoices from a listed issuer and does not reverse it within sixty days of the listing pays 20% of the unreversed credit, in addition to the reversal and default surcharge. ### Common mistakes - **Quoting the old amounts.** Serials 2 and 3 were amended by the Finance Act, 2026. Older summaries carry lower figures. - **Issuing two invoices for one supply.** Section 23 says not more than one tax invoice shall be issued for a taxable supply. - **Assuming an unregistered seller can pass on tax on paper.** Section 23(2) limits invoicing to registered persons and persons paying retail tax. - **Confusing serial 3 with serial 29.** Serial 3 is about who may issue an invoice. Serial 29 is about invoices with no real supply behind them. ### What to check in the official text Read section 23 and serials 2, 3, 29 and 31 of the Table in section 33 of the Sales Tax Act, 1990, as amended to 30 June 2026. The Table is printed as a multi-page grid in the official PDF, so check the wording of each entry against the page itself. Where the Board has notified modified invoices or electronic invoicing for your class of persons, those notifications are not held on this site. ### Frequently asked #### Is the Rs. 25,000 penalty per invoice or per month? Serial 2 of the section 33 Table says 'any person who fails to issue an invoice when required under this Act' shall pay Rs. 25,000 or five per cent of the tax involved, whichever is higher. The Table does not say whether one missing invoice or a month of missing invoices counts as one offence, and this site does not decide that point. #### Can an unregistered wholesaler issue a sales tax invoice? Section 23(2) says no person other than a registered person or a person paying retail tax shall issue an invoice under the section. Issuing one without that authority falls under serial 3 of the section 33 Table: Rs. 50,000 or 10% of the tax involved, whichever is higher. #### What is the penalty for a fake invoice with no real supply behind it? Serial 29, added by the Finance Act, 2026, deals with an invoice for a simulated or fictitious transaction, established after notice and adjudication. The penalty equals the face value of that invoice, and the Board places the issuer on a public simulated invoice issuers register. ### Citations - [Sales Tax Act, 1990, Section 33, Table, S. Nos. 2 and 3 (as amended by the Finance Act, 2026)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "Provided further that not more than one tax invoice shall be issued for a taxable supply" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 33, Table, S. Nos. 29 and 31 (simulated or fictitious invoices, added by the Finance Act, 2026)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What records and stock registers must a registered wholesaler keep, for how long, and what if stock does not match the books? Source: https://qanoondigest.com/faq/wholesalers-distributors/sales-tax-records-stock-register-retention Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 22 of the Sales Tax Act, 1990 requires records of purchases, supplies, imports, inventory, invoices, bank statements, cash book and gate passes, kept in English or Urdu. Section 24 requires them to be kept for six years. If they are not produced at audit under section 25, section 11D allows a best judgment assessment and disallowance of input tax. **Applies to:** Registered wholesalers, dealers and distributors making taxable supplies, including those who also make exempt or zero-rated supplies. A registered wholesaler's books are the evidence for every rupee of output tax declared and every rupee of input tax claimed. The Sales Tax Act, 1990 lists what must be kept, sets how long, and says what an officer may do when the records are not there. ### What records does section 22 require? Section 22(1) applies to a registered person making taxable supplies. The records must be kept at the business premises or registered office, in English or Urdu, for goods purchased, imported and supplied, including zero-rated and exempt supplies. They must be in a form that permits ready ascertainment of the tax liability for each tax period. | Clause | Record | | --- | --- | | (a) | Supplies: description, quantity and value of goods, name and address of the buyer, and tax charged | | (b) | Purchases: description, quantity and value, name, address and registration number of the supplier, and tax on purchases | | (c) | Imports: description, quantity, value and tax paid at import | | (d) | Zero-rated and exempt supplies | | (da) | Double entry sales tax accounts | | (e) | Invoices, credit notes, debit notes, bank statements, banking instruments, inventory records, utility bills, salary and labour bills, cash book, rental agreements, sale purchase agreements and lease agreements | | (ea) | Gate passes, inward or outward, and transport receipts | | (eb) | Electronic version of the records in clauses (a) to (ea) | | (f) | Other records the Board specifies | Three further powers sit in the same section. Section 22(1A) lets the Board require a registered person to declare and use only a specified number of business bank accounts. Section 22(2) and 22(3) let the Board specify other records, or software for keeping records electronically. Under section 22(4), a registered person whose accounts are audited under the Companies Ordinance, 1984 submits a copy of the audited accounts with an auditor's certificate on payment of due tax. ### How long must the records be kept? Section 24 requires every person who must keep records under the Act to retain them for six years after the end of the tax period they relate to. If an assessment, appeal, revision, reference, petition or alternative dispute resolution proceeding is still running, the records are kept until it is finally decided. Section 25(4) sets the matching limit on the officer: records cannot be called for after six years from the end of the financial year they relate to. ### What happens at a sales tax audit? Under section 25(1) and (2), the Commissioner directs an audit for reasons recorded in writing and communicated in the notice. Section 25(3) says those reasons must identify risk factors and cannot be the mere verification of input tax or output tax. The officer may then call for any record, including electronic records with access to the machine and software (section 25(4)), and require attendance (section 25(5)). Section 25(7) directs the audit to verify declared tax, input tax, refunds, and "stocks consumed or available". Section 25(8B), inserted by the Finance Act, 2026, requires an audit report after the person's explanation is obtained. ### What if stock does not match the books, or records are not produced? The Act does not set a formula for treating a stock shortage or surplus. What it does say: - Section 25(10) lets the officer proceed to a best judgment assessment under section 11D where the registered person fails to produce records required under the Act. - Section 11D(1)(b) allows that assessment after a show cause notice, based on available information, together with penalty and default surcharge. - Section 11D(2) lets the officer disallow or reduce input tax that the person cannot support with an invoice or other evidence. The section 33 Table adds separate penalties: | S. No. | Offence | Penalty | | --- | --- | --- | | 8 | Failing to maintain records required under the Act or rules | Rs. 50,000 or 5% of the tax involved, whichever is higher | | 9 | Failing, without reasonable cause, to produce records under section 25 | Rs. 5,000 on the first notice, Rs. 10,000 on the second, Rs. 50,000 on the third | | 12 | Denying access to premises, stocks, accounts or records, or failing to present them | Rs. 25,000 or 100% of the tax involved, whichever is higher, with possible prosecution | The Rs. 50,000 figure in serial 8 was substituted by the Finance Act, 2026. ### Worked example (illustrative figures) Qureshi Traders, a registered wholesaler in Sialkot, claims input tax of Rs. 900,000 for one month. At audit it produces invoices supporting Rs. 760,000 and cannot produce records for the rest. All amounts are invented. 1. Unsupported input tax: Rs. 900,000 minus Rs. 760,000 = Rs. 140,000. 2. Under section 11D(2), the officer may disallow or reduce that Rs. 140,000. 3. If serial 8 is applied with Rs. 140,000 as the tax involved: 5% of Rs. 140,000 = Rs. 7,000, which is below the floor, so the penalty is **Rs. 50,000**. 4. If the firm had also ignored three notices to produce records, serial 9 adds Rs. 5,000 + Rs. 10,000 + Rs. 50,000 = **Rs. 65,000**. The Table does not define "tax involved" for serial 8, so step 3 shows one reading only. ### Common mistakes - **Keeping only sales and purchase invoices.** Section 22(1)(e) and (ea) also cover inventory records, cash book, bank statements and gate passes. - **Destroying records at five years.** Section 24 says six, and longer while proceedings are open. - **Assuming a missing invoice only costs a penalty.** Section 11D(2) can also remove the input tax itself. ### What to check in the official text Read sections 22, 24, 25 and 11D of the Sales Tax Act, 1990 as amended to 30 June 2026, and serials 8, 9 and 12 of the section 33 Table in the official PDF. Any Board notification under section 22(1A), 22(2) or 22(3) specifying extra records, bank accounts or software for your class of business is not held on this site. ### Frequently asked #### Does the Act use the words 'stock register'? No. Section 22(1)(e) requires 'inventory records', and section 25(7) directs the audit officer to verify stocks consumed or available. The Act does not prescribe a particular stock register format; section 22(2) and 22(3) let the Board specify other records or software by notification. #### Can records be kept on a computer only? Section 22(1)(eb), added by the Finance Act, 2021, lists an electronic version of the records in clauses (a) to (ea) as a record in its own right, and section 22(3) lets the Board prescribe software for electronic record keeping. Under section 25(4), an officer auditing electronically kept records must be given access to the machine and software. #### Is six years always the limit? Section 24 says six years after the end of the tax period, or until any assessment, appeal, revision, reference, petition or alternative dispute resolution proceedings are finally decided, if that is later. ### Citations - [Sales Tax Act, 1990, section 22 (Records. ............................................................................ ……....58 23. Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#22-records-58-23-tax-invoices), as amended to 2026-06-30: "in such form and manner as would permit ready ascertainment of his tax liability during a tax period" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 24 (Retention of record and documents for six years)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#24-retention-of-record-and-documents-for-six-years), as amended to 2026-06-30: "after the end of the tax period to which such record or documents relate" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 25 (Audit of sales tax affairs)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#25-audit-of-sales-tax-affairs), as amended to 2026-06-30: "the officer of Inland Revenue shall not call for record or documents of the registered person after expiry of six years from the end of the financial year to which they relate." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 11D (Best judgment Assessment)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#11d-best-judgment-assessment), as amended to 2026-06-30: "the officer of Inland Revenue may also disallow or reduce a registered person input tax on goods if the registered person is unable, to provide invoice or other record or evidence of the transaction or circumstances giving rise to such claim." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 33, Table, S. Nos. 8, 9 and 12 (records, production of records and access)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What records and stock register must a registered wholesaler keep, and for how long? Source: https://qanoondigest.com/faq/wholesalers-distributors/sales-tax-records-stock-register-wholesaler Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 22 of the Sales Tax Act, 1990 requires records of supplies, purchases, inventory, invoices, bank statements, gate passes and transport receipts, double entry sales tax accounts and electronic copies. Section 24 requires them to be kept for six years after the tax period, or longer while proceedings are pending, and section 25 lets officers audit them. **Applies to:** Wholesalers, dealers and distributors registered for sales tax who make taxable supplies and may face a sales tax audit. A registered wholesaler's records are what a sales tax audit is built on. The Sales Tax Act, 1990 sets out what must be kept in section 22, how long in section 24, and how an officer examines them in section 25. A missing ledger can cost a penalty on its own, before any tax is found short. ### What records does section 22 require? Section 22(1) requires a registered person making taxable supplies to keep, at the business premises or registered office, in English or Urdu, records of goods purchased, imported and supplied, including zero-rated and exempt supplies, "in such form and manner as would permit ready ascertainment of his tax liability during a tax period". The list is: | Clause | Record | | --- | --- | | (a) | Supplies: description, quantity and value of goods, name and address of the buyer, and tax charged | | (b) | Purchases: description, quantity and value, supplier's name, address and registration number, and tax on purchases | | (c) | Imports: description, quantity, value and tax paid on import | | (d) | Zero-rated and exempt supplies | | (da) | Double entry sales tax accounts | | (e) | Invoices, credit notes, debit notes, bank statements, banking instruments, inventory records, utility bills, salary and labour bills, cash book, rental, sale purchase and lease agreements | | (ea) | Gate passes, inward or outward, and transport receipts | | (eb) | Electronic version of the records in (a) to (ea) | | (f) | Other records specified by the Board | Section 22(1A) lets the Board require a registered person to declare and use only a specified number of business bank accounts for purchase and sale payments. Section 22(4) requires a person whose accounts are audited under the Companies Ordinance, 1984 to submit the annual audited accounts with an auditor's certificate of payment of due tax. For a distributor, rule 14 of the Sales Tax Rules, 2006 adds a return-side duty: registered commercial importers, distributors and wholesalers of taxable goods furnish details of goods purchased or imported and goods supplied in Annex-H1 of the monthly return. In practice this ties the inventory records in section 22 to what is reported each month. ### How long must the records be kept? Section 24 says a person required to keep records shall retain them for six years after the end of the tax period to which they relate, "or till such further period the final decision in any proceedings including proceedings for assessment, appeal, revision, reference, petition and any proceedings before an alternative Dispute Resolution Committee is finalized". ### How are the records used in an audit? Under section 25, the Commissioner may, on reasons recorded in writing and communicated in the notice, direct an audit of a registered person's sales tax affairs. After the notice, the officer may call for records, including electronic data, and the registered person shall allow access to the machine and software. The proviso to section 25(4) bars calling for records more than six years after the end of the financial year to which they relate. Section 25(7) says the audit verifies declared liability, output tax, input tax, tax paid, refunds and "stocks consumed or available". That is where inventory records and gate passes matter. The Finance Act, 2026 added section 25(8B), requiring an audit report after the officer obtains the registered person's explanation on the issues raised. ### Worked example (illustrative figures) Malik Brothers, a registered distributor of edible goods in Peshawar, receives an audit notice. The names and amounts are invented; the penalty figures are from serials 8 and 9 of the section 33 Table. 1. The firm does not produce its records on the first notice: Rs. 5,000. 2. It fails again on the second notice: Rs. 10,000. 3. It fails on the third notice: Rs. 50,000. 4. If all three are imposed: Rs. 5,000 + Rs. 10,000 + Rs. 50,000 = Rs. 65,000. Separately, suppose the officer finds the firm kept no inventory records and the tax involved is Rs. 1,400,000. Serial 8 sets Rs. 50,000 or 5% of the tax involved, whichever is higher. 5% of Rs. 1,400,000 is Rs. 70,000, which is higher, so the penalty is Rs. 70,000. ### What if an appeal is still running after six years? Section 24 extends retention until the final decision in the pending assessment, appeal, revision, reference, petition or ADR proceeding. Records for July 2020 would ordinarily be kept until at least July 2026, but longer if that period is still under appeal. ### What if I find a mistake before the audit notice? Section 25(11) says that if a registered person voluntarily deposits the tax short paid with default surcharge before receiving an audit notice, no penalty shall be recovered. If the deposit is made during the audit or before a show cause notice, the person pays 25% of the section 33 penalty; after a show cause notice, 50%. ### Common mistakes - **Keeping only invoices.** Section 22 also requires inventory records, gate passes, transport receipts and double entry sales tax accounts. - **Discarding files after five years.** The Act says six years, and longer while proceedings are pending. - **Keeping records at home.** Section 22(1) says the business premises or registered office. ### What to check in the official text Read sections 22, 24 and 25 of the Sales Tax Act, 1990 as amended to 30 June 2026, serials 8 and 9 of the section 33 Table, and rule 14 of the Sales Tax Rules, 2006. Any Board notification specifying additional records under section 22(1)(f) or (2), bank account limits under section 22(1A), or electronic record software under section 22(3) is not held on this site. ### Frequently asked #### Does the Sales Tax Act use the words 'stock register'? Section 22(1) lists 'inventory records' among the records to be kept, alongside gate passes and transport receipts. It does not prescribe a particular stock register format. The Board may specify other records by Gazette notification under section 22(1)(f) and (2). #### Can I keep the records only on a computer? Section 22(1)(eb) requires an electronic version of the listed records. It does not say the paper originals may be discarded. During an audit, section 25(4) says an officer may be given access to the machine and software and obtain attested hard copies. #### What if I cannot produce records when the audit notice arrives? Serial 9 of the section 33 Table sets penalties of Rs. 5,000, Rs. 10,000 and Rs. 50,000 for failing without reasonable cause to produce records on the first, second and third notice. Section 25(10) also lets the officer proceed to a best judgment assessment. ### Citations - [Sales Tax Act, 1990, section 22 (Records. ............................................................................ ……....58 23. Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#22-records-58-23-tax-invoices), as amended to 2026-06-30: "in such form and manner as would permit ready ascertainment of his tax liability during a tax period" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 24 (Retention of record and documents for six years)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#24-retention-of-record-and-documents-for-six-years), as amended to 2026-06-30: "or till such further period the final decision in any proceedings including proceedings for assessment, appeal, revision, reference, petition and any proceedings before an alternative Dispute Resolution Committee is finalized" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 25 (Audit of sales tax affairs)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#25-audit-of-sales-tax-affairs), as amended to 2026-06-30: "Provided that the officer of Inland Revenue shall not call for record or documents of the registered person after expiry of six years from the end of the financial year to which they relate." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 14 (Filing of returns)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#14-filing-of-returns), as amended to 2025-06-30: "all registered commercial importers, distributers, wholesalers making supply of taxable goods shall furnish, in Annex-H1 of the monthly return, details of such goods purchased or imported and goods supplied" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, Section 33, Table, S. Nos. 8 and 9 (failure to maintain or produce records)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Does a distributor who sells only exempt goods have to register for sales tax? Source: https://qanoondigest.com/faq/wholesalers-distributors/distributor-exempt-goods-sales-tax-registration Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 14(1) of the Sales Tax Act, 1990 requires registration only from a person engaged in making taxable supplies, and section 13 exempts goods listed in the Sixth Schedule. A distributor who supplies only exempt goods is therefore outside section 14(1). Once any taxable goods are added, section 14(1)(e) applies and section 8(2) limits input tax. **Applies to:** Wholesalers and distributors in Pakistan whose goods are wholly or partly exempt under the Sixth Schedule to the Sales Tax Act. A distributor of rice, flour or pulses often hears that "every wholesaler must register". That is true for wholesalers of taxable goods. The duty in section 14 of the Sales Tax Act, 1990 is tied to making taxable supplies, so a trader whose goods are all exempt sits outside it. The picture changes as soon as one taxable line is added to the stock. ### What does the law say? Section 14(1) begins with "Every person engaged in making taxable supplies in Pakistan, including zero-rated supplies". Only such persons who also fall in a listed category are "required to be registered". Clause (e) of the list is "a wholesaler, dealer or distributor". Three definitions in section 2 then decide what a taxable supply is: | Clause of section 2 | What it says (in short) | | --- | --- | | (11) exempt supply | A supply which is exempt from tax under section 13 | | (39) taxable goods | All goods other than those exempted under section 13 | | (41) taxable supply | A supply of taxable goods by an importer, manufacturer, wholesaler (including dealer), distributor or retailer, other than a supply exempt under section 13, including zero-rated supplies | Section 13(1) says that supply or import of goods specified in the Sixth Schedule shall, subject to conditions specified by the Federal Government, be exempt from tax. Read together, a supply of Sixth Schedule goods is an exempt supply, not a taxable supply. A distributor whose every supply is exempt is not "engaged in making taxable supplies", so section 14(1) does not require registration. ### Which goods are exempt? The Sixth Schedule is a long table. A few entries in Table-1 (Imports or Supplies), as printed in the consolidated Act amended to 30 June 2026, are relevant to food distributors: | Serial No. | Description, as printed | | --- | --- | | 14 | Pulses | | 16 | Red chillies excluding those sold under brand names and trademarks | | 17 | Ginger excluding those sold under brand names and trademarks | | 18 | Turmeric excluding those sold under brand names and trademarks | | 19 | Rice, wheat, wheat and meslin flour | Many other serial numbers in the same table have been omitted over the years, and several entries carry qualifications. The wording "excluding those sold under brand names and trademarks" in serial numbers 16 to 18 means branded red chillies, ginger and turmeric are not covered by those entries. Each entry must be read with its PCT heading and any condition attached to it. ### How does it work when a trader sells both? Once a distributor supplies any taxable goods, it is engaged in making taxable supplies and clause (e) of section 14(1) applies. The exempt goods do not become taxable because of registration. What changes is input tax. Section 8(2) says a registered person who deals in taxable and non-taxable supplies "can reclaim only such proportion of the input tax as is attributable to taxable supplies". Section 8(1)(a) separately bars input tax on goods used for any purpose other than taxable supplies. Rule 25 of the Sales Tax Rules, 2006 sits in the chapter that applies to registered persons making taxable and exempt supplies at the same time. It sets the method: 1. Input tax relating wholly to taxable supplies is admissible. 2. Input tax relating wholly to exempt supplies is not admissible. 3. Residual input tax, used for both, is apportioned: value of taxable supplies divided by value of taxable plus exempt supplies, multiplied by residual input tax. 4. Monthly adjustments are provisional, and a final adjustment is made at the end of each financial year on the year's actual supplies. Rule 25 speaks of input tax "paid on raw materials" in sub-rules (1) and (2), wording written with manufacturers in mind. Section 8(2) is the general rule for every registered person. ### Worked example (illustrative figures) Rashid Traders in Sukkur distributes rice and pulses to shops across the district. In July 2026 it adds a line of packaged goods that, for this example, are assumed not to be in the Sixth Schedule. 1. Before July, every supply was exempt. Section 14(1) did not reach Rashid Traders. 2. From July it makes taxable supplies as a distributor, so clause (e) of section 14(1) applies. 3. July supplies: taxable Rs. 2,000,000; exempt Rs. 6,000,000; total Rs. 8,000,000. 4. Input tax on the packaged goods bought for resale is Rs. 250,000. It relates wholly to taxable supplies. 5. Residual input tax on items used for both lines (assume packing material) is Rs. 60,000. 6. Rule 25(3) share: Rs. 60,000 x 2,000,000 / 8,000,000 = Rs. 15,000. 7. Input tax taken into the July return: Rs. 250,000 + Rs. 15,000 = Rs. 265,000, provisionally, subject to the year-end adjustment under rule 25(4). The other Rs. 45,000 of residual input tax relates to exempt supplies and is not claimed. ### What if an exempt item is branded or processed? The exemption follows the exact words of the Sixth Schedule entry. Serial numbers 16 to 18 expressly exclude red chillies, ginger and turmeric sold under brand names and trademarks. A distributor moving from loose to branded stock of those items may be moving from exempt to taxable supplies, and so into section 14(1). ### Common mistakes - **Assuming "food" is exempt.** Only goods listed in the Sixth Schedule, or exempted by a notification under section 13(2), are exempt. Many former entries in Table-1 now read "omitted". - **Registering and claiming all input tax.** Section 8(2) and rule 25 allow only the share attributable to taxable supplies. - **Ignoring the year-end adjustment.** Rule 25(4) says the monthly apportionment is provisional, and rule 25(5) makes a wrongful claim from an incorrect formula punishable even though it was provisional. ### What to check in the official text Read sections 2, 8, 13 and 14 of the Sales Tax Act amended to 30 June 2026 and rule 25 of the Sales Tax Rules, 2006, with the short application rule that opens its chapter. Check the exact Sixth Schedule entry for each product, including its PCT heading and any condition. Exemptions granted by notification under section 13(2) are not held in this corpus. ### Frequently asked #### Do I need sales tax registration if I only sell pulses, rice and wheat flour? Pulses and rice, wheat, wheat and meslin flour appear in Table-1 of the Sixth Schedule, and section 13 exempts goods listed there, subject to conditions. Section 14(1) requires registration from a person making taxable supplies, so a trader dealing only in exempt goods is not caught by it. #### What happens if I start selling one taxable product as well? You are then engaged in making taxable supplies, and section 14(1)(e) lists a wholesaler, dealer or distributor as required to register. The exempt goods stay exempt, but section 8(2) lets you reclaim only the input tax attributable to taxable supplies. #### How is input tax split between taxable and exempt sales? Rule 25 of the Sales Tax Rules says input tax relating wholly to exempt supplies is not admissible, and common input tax is apportioned by the value of taxable supplies over total taxable and exempt supplies. Monthly figures are provisional and are adjusted at the end of the year. ### Citations - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "(e) a wholesaler, dealer or distributor; and" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 13 (Exemption)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#13-exemption), as amended to 2026-06-30: "(1) Notwithstanding the provisions of section 3, supply of goods or import of goods specified in the Sixth Schedule shall, subject to such conditions as may be specified by the" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "(11) “exempt supply” means a supply which is exempt from tax under section 13;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Sixth Schedule, Table-1 (Imports or Supplies), serial numbers 14, 16 to 18 and 19](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8 (Tax credit not allowed)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8-tax-credit-not-allowed), as amended to 2026-06-30: "If a registered person deals in taxable and non-taxable supplies, he can reclaim only such proportion of the input tax as is attributable to taxable supplies in such manner as may be specified by the Board." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 25 (Determination of input tax)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#25-determination-of-input-tax), as amended to 2025-06-30: "(2) Input tax paid on raw materials relating wholly to exempt supplies shall not be admissible." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf --- ## Is sales tax registration compulsory for a wholesaler or distributor even if turnover is small? Source: https://qanoondigest.com/faq/wholesalers-distributors/sales-tax-registration-wholesaler-distributor Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 14(1)(e) of the Sales Tax Act, 1990 lists a wholesaler, dealer or distributor making taxable supplies among the persons required to register, and that clause sets no turnover threshold. If such a person does not apply, section 14(2A) and rule 6 of the Sales Tax Rules allow the Commissioner to register them compulsorily. **Applies to:** Wholesalers, dealers and distributors in Pakistan who supply taxable goods, whatever the size of their business. A small wholesaler often assumes that sales tax registration only starts above some level of sales. For wholesalers, dealers and distributors, the Sales Tax Act, 1990 does not work that way. The test in section 14 is what you do, not how much you sell: if you supply taxable goods as a wholesaler, dealer or distributor, you fall inside the list of persons who are required to be registered. ### What does the law say? Section 14(1) of the Sales Tax Act, 1990, as amended to 30 June 2026, says that every person engaged in making taxable supplies in Pakistan, including zero-rated supplies, in the course or furtherance of a taxable activity, who falls in one of the listed categories, "is required to be registered under this Act". Clause (e) of that list is simply "a wholesaler, dealer or distributor". The other clauses of the same list show where the Act does carve people out. Clause (a) covers a manufacturer "who is not running a cottage industry", and clause (b) covers only a retailer who is liable to pay sales tax, excluding retailers who pay through their electricity bill under section 3(9). Clause (e) has no such exclusion and no turnover figure. Section 2 defines the words: | Term | Definition in section 2 (in short) | | --- | --- | | Distributor, clause (7) | A person appointed by a manufacturer, importer or any other person for a specified area to purchase goods from him for further supply, including one who also sells as a wholesaler or retailer | | Wholesaler, clause (47) | Includes a dealer, and means a person who carries on, "whether regularly or otherwise", the business of buying and selling goods by wholesale, or supplying or distributing goods by wholesale | | Registered person, clause (25) | A person who is registered or is liable to be registered | The words "whether regularly or otherwise" in clause (47) mean that occasional wholesale trade is also inside the definition. ### How does registration work in practice? Rule 5(1) of the Sales Tax Rules, 2006 says a person required to be registered shall apply "before making any taxable supplies", on the computerized system in Form STR-1. Rule 5(2) lists what the applicant uploads, including: - a bank account certificate in the name of the business; - the gas and electricity consumer number; - particulars of all branches; - GPS-tagged photographs of the business premises; - for an individual, an association of persons or a single-member company (other than a manufacturer), a balance sheet showing business capital, assets and liabilities. Rule 5(4) then requires a visit to a NADRA e-Sahulat Centre within a month for biometric verification. If that is missed or fails, the rule says the person's name "shall be taken off the sales tax Active Taxpayer List". ### What happens if a distributor does not register? **Compulsory registration.** Section 14(2A) says that where a person required to register does not apply, the Commissioner or an authorised officer, after inquiry and a hearing, "shall compulsorily register such person". Rule 6 sets the procedure: a notice in Form STR-6, a chance to reply and be heard, and an order. If the person does not respond within the time in the notice, rule 6(3) says the Commissioner shall register the person through the computerized system. Rule 6(4) then makes the person comply with the Act from the date of compulsory registration. **No benefits while unregistered.** The proviso to clause (25) of section 2 says a person liable to be registered but not registered "shall not be entitled to any benefit" available to a registered person. So input tax cannot be claimed while the person stays outside registration. **Escalating measures.** The Act now carries a ladder of further steps: | Section | Measure | | --- | --- | | 14AC | After three opportunities of hearing, the Commissioner can have bank accounts suspended for three working days, repeated twice, and then permanently barred | | 14AD | A committee can recommend a bar on transfer of immoveable property if registration is not obtained within fifteen days of the section 14AC order | | 14AE | The Chief Commissioner can seal the business premises, seize moveable property or appoint a receiver for the taxable activity | Section 14AE(1) applies "subject to prior action under section 14AC and 14AD", and section 14AE(2) requires a public notice, a hearing through an open court by a committee that includes a representative of the Chambers of Commerce or a trade association, and publication of the decision. Each of sections 14AC, 14AD and 14AE says it comes into force on a date the Board notifies in the official Gazette. Those notifications are not in this corpus, so this page does not say whether each measure is already in force. On registration, each measure is reversed: section 14AC(5) and section 14AD(6) require the bar to be removed within two working days, and section 14AE(3) says the Chief Commissioner shall reverse the order not later than two working days. ### Worked example (illustrative figures) Sajid runs a small wholesale outlet for packaged snacks in Gujranwala's grain market. His sales are about Rs. 900,000 a month, all to retail shops. He has never registered because he believed small traders were exempt. 1. He buys and sells goods by wholesale, so he is a wholesaler under clause (47) of section 2. 2. Assume, for this example, that none of his goods appear in the Sixth Schedule, so his supplies are taxable supplies. 3. Section 14(1)(e) lists a wholesaler with no turnover limit. Rs. 900,000 a month, or any other figure, does not change that. 4. Rule 5(1) says he should have applied before making taxable supplies. 5. While he stays unregistered, the proviso to section 2(25) denies him any benefit of a registered person, including input tax. The figure is invented. ### What if all my goods are exempt? Section 14(1) only applies to a person "engaged in making taxable supplies". A trader who deals only in goods exempt under section 13 is in a different position. That case is covered on the related page about distributors of exempt goods. ### Common mistakes - **Looking for a turnover threshold in clause (e).** There is none. The only carve-outs in section 14(1) are for manufacturers running a cottage industry and for retailers outside clause (b), not for wholesalers or distributors. - **Assuming registration ends with the online form.** Rule 5(4) requires biometric verification within a month, or the name is taken off the sales tax Active Taxpayer List. ### What to check in the official text Read section 14 and clauses (7), (25) and (47) of section 2 of the Sales Tax Act amended to 30 June 2026, sections 14AC, 14AD and 14AE, and rules 5 and 6 of the Sales Tax Rules, 2006 as amended to 30 June 2025. Check for any Board notification bringing sections 14AC, 14AD and 14AE into force, since the consolidated Act leaves their start date to the Board. ### Frequently asked #### Is there a minimum turnover before a distributor must register for sales tax? Section 14(1)(e) of the Sales Tax Act lists a wholesaler, dealer or distributor without any turnover figure. The duty depends on making taxable supplies in the course of a taxable activity, not on the size of sales. #### What happens if a wholesaler does not apply for registration? Section 14(2A) and rule 6 of the Sales Tax Rules let the Commissioner issue a notice in Form STR-6 and then register the person compulsorily. Sections 14AC, 14AD and 14AE add bank account bars, property transfer bars, sealing, seizure and appointment of a receiver, each from a date the Board notifies. #### Can an unregistered wholesaler claim input tax? No. Clause (25) of section 2 treats a person liable to register as a registered person, but its proviso says such a person is not entitled to any benefit available to a registered person under the Act or rules. ### Citations - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "Every person engaged in making taxable supplies in Pakistan, including zero-rated supplies, in the course or furtherance of any taxable activity carried on by him, falling in any of the following categories, if not already registered, is required to be registered under this Act" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“registered person” means a person who is registered or is liable to be registered under this Act: Provided that a person liable to be registered but not registered under this Act" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 5 (46Application for registration)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#5-46application-for-registration), as amended to 2025-06-30: "A person required to be registered under the Act shall, before making any taxable supplies, apply on the computerized system through owner, authorized member or partner or authorized director, as the case may be, in the Form STR-1, as annexed to these rules." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 6 (62Compulsory registration)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#6-62compulsory-registration), as amended to 2025-06-30: "he shall issue notice to such person in the Form set out in Form STR-6." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, Section 14AC (Bar on operations of bank accounts) and section 14AD (Bar on transfer of immoveable property)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 14AE (Other measures for non-registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14ae-other-measures-for-non-registration), as amended to 2026-06-30: "Upon registration, of such person the Chief Commissioner shall reverse the order issued under sub-section (1) not later than two working days." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## When is a distributor's monthly sales tax return due and what are the penalties for filing or paying late? Source: https://qanoondigest.com/faq/wholesalers-distributors/monthly-sales-tax-return-due-date-late Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 2(9) of the Sales Tax Act, 1990 sets the due date as the 15th of the next month; rule 18(9) allows filing by the 18th if tax is paid by the 15th. A late return costs Rs. 50,000, or Rs. 2,000 a day within ten days. Late tax costs Rs. 50,000 or 5%, plus surcharge. **Applies to:** Registered wholesalers, dealers and distributors who file monthly sales tax returns under section 26 of the Sales Tax Act, 1990. A registered distributor files one sales tax return for each month, and three separate dates sit around it: when the sales data is uploaded, when the tax is paid, and when the return is submitted. Missing any of them has a price set in the Sales Tax Act, 1990. ### What does the law say about the due date? Section 26(1) requires every registered person to furnish, not later than the due date, a true, complete and correct return showing purchases, supplies, tax due and tax paid for a tax period. Section 2(43) defines the tax period as one month unless the Board specifies otherwise. Section 2(9) defines the due date as the 15th day of the month following the end of the tax period, or another date the Board notifies. Since the Finance Act, 2016, different dates may be set for different parts or annexures of the return. Rule 18 of the Sales Tax Rules, 2006 fills in the timetable: | Step | Rule | Date | | --- | --- | --- | | Upload sales data in Annexure-C and debit or credit notes in Annexure-I | 18(3) | By the 10th of the following month | | Deposit the tax due | 18(9) | By the 15th | | Submit the return electronically | 18(9) | By the 18th of the same month | Rule 18(1) also treats a return as invalid if relevant data is left blank in any applicable column or annexure. Under the second proviso to rule 18(3), a buyer's return stays provisional until its seller files by the last day of the month in which the due date falls. ### What are the penalties for filing or paying late? The section 33 Table sets these amounts, as amended by the Finance Act, 2026: | S. No. | Offence | Penalty | | --- | --- | --- | | 1 | Failing to furnish a return within the due date | Rs. 50,000; if filed within ten days of the due date, Rs. 2,000 for each day of default | | 5 | Failing to deposit tax due in the time or manner laid down | Rs. 50,000 or 5% of the tax involved, whichever is higher; if paid within ten days of the due date, Rs. 5,000 for each day of default | | 6 | Repeating an erroneous calculation in the return during a year, so that less tax is paid | Rs. 5,000 or 3% of the tax involved, whichever is higher | S. No. 5 has two further provisos. No penalty is imposed for a miscalculation made for the first time in a year. If tax is still unpaid sixty days after a notice from an officer not below Assistant Commissioner, the defaulter may, on conviction by a Special Judge, face imprisonment up to three years, a fine up to the tax involved, or both. ### What is default surcharge? Section 34(1)(a) adds default surcharge on unpaid tax at 12% per annum or KIBOR plus 3% per annum, whichever is higher. Section 34(2)(b) counts the period from the 16th day of a month following the due date of the tax period to the day before the tax is actually paid. Tax fraud attracts 2% per month instead, under section 34(1)(c). The Act does not state a KIBOR figure, so this site cannot say which limb is higher in a given month. ### Worked example (illustrative figures) Chaudhry Distributors in Gujranwala owes Rs. 800,000 of sales tax for the March 2027 tax period. The due date is 15 April 2027. It pays and files on 5 May 2027, twenty days after the due date. The amounts and dates are invented, and the example assumes 12% is the higher limb in section 34. 1. **Late return (S. No. 1):** more than ten days late, so the flat **Rs. 50,000** applies. 2. **Late payment (S. No. 5):** 5% of Rs. 800,000 = Rs. 40,000. The floor is Rs. 50,000, so **Rs. 50,000** applies. 3. **Default surcharge:** 16 April to 4 May is 19 days. Rs. 800,000 x 12% = Rs. 96,000 a year. Rs. 96,000 x 19 / 365 = **Rs. 4,997** (rounded). 4. Total over the tax: Rs. 50,000 + Rs. 50,000 + Rs. 4,997 = **Rs. 104,997**. **Variation.** If it had paid and filed on 22 April, seven days after the due date: S. No. 1 gives 7 x Rs. 2,000 = Rs. 14,000, and S. No. 5 gives 7 x Rs. 5,000 = Rs. 35,000. The Table does not say whether the return penalty is counted from the 15th in section 2(9) or the 18th in rule 18(9), and this site does not settle that point. ### What if the distributor needs more time? Section 26AB lets the registered person apply to the Commissioner by the due date for an extension. The Commissioner may grant up to fifteen days for absence from Pakistan, sickness or other reasonable cause, and the Chief Commissioner may grant a further period. Section 26AB(5) says the extension does not move the payment date for default surcharge. ### Common mistakes - **Treating the 18th as the payment date.** Rule 18(9) requires the tax by the 15th; only the return moves to the 18th. - **Assuming a late return with tax paid costs nothing.** S. No. 1 applies to the return itself. - **Ignoring two missed months.** Section 2(1A)(b) removes active taxpayer status after two consecutive late returns. ### What to check in the official text Read sections 2(9), 26, 26AB and 34 of the Sales Tax Act, 1990 as amended to 30 June 2026, and S. Nos. 1, 5 and 6 of the section 33 Table in the official PDF. Then read rule 18 of the Sales Tax Rules, 2006, held here as amended to 30 June 2025. Any Board notification setting a different due date for your class of persons is not held on this site. ### Frequently asked #### Is the penalty for a late return the same as for late payment? No. S. No. 1 of the section 33 Table covers failing to furnish a return by the due date: Rs. 50,000, or Rs. 2,000 for each day of default if the return is filed within ten days. S. No. 5 covers failing to deposit tax on time: Rs. 50,000 or 5% of the tax involved, whichever is higher, or Rs. 5,000 a day if paid within ten days. #### Does an extension to file also extend the payment date? No. Section 26AB(5) says an extension of time to furnish the return does not change the due date for payment of sales tax for the purpose of default surcharge under section 34. #### Can a late return affect my active taxpayer status? Yes. Section 2(1A)(b) excludes from the definition of active taxpayer a registered person who fails to file the return under section 26 by the due date for two consecutive tax periods. ### Citations - [Sales Tax Act, 1990, section 26 (* Return)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#26-return), as amended to 2026-06-30: "shall furnish not later than the due date a true" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "day of the month following the end of the tax period, or such other date as the" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 18 (Electronic filing of Sales Tax return)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#18-electronic-filing-of-sales-tax-return), as amended to 2025-06-30: "the tax due shall be deposited by the 15th and the return shall be submitted electronically by 18th of the same month." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, Section 33, Table, S. Nos. 1, 5 and 6 (late return, late payment, repeated miscalculation)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 34 (Default Surcharge)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#34-default-surcharge), as amended to 2026-06-30: "the period of default shall be reckoned from the 16th day of a month (following the due date of the tax period to which the default relates) to the day preceding the date on which the tax due is actually paid." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 26AB (extension of time for furnishing returns), printed within section 26](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## How much sales tax can a company withhold when it buys from a registered distributor, and is it excluded for Third Schedule goods? Source: https://qanoondigest.com/faq/wholesalers-distributors/sales-tax-withholding-company-buying-from-distributor Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 3(7) and the Eleventh Schedule of the Sales Tax Act, 1990, a government buyer or company withholds 1/10th of the sales tax shown on an active distributor's invoice. A company buying from a non-active supplier withholds 5% of gross value. Third Schedule goods, and supplies by an active taxpayer to another registered person, are excluded from withholding. **Applies to:** Registered wholesalers, dealers and distributors who supply companies, government departments, autonomous bodies or public sector organizations. When a distributor sells to a company or a government office, part of the sales tax on the invoice may be kept back by the buyer and paid to the government directly. How much depends on who the buyer is, whether the distributor is on the active taxpayers list, and what goods are sold. ### What does the law say? Section 3(7) of the Sales Tax Act, 1990 says the tax shall be withheld at the rate specified in the Eleventh Schedule by any person or class of persons purchasing goods or services, acting as withholding agent. The Eleventh Schedule then sets out who withholds, from which supplier, and how much. | S. No. | Withholding agent | Supplier | Extent of deduction | | --- | --- | --- | --- | | 1 | Federal and provincial government departments, autonomous bodies, public sector organizations; companies as defined in the Income Tax Ordinance, 2001 | Active Taxpayers | 1/5th of sales tax shown on invoice | | 2 | Same as S. No. 1 | Active Taxpayer registered as a wholesaler, dealer or distributor | 1/10th of sales tax shown on invoice | | 3 | Federal and provincial government departments, autonomous bodies, public sector organizations | Persons other than Active Taxpayers | Whole of the tax involved, or as applicable to supplies on the basis of gross value of supplies | | 4 | Companies, associations of persons and individuals as defined in the Income Tax Ordinance, 2001, excluding companies exporting surgical instruments | Persons other than Active Taxpayers | 5% of gross value of supplies | The words "association of persons and individuals" in S. No. 4 were added by the Finance Act, 2026. An "active taxpayer" is defined in section 2(1A). It is a registered person who is not blacklisted or suspended, has not missed the monthly sales tax return by the due date for two consecutive tax periods, and has filed the income tax return and withholding statements the definition names. ### When does withholding not apply? The Schedule lists goods and supplies to which withholding "shall not be applicable". Two matter most to distributors: - **Clause (vi): goods specified in the Third Schedule.** A buyer does not withhold under the Eleventh Schedule on goods listed there. - **Clause (viii): supplies made by an Active Taxpayer to another registered person**, except the supplies in S. Nos. 5, 7, 9, 10, 11, 12 and 13, which cover advertisement services, lead and scrap batteries, gypsum and limestone flux, coal, waste paper, plastic waste, and crush stone and silica. Read together, serial 2 and clause (viii) mean the 1/10th deduction reaches an active distributor's sales to the listed buyers that are not themselves registered persons. The Schedule does not state this in one place; it follows from the two provisions side by side. The other exclusions cover electricity, natural gas, certain petroleum products, vegetable ghee and cooking oil, telecommunication services, supplies by importers who paid value addition tax at import, and certain supplies to low cost housing schemes. ### How is it collected and credited? Rule 150ZZI of the Sales Tax Rules, 2006 makes the buyer announce in its advertisement or notice that sales tax will be deducted, deduct the Eleventh Schedule amount, pay the balance to the supplier, deposit the deduction, and issue a certificate to the supplier. Rule 150ZZJ requires the distributor to issue a sales tax invoice as the Act stipulates and to file its monthly return taking credit of the tax deducted. Rule 18(4A) adds a condition: if a supplier declares tax withheld but does not declare the matching sale to that withholding agent, neither the withheld amount nor the reduction in output tax is allowed. ### Worked example (illustrative figures) Awan Distributors in Rawalpindi is an active taxpayer registered as a distributor. It supplies taxable goods, not in the Third Schedule, to a federal government department that is not a registered person. The value of supply is Rs. 2,000,000. The figures are invented; the 18% rate is from section 3(1) and the fraction from S. No. 2. 1. Sales tax on invoice: 18% of Rs. 2,000,000 = Rs. 360,000. 2. Withheld by the department: 1/10th of Rs. 360,000 = Rs. 36,000. 3. Tax paid to the distributor: Rs. 360,000 minus Rs. 36,000 = Rs. 324,000. 4. Total paid to the distributor: Rs. 2,000,000 + Rs. 324,000 = **Rs. 2,324,000**. 5. In its return the distributor declares Rs. 360,000 output tax and takes credit for the Rs. 36,000 withheld. **Variation.** If the same goods were supplied to a company by a distributor who is not an active taxpayer, S. No. 4 applies at 5% of gross value of supplies. The Schedule does not define "gross value". Read as the value of Rs. 2,000,000 before tax, 5% is Rs. 100,000. Read as the invoice total of Rs. 2,360,000, 5% is Rs. 118,000. This site does not decide which reading is right. ### Common mistakes - **Withholding on Third Schedule goods.** Clause (vi) excludes them. - **Applying 1/5th to a distributor.** S. No. 2 sets 1/10th for an Active Taxpayer registered as a wholesaler, dealer or distributor. - **Declaring the credit without declaring the sale.** Rule 18(4A) disallows both. ### What to check in the official text Read section 3(7), the definition in section 2(1A), and the Eleventh Schedule with the clauses after its Table in the Sales Tax Act, 1990 as amended to 30 June 2026. Then read rules 150ZZI and 150ZZJ and rule 18 of the Sales Tax Rules, 2006, held here as amended to 30 June 2025. Whether a supplier is active on a given date is shown on the Board's active taxpayers list, which this site does not hold. ### Frequently asked #### Does a registered company withhold anything from an active distributor? Clause (viii) after the Eleventh Schedule Table says withholding does not apply to supplies made by an Active Taxpayer to another registered person, except the supplies in S. Nos. 5, 7 and 9 to 13. A distributor's ordinary goods are not in those serials, so a buyer that is itself a registered person falls outside withholding on that supply. #### Can the buying company claim the withheld amount as its own input tax? No. The proviso to rule 150ZZI(2) of the Sales Tax Rules, 2006 says the withholding agent is not entitled to reclaim or deduct the amount withheld as input tax. #### What does the distributor receive as proof of the deduction? Rule 150ZZI(8) requires the withholding agent to issue a certificate naming the supplier and its registration number, describing the goods and stating the sales tax deducted. ### Citations - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "at the rate as specified in the Eleventh Schedule, by any person or class of persons" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Eleventh Schedule, Table, S. Nos. 1 to 4, and clauses (vi) and (viii) after the Table](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“active taxpayer” means a registered person who does not fall in any of the following categories, namely:-" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 150ZZI (Responsibility of a withholding agent)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zzi-responsibility-of-a-withholding-agent), as amended to 2025-06-30: "Provided that the withholding agent shall not be entitled to reclaim or deduct the amount of tax withheld from such persons as input tax." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZZJ (Responsibility of the registered supplier)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zzj-responsibility-of-the-registered-supplier), as amended to 2025-06-30: "(2) The registered supplier shall file monthly return as prescribed in Chapter II, taking due credit of the sales tax deducted by the withholding agent, in the manner as prescribed in the return." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 18 (Electronic filing of Sales Tax return)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#18-electronic-filing-of-sales-tax-return), as amended to 2025-06-30: "the amount of sales tax withheld and reduction in output tax shall not be allowed to such person." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf --- ## When a company or government department buys from me, how much sales tax can it withhold? Source: https://qanoondigest.com/faq/wholesalers-distributors/sales-tax-withholding-buyer-distributor Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under the Eleventh Schedule to the Sales Tax Act, 1990, a government department or company buying from an active distributor, dealer or wholesaler withholds 1/10th of the invoice sales tax. Other active taxpayers suffer 1/5th. Suppliers who are not active taxpayers suffer the whole tax or 5% of gross value, subject to the exclusions after the Table. **Applies to:** Registered wholesalers, dealers and distributors who sell to government departments, autonomous bodies, public sector organizations, companies and other withholding agents. When a distributor supplies a government office, a public sector body or a company, the buyer may hold back part of the sales tax shown on the invoice and deposit it with the government directly. How much depends on who the buyer is, whether the distributor is an active taxpayer, and whether the goods fall in one of the exclusions printed after the Eleventh Schedule Table. ### What does the law say? Section 3(7) of the Sales Tax Act, 1990 says the tax shall be withheld at the rate specified in the Eleventh Schedule, by a person or class of persons being a purchaser of goods or services, "as withholding agent for the purpose of depositing the same, in such manner and subject to such conditions or restrictions as the Board may prescribe" through a Gazette notification. The Eleventh Schedule Table, as amended to 30 June 2026, sets these rates for the first four rows: | S. No. | Withholding agent | Supplier category | Rate or extent of deduction | | --- | --- | --- | --- | | 1 | (a) Federal and provincial government departments, autonomous bodies and public sector organizations; (b) companies as defined in the Income Tax Ordinance, 2001 | Active taxpayers | 1/5th of sales tax as shown on invoice | | 2 | Same as S. No. 1 | Active taxpayer registered as a wholesaler, dealer or distributor | 1/10th of sales tax as shown on invoice | | 3 | Federal and provincial government departments, autonomous bodies and public sector organizations | Persons other than active taxpayers | Whole of the tax involved or as applicable to supplies on the basis of gross value of supplies | | 4 | Companies, association of persons and individuals as defined in the Income Tax Ordinance, 2001, excluding companies exporting surgical instruments | Persons other than active taxpayers | 5% of gross value of supplies | The words "association of persons and individuals" in row 4 were added by the Finance Act, 2026. ### Which supplies are excluded? The heading of the Table says withholding "shall not be applicable" to the goods and supplies listed after it. Those clauses are: 1. Electrical energy. 2. Natural gas. 3. Petroleum products as supplied by exploration and production companies, refineries, oil marketing companies and dealers of motor spirit and high speed diesel. 4. Vegetable ghee and cooking oil. 5. Telecommunication services. 6. Goods specified in the Third Schedule. 7. Supplies by importers who paid value addition tax at import. 8. Supplies made by an active taxpayer to another registered person, except supplies under S. Nos. 5, 7, 9, 10, 11, 12 and 13 of the Table. 9. Sand, stone, gravel or crush and clay supplied to low cost housing schemes sponsored or approved by the Naya Pakistan Housing and Development Authority. Clause (viii) matters most to a distributor. If you are an active taxpayer and your buyer is itself registered, the Schedule does not apply to that supply. Rows 1 and 2 therefore reach an active distributor mainly where the government department or company buying from it is not a registered person. ### Who counts as an active taxpayer? Section 2(1A) defines an active taxpayer as a registered person who is not blacklisted or under suspended registration, has not failed to file sales tax returns by the due date for two consecutive tax periods, has not failed to file the income tax return or statement under the Income Tax Ordinance, 2001 by the due date, and has not failed to file the quarterly or annual withholding tax statement under that Ordinance. ### Worked example (illustrative figures) Ahmed Distributors in Quetta supplies stationery to a buyer. The invoice shows value exclusive of tax of Rs. 1,000,000 and sales tax of Rs. 180,000. The names and amounts are invented; the fractions and percentage are from the Eleventh Schedule. | Situation | Calculation | Tax withheld by buyer | | --- | --- | --- | | Active distributor, unregistered government department buys (row 2) | 1/10 x Rs. 180,000 | Rs. 18,000 | | Same, but supplier is an active taxpayer not registered as a distributor (row 1) | 1/5 x Rs. 180,000 | Rs. 36,000 | | Distributor not active, government department buys (row 3) | Whole of the tax | Rs. 180,000 | | Distributor not active, company buys (row 4) | 5% x gross value | Rs. 50,000 on Rs. 1,000,000, or Rs. 59,000 on Rs. 1,180,000 | | Active distributor, registered company buys | Clause (viii) exclusion | Nil | The Schedule does not define "gross value of supplies", so the row 4 line shows both readings rather than choosing one. ### How does the withheld amount reach my return? Rule 18 of the Sales Tax Rules, 2006 links the supplier's reduction in output tax to the buyer's return. Rule 18(5)(ii) allows the supplier a provisional reduction, which is adjusted or recovered if the buyer does not declare the withheld amount by the 10th day of the next month. Rule 18(4A) says that where a registered person declares tax withheld but does not declare the corresponding sales to that withholding agent, the withheld amount and reduction in output tax "shall not be allowed". ### What if the buyer does not withhold? Section 11F puts the consequence on the withholding agent. Where a person required to withhold under section 3(7) fails to withhold, or withholds and fails to deposit, an officer not below Assistant Commissioner shall, after a show cause notice, determine and recover the amount in default and impose penalty and default surcharge. ### Common mistakes - **Assuming every company withholds from every supplier.** Clause (viii) removes supplies by an active taxpayer to another registered person. - **Using 1/5th for a distributor.** Row 2 gives 1/10th where the active taxpayer is registered as a wholesaler, dealer or distributor. - **Declaring the withheld tax without the matching sale.** Rule 18(4A) disallows it. ### What to check in the official text Read section 2(1A), section 3(7), section 11F and the Eleventh Schedule in the Sales Tax Act, 1990 as amended to 30 June 2026, and rule 18 of the Sales Tax Rules, 2006. The Board's notification prescribing the manner, conditions and restrictions for withholding under section 3(7) is not held on this site in a current version. ### Frequently asked #### Does a registered company withhold sales tax when it buys from an active distributor? Clause (viii) after the Eleventh Schedule Table excludes supplies made by an active taxpayer to another registered person, apart from a few listed serial numbers that do not concern ordinary distribution. So where both the distributor and the buying company are registered and the distributor is active, the Schedule's withholding does not apply to that supply. #### What happens if I stop being an active taxpayer? Section 2(1A) removes a registered person from active taxpayer status if, among other things, it fails to file sales tax returns for two consecutive tax periods or misses its income tax return. The supplier then moves to rows 3 or 4 of the Table, where a government buyer withholds the whole tax and other listed buyers withhold 5% of gross value. #### Does the 1/10th rate apply to goods in the Third Schedule? No. Clause (vi) after the Table excludes goods specified in the Third Schedule to the Sales Tax Act, 1990, so the withholding rates in the Table do not apply to those goods. ### Citations - [Sales Tax Act, 1990, Eleventh Schedule, Table (S. Nos. 1 to 4) and exclusions (i) to (ix) after the Table](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "as withholding agent for the purpose of depositing the same, in such manner and subject to such conditions or restrictions as the Board may prescribe in this behalf through a notification in the official Gazette" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“active taxpayer” means a registered person who does not fall in any of the following categories, namely:-" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 11F (Failure to withhold sales tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#11f-failure-to-withhold-sales-tax), as amended to 2026-06-30: "fails to withhold the tax or having withheld the tax fails to deposit the same in the prescribed manner" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 18 (Electronic filing of Sales Tax return)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#18-electronic-filing-of-sales-tax-return), as amended to 2025-06-30: "where a registered person declares an amount of sales tax withheld by a withholding agent, but does not declare the corresponding sales to such withholding agent in his return, as the case may be, the amount of sales tax withheld and reduction in output tax shall not be allowed to such person." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf --- ## How much income tax does a company deduct under section 153 when it buys goods from me as a distributor? Source: https://qanoondigest.com/faq/wholesalers-distributors/section-153-tax-distributor-sales-companies Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 153(1)(a) and Division III of Part III of the First Schedule, a company buying goods deducts 5% of the gross amount (5.5% if the seller is not a company). Second Schedule clauses (24A) and (24C) cut this to 2.5% for cigarette distributors, 1% for pharmaceutical distributors and 0.25% for listed goods if on both active taxpayers' lists. **Applies to:** Distributors, dealers and wholesalers who sell goods to companies, the Federal Government, larger AOPs and individuals, and other prescribed persons under section 153. The default rate on goods is 5% of the gross amount when the distributor is a company and 5.5% when it is not. Distributors of cigarettes, pharmaceutical products and certain listed goods get lower rates through clauses in the Second Schedule. These rates come from the Income Tax Ordinance, 2001 as amended to 30 June 2026, so they apply for tax year 2027. ### What does the law say? Section 153(1)(a) requires every "prescribed person" paying for the sale of goods to a resident person to deduct tax "from the gross amount payable (including sales tax, if any)" at the rate in Division III of Part III of the First Schedule. It excludes cases where the payment is less than seventy-five thousand rupees in aggregate during a financial year. Section 153(7) lists the prescribed persons who must deduct. They include the Federal Government, a company, an association of persons constituted by or under law, a non-profit organization, an AOP or individual with turnover of one hundred million rupees or above in any of the preceding tax years, and a person registered under the Sales Tax Act, 1990 with turnover of one hundred million rupees or more in any of the preceding tax years. ### What rates apply to a distributor in tax year 2027? | Situation | Where the rate is | Rate on gross amount | | --- | --- | --- | | Sale of rice, cotton seed or edible oils | Division III, para (1)(a) | 1.5% | | Other goods, seller is a company | Division III, para (1)(b)(i) | 5% | | Other goods, seller is not a company | Division III, para (1)(b)(ii) | 5.5% | | Distributors of cigarette | Second Schedule, clause (24A) | 2.5% | | Distributors of pharmaceutical products | Second Schedule, clause (24A) | 1% | | Distributors, dealers, sub-dealers, wholesalers and retailers of fast moving consumer goods, fertilizer, electronics excluding mobile phones, sugar, cement, steel and edible oil | Second Schedule, clause (24C), if on both active taxpayers' lists | 0.25% | Clause (24C) sets its rate "subject to the condition that beneficiaries of reduced rate are appearing on the Active Taxpayers’ Lists" issued under both the Sales Tax Act, 1990 and the Income Tax Ordinance, 2001. A distributor on only one list does not meet that condition. Clause (24C) also carries a proviso that "the benefit under this clause shall only be available to those Tier-1 retailers as defined under Sales Tax Act, 1990 who are integrated" with the Board's computerized system. Read literally, that wording speaks only of Tier-1 retailers. The clause does not say whether the proviso limits the benefit for distributors, dealers and wholesalers, who are not retailers. This page does not resolve that. ### Is the deduction minimum tax for a distributor? Yes, unless the distributor is a manufacturer company or a listed company. Section 153(3) says tax deductible under sub-section (1) shall be minimum tax. Its proviso says tax deducted under clause (a) is not minimum tax where payments for goods are received by a company being a manufacturer of such goods, or a public company listed on a registered stock exchange in Pakistan. A trading distributor fits neither exception. ### What if I am not on the active taxpayers' list? Rule 1 of the Tenth Schedule says that where tax is to be deducted from a person not appearing in the active taxpayers' list, the rate "shall be increased by hundred percent" of the rate specified in the Ordinance. The reduced rate in clause (24C) is in any case available only to persons on both active taxpayers' lists. ### Worked example (illustrative figures) A company running a chain of grocery stores in Rawalpindi pays four suppliers, each invoice Rs. 2,000,000 gross including sales tax. All suppliers are on the active taxpayers' list under the Ordinance. | Supplier | Rate | Arithmetic | Tax deducted | | --- | --- | --- | --- | | Stationery distributor, an AOP | 5.5% | 2,000,000 × 5.5% | Rs. 110,000 | | FMCG distributor, on both active taxpayers' lists | 0.25% | 2,000,000 × 0.25% | Rs. 5,000 | | Pharmaceutical distributor | 1% | 2,000,000 × 1% | Rs. 20,000 | | Cigarette distributor | 2.5% | 2,000,000 × 2.5% | Rs. 50,000 | Check: 110,000 + 5,000 + 20,000 + 50,000 = Rs. 185,000 deducted in total. Each distributor receives Rs. 2,000,000 minus its own deduction. ### Common mistakes - **Applying the rate before sales tax.** Section 153(1) says the gross amount includes sales tax. - **Assuming FMCG status alone gives 0.25%.** Clause (24C) requires appearance on both active taxpayers' lists. - **Treating the deduction as adjustable.** For a trading distributor it is minimum tax under section 153(3). - **Overlap between clauses.** Cigarettes may also be described as fast moving consumer goods. Clauses (24A) and (24C) do not say which prevails where both could apply. ### What to check in the official text Read section 153, including sub-section (3) and the definitions in sub-section (7). Check paragraph (1) of Division III of Part III of the First Schedule, clauses (24A) and (24C) of Part II of the Second Schedule, and rule 1 of the Tenth Schedule. Also check whether the buyer holds, or you hold, a certificate under section 153(4), which allows a reduced rate only where the tax is not minimum tax. ### Frequently asked #### Is the section 153 deduction my final tax as a distributor? It is minimum tax. Section 153(3) makes tax deductible under sub-section (1) minimum tax, and the proviso excludes only payments for goods received by a company that manufactures them or by a listed public company. A distributor that is neither falls under the minimum tax rule. #### Is the rate applied to the price before or after sales tax? After. Section 153(1) requires deduction from the gross amount payable including sales tax, if any. #### Do small purchases escape deduction? Section 153(1)(a) excludes a sale of goods where the payment is less than seventy-five thousand rupees in aggregate during a financial year. ### Citations - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "deduct tax from the gross amount payable (including sales tax, if any) at the rate specified in Division III of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), paragraph (1)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part II, clauses (24A) and (24C)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (Rate of deduction or collection of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much section 153 tax does a company deduct when paying a distributor for goods, and is it minimum or adjustable tax? Source: https://qanoondigest.com/faq/wholesalers-distributors/section-153-withholding-distributor-sales-rate Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer For tax year 2027, Division III of Part III of the First Schedule sets section 153 tax on payments for goods at 5% for a company and 5.5% for others. Clause (24A) cuts it for cigarette and pharmaceutical distributors, and clause (24C) to 0.25% for listed goods if on both Active Taxpayers' Lists. Section 153(3) makes it minimum tax. **Applies to:** Distributors, dealers and wholesalers in Pakistan who sell goods to companies and other prescribed persons that must deduct tax under section 153. When a distributor supplies goods to a company, the company pays the invoice less income tax withheld under section 153 of the Income Tax Ordinance, 2001. The rate depends on who the distributor is, which goods it sells and whether it appears on the Active Taxpayers' Lists. The answer below uses the Ordinance as amended to 30 June 2026, which gives the rates for tax year 2027. ### Who has to deduct the tax? Section 153(1)(a) requires every "prescribed person" paying a resident person for the sale of goods, including toll manufacturing, to deduct tax from the gross amount payable, including sales tax. The duty does not arise where payments are less than seventy-five thousand rupees in aggregate during a financial year. Section 153(7) defines prescribed persons to include: - the Federal Government, a company, an association of persons constituted by or under law, and a non-profit organization; - a foreign contractor or consultant, and a consortium or joint venture; - an individual or association of persons with turnover of one hundred million rupees or more in any of the preceding tax years; - a person registered under the Sales Tax Act, 1990 with turnover of one hundred million rupees or more in any of the preceding tax years; and - a builder. ### What are the rates? | Seller and goods | Rate on gross amount payable | Source | | --- | --- | --- | | Company, sale of goods (not toll manufacturing) | 5% | Division III, para (1)(b)(i) | | Other than a company, sale of goods (not toll manufacturing) | 5.5% | Division III, para (1)(b)(ii) | | Distributors of cigarettes | 2.5% | Clause (24A) | | Distributors of pharmaceutical products | 1% | Clause (24A) | | Distributors, dealers, sub-dealers, wholesalers and retailers of fast moving consumer goods, fertilizer, electronics excluding mobile phones, sugar, cement, steel and edible oil, on both Active Taxpayers' Lists | 0.25% | Clause (24C) | Clause (24C) applies only if the recipient appears on the Active Taxpayers' Lists issued under both the Sales Tax Act, 1990 and the Income Tax Ordinance, 2001. Its proviso limits the benefit for retailers to Tier-1 retailers integrated with the Board's computerized system for real time reporting. Clause (24A) sets no Active Taxpayers' List condition of its own. Division III also has separate rates for rice, cotton seed and edible oils (1.5%) and for toll manufacturing. ### What if the distributor is not on the Active Taxpayers' List? Rule 1 of the Tenth Schedule increases any rate of deduction or collection by hundred percent for persons not appearing in the active taxpayers' list. On the plain words, a 5.5% rate becomes 11% for a non-company distributor off the list. ### Is it minimum tax or adjustable? Section 153(3) says the tax deductible under sub-section (1) on the income of a resident person "shall be minimum tax". There are two exceptions for goods: it is not minimum tax where the payment is received by a company that manufactures the goods, or by a public company listed on a registered stock exchange in Pakistan. A distributor, dealer or wholesaler that does not manufacture the goods falls outside both exceptions. An Explanation to sub-section (3) says the income it refers to is the amount on which tax is deductible. Section 153 labels the tax as minimum tax but does not itself set out the full computation in the return. Section 153(4) matters here too. The Commissioner can allow a reduced rate "in cases where tax deductible under sub-section (1) is not minimum". Because a distributor's section 153 tax is minimum tax, that route is not open to it on the words of the section. ### How does this sit alongside section 236G? The same carton can meet both taxes at different points. When the distributor buys from the manufacturer or commercial importer, section 236G tax is collected from the distributor, and section 236G(2) allows credit for it against the distributor's tax for the year. When the distributor sells that stock to a company, section 153 tax is deducted from the payment and is minimum tax. They are different taxes on different transactions, with different treatment. ### Worked example (illustrative figures) Al-Noor Distributors, an association of persons in Lahore, supplies packaged biscuits to a company. The invoice, including sales tax, is Rs. 2,360,000. The amounts are invented; the rates are those cited above. 1. On both Active Taxpayers' Lists, clause (24C) applies: Rs. 2,360,000 x 0.25% = Rs. 5,900 deducted. The company pays Rs. 2,354,100. 2. Not on both lists, so clause (24C) is lost, but on the income tax list: Division III rate for a non-company, Rs. 2,360,000 x 5.5% = Rs. 129,800. 3. Not on the income tax Active Taxpayers' List: the Tenth Schedule doubles 5.5% to 11%, so Rs. 2,360,000 x 11% = Rs. 259,600. Clause (24C) does not define "fast moving consumer goods". Whether a particular product qualifies is not settled by the clause itself. ### Common mistakes - **Calling section 153 tax on a distributor's sales adjustable.** Section 153(3) makes it minimum tax unless the seller is a manufacturing company or listed public company. - **Leaving sales tax out of the base.** Section 153(1) deducts from the gross amount including sales tax. - **Claiming 0.25% while on only one list.** Clause (24C) needs both Active Taxpayers' Lists. ### What to check in the official text Read section 153 and Division III of Part III of the First Schedule, clauses (24A) and (24C) of Part II of the Second Schedule, and rule 1 of the Tenth Schedule, all as amended to 30 June 2026. Check the full list of prescribed persons in section 153(7) against the buyer you supply. ### Frequently asked #### Is section 153 tax on a distributor's sales final tax? No. Section 153(3) says tax deductible under sub-section (1) is minimum tax on the income of a resident person. It is not minimum tax only where the goods are sold by a company that manufactures them or by a listed public company. #### Is sales tax included in the amount on which section 153 tax is deducted? Yes. Section 153(1) requires deduction from the gross amount payable, including sales tax, if any, at the rate in Division III of Part III of the First Schedule. #### Can a distributor get a reduced rate certificate under section 153(4)? Section 153(4) allows a reduced rate only where the tax deductible under sub-section (1) is not minimum tax. For a distributor that is not a manufacturing company or listed public company, the tax is minimum tax, so sub-section (4) does not reach it on its words. ### Citations - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "tax deducted under clause (a) of sub-section (1) shall 5[not be minimum tax] where payments are received on sale or supply of goods, by a, -" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), paragraph (1), sub-paragraph (b)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part II, clause (24A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part II, clause (24C)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236G (Advance tax on sales to distributors, dealers and wholesalers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236g-advance-tax-on-sales-to-distributors-dealers-and-wholesalers), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What is section 236G advance tax and who collects it from distributors and wholesalers? Source: https://qanoondigest.com/faq/wholesalers-distributors/what-is-section-236g-advance-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 236G of the Income Tax Ordinance requires every manufacturer or commercial importer to collect advance tax at the time of sale to distributors, dealers and wholesalers, at the rate in Division XIV of Part IV of the First Schedule. Under section 236G(2) the buyer gets credit for it against its own income tax for that tax year. **Applies to:** Distributors, dealers and wholesalers in Pakistan who buy goods from manufacturers or commercial importers. Section 236G is an advance income tax that a manufacturer or commercial importer adds to its invoice when it sells goods to a distributor, dealer or wholesaler. The seller collects it and the buyer bears it, but the buyer can count it towards its own income tax for the same tax year. This is why a distributor's purchase invoice often shows a small income tax line on top of the price of the goods. ### What does the law say? Section 236G(1) of the Income Tax Ordinance, 2001 says that every manufacturer or commercial importer, at the time of sale to distributors, dealers and wholesalers, "shall collect advance tax at the rate specified in Division XIV of Part IV of the First Schedule, from the aforesaid person to whom such sales have been made." Section 236G(2) then says credit for the tax collected "shall be allowed in computing the tax due by the distributor, dealer or wholesaler on the taxable income for the tax year in which the tax was collected." Section 236G sits in Chapter XII of the Ordinance, headed "Transitional Advance Tax Provisions". The section was added by the Finance Act, 2013. ### Who has to collect it, and from whom? The collecting side and the paying side are both fixed by the words of section 236G(1): | Role | Who, under section 236G(1) | | --- | --- | | Collects the tax | Every manufacturer or commercial importer | | Pays the tax | Distributors, dealers and wholesalers who buy from them | | When | At the time of sale | | Rate | Division XIV of Part IV of the First Schedule | A sale by one distributor to another distributor, or by a wholesaler to a wholesaler, is not a sale by a manufacturer or commercial importer, so it is outside the words of section 236G(1). Sales by distributors and wholesalers onward to retailers are dealt with by a different section, section 236H, which is covered on its own page. ### What does "distributor" mean? Clause (18A) of section 2 defines a distributor as "a person appointed by a manufacturer, importer or any other person for a specified area to purchase goods from him for further supply". Two features stand out: the person is appointed, and the appointment is for a specified area. A company's appointed area distributor for Hyderabad fits these words. The definitions in section 2 do not define "dealer" or "wholesaler", and they do not define "commercial importer" either. The Ordinance leaves those words without a statutory definition in section 2, so they carry their ordinary meaning unless another provision says otherwise. This page does not try to fill that gap. ### What rate is collected? Division XIV of Part IV of the First Schedule, as amended to 30 June 2026, sets the rates that apply for tax year 2027 (1 July 2026 to 30 June 2027): | Category of sale | Rate | | --- | --- | | Fertilizers | 0.7% | | Other than fertilizers | 0.1% | A proviso sets 0.25% on sales of fertilizer to distributors, dealers or wholesalers who appear on both the Active Taxpayers' Lists issued under the Sales Tax Act, 1990 and the Income Tax Ordinance, 2001. A buyer not on the Active Taxpayers' List pays a higher rate under the Tenth Schedule. The rates, including that higher rate, are set out in full on the related page on 236G rates. ### Worked example (illustrative figures) Imran runs a distributorship in Faisalabad, appointed by a detergent manufacturer for the Faisalabad district. In July 2026 he buys detergent worth Rs. 3,000,000 from the manufacturer. He is on the Active Taxpayers' List. The figures are invented; the rate is the Division XIV rate. 1. Goods are "other than fertilizers", so the rate is 0.1%. 2. Rs. 3,000,000 x 0.1% = Rs. 3,000. 3. The manufacturer collects Rs. 3,000 from Imran at the time of sale. If Imran's purchases for the whole of tax year 2027 come to Rs. 36,000,000, the tax collected at 0.1% is Rs. 36,000. Under section 236G(2), that Rs. 36,000 is allowed as credit when his tax for tax year 2027 is computed. ### What if the goods are fertilizer? The rate is 0.7% under Division XIV, or 0.25% if the buyer appears on both the income tax and sales tax Active Taxpayers' Lists. On a Rs. 1,000,000 fertilizer purchase that is Rs. 7,000 at 0.7%, or Rs. 2,500 at 0.25% (illustrative figures). ### What if I buy through a wholesaler rather than directly? Section 236G(1) only reaches sales by a manufacturer or commercial importer. If you buy from another wholesaler, section 236G is not the section that applies to that purchase. Whether section 236H applies instead depends on whether you are treated as a retailer or as a wholesaler buying from a distributor or dealer, which the related pages cover. ### Common mistakes - **Thinking the distributor collects 236G.** Under section 236G(1) the manufacturer or commercial importer collects it. The distributor pays it. - **Treating it as a lost cost.** Section 236G(2) gives credit against the buyer's income tax for the tax year in which it was collected. - **Claiming it in the wrong year.** The credit is for "the tax year in which the tax was collected", not the year the goods are sold on. - **Assuming only listed sectors are covered.** The sector list that used to limit the section was omitted by the Finance Act, 2024. See the related page on which goods are covered. ### What to check in the official text Read section 236G and clause (18A) of section 2 of the Income Tax Ordinance amended to 30 June 2026, together with Division XIV of Part IV of the First Schedule and its proviso. The consolidated text does not define "dealer", "wholesaler" or "commercial importer" in section 2, so any argument about who counts as one should start from the words of the section itself. ### Frequently asked #### Who collects section 236G tax? Section 236G(1) places the duty on every manufacturer or commercial importer. They collect it at the time of sale from the distributor, dealer or wholesaler who buys the goods. #### Is section 236G tax a final tax for the distributor? No. Section 236G(2) says credit for the tax collected shall be allowed in computing the tax due by the distributor, dealer or wholesaler for the tax year in which it was collected. #### Does the Ordinance define a wholesaler or dealer? Clause (18A) of section 2 defines a distributor as a person appointed by a manufacturer, importer or any other person for a specified area to purchase goods from him for further supply. The definitions section does not define wholesaler or dealer. ### Citations - [Income Tax Ordinance, 2001, section 236G (Advance tax on sales to distributors, dealers and wholesalers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236g-advance-tax-on-sales-to-distributors-dealers-and-wholesalers), as amended to 2026-06-30: "(2) Credit for tax collected under sub-section (1) shall be allowed in computing the tax due by the distributor, dealer or wholesaler on the taxable income for the tax year in which the tax was collected." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236H (Advance tax on sales to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236h-advance-tax-on-sales-to-retailers), as amended to 2026-06-30: "(2) Credit for the tax collected under sub-section (1) shall be allowed in computing the tax due by the retailer on the taxable income for the tax year in which the tax was collected." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XIV (Advance tax on sale to distributors, dealers or wholesalers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What is the section 236G rate for tax year 2027 for a distributor on the Active Taxpayers List and one who is not? Source: https://qanoondigest.com/faq/wholesalers-distributors/section-236g-rate-active-taxpayers-list Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer For tax year 2027, Division XIV of the First Schedule sets section 236G at 0.1% on goods other than fertilizer and 0.7% on fertilizer, or 0.25% on fertilizer for a buyer on both Active Taxpayers' Lists. For a buyer not on the list, the Tenth Schedule applied through section 100BA sets 2% on goods other than fertilizer. **Applies to:** Distributors, dealers and wholesalers who buy goods from manufacturers or commercial importers in tax year 2027. A distributor, dealer or wholesaler pays section 236G tax at one of a small number of rates, and the rate turns on two things: whether the goods are fertilizer, and whether the buyer appears on the Active Taxpayers' List. The difference between being on and off the list is large, as the example below shows. ### What rates does the law set for tax year 2027? Section 236G(1) of the Income Tax Ordinance, 2001 tells every manufacturer or commercial importer to collect advance tax "at the rate specified in Division XIV of Part IV of the First Schedule". The Ordinance as amended to 30 June 2026 gives these rates, which apply to tax year 2027 (1 July 2026 to 30 June 2027): | Goods | Buyer on the Active Taxpayers' List | Buyer not on the list | | --- | --- | --- | | Other than fertilizers | 0.1% (Division XIV) | 2% (Tenth Schedule, serial 3) | | Fertilizers | 0.7% (Division XIV), or 0.25% if on both lists | Rule 1 of the Tenth Schedule: rate increased by 100% | The 0.25% figure comes from the proviso to Division XIV. It applies to fertilizer sold to distributors, dealers or wholesalers "if they are already appearing on both the Active Taxpayers' Lists issued under the provisions of the Sales Tax Act, 1990 and the Income Tax Ordinance, 2001". ### Where does the higher rate come from? Section 100BA says the collection of advance income tax from a person not appearing in the Active Taxpayers' List "shall be determined in accordance with the rules in the Tenth Schedule", and section 100BA(2) gives the Tenth Schedule effect notwithstanding anything else in the Ordinance. Rule 1 of the Tenth Schedule has a general rule and a table: - **The general rule.** Where tax is collected from a person not on the list, the rate "shall be increased by hundred percent of the rate specified in" the Ordinance. - **The table under the third proviso.** Serial 3 fixes 2% for section 236G "On the gross amount of sale to distributors, dealers or wholesalers other than sale of fertilizer". Serial 4 fixes 2.5% for section 236H. Because serial 3 expressly leaves out fertilizer, a fertilizer sale to a buyer off the list falls back to the general rule. Increasing 0.7% by one hundred percent of 0.7% gives 1.4%. The Tenth Schedule does not print that figure; it is the arithmetic of rule 1's words. ### Worked example (illustrative figures) Bilal Traders is a distributor in Multan. In tax year 2027 it buys cooking oil worth Rs. 5,000,000 from a manufacturer, and separately buys fertilizer worth Rs. 2,000,000 from a fertilizer company. The amounts are invented; the rates are the ones above. **Cooking oil (other than fertilizer), Rs. 5,000,000** 1. On the Active Taxpayers' List: Rs. 5,000,000 x 0.1% = Rs. 5,000. 2. Not on the list: Rs. 5,000,000 x 2% = Rs. 100,000. 3. Difference: Rs. 100,000 minus Rs. 5,000 = Rs. 95,000. **Fertilizer, Rs. 2,000,000** 1. On both the income tax and sales tax lists: Rs. 2,000,000 x 0.25% = Rs. 5,000. 2. On the income tax list only: Rs. 2,000,000 x 0.7% = Rs. 14,000. 3. Not on the income tax list: 0.7% increased by 100% is 1.4%, so Rs. 2,000,000 x 1.4% = Rs. 28,000. So on the same Rs. 7,000,000 of purchases, Bilal Traders has Rs. 10,000 collected if it is on both lists (Rs. 5,000 plus Rs. 5,000), and Rs. 128,000 if it is on neither (Rs. 100,000 plus Rs. 28,000). ### What if the distributor gets on the list during the year? Rule 1 of the Tenth Schedule applies "Where tax is required to be deducted or collected" from persons not appearing in the list, so the question is the buyer's status when the tax is collected at the time of sale. The Ordinance text does not say how a manufacturer checks the list or on what date; that is a matter of procedure outside the text reproduced here. ### What if the higher rate was already collected? Section 236G(2) gives the distributor credit for tax collected under section 236G(1) in computing its tax for the tax year in which it was collected. Rule 4(3) of the Tenth Schedule also says that where returns are filed before a provisional assessment, or within the period allowed after one, "the tax deducted or collected under rule 1 shall be adjustable against the tax payable in the return filed for the relevant tax year". Rule 3 sets out what happens if a person whose tax was collected under rule 1 does not file a return by the due date: the Commissioner makes a provisional assessment, imputing income from the tax collected and treating that imputed income as concealed income. ### What about a distributor on the list who files late? Section 100BA(1) extends the Tenth Schedule to "persons appearing on the active taxpayers' list who have not filed return by the due date". Rule 1A of the Tenth Schedule, which set rates for that group, was omitted by the Finance Act, 2026, and rule 1 as it now reads speaks only of persons not appearing in the list. The consolidated text does not state a separate section 236G rate for a late filer who is on the list, and this page does not try to supply one. ### Common mistakes - **Doubling 0.1% for a buyer off the list.** For goods other than fertilizer, the Tenth Schedule table fixes 2%, not 0.2%. The 0.2% figure belonged to the filer and non-filer columns in the version of Division XIV substituted by the Finance Act, 2019. - **Assuming the 0.25% fertilizer rate follows from the income tax list alone.** The proviso needs both lists. - **Treating the extra tax as a penalty that is simply lost.** It is collected under section 236G, and credit is given under section 236G(2). What cannot be recovered in practice depends on the distributor's own tax position for the year. ### What to check in the official text Read Division XIV of Part IV of the First Schedule with its proviso, and rule 1 of the Tenth Schedule with the Table under its third proviso, in the Income Tax Ordinance amended to 30 June 2026. Confirm the buyer's status on both Active Taxpayers' Lists on the date of sale, and note the omission of rule 1A by the Finance Act, 2026 if the buyer is on the list but filed late. ### Frequently asked #### What is the 236G rate on ordinary goods for a distributor on the Active Taxpayers List in tax year 2027? Division XIV of Part IV of the First Schedule sets 0.1% for sales other than fertilizers. On purchases of Rs. 1,000,000 that is Rs. 1,000. #### What is the 236G rate for a distributor who is not on the Active Taxpayers List? Serial 3 of the Table under the third proviso to rule 1 of the Tenth Schedule sets 2% on the gross amount of sale to distributors, dealers or wholesalers other than sale of fertilizer. Section 100BA gives the Tenth Schedule effect over the rest of the Ordinance. #### Who gets the 0.25% fertilizer rate? The proviso to Division XIV gives 0.25% on fertilizer sold to distributors, dealers or wholesalers who appear on both the Active Taxpayers' Lists, the one under the Sales Tax Act, 1990 and the one under the Income Tax Ordinance, 2001. Being on only one of them does not meet the words of the proviso. ### Citations - [Income Tax Ordinance, 2001, section 236G (Advance tax on sales to distributors, dealers and wholesalers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236g-advance-tax-on-sales-to-distributors-dealers-and-wholesalers), as amended to 2026-06-30: "dealers and wholesalers, shall collect advance tax at the rate specified in Division XIV of Part IV of the First Schedule, from the aforesaid person to whom such sales have been made." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XIV (Advance tax on sale to distributors, dealers or wholesalers), Table and proviso](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 and its third proviso, Table serial 3 (Section 236G)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rules 3 and 4 (provisional assessment, and adjustment where returns are filed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "(2) The provisions of the Tenth Schedule shall have effect notwithstanding anything to the contrary contained in this Ordinance." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## If the manufacturer paid sales tax on the printed retail price of Third Schedule goods, does a distributor charge sales tax or further tax again? Source: https://qanoondigest.com/faq/wholesalers-distributors/third-schedule-goods-distributor-sales-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 3(2)(a) of the Sales Tax Act, 1990 charges taxable supplies of Third Schedule goods at eighteen per cent of the printed retail price, not only the manufacturer's supply. No provision frees a distributor's resale, but section 7 lets it deduct the tax on its purchase invoice. Further tax under section 3(1A) is added on top. **Applies to:** Registered distributors and wholesalers in Pakistan who resell branded consumer goods listed in the Third Schedule to the Sales Tax Act. Branded consumer goods in Pakistan, from soap and shampoo to biscuits, tea and juices, carry a printed retail price and a printed sales tax amount. That printing is a feature of the Third Schedule to the Sales Tax Act, 1990. FMCG distributors then ask whether their own sale to shops is taxed again, and whether further tax applies on top. The Act gives a clear rule for the rate and the price, and is less explicit about the stages after the manufacturer. ### What does the law say? **The charge.** Section 3(2)(a) says that, notwithstanding section 3(1), "taxable supplies and import of goods specified in the Third Schedule shall be charged to tax at the rate of eighteen per cent of the retail price". If the goods are also in the Eighth Schedule, its rates apply instead. The retail price and the amount of sales tax must be "legibly, prominently and indelibly printed or embossed by the manufacturer" (or the importer, for imported goods) on each article, packet, container or label. **The meaning of retail price.** Clause (27) of section 2 defines it as the price fixed by the manufacturer, or importer for imported goods, "inclusive of all duties, charges and taxes (other than sales tax)" at which the brand or variety is sold to the general body of consumers. Where more than one price is fixed for the same brand or variety, the highest applies. Provisos let the Board specify zones for the highest retail price and fix retail prices by notification. For imported Third Schedule goods, the retail price cannot be less than 130 percent of the customs value including customs duties and federal excise duty. **Who pays.** Section 3(3)(a) puts liability for tax on a supply of goods on "the person making the supply". ### Which goods are in the Third Schedule? The source text of the Act to 30 June 2026 lists serial numbers 1 to 75, some omitted. Examples of entries in force include fruit juices, ice cream, aerated waters, cigarettes, toilet soap, detergents, shampoo, toothpaste, tea, powder drinks, toilet and tissue paper, branded spices in retail packing, cement in retail packing, household electrical and gas appliances, paints in retail packing, tyres, motorcycles and branded biscuits in retail packing. Serial numbers 56 to 75 were added through the Finance Act, 2026 and cover items such as edible fats and oils, sugar confectionery, pasta, sauces, milk products, footwear, crockery, household utensils and ceramic sanitary products, each as described in its entry. A note at the end says a higher rate notified by the Federal Government continues after inclusion. ### Does the distributor charge sales tax again? The words of section 3(2)(a) apply to "taxable supplies" of Third Schedule goods. They are not limited to the manufacturer's supply; only the duty to print the price is placed on the manufacturer. A registered distributor reselling those goods is making a taxable supply under clause (41) of section 2. The Act contains no provision that expressly takes a distributor's later supply of Third Schedule goods outside tax, and none that sets out how the distributor's invoice should show it. What the Act does provide is the input tax mechanism. Section 7(1) lets the distributor deduct input tax paid on its purchases from its output tax. If the distributor's output tax on a carton is worked on the same printed retail price as the manufacturer's, the two amounts are equal and the net sales tax on that carton is nil. The Sales Tax Rules point the same way. Rule 18A(d) deals with how the provisional return rule treats invoices for Third Schedule "items" issued to "a distributor, or a wholesaler, or a retailer, by a manufacturer". That rule only makes sense if those buyers carry such invoices into their own returns as purchases. ### Worked example (illustrative figures) Awan Distributors in Rawalpindi buys 1,000 cartons of branded biscuits in retail packing (serial number 47) from a registered manufacturer. The figures are invented. 1. Printed retail price per carton, excluding sales tax: Rs. 1,000. Printed sales tax at 18%: Rs. 180. 2. Manufacturer's tax on 1,000 cartons: 1,000 x Rs. 180 = Rs. 180,000. This is Awan's input tax. 3. Awan resells all 1,000 cartons to registered, active shops. Output tax at 18% of the retail price: 1,000 x Rs. 180 = Rs. 180,000. 4. Net sales tax: Rs. 180,000 minus Rs. 180,000 = nil, before any limit on input tax. ### What about further tax? Section 3(1A) adds further tax at four percent "in addition to" the rates in sub-sections (1), (1B), (2), (5), (6) and section 4. Sub-section (2) is on that list, so on the text further tax applies when a distributor supplies Third Schedule goods to an unregistered or non-active buyer. The Act does not exclude later stages from it, but the Federal Government can exclude supplies by notification, and any such notification is outside this corpus. The Act does not say what "value" means for further tax on Third Schedule goods. Continuing the example, if 400 cartons went to unregistered shops at a selling price of Rs. 850 each excluding tax, four percent could be read as 4% x Rs. 340,000 = Rs. 13,600 on the selling price, or 4% x Rs. 400,000 = Rs. 16,000 on the retail price. This page does not choose between those readings. ### Common mistakes - **Treating printed tax as the end of the chain.** The Act does not say that; the distributor's resale is still a taxable supply on the text. - **Taxing the resale on a lower selling price.** Section 3(2)(a) charges on the retail price, not the distributor's trade price. - **Forgetting new entries.** Many food, household and personal care goods joined the Schedule through the Finance Act, 2026. ### What to check in the official text Read section 3(1A), (2)(a) and (3)(a), clauses (27) and (41) of section 2, section 7 and the Third Schedule in the Sales Tax Act as amended to 30 June 2026, and rule 18A of the Sales Tax Rules, 2006. Check any Board notification fixing retail prices or zones, and any Federal Government notification under section 3(1A) or section 3(2), since none is held in this corpus. ### Frequently asked #### Is a distributor's sale of Third Schedule goods outside sales tax because the manufacturer already paid? The Act does not say so. Section 3(2)(a) applies to taxable supplies of Third Schedule goods without naming only the manufacturer, and the distributor deducts the tax on its purchase invoice as input tax under section 7(1). Whether a notification or Board order treats the later stage differently is outside this corpus. #### Does further tax apply to Third Schedule goods sold to unregistered shops? Section 3(1A) adds further tax at four percent in addition to the rate in section 3(2), among others, so on the text it applies when the buyer is unregistered or not active. The Act does not say whether four percent is worked on the retail price or on the value of supply for these goods. #### Which goods did the Finance Act, 2026 add to the Third Schedule? The consolidated Act shows serial numbers 56 to 75 added through the Finance Act, 2026. They include vegetable and animal fats and oils, sugar confectionery, pasta, sauces, milk products, footwear, crockery and household utensils, where sold in retail packing or put up for retail sale as each entry states. ### Citations - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "specified in the Third Schedule shall be charged to tax at the rate of" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“retail price”, with reference to the Third Schedule, means the price fixed by the manufacturer" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Third Schedule (see clause (a) of sub-section (2) of section 3), serial numbers 1 to 75](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 7 (Determination of tax liability)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#7-determination-of-tax-liability), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, Rule 18A, clause (d), and the Explanation on "items" pertaining to the Third Schedule](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf --- ## What must a sales tax invoice issued by a wholesaler or distributor show? Source: https://qanoondigest.com/faq/wholesalers-distributors/sales-tax-invoice-details-distributor Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 23(1) of the Sales Tax Act, 1990 requires a serially numbered tax invoice, in Urdu or English, at the time of supply, showing the supplier's and recipient's name, address and registration number, the date, description and quantity, value exclusive of tax, sales tax, and value inclusive of tax. Only one invoice may be issued per supply. **Applies to:** Registered wholesalers, distributors and dealers who issue sales tax invoices on taxable or exempt supplies of goods. A sales tax invoice is the document that carries tax from one business to the next. The seller's invoice is the buyer's evidence for input tax under section 7(2), so a wholesaler's invoice has to satisfy section 23 of the Sales Tax Act, 1990 for its customers as well as for itself. ### What particulars does section 23(1) require? Section 23(1) requires a registered person making a taxable supply to issue a serially numbered tax invoice at the time of supply of goods, in Urdu or English, containing: | Clause | Particular | | --- | --- | | (a) | Name, address and registration number of the supplier | | (b) | Name, address and registration number of the recipient, and, for supplies by a manufacturer or importer to an unregistered distributor, the NIC or NTN of that distributor | | (c) | Date of issue of invoice | | (d) | Description and quantity of goods (for textile yarn and fabric, including count, denier and construction) | | (e) | Value exclusive of tax | | (f) | Amount of sales tax | | (g) | Value inclusive of tax | ### What did the Finance Act, 2026 change? The Finance Act, 2026 substituted the opening words so that a registered person making a taxable "as well as exempt supply" shall issue a tax invoice, including an advance receipt invoice, "bearing a verifiable and unique FBR invoice number". The consolidated text as printed keeps the older words "supply shall issue a serially numbered tax invoice" after the new expression, so the sentence does not read cleanly. The official PDF should be checked on this point. Two new provisos to clause (b) say that the Board may notify persons allowed to issue an advance receipt invoice within the notified system, and that the verifiable and unique FBR invoice number condition applies from the time the Board notifies. An Explanation defining "ordinary consumer" still sits under clause (b), although the current clause does not use that term. ### What other rules apply to the invoice? The provisos after clause (g) add three rules: 1. The Board may notify modified invoices for different persons or classes. 2. "Not more than one tax invoice shall be issued for a taxable supply." 3. Added by the Finance Act, 2025: where goods are transported or supplied, the registered person shall ensure the generation and linkage of the tax invoice with the e-Bilty generated under section 40C of the Sales Tax Act and section 83C of the Customs Act, 1969. Section 40C lets the Board specify persons or goods for electronic monitoring or tracking of production, sales, clearances and stocks, and sub-section (4) applies section 83C of the Customs Act mutatis mutandis. Section 83C(1) of the Customs Act (amended to 30 June 2025) requires any consignor, transporter, supplier or recipient causing inland movement of goods to electronically generate, carry, display or validate an e-bilty through the Cargo Tracking System. Section 23(2) says no person other than a registered person or a person paying retail tax shall issue an invoice. Sub-sections (3) to (6) cover electronic invoices, the Board's power over issuance and authentication, and integration with the Board's computerised system; the related page on electronic invoicing covers those. ### Worked example (illustrative figures) Hamza Traders, a registered distributor of detergents in Hyderabad, delivers 200 cartons by truck to Bilal Store, a registered retailer. The amounts are invented. The example assumes the goods are taxed at the standard rate in section 3(1), "eighteen per cent of the value", with no special rate or exemption applying. | Invoice field | Entry | | --- | --- | | Supplier (a) | Hamza Traders, its address and registration number | | Recipient (b) | Bilal Store, its address and registration number | | Date (c) | 14 October 2026 | | Description and quantity (d) | Detergent powder 1 kg, 200 cartons | | Value exclusive of tax (e) | Rs. 400,000 | | Sales tax (f) | Rs. 400,000 x 18% = Rs. 72,000 | | Value inclusive of tax (g) | Rs. 400,000 + Rs. 72,000 = Rs. 472,000 | Because the goods move by truck, the third proviso requires the invoice to be linked to the e-Bilty. Hamza Traders issues one invoice for this supply, not a second one for the same delivery. ### What if the invoice is missing a particular? For the buyer, section 7(2)(i) requires a tax invoice in its name and bearing its registration number before input tax is deducted. For a seller that supplies unregistered distributors, section 8(1)(m) disallows input tax attributable to those supplies, on a pro-rata basis, where the invoices do not bear the recipient's NIC or NTN as section 23 requires. ### Common mistakes - **Leaving out the buyer's registration number.** Clause (b) requires it, and the buyer needs it under section 7(2)(i). - **Issuing a second invoice for the same supply.** The second proviso to clause (g) forbids it. - **Treating e-Bilty as a transporter's matter only.** The third proviso places the linkage duty on the registered person supplying the goods. - **Assuming exempt supplies need no invoice.** The Finance Act, 2026 wording refers to taxable "as well as exempt" supply. ### What to check in the official text Read sections 3, 7, 8, 23 and 40C of the Sales Tax Act, 1990 as amended to 30 June 2026, and section 83C of the Customs Act, 1969. The date from which the verifiable FBR invoice number applies, any modified invoice formats, and e-Bilty procedures are set by Board notifications that this site does not hold. ### Frequently asked #### Does a distributor's invoice need a verifiable FBR invoice number? Section 23(1), as substituted by the Finance Act, 2026, refers to a tax invoice bearing a verifiable and unique FBR invoice number. A proviso says that condition applies from the time the Board notifies, so the start date depends on a Board notification. #### Can an unregistered wholesaler issue a sales tax invoice? No. Section 23(2) says no person other than a registered person or a person paying retail tax shall issue an invoice under section 23. #### When must the NIC or NTN of the buyer appear on the invoice? Clause (b) of section 23(1) requires the NIC or NTN of an unregistered distributor on supplies by a manufacturer or importer to that distributor. Section 8(1)(m) disallows input tax, pro rata, attributable to supplies to unregistered distributors where the invoices do not bear it. ### Citations - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "Provided further that not more than one tax invoice shall be issued for a taxable supply" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 40C (Monitoring or Tracking by Electronic or other means)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#40c-monitoring-or-tracking-by-electronic-or-other-means), as amended to 2026-06-30: "the Board may, by notification in the official Gazette, specify any registered person or class of registered persons or any good or class of goods in respect of which monitoring or tracking of production, sales, clearances, stocks or any other related activity may be implemented through electronic or other means" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8 (Tax credit not allowed)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8-tax-credit-not-allowed), as amended to 2026-06-30: "on pro-rata basis, for which sale invoices do not bear the NIC number or NTN as the case may be, of the recipient as stipulated in section 23." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Customs Act, 1969, section 83C (Cargo Tracking System and e-Bilty mechanism)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#83c-cargo-tracking-system-and-e-bilty-mechanism), as amended to 2025-06-30: "shall be required to electronically generate, carry, display or validate an e-bilty through the Cargo Tracking System." Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Sales Tax Act, 1990, section 7 (Determination of tax liability)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#7-determination-of-tax-liability), as amended to 2026-06-30: "(2) A registered person shall not be entitled to deduct input tax from output tax unless,-" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "(1) Subject to the provisions of this Act, there shall be charged, levied and paid a tax known as sales tax at the rate of" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What must a distributor's sales tax invoice contain, including the CNIC or NTN of an unregistered buyer? Source: https://qanoondigest.com/faq/wholesalers-distributors/sales-tax-invoice-particulars-section-23 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 23(1) of the Sales Tax Act, 1990 requires a serially numbered tax invoice showing both parties' name, address and registration number, date, description and quantity, value before tax, sales tax and value after tax. On a manufacturer's or importer's supply to an unregistered distributor, its NIC or NTN is required, and section 8(1)(m) denies related input tax where missing. **Applies to:** Registered distributors, wholesalers and dealers who issue sales tax invoices to retailers, sub-distributors and other buyers, registered or not. A sales tax invoice is the document on which both sides of a sale rely. The supplier records output tax from it, and the buyer can only claim input tax if it holds one. Section 23 of the Sales Tax Act, 1990 fixes what goes on it, and section 8 attaches a cost to leaving out one particular item for unregistered distributors. ### What particulars does section 23 require? Section 23(1) requires a registered person making a supply to issue a serially numbered tax invoice at the time of supply of goods, in Urdu or English, containing these particulars: | Clause | Particular | |---|---| | (a) | Name, address and registration number of the supplier | | (b) | Name, address and registration number of the recipient, and for supplies by a manufacturer or importer to an unregistered distributor, the NIC or NTN of that distributor | | (c) | Date of issue of invoice | | (d) | Description and quantity of goods (with count, denier and construction for textile yarn and fabric) | | (e) | Value exclusive of tax | | (f) | Amount of sales tax | | (g) | Value inclusive of tax | The provisos and later subsections add further rules: - **One invoice per supply.** Not more than one tax invoice shall be issued for a taxable supply. - **Modified invoices.** The Board may notify modified invoices for different persons or classes of persons. - **e-Bilty linkage.** Added by the Finance Act, 2025: where goods are transported or supplied, the registered person must ensure the tax invoice is generated and linked with the e-Bilty generated under section 40C. Section 40C(4) applies section 83C of the Customs Act, 1969 with necessary changes; the detailed e-Bilty procedure is not set out in the text held here. - **Who may issue.** Section 23(2) says no one other than a registered person or a person paying retail tax may issue an invoice under this section. - **Electronic invoicing.** Sections 23(3) to (6) let the Board require electronic invoices, prescribe how invoices are issued and authenticated, and require integration with the Board's computerised system for real-time reporting. ### What changed in 2026? The Finance Act, 2026 substituted the opening words of section 23(1). They now refer to a registered person making "a taxable as well as exempt supply" issuing a tax invoice, including an advance receipt invoice, "bearing a verifiable and unique FBR invoice number". A proviso says that number requirement applies from the time the Board notifies, and another lets the Board notify who may issue advance receipt invoices. The consolidated text still carries the older words "supply shall issue a serially numbered tax invoice" after the new expression, so the sentence reads awkwardly. This page does not try to resolve that drafting. ### How does the NIC or NTN rule affect input tax? Section 8(1)(m) bars input tax on "the input goods or services attributable to supplies made to un-registered distributor, on pro-rata basis, for which sale invoices do not bear the NIC number or NTN as the case may be, of the recipient as stipulated in section 23." In plain terms, if part of a registered person's sales goes to unregistered distributors on invoices without their NIC or NTN, a matching proportion of that person's own input tax is disallowed. The Act does not set out the pro-rata formula. There is a gap worth knowing. Section 23(1)(b) names the NIC or NTN requirement only "in case of supplies by manufacturer or importer to unregistered distributor". Section 8(1)(m) is not limited to manufacturers or importers. The text does not state directly whether a distributor that neither makes nor imports goods, selling to an unregistered sub-distributor, must show the NIC or NTN. Recording it removes the question. ### Worked example (illustrative figures) Al-Madina Distributors, registered in Karachi, supplies 200 lengths of electrical conduit pipe at Rs. 900 each to a registered retailer in Hyderabad. The quantities and prices are invented. Assume the goods are taxed at the standard rate of eighteen per cent under section 3(1) and fall under no special schedule. 1. Value exclusive of tax: 200 x Rs. 900 = Rs. 180,000. 2. Sales tax: Rs. 180,000 x 18 / 100 = Rs. 32,400. 3. Value inclusive of tax: Rs. 180,000 + Rs. 32,400 = Rs. 212,400. The invoice carries a serial number, Al-Madina's name, address and registration number, the retailer's name, address and registration number, the date, "conduit pipe, 200 lengths", and the three amounts above. Because the goods travel by truck, the invoice is linked to the e-Bilty. If the same load went to an unregistered sub-distributor, the invoice would also carry that buyer's NIC or NTN, and section 3(1A) further tax would come into play; see the related page on further tax. ### Common mistakes - **Leaving out the recipient's details on wholesale sales.** Clause (b) applies to every tax invoice. The Explanation after clause (b) defines "ordinary consumer", but that term no longer appears in the substituted clause (b). - **Issuing a second invoice to correct the first.** The second proviso forbids more than one invoice per taxable supply. - **Assuming the buyer's input tax is safe on any paper invoice.** Section 7(2)(i) requires the buyer to hold a tax invoice in its name and bearing its registration number. ### What to check in the official text Read sections 7, 8, 23 and 40C of the Sales Tax Act, 1990 as amended to 30 June 2026. Board notifications on modified invoices, electronic invoicing, the start date for the unique FBR invoice number, and the e-Bilty procedure under section 83C of the Customs Act, 1969 are not part of the text held here. ### Frequently asked #### Does the law say CNIC or NIC? Section 23(1)(b) and section 8(1)(m) both use the words "NIC or NTN". The text does not use the term CNIC. Which of the two numbers applies is left as "the case may" be. #### Can a distributor issue two invoices for the same delivery? No. The second proviso to section 23(1) says not more than one tax invoice shall be issued for a taxable supply. #### Must a distributor issue an invoice for exempt goods too? The opening words of section 23(1), as substituted by the Finance Act, 2026, refer to a registered person making a taxable as well as exempt supply issuing a tax invoice, including an advance receipt invoice, with a verifiable and unique FBR invoice number. A proviso says that number requirement applies from the time the Board notifies. ### Citations - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "name, address and registration number of the recipient and in case of supplies by manufacturer or importer to unregistered distributor, the NIC or NTN of such unregistered distributors, as the case may." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "the registered person shall ensure the generation and linkage of the tax invoice with the e-Bilty generated under section 40C of this Act and section 83C of the Customs Act, 1969." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8 (Tax credit not allowed)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8-tax-credit-not-allowed), as amended to 2026-06-30: "on pro-rata basis, for which sale invoices do not bear the NIC number or NTN as the case may be, of the recipient as stipulated in section 23." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 7 (Determination of tax liability)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#7-determination-of-tax-liability), as amended to 2026-06-30: "(2) A registered person shall not be entitled to deduct input tax from output tax unless,-" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 40C (Monitoring or Tracking by Electronic or other means)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#40c-monitoring-or-tracking-by-electronic-or-other-means), as amended to 2026-06-30: "the provisions of section 83C of the Customs Act, 1969 (IV of 1969) shall mutatis mutandis apply." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "(1) Subject to the provisions of this Act, there shall be charged, levied and paid a tax known as sales tax at the rate of" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## When do I have to charge 4% further tax on a sale to an unregistered buyer or one not on the active taxpayers list, and is it still in force? Source: https://qanoondigest.com/faq/wholesalers-distributors/further-tax-4-percent-unregistered-buyer Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 3(1A) of the Sales Tax Act, 1990, as amended to 30 June 2026, still charges further tax at four percent of the value of taxable supplies made to a buyer who has not obtained registration or is not an active taxpayer. It is added to the normal sales tax unless a Gazette notification excludes the supply. **Applies to:** Registered wholesalers and distributors in Pakistan who sell taxable goods to unregistered shops or to registered buyers who are not on the active taxpayers list. A wholesaler in Pakistan often sells to two kinds of shop at once: registered traders who can claim input tax, and small unregistered shops that cannot. The Sales Tax Act, 1990 treats the second kind of sale differently. On top of the normal sales tax, the supplier charges a further tax, and the text of the Act as amended to 30 June 2026 keeps that charge at four percent. ### What does the law say? Section 3(1A) reads, in the words of the Act, "where taxable supplies are made to a person who has not obtained registration number or he is not an active taxpayer, there shall be charged, levied and paid a further tax at the rate of four percent of the value". It is "in addition to" the rates in sub-sections (1), (1B), (2), (5) and (6) of section 3 and section 4. Three limits are built into the same sub-section: | Limit | What the text says | | --- | --- | | Section 8(6) | Section 3(1A) is "subject to" section 8(6), under which the Board can specify goods that a registered person cannot supply to an unregistered person at all | | Federal Government notification | The Federal Government "may, by notification in the official Gazette, specify the taxable supplies in respect of which the further tax shall not be charged" | | Taxable supplies only | Further tax attaches to taxable supplies, and clause (41) of section 2 excludes exempt supplies from that term | The footnotes to the consolidated Act show the history: section 3(1A) was inserted by the Finance Act, 2013, the words "or he is not an active taxpayer" were added by the Finance Act, 2022, and "four" replaced "three" through the Finance Act, 2023. ### Who counts as not an active taxpayer? Clause (1A) of section 2 defines an active taxpayer as a registered person who does not fall in any of these categories: 1. blacklisted, or registration suspended, under section 21; 2. fails to file the sales tax return under section 26 by the due date for two consecutive tax periods; 3. fails to file an income tax return under section 114 or a statement under section 115 of the Income Tax Ordinance, 2001 by the due date; 4. fails to file a quarterly or annual withholding statement under section 165 of that Ordinance. Section 21A lets the Board maintain an active taxpayers list in the manner prescribed by rules. Rule 12A(1) of the Sales Tax Rules, 2006 says a registered person who does not fulfil the conditions "shall automatically become a non-active taxpayer" and be removed from that list. Rule 12A(2) then bars a non-active taxpayer from issuing sales tax invoices and from claiming input tax or refund. One drafting point: rule 12A(1), in the Rules as amended to 30 June 2025, refers to "clause (1) of section 2". The Finance Act, 2025 renumbered the definition of active taxpayer as clause (1A). The Rules text in this corpus has not caught up with that renumbering. ### How does it work in practice? For each sale, the supplier checks two things about the buyer: is there a registration number, and is the buyer on the active taxpayers list? If the answer to either is no, and the goods are taxable and not excluded by notification, section 3(1A) adds four percent of the value. The supplier collects it and pays it with its return for the tax period. Whether input tax can be set against it is a separate question, covered on the related page about further tax and input tax. ### Worked example (illustrative figures) Bilal Traders, a registered distributor in Multan, supplies the same goods in one day to two shops. Assume the goods are charged at the standard rate of eighteen per cent under section 3(1), are not listed in the Third Schedule and are not covered by any exclusion notification. The amounts are invented. | Step | Shop A: registered, active | Shop B: unregistered | | --- | --- | --- | | Value of supply | Rs. 500,000 | Rs. 500,000 | | Sales tax at 18% | Rs. 90,000 | Rs. 90,000 | | Further tax at 4% | nil | Rs. 20,000 | | Invoice total | Rs. 590,000 | Rs. 610,000 | Check: 500,000 x 18% = 90,000; 500,000 x 4% = 20,000; 500,000 + 90,000 + 20,000 = 610,000. ### What if the buyer becomes non-active after I invoiced? The Act ties further tax to the time a taxable supply is made to a person who "is not an active taxpayer". The Act does not say how a supplier is to treat a buyer whose status changes between order and delivery. Clause (44) of section 2 fixes the time of supply as delivery or payment, whichever is earlier, which is the natural point to check status, but the Act does not state that link in terms. ### Common mistakes - **Assuming further tax was abolished.** The consolidated Act to 30 June 2026 still contains section 3(1A) at four percent. Any exclusion would come from a Federal Government notification, and none is held in this corpus. - **Charging it to every registered buyer.** An active registered buyer is outside section 3(1A). - **Ignoring zero-rated goods.** Section 4 opens "Notwithstanding the provisions of section 3 except those of sub-section (1A)", so zero-rating does not remove further tax. ### What to check in the official text Read section 3(1A), clauses (1A), (41) and (44) of section 2, and sections 4, 8(6) and 21A of the Sales Tax Act as amended to 30 June 2026, and rule 12A of the Sales Tax Rules, 2006. Check any Federal Government notification under section 3(1A) and any Board notification under section 8(6) for your goods, since neither is held in this corpus. ### Frequently asked #### Is further tax still 4% for sales made after 1 July 2026? Yes. Section 3(1A) of the Sales Tax Act as amended to 30 June 2026 still reads four percent. The word four replaced three through the Finance Act, 2023, and the consolidated text to 30 June 2026 shows no later change to the rate. #### Do I charge further tax to a registered buyer? Only if that buyer is not an active taxpayer. Clause (1A) of section 2 treats a registered person as not active if, for example, the person is blacklisted or suspended, or has missed two consecutive sales tax returns, the income tax return, or a withholding statement. #### Does further tax apply to zero-rated goods? Section 4 zero-rates certain goods notwithstanding section 3, except sub-section (1A). Section 3(1A) also names section 4 among the rates further tax is added to, so on the text further tax is still charged when such goods go to an unregistered or non-active buyer. ### Citations - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "where taxable supplies are made to a person who has not obtained registration number" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“active taxpayer” means a registered person who does not fall in any of the following categories" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 21A (Active taxpayers list)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#21a-active-taxpayers-list), as amended to 2026-06-30: "The Board shall have the power to maintain active taxpayers list in the manner as may be prescribed by rules" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 12A (Non-active taxpayer)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#12a-non-active-taxpayer), as amended to 2025-06-30: "shall automatically become a non-active taxpayer and his name shall be removed from the active taxpayers list maintained by the Board." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, section 4 (Zero rating)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#4-zero-rating), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8 (Tax credit not allowed)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8-tax-credit-not-allowed), as amended to 2026-06-30: "specify any goods or class of goods which a registered person cannot supply to any person who is not registered" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Which purchases can a wholesaler not claim input tax on? Source: https://qanoondigest.com/faq/wholesalers-distributors/input-tax-not-allowed-section-8 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 8(1) of the Sales Tax Act, 1990 bars input tax on goods not used for taxable supplies, fake invoices, tax the supplier has not deposited, purchases not verifiable in the supply chain, personal consumption, and vehicles, furniture and office equipment not bought for resale. Section 7(2) also requires an invoice in the buyer's own name and registration number. **Applies to:** Wholesalers, distributors and dealers registered under the Sales Tax Act, 1990 who deduct input tax from output tax in their monthly returns. A registered wholesaler pays sales tax on what it buys and charges sales tax on what it sells. The difference is paid to the government, but only purchases that pass sections 7 and 8 of the Sales Tax Act, 1990 count as input tax. This page lists the purchases that fail. ### What must a purchase have before input tax can be claimed? Section 7(1) gives a registered person the right to deduct input tax paid or payable during the tax period for taxable supplies made, or to be made, from output tax. It is subject to sections 8, 8B and 73. Section 7(2) adds conditions. For a local purchase, the buyer must hold a tax invoice "in his name and bearing his registration number". For imported goods, the buyer must hold a bill of entry or goods declaration in his name showing his sales tax registration number, cleared by customs. For goods bought at auction, a treasury challan in his name and registration number showing payment of sales tax. On timing, the proviso to section 7(1) says input tax not deducted in the relevant period may be claimed in the return for any of the six succeeding tax periods. ### Which purchases does section 8 bar? Section 8(1) opens with "Notwithstanding anything contained in this Act", so it overrides the general right in section 7. A registered person cannot reclaim or deduct input tax on: | Clause | What is barred | What it means for a wholesaler | | --- | --- | --- | | (a) | Goods or services used or to be used for any purpose other than taxable supplies | Stock sold as exempt goods, or used for something other than taxable supplies | | (b) | Goods or services the Federal Government specifies by notification | Depends on notifications this site does not hold | | (c) | Goods covered by a specified sub-section of the charging section | Narrow; read clause (c) itself | | (ca) | Goods or services where the supplier has not deposited the sales tax in the Government treasury | The buyer carries the risk of the supplier's non-payment | | (caa) | Purchases where CREST shows a discrepancy, or input tax not verifiable in the supply chain | Mismatches in the system block the claim | | (d) | Fake invoices | No claim on an invoice that is not genuine | | (e) | Purchases where the person fails to give information the Board requires by notification | Tied to a Board notification | | (f) | Goods and services not related to the taxable supplies made | Items unconnected to the trading business | | (g) | Goods and services acquired for personal or non-business consumption | Household purchases through the business | | (h) | Goods used in, or permanently attached to, immoveable property, such as building materials, paints, fittings, pipes, wires and cables | Warehouse construction materials, unless bought for resale | | (i) | Vehicles in Chapter 87 of the First Schedule to the Customs Act, 1969 and their parts, electrical and gas appliances, furniture, furnishings, office equipment (excluding electronic cash registers) | Delivery vans, office furniture, computers, unless bought for sale or re-sale | | (j) | Services where the provincial sales tax law bars input tax adjustment | Governed by provincial law, outside this site | | (k) | Agricultural machinery or equipment taxed at 7% under the Eighth Schedule | Rarely relevant to a trader | | (l) | From a date the Board notifies, goods and services the supplier has not declared in his return, or where he has not paid the tax shown in his return | The buyer's claim depends on the supplier's return | | (m) | Input attributable to supplies made to an unregistered distributor, pro rata, where the sale invoices do not bear the recipient's NIC or NTN as section 23 requires | Applies where the seller supplies unregistered distributors | ### What if I sell both taxable and exempt goods? Section 8(2) says a person dealing in taxable and non-taxable supplies "can reclaim only such proportion of the input tax as is attributable to taxable supplies in such manner as may be specified by the Board." The method of apportionment is set by the Board, not in section 8 itself. ### Worked example (illustrative figures) Nadeem Brothers, a registered wholesaler of cooking oil and soap in Gujranwala, lists its purchases for one month. The amounts are invented. | Purchase | Input tax on invoice | Admissible? | Reason | | --- | --- | --- | --- | | Soap cartons for resale, invoice in firm's name and registration number | Rs. 180,000 | Yes, subject to section 8B | Meets section 7(2)(i) | | Cooking oil for resale, supplier later found not to have deposited the tax | Rs. 90,000 | No | Section 8(1)(ca) | | Office chairs and a desk | Rs. 12,000 | No | Section 8(1)(i), not for resale | | Refrigerator for the owner's home | Rs. 15,000 | No | Section 8(1)(g) and (i) | Step by step: 1. Total input tax on invoices: Rs. 180,000 + Rs. 90,000 + Rs. 12,000 + Rs. 15,000 = Rs. 297,000. 2. Inadmissible under section 8(1): Rs. 90,000 + Rs. 12,000 + Rs. 15,000 = Rs. 117,000. 3. Input tax that can be claimed: Rs. 297,000 - Rs. 117,000 = Rs. 180,000. The Rs. 180,000 is then still subject to the 90% ceiling in section 8B and the payment rules in section 73. ### What if the invoice is genuine but I paid in cash? Section 7(1) is subject to section 73. Payments above the section 73 threshold must go through the banking channel, and section 73(3) says the amount "shall be deposited in the business bank account of the supplier". The related page on cash payments covers this. ### Common mistakes - **Claiming on furniture, computers or vehicles used in the business.** Section 8(1)(i) bars these unless they are acquired for sale or re-sale. - **Assuming a proper invoice is enough.** Clauses (ca), (caa) and (l) make the claim depend on what the supplier deposited and declared. - **Claiming on invoices in a proprietor's personal name.** Section 7(2)(i) requires the buyer's name and registration number. - **Forgetting apportionment.** A wholesaler of both exempt and taxable goods can reclaim only the share attributable to taxable supplies under section 8(2). ### What to check in the official text Read sections 7, 8, 8B, 23 and 73 of the Sales Tax Act, 1990 as amended to 30 June 2026. Several clauses depend on instruments this site does not hold: notifications under section 8(1)(b), the Board's notified date for clause (l), the apportionment method under section 8(2), and provincial sales tax laws for clause (j). ### Frequently asked #### Can a wholesaler claim input tax on a purchase invoice made out in the owner's personal name? Section 7(2)(i) requires the buyer to hold a tax invoice in his name and bearing his registration number. An invoice that does not match the registered person's name and registration number does not meet that condition. #### Can I claim input tax on a delivery motorcycle or a shop air conditioner? Section 8(1)(i) bars input tax on vehicles in Chapter 87 of the First Schedule to the Customs Act, 1969, their parts, electrical and gas appliances, furniture, furnishings and office equipment other than electronic cash registers. The bar does not apply where those goods are acquired for sale or re-sale. #### How long do I have to claim input tax I missed? The proviso to section 7(1) allows input tax not deducted in the relevant period to be claimed in the return for any of the six succeeding tax periods. A tax period is ordinarily one month. ### Citations - [Sales Tax Act, 1990, section 8 (Tax credit not allowed)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8-tax-credit-not-allowed), as amended to 2026-06-30: "(2) If a registered person deals in taxable and non-taxable supplies, he can reclaim only such proportion of the input tax as is attributable to taxable supplies in such manner as may be specified by the Board." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 7 (Determination of tax liability)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#7-determination-of-tax-liability), as amended to 2026-06-30: "(2) A registered person shall not be entitled to deduct input tax from output tax unless,-" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 73 (Certain transactions not admissible)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#73-certain-transactions-not-admissible), as amended to 2026-06-30: "shall be deposited in the business bank account of the supplier" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8B (Adjustable input tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8b-adjustable-input-tax), as amended to 2026-06-30: "shall not be allowed to adjust input tax in excess of ninety per cent of the output tax for that tax period" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "Provided further that not more than one tax invoice shall be issued for a taxable supply" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## How do I tell whether a buyer is a wholesaler (236G) or a retailer (236H) when collecting advance tax? Source: https://qanoondigest.com/faq/wholesalers-distributors/wholesaler-or-retailer-236g-or-236h Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Start with who is selling. Section 236G covers only manufacturers and commercial importers selling to distributors, dealers and wholesalers. Section 236H covers sales to retailers, and sales by a distributor or dealer to another wholesaler. The Income Tax Ordinance defines distributor but not retailer or wholesaler; the Sales Tax Act defines all three. **Applies to:** Manufacturers, commercial importers, distributors and dealers whose customers include both shops selling to the public and traders buying for resale. The first test is not the buyer at all but the seller. Section 236G of the Income Tax Ordinance, 2001 only ever applies to a manufacturer or commercial importer. Section 236H applies to a wider group of sellers and turns on whether the buyer is a retailer, or, in one limb, another wholesaler buying from a distributor or dealer. ### What does the law say? **Section 236G** says every manufacturer or commercial importer, "at the time of sale to distributors, dealers and wholesalers", shall collect advance tax at the rate in Division XIV of Part IV of the First Schedule from the buyer. Credit for that tax is allowed to the distributor, dealer or wholesaler for the tax year in which it was collected. **Section 236H** says every manufacturer, distributor, dealer, wholesaler or commercial importer, at the time of sale to retailers, "and every distributor or dealer to another wholesaler in respect of the said sectors", shall collect advance tax at the rate in Division XV of Part IV. Credit is allowed to the retailer. The rates for tax year 2027 (1 July 2026 to 30 June 2027) in the First Schedule are: | Section | Seller | Buyer | Rate | | --- | --- | --- | --- | | 236G | Manufacturer or commercial importer | Distributor, dealer or wholesaler | 0.7% fertilizers; 0.1% other goods | | 236G proviso | Same | Fertilizer distributor, dealer or wholesaler on both active taxpayers' lists | 0.25% | | 236H | Manufacturer, distributor, dealer, wholesaler or commercial importer | Retailer | 0.5% of gross amount of sales | | 236H second limb | Distributor or dealer | Another wholesaler | 0.5% (same Division) | ### What does the law define, and what does it leave out? The Ordinance defines only one of the terms. Section 2(18A) says a distributor "means a person appointed by a manufacturer, importer or any other person for a specified area to purchase goods from him for further supply". There is no definition of retailer, wholesaler or dealer in section 2 of the Ordinance. The Sales Tax Act, 1990 defines all three in its own section 2: - **Distributor, clause (7):** the same appointed-for-an-area wording, plus "a person who in addition to being a distributor is also engaged in supply of goods as a wholesaler or a retailer". - **Retailer, clause (28):** a person "supplying goods to general public for the purpose of consumption". A proviso requires a person who combines import, manufacture or production with retail to notify and advertise wholesale and retail prices separately, and declare the addresses of retail outlets. - **Wholesaler, clause (47):** "includes a dealer" and means any person who carries on the business of buying and selling goods by wholesale, or supplying or distributing goods by wholesale, and includes a person supplying taxable goods to a person who deducts income tax at source under the Ordinance. Neither section 236G nor section 236H says that the Sales Tax Act definitions apply to them. Using those definitions as a guide is a reading, not a rule stated in the Ordinance. This page does not resolve that gap. ### How does it work in practice? Ask three questions in order: 1. **Am I a manufacturer or commercial importer?** If not, section 236G never applies to your sales. 2. **Is my buyer supplying goods to the general public for consumption?** If yes, the sale looks like a sale to a retailer under 236H. 3. **Is my buyer another wholesaler, and am I a distributor or dealer?** If yes, the second limb of 236H may apply. The second limb has a drafting problem. The words "in respect of the said sectors" once pointed to a list of sectors (pharmaceuticals, electronics, sugar, cement and others) in section 236H(1). The consolidated text shows that list was omitted by the Finance Act, 2024. The phrase "the said sectors" now has nothing to refer back to. The Ordinance does not say how the limb applies after that omission. ### Worked example (illustrative figures) A biscuit manufacturer in Lahore sells in one month: | Buyer | Sale value | Section | Rate | Tax collected | | --- | --- | --- | --- | --- | | Bilal Traders, its appointed distributor for Gujranwala | Rs. 5,000,000 | 236G | 0.1% | Rs. 5,000 | | A single shop buying direct | Rs. 400,000 | 236H | 0.5% | Rs. 2,000 | Arithmetic: 5,000,000 × 0.1% = 5,000. 400,000 × 0.5% = 2,000. Bilal Traders then sells: | Buyer | Sale value | Section | Rate | Tax collected | | --- | --- | --- | --- | --- | | Kiryana shops selling to households | Rs. 3,000,000 | 236H | 0.5% | Rs. 15,000 | | Rehman Wholesale, which resells to smaller shops | Rs. 1,000,000 | 236H second limb, if it applies | 0.5% | Rs. 5,000 | Arithmetic: 3,000,000 × 0.5% = 15,000. 1,000,000 × 0.5% = 5,000. The second row depends on how "the said sectors" is read, as explained above. Bilal Traders does not collect under section 236G on either sale, because it is not a manufacturer or commercial importer. ### What if ...? **What if one buyer does both wholesale and retail?** Neither section says how to split a sale to a buyer who both resells and sells to the public. The Sales Tax Act definition of distributor expressly covers a person who is also a wholesaler or retailer, but that definition is not written into sections 236G or 236H. **What if the buyer is a Tier-1 retailer?** Tier-1 status is a Sales Tax Act concept under section 2(43A). Section 236H does not distinguish Tier-1 retailers from other retailers; it refers only to "retailers". **What if I sell to a company or other large buyer?** The buyer may have its own duty to deduct tax from the payment it makes to you under a different withholding section, with different rates. That is covered on a separate page in this category. ### Common mistakes - **Distributors collecting 236G.** Section 236G(1) names only the manufacturer or commercial importer as collector. - **Assuming the Ordinance defines "retailer".** It does not. Only "distributor" is defined, in section 2(18A). - **Using old sector lists.** Guidance written before the Finance Act, 2024 lists sectors in section 236H. The consolidated text shows that list omitted. - **Charging 236H on the net of tax.** Division XV applies the rate "on the gross amount of sales". ### What to check in the official text Read sections 236G and 236H, clause (18A) of section 2 of the Ordinance, and clauses (7), (28) and (47) of section 2 of the Sales Tax Act. Check Divisions XIV and XV of Part IV of the First Schedule for the rates, and the footnotes to section 236H showing the Finance Act, 2024 omission. Higher rates for buyers not on the active taxpayers' list are covered on a separate page. ### Frequently asked #### Does the Income Tax Ordinance define retailer and wholesaler for sections 236G and 236H? No. Section 2(18A) of the Ordinance defines distributor, but the Ordinance does not define retailer or wholesaler for these two sections. The Sales Tax Act, 1990 defines distributor, retailer and wholesaler in section 2, but that Act does not say its definitions apply to the Ordinance. #### I am a distributor. Do I ever collect tax under section 236G? Not as a seller. Section 236G(1) places the duty to collect only on a manufacturer or commercial importer. A distributor is on the paying side of 236G when it buys from a manufacturer or importer, and on the collecting side of 236H when it sells to retailers. #### What rates apply under the two sections for tax year 2027? Division XIV of Part IV of the First Schedule sets 0.7% for fertilizers and 0.1% for other goods under section 236G, with 0.25% for fertilizer buyers on both active taxpayers' lists. Division XV sets 0.5% of the gross amount of sales under section 236H. ### Citations - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "(18A) “distributor” means a person appointed by a manufacturer, importer" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236G (Advance tax on sales to distributors, dealers and wholesalers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236g-advance-tax-on-sales-to-distributors-dealers-and-wholesalers), as amended to 2026-06-30: "dealers and wholesalers, shall collect advance tax at the rate specified in Division XIV of Part IV of the First Schedule, from the aforesaid person to whom such sales have been made." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236H (Advance tax on sales to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236h-advance-tax-on-sales-to-retailers), as amended to 2026-06-30: "every distributor or dealer to another wholesaler in respect of the said sectors" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“distributor” means a person appointed by a manufacturer, importer or any other person for a specified area to purchase goods from him for further supply and includes a person who in addition to being a distributor is also engaged in supply of goods as a wholesaler or a retailer;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "means any person who carries on, whether regularly or otherwise, the business of buying and selling goods by wholesale" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XIV (Advance tax on sale to distributors, dealers or wholesalers) and Division XV (Advance tax on sale to retailers)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- # Restaurants, cafes and bakeries Tax on food businesses: sales tax, services tax, withholding and record keeping. ## Can I adjust the income tax on my restaurant's commercial electricity bill? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/restaurant-electricity-bill-income-tax-235 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Partly, unless you are a company. Under section 235(4) of the Income Tax Ordinance, for a taxpayer other than a company, tax collected on bills up to Rs. 360,000 a year is minimum tax with no refund, and tax on the monthly bill above Rs. 30,000 is adjustable. For a company, all of it is adjustable. **Applies to:** Owners of restaurants, cafes, bakeries and commercial kitchens in Pakistan who pay a commercial electricity bill, whether as a sole proprietor, an association of persons or a company. Only part of it, if you run the restaurant or bakery as an individual or a partnership. Section 235(4) of the Income Tax Ordinance, 2001 splits the tax collected through a commercial electricity bill into a minimum tax portion, which cannot be refunded, and an adjustable portion. A company is treated differently: all the tax is adjustable against its tax liability. ### What does the law say? Section 235(1) requires advance tax to be collected, at the rates in Division IV of Part IV of the First Schedule, on the amount of the electricity bill of a commercial or industrial consumer (and a domestic consumer, subject to a proviso for those on the Active Taxpayers' List). Section 235(2) makes the person preparing the bill charge it in the same way as the electricity charges. Its Explanation says the bill means the bill inclusive of sales tax and all incidental charges. Section 235(4) then says: - **(a)** for a taxpayer other than a company, tax collected up to a bill amount of three hundred and sixty thousand rupees per annum shall be treated as minimum tax on the income of such persons, and no refund shall be allowed; - **(b)** for a taxpayer other than a company, tax collected on the monthly bill over and above thirty thousand rupees per month shall be adjustable; and - **(c)** for a company, tax collected shall be adjustable against tax liability. ### What are the rates for a commercial kitchen? Division IV of Part IV of the First Schedule, as amended to 30 June 2026, sets these rates for commercial and industrial consumers, measured on the gross amount of the bill. They apply in tax year 2027 (1 July 2026 to 30 June 2027). | Gross amount of monthly bill | Tax (commercial consumer) | |---|---| | Up to Rs. 500 | Rs. 0 | | Above Rs. 500, not above Rs. 20,000 | 10% of the amount | | Above Rs. 20,000 | Rs. 1,950 plus 12% of the amount exceeding Rs. 20,000 | Industrial consumers pay Rs. 1,950 plus 5% above Rs. 20,000. The Ordinance does not itself define which premises are commercial or industrial consumers. ### Worked example (illustrative figures) Bilal runs a bakery in Faisalabad as a sole proprietor. His commercial electricity bill, including sales tax and all charges, is Rs. 80,000 every month. The bill amount is invented; the rates and thresholds are those in section 235 and Division IV. **Tax charged on each month's bill:** 1. Amount above Rs. 20,000: 80,000 - 20,000 = Rs. 60,000 2. 12% of Rs. 60,000 = Rs. 7,200 3. Tax on the bill: 1,950 + 7,200 = Rs. 9,150 4. For twelve months: 9,150 x 12 = Rs. 109,800 **Splitting it under section 235(4):** The Ordinance does not print a formula for dividing the tax on one bill between clauses (a) and (b). One way to read the two clauses together is to work out the tax on the first Rs. 30,000 of the monthly bill (which adds up to Rs. 360,000 over a year) and treat the rest as adjustable: 1. Tax on a Rs. 30,000 bill: 1,950 + 12% of 10,000 = 1,950 + 1,200 = Rs. 3,150 2. Minimum tax portion for the year: 3,150 x 12 = Rs. 37,800 3. Adjustable portion per month: 9,150 - 3,150 = Rs. 6,000 4. Adjustable portion for the year: 6,000 x 12 = Rs. 72,000 5. Check: 37,800 + 72,000 = Rs. 109,800 If Bilal's bakery were instead owned by a private limited company, section 235(4)(c) would make the full Rs. 109,800 adjustable against the company's tax liability. ### What if my bill is small? Take a cafe with a commercial bill of Rs. 25,000 a month (illustrative). Tax is 1,950 + 12% of 5,000 = 1,950 + 600 = Rs. 2,550. The annual bill is 25,000 x 12 = Rs. 300,000, which is below Rs. 360,000, and no monthly bill goes above Rs. 30,000. For a taxpayer other than a company, the whole Rs. 2,550 a month falls under section 235(4)(a): minimum tax, with no refund. ### What if I am not on the Active Taxpayers' List? Rule 1 of the Tenth Schedule says that where tax is required to be collected under any provision of the Ordinance from a person not appearing in the active taxpayers' list, the rate shall be increased by hundred per cent of the rate specified. The proviso in section 235(1) that switches off collection for listed persons applies to domestic consumers only, not to commercial connections. How a distribution company applies the Tenth Schedule to a particular bill is not set out in the Ordinance. ### Common mistakes - **"All tax on my electricity bill is adjustable."** Only for a company. For others, section 235(4)(a) treats the tax up to Rs. 360,000 of annual billing as minimum tax with no refund. - **"The tax is worked out on the electricity charges alone."** The Explanation to section 235(2) says the bill includes sales tax and all incidental charges. - **"Nothing can stop the deduction."** Section 235(3) allows a certificate from the Commissioner in the cases it lists, such as exempt income or advance tax liability already discharged. ### What to check in the official text Read section 235 and Division IV of Part IV of the First Schedule of the Income Tax Ordinance, 2001 as amended to 30 June 2026, and rule 1 of the Tenth Schedule. Also look at the Second Schedule for any clause that disapplies section 235 for a particular class of taxpayer, since some clauses there do so for named sectors. ### Frequently asked #### What rate of income tax is charged on a commercial electricity bill? Division IV of Part IV of the First Schedule sets it for commercial consumers: nil up to Rs. 500, 10% of the amount for bills above Rs. 500 up to Rs. 20,000, and Rs. 1,950 plus 12% of the amount above Rs. 20,000 for larger bills. Section 235 measures the bill inclusive of sales tax and all incidental charges. #### Is the electricity bill tax adjustable for a private limited company that runs a restaurant? Yes. Section 235(4)(c) says that in the case of a company, tax collected shall be adjustable against tax liability. The minimum tax treatment in section 235(4)(a) applies only to a taxpayer other than a company. #### Can the tax be stopped from being charged on the bill? Section 235(3) says it shall not be collected from a person who produces a certificate from the Commissioner that their income for the tax year is exempt, or that they have already discharged their advance tax liability, or that their entire income is subject to final or minimum tax under another provision. ### Citations - [Income Tax Ordinance, 2001, section 235 (Electricity consumption)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#235-electricity-consumption), as amended to 2026-06-30: "shall be treated as minimum tax on the income of such persons and no refund shall be allowed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 235 (Electricity consumption)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#235-electricity-consumption), as amended to 2026-06-30: "electricity consumption bill referred to in sub-section (2) means electricity bill inclusive of sales tax and all incidental charges." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 235 (Electricity consumption)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#235-electricity-consumption), as amended to 2026-06-30: "Advance tax under this section shall not be collected from a person who produces a certificate from the Commissioner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division IV (Electricity Consumption), clause (1) Table](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (rate of deduction or collection of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Does my restaurant have to collect advance tax on weddings and functions it hosts? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/functions-tax-weddings-restaurants-236cb Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 236CB of the Income Tax Ordinance, 2001 makes the owner, lessee, operator or manager of a restaurant, hotel, marriage hall, marquee, lawn or club collect advance tax on the total function bill. Division XI of Part IV of the First Schedule sets the rate at 10%, and the tax is adjustable for the person holding the function. **Applies to:** Owners, lessees, operators and managers of restaurants, hotels, marriage halls, marquees, commercial lawns, clubs and community places that host functions, and the families or organisers who book them. A restaurant that hosts weddings, parties or other functions is a collecting agent for income tax on those bills. Section 236CB of the Income Tax Ordinance, 2001 puts the duty on whoever owns, leases, operates or manages the venue, and the rate in the First Schedule is 10% of the total bill. The host who pays it can adjust it against their own income tax. ### What does the law say? Section 236CB(1) says every prescribed person shall collect advance tax, at the rate in Division XI of Part IV of the First Schedule, on the total amount of the bill from a person arranging or holding a function in a marriage hall, marquee, hotel, restaurant, commercial lawn, club, community place or any other place used for such purpose. The collection is "subject to such conditions or limitations as may be prescribed". Section 236CB(4) defines the two key terms: - **"Function"** includes any wedding related event, a seminar, a workshop, a session, an exhibition, a concert, a show, a party or any other gathering held for such purpose. - **"Prescribed person"** includes the owner, a lease-holder, an operator or a manager of a marriage hall, marquee, hotel, restaurant, commercial lawn, club, community place or any other place used for such purpose. Division XI of Part IV of the First Schedule, as amended to 30 June 2026, reads: "The rate of tax to be collected under section 236CB shall be 10%." That is the rate for tax year 2027 (1 July 2026 to 30 June 2027). Section 236CB(3) says the advance tax collected under sub-sections (1) and (2) shall be adjustable. ### What about food from an outside caterer? Section 236CB(2) covers it. Where food, service or any other facility is provided by any other person, the prescribed person shall also collect advance tax on the payment for that food, service or facility, at the Division XI rate, from the person arranging or holding the function. A restaurant that rents out its hall while the family brings in a separate caterer is still the one collecting the tax on the caterer's bill. ### Worked example (illustrative figures) A family books the banquet hall of a restaurant in Multan for a mehndi. The restaurant's own bill for hall and food is Rs. 1,200,000. The family also hires a separate decorator whose bill is Rs. 300,000. The amounts are invented; the rates are the ones cited on this page. **Host on the Active Taxpayers' List:** 1. Restaurant bill: 1,200,000 x 10 / 100 = Rs. 120,000 2. Outside decorator's bill: 300,000 x 10 / 100 = Rs. 30,000 3. Total advance tax the restaurant collects: 120,000 + 30,000 = Rs. 150,000 **Host not on the Active Taxpayers' List:** Rule 1 of the Tenth Schedule increases the rate by hundred per cent, so 10% becomes 20%. 1. Restaurant bill: 1,200,000 x 20 / 100 = Rs. 240,000 2. Outside decorator's bill: 300,000 x 20 / 100 = Rs. 60,000 3. Total advance tax collected: 240,000 + 60,000 = Rs. 300,000 In both cases the amount collected is advance tax that section 236CB(3) makes adjustable for the host. ### What if the host was not required to file a return? Rule 2 of the Tenth Schedule deals with this. Where the person collecting the tax is satisfied that a person not on the active taxpayers' list was not required to file a return of income, it must, before collecting the tax, send the Commissioner a written electronic notice giving the person's name, CNIC or NTN and address, the nature and amount of the transaction, and the reason. The Commissioner has thirty days to accept the contention or direct collection under rule 1. If no order is passed within thirty days, the contention is treated as accepted. ### What if the gathering is small, like a birthday dinner? Section 236CB(4)(a) includes "a party or any other gathering". The section itself does not set a minimum bill, guest count or floor area. Section 236CB(1) makes collection subject to conditions or limitations "as may be prescribed", and no rules under section 236CB appear in the edition of the Income Tax Rules, 2002 held in this corpus. This page does not assume any threshold. ### Common mistakes - **"Only marriage halls collect this tax."** The section names restaurants, hotels, marquees, commercial lawns, clubs, community places and any other place used for such purpose. - **"The caterer's bill is the caterer's problem."** Section 236CB(2) makes the venue operator collect on food, service or facilities supplied by any other person. - **"This tax is lost money for the host."** Section 236CB(3) says it is adjustable, so the host can take it into account against their own income tax liability. - **"This is the same as sales tax on the hall."** Sales tax on services is a separate levy under a different law. Provincial sales tax on services is outside this site's corpus. ### What to check in the official text Read section 236CB and Division XI of Part IV of the First Schedule of the Income Tax Ordinance, 2001 as amended to 30 June 2026, and rules 1 and 2 of the Tenth Schedule. Check whether the Board has prescribed any conditions or limitations under section 236CB(1), since those would sit in rules or notifications not held here. ### Frequently asked #### What counts as a function under section 236CB? Section 236CB(4)(a) says a function includes any wedding related event, a seminar, a workshop, a session, an exhibition, a concert, a show, a party or any other gathering held for such purpose. The section does not set a minimum bill or guest count. #### Does the tax apply to food brought in by an outside caterer? Yes. Section 236CB(2) says that where food, service or any other facility is provided by any other person, the prescribed person shall also collect advance tax on the payment for it from the person arranging or holding the function, at the Division XI rate. #### What if the host is not on the Active Taxpayers' List? Rule 1 of the Tenth Schedule increases the rate of tax to be collected by hundred per cent of the rate specified in the Ordinance for persons not appearing in the active taxpayers' list. Applied to the 10% in Division XI, that gives 20%, subject to the rule 2 procedure for persons not required to file a return. ### Citations - [Income Tax Ordinance, 2001, section 236CB (Advance tax on functions and gatherings)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236cb-advance-tax-on-functions-and-gatherings), as amended to 2026-06-30: "(b) "prescribed person" includes the owner, a lease-holder, an operator or a manager of a marriage hall, marquee, hotel, restaurant, commercial lawn, club, a community place or any other place used for such purpose." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236CB (Advance tax on functions and gatherings)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236cb-advance-tax-on-functions-and-gatherings), as amended to 2026-06-30: "(3) The advance tax collected under sub-section (1) and subsection (2) shall be adjustable." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XI (Advance tax on functions and gatherings)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (rate of deduction or collection of tax) and rule 2 (persons not required to file return)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Are bun, rusk, sheer mal and vermicelli sold by a bakery taxed at the reduced 10% rate? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/bun-rusk-sheer-mal-bakery-tax-rate Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Only outside Tier-1 shops. Serial 87 of Table-1 of the Eighth Schedule to the Sales Tax Act taxes local supply of vermicelli, sheer mal, bun and rusk at 10%, but excludes those sold in bakeries and sweet shops that are Tier-1 retailers. A Tier-1 bakery pays the rate under section 3(9A), which falls back to 18% under section 3(1). **Applies to:** Bakery and sweet shop owners, and makers of bun, rusk, sheer mal and vermicelli, who want to know which federal sales tax rate applies to these items under the Sales Tax Act, 1990 as amended to 30 June 2026. The reduced 10% rate for bun, rusk, sheer mal and vermicelli is real, but it stops at the door of a Tier-1 bakery or sweet shop. When these items are sold in a Tier-1 outlet, the Eighth Schedule entry does not apply, and the outlet charges the rate that section 3(9A) of the Sales Tax Act, 1990 points to. ### What does the law say? Section 3(2)(aa) of the Sales Tax Act says goods specified in the Eighth Schedule are charged at the rates and subject to the conditions set out there. Serial 87 of Table-1 of the Eighth Schedule, inserted by the Finance Act, 2024, reads (spelling as printed in the official text): | Serial | Description | Rate | | --- | --- | --- | | 87 | Local supply of vermicillies, sheer mal, bun and rusk excluding those sold in bakeries, and sweet shops falling in the category of Tier-1 retailers. | 10% | So the entry has two parts. It gives a 10% rate for local supply of the four items, and it carves out the same items when sold in Tier-1 bakeries and sweet shops. ### What rate applies once the 10% entry is excluded? Section 3(9A) says Tier-1 retailers "shall pay sales tax at the rate as applicable to the goods sold" under the Act or a notification. Once serial 87 excludes the item, no other Eighth Schedule entry for bun or rusk was found in the Act, so the general rate in section 3(1) applies. Section 3(1) sets that rate at eighteen per cent of the value of the supply. Whether an outlet is Tier-1 depends on clause (43A) of section 2. As amended to 30 June 2026, an outlet is Tier-1 if it meets any one limb, for example being a unit of a national or international chain, operating in an air-conditioned mall or plaza (not a kiosk), or having cumulative electricity bills above Rs. 1,200,000 in the preceding twelve consecutive months. ### How does it work in practice? | Who is selling | Rate on bun, rusk, sheer mal, vermicelli | | --- | --- | | A registered maker supplying these items locally, for example to kiryana stores | 10% under serial 87 | | A Tier-1 bakery or sweet shop selling them over the counter | Excluded from serial 87, so 18% under section 3(1) read with 3(9A) | | A bakery or sweet shop that is not Tier-1 | Pays through the monthly electricity bill under section 3(9), at 5% where the bill does not exceed Rs. 20,000 and 7.5% where it does | Value, for these calculations, means the price excluding the sales tax itself, as clause (46) of section 2 defines "value of supply". ### Worked example (illustrative figures) Two made-up businesses in Lahore: **Noor Rusk Works, Kot Lakhpat.** A registered maker supplies packets of rusk to local shops. Its sales for the month are Rs. 400,000, excluding tax. 1. Rate under serial 87: 10%. 2. Sales tax: Rs. 400,000 x 10% = Rs. 40,000. 3. Total billed: Rs. 400,000 + Rs. 40,000 = Rs. 440,000. **Gulberg Bake House, in an air-conditioned plaza.** It is Tier-1 under limb (b) of section 2(43A). It sells bun and rusk worth Rs. 150,000, excluding tax, in the same month. 1. Serial 87 excludes bakeries that are Tier-1, so the 10% rate is not available. 2. Rate under section 3(1): 18%. 3. Sales tax: Rs. 150,000 x 18% = Rs. 27,000. 4. Total collected: Rs. 150,000 + Rs. 27,000 = Rs. 177,000. Had Gulberg Bake House been able to use serial 87, the tax would have been Rs. 150,000 x 10% = Rs. 15,000. The difference is Rs. 12,000 for the month. ### What if ...? **What if my bakery is not Tier-1?** Section 3(9) charges retailers other than Tier-1 through their monthly electricity bills. On the Act's wording, a non-Tier-1 bakery's federal sales tax is collected that way rather than item by item, so the choice between 10% and 18% does not arise for its counter sales. **What if I only sell plain bread?** Serial 54 of Table-2 of the Sixth Schedule exempts "All types of breads, nans and chapattis" on local supply. Bun and rusk are named separately in the Eighth Schedule, and the Act does not say whether a bun is also a "bread" for serial 54. That overlap is not resolved in the text. **What if my sweet shop is Tier-1 and also sells sheer mal made by someone else?** The exclusion is about where the item is sold: "those sold in bakeries, and sweet shops falling in the category of Tier-1 retailers". It does not depend on who made the item. ### Common mistakes - **Treating 10% as the bakery rate.** Serial 87 excludes Tier-1 bakeries and sweet shops, which are exactly the outlets most likely to charge it. - **Reading the comma loosely.** The entry says "bakeries, and sweet shops falling in the category of Tier-1 retailers". The most natural reading applies the Tier-1 condition to both, but the comma leaves room for argument, and the Act does not clarify it. - **Forgetting the entry is recent.** Serial 87 was inserted by the Finance Act, 2024. Older rate lists will not show it. ### What to check in the official text Read serial 87 of Table-1 of the Eighth Schedule in the official PDF of the Sales Tax Act as amended to 30 June 2026, together with section 3(1), 3(2)(aa), 3(9) and 3(9A), and clauses (43A) and (46) of section 2. Check serial 54 of Table-2 of the Sixth Schedule for bread. Check also whether any notification issued under section 3 changes the rate for these items. Such notifications are not held in this corpus. ### Frequently asked #### Does the 10% rate for rusk apply to my small neighbourhood bakery? A bakery that is not a Tier-1 retailer pays sales tax through its monthly electricity bill under section 3(9), not at a per-item rate on its sales. Serial 87 matters mainly to registered makers and suppliers of these items and to Tier-1 outlets, which it excludes. #### Is plain bread also taxed at 10%? No. Serial 54 of Table-2 of the Sixth Schedule exempts all types of breads, nans and chapattis on local supply. Bun and rusk have their own entry at serial 87 of the Eighth Schedule, so the bread exemption and the 10% rate are separate entries. #### Does the exclusion cover every bakery or only Tier-1 bakeries? The entry reads 'excluding those sold in bakeries, and sweet shops falling in the category of Tier-1 retailers'. The comma after 'bakeries' leaves some room for reading it as covering all bakeries, and the Act gives no further guidance on the point. ### Citations - [Sales Tax Act, 1990, Eighth Schedule, Table-1, serial 87](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "Notwithstanding anything contained in this Act, Tier-1 retailers shall pay sales tax at the rate as applicable to the goods sold under relevant provisions of this Act or a notification issued there under" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“Tier-1 retailer” means a retailer falling in any one or more of the following categories, namely:-" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Sixth Schedule, Table-2 (Local Supplies only), serial 54](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Can a bakery or sweet shop claim input tax on flour, sugar, ghee and packaging? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/bakery-input-tax-flour-sugar-ghee Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer A registered bakery can deduct input tax on taxable purchases used for taxable supplies under section 7 of the Sales Tax Act, if it holds tax invoices. Section 8 bars some purchases and limits credit to the taxable share, section 8B caps adjustment at 90% of output tax, and exempt flour carries no tax to claim. **Applies to:** Registered bakeries, sweet shops and similar food businesses, mainly Tier-1 retailers, that want to know which purchases give input tax credit under the Sales Tax Act, 1990 as amended to 30 June 2026. A bakery can claim input tax only when three things line up: it is registered, it holds proper tax invoices for purchases that actually carried sales tax, and those purchases are used for taxable supplies. The Sales Tax Act, 1990 then limits how much of that credit can be used in a month. ### What does the law say? **Section 7(1)** lets a registered person deduct input tax paid or payable during the tax period, for taxable supplies made or to be made, from the output tax due for that period. It is expressly subject to sections 8 and 8B. A proviso allows a missed claim to be made in any of the six succeeding tax periods. **Section 7(2)** makes a tax invoice a condition. For a local purchase, the buyer must hold a tax invoice in its name bearing its registration number. For electricity or gas, a bill bearing the registration number and the connection address serves. **Section 8** bars input tax on, among other things: - goods or services used for anything other than taxable supplies (8(1)(a) and (f)); - tax not deposited by the supplier, purchases flagged by CREST, and fake invoices (8(1)(ca), (caa), (d)); - goods for personal or non-business use (8(1)(g)); - building materials and fittings for immoveable property (8(1)(h)); - vehicles, electrical and gas appliances, furniture, furnishings and office equipment (excluding electronic cash registers), unless bought for resale (8(1)(i)). Section 8(2) adds that a person dealing in taxable and non-taxable supplies can reclaim only the proportion of input tax attributable to taxable supplies, in the manner the Board specifies. Section 8(3) says no one other than a registered person can deduct input tax. **Section 8B(1)** caps input tax adjustment at ninety per cent of output tax for the tax period, except for fixed assets or capital goods. **Section 8B(6)** reduces a Tier-1 retailer's adjustable input tax for the whole tax period by 60% if it does not integrate its retail outlet as prescribed. ### How does it work for flour, sugar, ghee and packaging? | Purchase | What the Act shows | Input tax position | | --- | --- | --- | | Wheat flour, maida | Exempt: Sixth Schedule, Table-1, serial 19 ("Rice, wheat, wheat and meslin flour") | No tax charged, so nothing to claim | | Desi ghee, unbranded | Exempt on local supply: Table-2, serial 35, excluding that sold under a brand name | Nothing to claim on unbranded desi ghee | | Sugar, branded ghee, cooking oil, packaging, cake boxes | No Sixth Schedule exemption found for these | Claimable if a registered supplier's tax invoice shows the tax and the item is used for taxable sales | | Ovens, chillers, display counters | Section 8(1)(i) bars electrical and gas appliances and furniture | The Act does not say whether commercial bakery ovens count as "appliances". Read clause (i) closely | ### Why doesn't bread give input tax credit? Serial 54 of Table-2 of the Sixth Schedule exempts all types of breads, nans and chapattis. Input tax under section 7 is linked to taxable supplies, and section 8(1)(a) bars input tax on goods used for anything else. So sugar, packaging or other taxed inputs used to make bread do not produce a claim. Where the same inputs go into both bread and cakes, section 8(2) limits the claim to the taxable share. The method of splitting is left to the Board and is not set out in the Act. ### Worked example (illustrative figures) Rahat Bakers, a registered Tier-1 bakery in Faisalabad, integrated with the Board's system. One month: - Taxable sales (cakes, pastries, mithai), excluding tax: Rs. 2,000,000. - Output tax at 18% under section 3(1) read with 3(9A): Rs. 2,000,000 x 18% = Rs. 360,000. - Tax shown on invoices for sugar, cream, boxes and branded ghee used only for cakes and pastries: Rs. 195,000. - Flour bought: exempt, no tax on the invoice. Steps: 1. The 90% cap: Rs. 360,000 x 90% = Rs. 324,000. 2. Input tax of Rs. 195,000 is below Rs. 324,000, so all of it can be adjusted. 3. Tax payable: Rs. 360,000 - Rs. 195,000 = Rs. 165,000. **If input tax were Rs. 340,000 that month:** only Rs. 324,000 can be adjusted. Payable: Rs. 360,000 - Rs. 324,000 = Rs. 36,000. The Rs. 16,000 excess can be adjusted or refunded only on the conditions in section 8B(2), on a yearly basis under 8B(3). **If Rahat Bakers had not integrated its outlet:** section 8B(6) reduces the adjustable input tax by 60%. Rs. 195,000 x 60% = Rs. 117,000 reduction. Adjustable: Rs. 195,000 - Rs. 117,000 = Rs. 78,000. Payable: Rs. 360,000 - Rs. 78,000 = Rs. 282,000. ### Common mistakes - **Expecting credit on flour.** Flour is exempt, so the invoice carries no sales tax. - **Claiming on inputs for bread.** Bread is exempt, and section 8(2) limits credit to the taxable share. - **Claiming without a tax invoice in the bakery's own name.** Section 7(2) requires the invoice to bear the buyer's registration number. - **Ignoring the 90% cap.** Section 8B(1) applies every tax period, apart from fixed assets or capital goods. ### What to check in the official text Read sections 7, 8 and 8B, and section 3(9A), of the Sales Tax Act as amended to 30 June 2026. In the official PDF, check serial 19 of Table-1 and serials 35 and 54 of Table-2 of the Sixth Schedule. Section 8B(1) lets the Board exclude persons from the cap or change the limit by notification, and section 8(1)(b) lets the Federal Government bar further items. Those notifications are not in this corpus. ### Frequently asked #### Can I claim input tax on the flour I buy? Serial 19 of Table-1 of the Sixth Schedule exempts rice, wheat, wheat and meslin flour. An exempt supply carries no sales tax, so there is no input tax on it to claim. #### What happens to input tax if my Tier-1 bakery is not integrated with FBR? Section 8B(6) says that where a Tier-1 retailer does not integrate its retail outlet as prescribed, during a tax period or part of it, the adjustable input tax for the whole of that tax period is reduced by 60%. #### Can a bakery that pays through its electricity bill claim input tax? Section 8(3) says no person other than a registered person can deduct or reclaim input tax. A bakery that pays through its electricity bill under section 3(9) and is not registered is therefore outside the input tax system. ### Citations - [Sales Tax Act, 1990, section 7 (Determination of tax liability)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#7-determination-of-tax-liability), as amended to 2026-06-30: "A registered person shall not be entitled to deduct input tax from output tax unless,-" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8 (Tax credit not allowed)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8-tax-credit-not-allowed), as amended to 2026-06-30: "If a registered person deals in taxable and non-taxable supplies, he can reclaim only such proportion of the input tax as is attributable to taxable supplies in such manner as may be specified by the Board." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8B (Adjustable input tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8b-adjustable-input-tax), as amended to 2026-06-30: "shall not be allowed to adjust input tax in excess of ninety per cent of the output tax for that tax period" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "Notwithstanding anything contained in this Act, Tier-1 retailers shall pay sales tax at the rate as applicable to the goods sold under relevant provisions of this Act or a notification issued there under" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Sixth Schedule, Table-1 (Imports or Supplies), serial 19](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Sixth Schedule, Table-2 (Local Supplies only), serials 35 and 54](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Can a restaurant or bakery charge sales tax if it is not registered? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/unregistered-restaurant-charging-sales-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Not under the Sales Tax Act, 1990. Section 23(2) says no person other than a registered person or a person paying retail tax shall issue a tax invoice. If tax is collected that was not payable, section 3B requires the whole amount to be paid to the Federal Government, and no refund of it is admissible. **Applies to:** Diners and customers of restaurants, cafes and bakeries, and owners of food businesses that are not registered for sales tax. A restaurant or bakery that is not registered cannot lawfully issue a sales tax invoice under the Sales Tax Act, 1990. The Act reserves the tax invoice for registered persons and persons paying retail tax. If a business still collects tax that it was not entitled to charge, the Act does not let it keep the money: section 3B requires it to be paid over to the Federal Government. ### What does the law say? Three provisions work together. - **Section 23(2)** says that no person other than a registered person or a person paying retail tax shall issue an invoice under section 23. Section 23(1) is the provision that requires a registered person to issue a tax invoice showing, among other things, the supplier's name, address and registration number and the amount of sales tax. - **Section 3B(1)** says that any person who has collected any tax or charge that was not payable, or that was more than the amount actually payable, and passed its incidence on to the consumer, shall pay the amount so collected to the Federal Government. Section 3B(2) treats that amount as an arrear of tax, and says any claim for refund of it is not admissible, notwithstanding any law or judgment of a court. Section 3B(3) puts the burden of proving whether the tax was passed on to the consumer on the person who collected it. - **Section 14(1)** lists who must register, including a manufacturer not running a cottage industry, a retailer liable to pay sales tax (other than one paying sales tax through the electricity bill), an importer, and a wholesaler, dealer or distributor. The definition in section 2(25) adds a twist. A "registered person" means a person who is registered or is liable to be registered. Its proviso says a person liable to be registered but not registered is not entitled to any benefit available to a registered person under the Act or its rules. The Act does not spell out how that definition bears on section 23(2), so this page does not draw a conclusion from it. ### How does it work in practice? For a customer, the practical point is that a bill showing an amount of "sales tax" should come from a business that holds a sales tax registration number, which section 23(1)(a) requires on a tax invoice. The separate page on verifying a restaurant bill covers the other particulars. For an owner, collecting tax without registration does not create a benefit. Section 3B makes the money payable to the Federal Government, and the proviso to section 2(25) denies a person who should have registered but did not the benefits of a registered person. ### Worked example (illustrative figures) A bakery in Gujranwala is not registered. Over a month it adds "sales tax" to customers' bills and collects Rs. 45,000 this way. These figures are invented. 1. Tax collected from customers: Rs. 45,000. 2. Under section 3B(1), that Rs. 45,000 was collected and passed on to consumers, so it is payable to the Federal Government. 3. Under section 3B(2), it is recoverable as an arrear of tax and no refund of it is admissible. 4. Separately, serial 3 of the Table in section 33 applies to any person who unauthorisedly issues an invoice in which an amount of tax is specified. The penalty is fifty thousand rupees or ten per cent of the tax involved, whichever is higher. Ten per cent of Rs. 45,000 is Rs. 4,500, so the higher figure is Rs. 50,000. The bakery ends up paying out the Rs. 45,000 it collected and faces a penalty on top. ### What if the business should have registered? Serial 7 of the Table in section 33 applies to a person required to apply for registration who fails to do so before making taxable supplies. The penalty is fifty thousand rupees or five per cent of the tax involved, whichever is higher. If that person fails to get registered within sixty days of starting the taxable activity, the Table adds that, on conviction by a Special Judge, he is liable to imprisonment for a term which may extend to three years, or a fine which may extend to an amount equal to the tax involved, or both. ### What if the restaurant is in Islamabad? Restaurant services in the Islamabad Capital Territory are taxed under the Islamabad Capital Territory (Tax on Services) Ordinance, 2001. Section 3(3) of that Ordinance applies the Sales Tax Act, 1990 and its rules to the collection and payment of the tax so far as they relate to registration and de-registration, records and audit, enforcement and adjudication, and penalties and prosecution. ### What about restaurants in Lahore, Karachi or Peshawar? Tax on restaurant services in the provinces is charged under provincial sales tax laws. Those laws are outside this site's corpus, so their registration and invoicing rules are not described here. ### Common mistakes - **"Adding tax to the bill is fine as long as it is paid to someone."** Section 23(2) limits who may issue a tax invoice, and section 3B sends tax that was not payable to the Federal Government. - **"Tax collected by mistake can be refunded later."** Section 3B(2) says no refund claim for such an amount is admissible. - **"The customer has to prove the tax was passed on."** Section 3B(3) places that burden on the person who collected it. ### What to check in the official text Read sections 2(25), 3B, 14 and 23 of the Sales Tax Act, 1990, and serials 3 and 7 of the Table in section 33, in the edition amended to 30 June 2026. Section 14(3) leaves the manner of registration to Board notifications, which are not reproduced here. ### Frequently asked #### What happens to sales tax an unregistered bakery collected by mistake? Section 3B of the Sales Tax Act, 1990 says any tax collected that was not payable, or collected in excess, and passed on to the consumer must be paid to the Federal Government. Section 3B(2) makes that amount an arrear of tax and says no refund claim in respect of it is admissible, including under a court direction. #### Is there a penalty for issuing a tax invoice without registration? Serial 3 of the Table in section 33 covers any person who unauthorisedly issues an invoice in which an amount of tax is specified. The penalty is fifty thousand rupees or ten per cent of the amount of tax involved, whichever is higher. #### Does this cover provincial sales tax on restaurant services? No. Restaurant services in Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan are taxed under provincial laws, which are outside this site's corpus. This page covers the federal Sales Tax Act, 1990 and, for Islamabad, the Islamabad Capital Territory (Tax on Services) Ordinance, which applies the Act's registration and penalty provisions. ### Citations - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3B (Collection of excess sales tax etc)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3b-collection-of-excess-sales-tax-etc), as amended to 2026-06-30: "Any person who has collected or collects any tax or charge, whether under misapprehension of any provision of this Act or otherwise, which was not payable as tax or charge or which is in excess of the tax or charge actually payable and the incidence of which has been passed on to the consumer, shall pay the amount of tax or charge so collected to the Federal Government." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "(b) a retailer who is liable to pay sales tax under the Act or rules made thereunder, excluding such retailer required to pay sales tax through his electricity bill under sub-section (9) of section 3;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "shall not be entitled to any benefit available to a registered person under any of the provisions of this Act or the rules made thereunder;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 33, Table, serial 3 (unauthorised invoice) and serial 7 (failure to apply for registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, section 3 (Scope of tax)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30#3-scope-of-tax), as amended to 2025-06-30: "(b) registration and de-registration;" Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf --- ## Can FBR post an officer at my restaurant or bakery to monitor sales? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/fbr-officer-posted-restaurant-monitoring Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, for registered persons. Section 40B of the Sales Tax Act, 1990 lets the Board post an Inland Revenue officer at a registered person's premises to monitor sales and stock. Rule 150ZC of the Sales Tax Rules, 2006 also requires registered restaurants and cafes to give officers continuous remote and on-site access to their records. **Applies to:** Restaurants, cafes, coffee shops, eateries, snack bars, hotels and bakeries registered under the Sales Tax Act, 1990. The Sales Tax Act, 1990 and the Sales Tax Rules, 2006 give the Federal Board of Revenue several ways to watch a registered restaurant's sales: posting an officer on the premises, electronic monitoring, and routine visits to check the invoicing system. Each applies to registered persons, and each is described below with its limits. ### What does section 40B allow? Section 40B of the Sales Tax Act, as amended to 30 June 2026, lets the Board post an officer of Inland Revenue "to the premises of registered person or class of such persons to monitor production, sale of taxable goods and the stock position". The posting is subject to whatever conditions and restrictions the Board thinks fit to impose. Three features stand out: 1. It applies to **registered persons**, individually or as a class. 2. Its stated purpose is monitoring production, sale of taxable goods and stock. 3. The section itself sets no time limit, notice period or warrant requirement. Those would come from the Board's conditions, which are not held in this corpus. ### What is electronic monitoring under section 40C? Section 40C(1) lets the Board, by notification in the official Gazette, specify registered persons or classes of registered persons, or goods, for monitoring or tracking of "production, sales, clearances, stocks or any other related activity" through electronic or other means. Sub-sections (2), (3) and (6), as substituted and added by the Finance Act, 2026, deal mainly with tax stamps, banderoles and production monitoring for taxable goods removed by manufacturers. ### What do the Sales Tax Rules require from restaurants? Chapter XIV-A of the Sales Tax Rules, 2006, as amended to 30 June 2025, is headed monitoring or tracking of certain registered persons by electronic or other means. Rule 150ZA applies it to registered persons being "restaurants, cafes, coffee shops, eateries, snack bars and hotels having any of such business activities". - **Rule 150ZC** requires them to give "continuous and full remote as well as on-site access" to records, documents and data, whether kept electronically or otherwise, whenever the officer of Inland Revenue having jurisdiction requires it. - **Rule 150ZE** makes failure to comply with the chapter liable to penal action under the Act. ### What are the periodic visits under rule 150XD? Rule 150XD sits in Chapter XIV, which covers integration of electronic invoicing for registered persons the Board notifies, called "integrated persons". Under rule 150XD(1), the officer of Inland Revenue having jurisdiction monitors the system "through periodic visits authorized in this behalf by the Commissioner". Under rule 150XD(2), where an integrated person does not account for sales without generating an invoice carrying the QR code or FBR invoice number, the officer computes the taxes on those unaccounted sales and recovers them, alongside any penal action. ### Worked example (illustrative figures) Chai Khana, a registered cafe in Saddar, Rawalpindi, is an integrated person with two point of sale counters. The facts are made up. - An Inland Revenue officer arrives on a visit authorised by the Commissioner under rule 150XD(1). - The officer asks to see the day's sales data. Rule 150ZC requires the cafe to give on-site access, and also remote access when required. - The officer finds 40 handwritten slips totalling Rs. 96,000 that carry no FBR invoice number. - Under rule 150XD(2), the officer computes the tax on those Rs. 96,000 of unaccounted sales and recovers it, and penal action under the Act may follow. The rate applied to those sales depends on where the cafe is and what it supplies. Restaurant services are taxed by the provinces, or in Islamabad under the ICT (Tax on Services) Ordinance, and provincial rates are outside this corpus. ### What if my restaurant is not registered under the Sales Tax Act? Section 40B, section 40C and Chapter XIV-A all refer to registered persons. Whether a particular restaurant must register is a separate question. Registration and taxation of restaurant services under provincial law are outside this corpus. ### What if the officer wants more than sales records? Rule 150ZC covers records, documents and data maintained electronically or otherwise. Section 40B speaks of monitoring production, sale of taxable goods and stock. Neither text lists specific documents beyond those words, and this page does not add to them. ### Common mistakes - **Treating the rule 150ZC duty as occasional.** It requires continuous access, remote as well as on-site, as and when required. - **Assuming an officer can only come with a warrant.** Neither section 40B nor rule 150XD mentions a warrant as a condition of the posting or visit. - **Keeping sales off the integrated system.** Rule 150XD(2) lets the officer compute and recover tax on sales made without an FBR invoice number. ### What to check in the official text Read sections 40B and 40C of the Sales Tax Act as amended to 30 June 2026, and rules 150ZA to 150ZE and 150XD of the Sales Tax Rules, 2006 as amended to 30 June 2025. Board notifications naming classes of persons under section 40B or 40C, and Commissioner authorisations for visits, are not held in this corpus. ### Frequently asked #### Does FBR need a court order to post an officer at a restaurant? Section 40B does not mention a warrant or court order. It lets the Board post an officer to the premises of a registered person or class of such persons, subject to conditions and restrictions the Board thinks fit to impose. #### What records must a restaurant let the officer see? Rule 150ZC requires a registered restaurant, cafe, coffee shop, eatery, snack bar or hotel to give continuous and full remote as well as on-site access to records, documents and data kept electronically or otherwise, as and when the officer of Inland Revenue having jurisdiction requires. #### What happens if a restaurant refuses access? Rule 150ZE makes a registered person who fails to comply with Chapter XIV-A liable to penal action as provided in the Sales Tax Act. The rule does not itself set an amount; the penalties are in the Act. ### Citations - [Sales Tax Act, 1990, section 40B (Posting of Inland Revenue Officer)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#40b-posting-of-inland-revenue-officer), as amended to 2026-06-30: "may post Officer of 6[Inland Revenue] to the premises of registered person or class of such persons to monitor production, sale of taxable goods and the stock position" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 40C (Monitoring or Tracking by Electronic or other means)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#40c-monitoring-or-tracking-by-electronic-or-other-means), as amended to 2026-06-30: "specify any registered person or class of registered persons or any good or class of goods in respect of which monitoring or tracking of production, sales, clearances, stocks or any other related activity may be implemented through electronic or other means as may be prescribed" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 150ZA (Application)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150za-application), as amended to 2025-06-30: "restaurants, cafes, coffee shops, eateries, snack bars and hotels having any of such business activities" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZC (Monitoring)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zc-monitoring), as amended to 2025-06-30: "shall provide continuous and full remote as well as on-site access to record, documents and data maintained electronically or otherwise as and when required by the officer of Inland Revenue having jurisdiction." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150XD (Functions of the Officer of Inland Revenue)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150xd-functions-of-the-officer-of-inland-revenue), as amended to 2025-06-30: "shall monitor operation of the system through periodic visits authorized in this behalf by the Commissioner." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZE (Failure to meet the conditions for electronic monitoring system)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150ze-failure-to-meet-the-conditions-for-electronic-monitoring-system), as amended to 2025-06-30: "In case a registered person fails to comply with the provisions of this chapter, he shall be liable to penal action as provided in the Act." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf --- ## Can FBR seal my restaurant or bakery, and on what grounds? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/can-fbr-seal-my-restaurant Law current to: 30 June 2026 (Sales Tax Act); 30 June 2025 (Sales Tax Rules). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, if the outlet is a Tier-1 retailer. Chapter XIV-AD of the Sales Tax Rules allows sealing where an integrated outlet issues unverified, duplicate or counterfeit-QR invoices or stays disconnected for forty-eight hours, and where a Tier-1 outlet fails to register or integrate. The Chief Commissioner must approve in writing before sealing. **Applies to:** Restaurants, cafes, bakeries and sweet shops that are Tier-1 retailers under the Sales Tax Act, 1990, whether already integrated with FBR's point of sale system or not. FBR can seal the business premises of a Tier-1 restaurant, cafe or bakery on two separate grounds set out in Chapter XIV-AD of the Sales Tax Rules, 2006. The first is misuse of an integrated point of sale system, such as fake, duplicate or unverified invoices. The second is failing to register or integrate at all. Each ground has its own approval steps and its own route to reopening. ### What does the law say? Rule 150ZEN says the chapter applies to two groups: 1. **Integrated outlets that misuse the system.** Any person integrated with the Board's computerized system who conducts transactions so as to avoid monitoring, tracking, reporting or recording, or "issues an invoice which does not carry the prescribed invoice number or barcode or QR code or bears duplicate invoice number or counterfeit barcode or QR code". 2. **Tier-1 outlets that are not integrated.** Any person required to integrate under section 3(9A) read with section 2(43A) of the Act who fails to register, or if registered, fails to integrate as the law and rules require. The Act itself makes the premises liable to sealing in the section 33 table: under serial 24 for invoice misuse by an integrated person, and under serials 25 and 25A for failure to register or integrate. ### Ground 1: an integrated outlet's invoices or connection Rule 150ZEO sets the procedure. The Commissioner with territorial jurisdiction may start proceedings on information that the outlet issued an invoice without the prescribed invoice number or QR code, with a duplicate number or counterfeit QR code, a defaced invoice, or other evidence of tampering. That information can come from: - an invoice reported as unverified on the "Tax Asaan" application or the POS Dashboard; - an invoice physically available or acquired through mystery shopping; or - any other reliable source. The Commissioner must verify the invoice through its number or QR code before declaring it unverified. Sealing is triggered where the outlet was involved in issuing unverified invoices, the store was disconnected from the FBR database for forty-eight hours, offline invoices were not entered within the next twenty-four hours, or the device did not keep a record of offline invoices. The Commissioner then seeks the Chief Commissioner's written approval, naming the sealing team. The Chief Commissioner allows or disallows the sealing and decides whether one or more branches are sealed. Rule 150ZEO(8) adds that the premises "may be sealed on any violation made by registered person". **Reopening (rule 150ZEQ).** The Commissioner imposes the serial 24 penalty by order. A de-sealing order issues within 24 hours of payment of the penalty and any audit demand, provided the software bug has been removed. Within three working days after de-sealing, the Commissioner arranges a software audit of all POS machines in all branches and creates a demand for any under-declared sales found. If payment is not made, de-sealing is done after a month and the premises are re-sealed after fifteen days if the default continues. The outlet may appeal the penalty order. ### Ground 2: a Tier-1 outlet that has not integrated Under rule 150ZEP, an officer not below Assistant Commissioner reports the non-integration in writing to the Commissioner, recommending sealing under serial 25A. The Commissioner inquires and forwards the report with reasons to the Chief Commissioner, who issues a written order allowing or disallowing sealing. **Reopening (rule 150ZER).** The Commissioner imposes the serial 25A penalty. The premises stay sealed until the penalty is paid and all POS machines in all branches or outlets are integrated. Integration is carried out in front of an FBR team that includes a technical person, and the Commissioner certifies within three days that all POS machines are integrated and free from technical and functional errors. ### Worked example (illustrative figures) Lahori Sweets is a made-up Tier-1 sweet shop with two branches in Lahore. A customer's bill from the Liberty branch shows as unverified on Tax Asaan. The Commissioner verifies it by QR code and confirms it is not in FBR's system. Suppose the tax on the unreported sales traced so far is Rs. 180,000. - Serial 24 penalty: the higher of Rs. 500,000 and 200% x Rs. 180,000 = Rs. 360,000. - Rs. 500,000 is higher, so the penalty is Rs. 500,000. If the tax involved were Rs. 400,000, 200% x Rs. 400,000 = Rs. 800,000, which is higher than Rs. 500,000, so the penalty would be Rs. 800,000. The Chief Commissioner may limit sealing to the Liberty branch if only its invoices were unverified. ### Common mistakes - **Treating a POS outage as harmless.** Forty-eight hours disconnected from the FBR database is a listed trigger. - **Forgetting offline bills.** Offline invoices not entered within the next twenty-four hours are also a trigger. - **Assuming non-Tier-1 food outlets fall under this chapter.** Chapter XIV-AD is titled for Tier-1 retailers. ### What to check in the official text Read rules 150ZEN to 150ZER of the Sales Tax Rules as amended to 30 June 2025, and serials 24, 25 and 25A of the section 33 table in the Sales Tax Act as amended to 30 June 2026. Two cross-references in the Rules look out of date: rule 150ZEQ still requires compliance with Chapter XIV-AA, which the Rules show as omitted by S.R.O. 69(I)/2025, and rule 150ZEN refers to integration under section 3(9A), whose integration proviso the Finance Act, 2025 omitted; the duty now sits in section 23(6). ### Frequently asked #### Can one officer decide to seal my restaurant on the spot? Not under the Rules. For an integrated outlet, the Commissioner must seek the written approval of the Chief Commissioner Inland Revenue. For a non-integrated outlet, the Chief Commissioner must issue a written order after recording reasons. In both cases the Chief Commissioner also notifies the team that carries out the sealing. #### What is the penalty for issuing fake or parallel receipts? Serial 24 of the section 33 table sets a penalty of Rs. 500,000 or two hundred per cent of the tax involved, whichever is higher, for an integrated person who avoids reporting or issues invoices without the prescribed number or QR code, or with duplicate numbers or counterfeit codes. On conviction by a Special Judge, simple imprisonment up to two years or an additional fine up to Rs. 2 million, or both, can also follow. #### Can only the branch at fault be sealed? For integrated Tier-1 retailers, rule 150ZEO(6) says the Chief Commissioner decides whether one or more branches are to be sealed, depending on the unverified invoices issued by the respective branches. ### Citations - [Sales Tax Rules, 2006, section 150ZEN (Application)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zen-application), as amended to 2025-06-30: "issues an invoice which does not carry the prescribed invoice number or barcode or QR code or bears duplicate invoice number or counterfeit barcode or QR code" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZEO (Procedure for sealing of business premises of integrated tier-1 retailers)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zeo-procedure-for-sealing-of-business-premises-of-integrated-tier-1-retailers), as amended to 2025-06-30: "involved in issuances of unverified invoice, or if store becomes disconnected with the FBR data base for forty eight hours" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZEP (Procedure for sealing of business premises of non-integrated tier-1 retailers)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zep-procedure-for-sealing-of-business-premises-of-non-integrated-tier-1-retailers), as amended to 2025-06-30: "The Chief Commissioner Inland Revenue concerned shall issue an order in writing for allowing or disallowing the sealing of such business premises after recording the reasons therein" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZER (Procedure for de-sealing of business premises of non-integrated tier-1 retailers)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zer-procedure-for-de-sealing-of-business-premises-of-non-integrated-tier-1-retailers), as amended to 2025-06-30: "The business premises of non-integrated tier-1 retailer shall remain sealed till the payment of penalty and integration of all POS machines installed in all its branches or outlets;" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, Rule 150ZEQ (printed within the rule 150ZEP entry)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, Section 33, Table, serials 24, 25 and 25A](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## If my cafe accepts card payments, does that make it a Tier-1 retailer? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/card-machine-cafe-tier-1-status Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No, not on its own. Section 4 of the Finance Act, 2026 omitted sub-clause (f) of section 2(43A) of the Sales Tax Act, the limb that caught retailers with a bank card terminal. As amended to 30 June 2026, the other limbs still apply, and card payment still sets the rate for Islamabad restaurant services. **Applies to:** Owners of small cafes, bakeries, tea shops and eateries in Pakistan who accept debit or credit cards and were told this makes them Tier-1 retailers. A card terminal no longer makes a cafe or bakery a Tier-1 retailer. The limb of section 2(43A) of the Sales Tax Act, 1990 that caught retailers with a bank point of sale for card payments was omitted by the Finance Act, 2026, which came into force on 1 July 2026. What is left is a shorter list of tests that have nothing to do with how customers pay. ### What does the law say? Before the Finance Act, 2026, sub-clause (f) of section 2(43A) made a retailer Tier-1 if it had acquired a point of sale for accepting payment through debit or credit cards from banking companies or any other digital payment service provider authorised by the State Bank of Pakistan. Section 4 of the Finance Act, 2026 says, in clause (43A), "sub-clauses (f) and (g) shall be omitted". Section 1 of that Act brings it into force on 1 July 2026 unless otherwise provided. The Sales Tax Act as amended to 30 June 2026 prints both sub-clauses as omitted. ### What still makes a cafe Tier-1? The limbs that remain in section 2(43A) are: 1. **(a)** a unit of a national or international chain of stores; 2. **(b)** a retailer in an air-conditioned shopping mall, plaza or centre, excluding kiosks; 3. **(c)** a cumulative electricity bill above Rs. 1,200,000 in the immediately preceding twelve consecutive months; 4. **(d)** a wholesaler-cum-retailer with turnover above Rs. 200 million engaged in bulk import and supply of consumer goods; 5. **(gb)** turnover above Rs. 200 million in the immediately preceding twelve consecutive months, declared or worked back from tax deducted under section 236G or 236H of the Income Tax Ordinance; 6. **(h)** any person or class of persons prescribed by the Board, who may also exclude persons by notification. None of these mentions card payments. A cafe that meets any one of them is Tier-1 whether it takes cards or not. ### Why does card payment still matter in Islamabad? Card payment has a separate role under the Islamabad Capital Territory (Tax on Services) Ordinance, 2001. Serial 1(ii) of Table-1 of its Schedule covers services provided by "restaurants including cafes, food (including ice-cream) parlors, coffee house, coffee shops, deras, food huts, eateries, resorts and similar cooked, prepared or ready-to-eat food service outlets etc." The rate in column (4) is: | How payment is received | Rate under serial 1(ii) | | --- | --- | | Debit or credit card, mobile wallet or QR scanning | Five per cent, on condition that no input tax adjustment or refund is admissible | | Cash | Fifteen per cent | So in Islamabad, a card machine changes the rate on the service, not the Tier-1 status. Section 3(1) of the same Ordinance also has a proviso requiring any service provider in Table-1 or Table-2 to integrate with the Board's computerized system for real-time reporting, from the date and in the manner the Board prescribes by general order. Outside Islamabad, sales tax on restaurant services is levied by the provinces under their own laws, which are outside this corpus. ### Worked example (illustrative figures) Two made-up cafes, both taking cards: | Test | Bean There, street cafe in Johar Town, Lahore | Brew Lab, cafe in F-7 Markaz, Islamabad | | --- | --- | --- | | Chain unit (a) | No, single outlet | No, single outlet | | Air-conditioned mall or plaza (b) | No, street-level | No, street-level | | Electricity above Rs. 1,200,000 in twelve months (c) | Rs. 720,000 | Rs. 960,000 | | Turnover above Rs. 200 million (gb) | Rs. 22 million | Rs. 30 million | | Card machine | Yes, not a Tier-1 test | Yes, not a Tier-1 test | | Tier-1? | No, on these facts | No, on these facts | For Brew Lab, the Islamabad rate still depends on payment method. On a bill of Rs. 2,000 before tax: - Paid by card: 5% x Rs. 2,000 = Rs. 100 sales tax. - Paid in cash: 15% x Rs. 2,000 = Rs. 300 sales tax. The difference on this one bill is Rs. 300 minus Rs. 100 = Rs. 200. ### What if my cafe was registered as Tier-1 only because of the card machine? The Sales Tax Act as amended to 30 June 2026 contains no transitional rule for retailers who were Tier-1 only under old sub-clause (f). It does not say whether an existing registration or integration ends automatically. The law is silent on this, and this page does not fill the gap. ### Common mistakes - **Relying on guidance from before July 2026.** Many summaries still list the card test. - **Removing the card machine to avoid Tier-1.** Since the card limb is gone, removing a terminal does not change Tier-1 status under section 2(43A). In Islamabad it would move card customers to cash, where the Schedule rate is fifteen per cent rather than five. - **Assuming a mall cafe escapes because it is small.** Limb (b) applies to any retailer in an air-conditioned mall, plaza or centre, excluding kiosks. ### What to check in the official text Compare clause (43A) of section 2 of the Sales Tax Act as amended to 30 June 2026 with section 4 of the Finance Act, 2026. For Islamabad, read serial 1 of Table-1 of the Schedule to the ICT (Tax on Services) Ordinance as amended to 30 June 2025, and any Board general order fixing the date for integration under section 3(1). Board notifications under limb (h) are not held in this corpus. ### Frequently asked #### What did the omitted card machine limb say? Before the Finance Act, 2026, sub-clause (f) of section 2(43A) covered a retailer who had acquired a point of sale for accepting payment through debit or credit cards from banking companies or other digital payment service providers authorised by the State Bank of Pakistan. Section 4 of the Finance Act, 2026 omitted it. #### Can my cafe still be Tier-1 even though the card test is gone? Yes, if it meets another limb. A cafe that is a unit of a chain, sits in an air-conditioned mall or plaza (not a kiosk), has electricity bills above Rs. 1,200,000 over twelve months, has turnover above Rs. 200 million, or is prescribed by the Board is still Tier-1. #### Why does card payment matter for an Islamabad cafe? Serial 1(ii) of Table-1 of the Schedule to the Islamabad Capital Territory (Tax on Services) Ordinance charges restaurant and cafe services at five per cent where payment is received by debit or credit card, mobile wallet or QR scanning, with no input tax adjustment, and fifteen per cent where payment is received in cash. ### Citations - [Finance Act, 2026, section 4 (Amendments of the Sales Tax Act, 1990 (VII of 1990))](https://qanoondigest.com/acts/finance-act/finance-act-2026#4-amendments-of-the-sales-tax-act-1990-vii-of-1990), as amended to 2026: "(ii) sub-clauses (f) and (g) shall be omitted;" Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Finance Act, 2026, section 1 (Short title and commencement)](https://qanoondigest.com/acts/finance-act/finance-act-2026#1-short-title-and-commencement), as amended to 2026: "It shall, unless otherwise provided, come into force on the first day of July, 2026." Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "(a) a retailer operating as a unit of a national or international chain of stores;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, Schedule, Table-1, serial 1(ii)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, section 3 (Scope of tax)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30#3-scope-of-tax), as amended to 2025-06-30: "any service provider as mentioned in Table 1 and Table 2 of the Schedule shall integrate his businesses with the Board’s computerized system for real-time reporting of provision of services." Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf --- ## Do I need an NTN or sales tax registration to run a home bakery or cake business? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/home-bakery-ntn-sales-tax-registration Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Sales tax registration is usually not needed if the home bakery is a cottage industry under section 2(5AB) of the Sales Tax Act: no industrial connection, residential area, ten workers or fewer, turnover up to Rs. 8 million. Income tax is separate: section 181 of the Income Tax Ordinance requires every taxpayer, including online sellers, to register. **Applies to:** People baking cakes, cookies and desserts at home in Pakistan and selling through social media, websites or delivery, under the Sales Tax Act, 1990 and the Income Tax Ordinance, 2001, both as amended to 30 June 2026. Two different laws answer this question, and they answer it differently. The Sales Tax Act, 1990 largely leaves a small home bakery alone if it qualifies as a cottage industry. The Income Tax Ordinance, 2001 does not have a cottage industry carve-out for registration: it asks every taxpayer to register. ### What does the Sales Tax Act say about a home bakery? Clause (5AB) of section 2 defines a "cottage industry" as a manufacturing concern that meets each of four conditions: | Condition | Text of section 2(5AB) | | --- | --- | | (a) | Does not have an industrial gas or electricity connection | | (b) | Is located in a residential area | | (c) | Does not have a total labour force of more than ten workers | | (d) | Annual turnover from all supplies does not exceed eight million rupees | Baking is manufacture for this purpose: section 2(16) treats mixing and preparing goods as manufacture. Three consequences follow for a home bakery that meets all four conditions: 1. **Exemption.** Serial 3 of Table-2 of the Sixth Schedule (local supplies) exempts "Supplies made by cottage industry." 2. **No compulsory registration as a manufacturer.** Section 14(1)(a) requires registration by "a manufacturer who is not running a cottage industry". 3. **No online-seller registration.** Section 14(1A) requires people selling digitally ordered goods through an online marketplace, website or software application to register, but excludes a person running a cottage industry. ### What about sales through couriers and online payments? Section 3(3)(c) makes the payment intermediary (for digital payment) or the courier (for cash on delivery) liable to collect and pay tax on digitally ordered goods at the rates in the Eleventh Schedule. Section 3(7A) says tax so withheld is the final discharge of tax liability for supplies of digitally ordered goods by a cottage industry. The Act does not explain how this withholding fits with the Sixth Schedule exemption for cottage industry supplies. Nor does it say whether selling through Instagram or WhatsApp messages counts as an "online marketplace, website or software application". This page does not resolve either point. ### What does the Income Tax Ordinance say? - **Registration.** Section 181(1) requires every taxpayer to apply for registration in the prescribed form and manner, and expressly includes a person selling digitally ordered goods within Pakistan through an online marketplace or courier service. - **CNIC as NTN.** Section 181(4) says that for individuals with a NADRA-issued CNIC, the CNIC is used as the National Tax Number. - **Platforms.** Section 181(1A) says an online marketplace or courier service must not let a vendor use its platform for e-commerce unless the vendor is registered under the Ordinance. Section 14(1B) of the Sales Tax Act likewise bars an online marketplace or courier from letting a seller use its services for e-commerce unless the seller holds an NTN. - **Returns.** Section 114(1)(ab) requires a return from a person whose taxable income exceeds the maximum amount not chargeable to tax. Section 114(1)(b)(vii) also requires one from a person who has obtained a National Tax Number. ### Worked example (illustrative figures) Sana bakes custom cakes at her house in Johar Town, Lahore. She uses the house's domestic electricity connection, two relatives help her, and she sells through Instagram with courier delivery. 1. Industrial connection: none. Condition (a) met. 2. Location: residential area. Condition (b) met. 3. Workers: Sana plus two helpers = 3, not more than ten. Condition (c) met. 4. Turnover: Rs. 450,000 a month x 12 = Rs. 5,400,000 a year, not above Rs. 8,000,000. Condition (d) met. On these facts Sana's business is a cottage industry, her supplies are exempt under serial 3, and section 14 does not require her to register for sales tax. Section 181 of the Income Tax Ordinance still applies to her as a taxpayer, and the courier she uses can refuse service unless she is registered under that Ordinance. **If orders grow to Rs. 700,000 a month:** Rs. 700,000 x 12 = Rs. 8,400,000, which exceeds Rs. 8,000,000. Condition (d) fails, she is no longer a cottage industry, and section 14(1)(a) and (1A) would then require sales tax registration. ### What if ...? **What if I rent a small shop for baking?** Condition (b) needs a residential area, and condition (a) rules out an industrial connection. A commercial premises may fail one or both. The Act does not define "residential area". **What if I also sell from a counter to walk-in customers?** Selling goods to the public for consumption can make a person a retailer under section 2(28). Retailers other than Tier-1 pay sales tax through their monthly electricity bills under section 3(9). The Act does not say how that applies to a counter run from a home on a domestic connection. ### Common mistakes - **Treating sales tax and income tax as one registration.** They are separate laws with separate tests. - **Counting profit instead of turnover.** Section 2(5AB)(d) looks at annual turnover from all supplies. - **Forgetting helpers.** The ten-worker limit counts the total labour force. ### What to check in the official text Read clauses (5AB), (16) and (28) of section 2, section 3(3)(c) and (7A), and section 14 of the Sales Tax Act as amended to 30 June 2026, and serial 3 of Table-2 of the Sixth Schedule in the official PDF. Read sections 114 and 181 of the Income Tax Ordinance as amended to 30 June 2026. The registration form and manner are prescribed by the Board and are not set out in these sections. ### Frequently asked #### Is a home bakery a cottage industry? It can be. Section 2(5AB) of the Sales Tax Act defines a cottage industry as a manufacturing concern with no industrial gas or electricity connection, located in a residential area, with no more than ten workers and annual turnover from all supplies not above Rs. 8 million. All four conditions must be met. #### Do I need a separate NTN if I have a CNIC? Section 181(4) of the Income Tax Ordinance says that for individuals with a NADRA-issued CNIC, the CNIC is used as the National Tax Number. Section 181(1) still requires every taxpayer to apply for registration in the prescribed form and manner. #### Once I register for income tax, must I file a return every year? Section 114(1)(b)(vii) lists a person who has obtained a National Tax Number among those required to file a return of income. Section 114(1)(ab) also requires a return where taxable income exceeds the amount not chargeable to tax. ### Citations - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "does not have a total labour force of more than ten workers; and" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Sixth Schedule, Table-2 (Local Supplies only), serial 3](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "(a) a manufacturer who is not running a cottage industry;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "cottage industry as defined in clause (5AB) of section 2 of this Act; and" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Income Tax Ordinance, 2001, section 181 (Taxpayer’s registration)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181-taxpayer-s-registration), as amended to 2026-06-30: "in case of individuals having Computerized National Identity Card (CNIC) issued by the National Database and Registration Authority, CNIC shall be used as National Tax Number." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "every person (other than a company) whose taxable income for the year exceeds the maximum amount that is not chargeable to tax under this Ordinance for the year;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How can I check whether my restaurant bill is a genuine FBR invoice, and what happens if I report it? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/verify-restaurant-bill-fbr-invoice Law current to: 30 June 2026 (Sales Tax Act); 30 June 2025 (Sales Tax Rules). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Rule 150XB of the Sales Tax Rules, 2006 requires the Board to offer a website facility for buyers of integrated businesses to check an invoice. Under rule 150ZEL, customers of integrated Tier-1 retailers verify through the Tax Asaan app or a Board WhatsApp number, report an unverified invoice with set details, and lose any prize without proof of digital payment. **Applies to:** Diners and customers of restaurants, cafes and bakeries that issue electronic invoices through a point of sale integrated with FBR's computerized system. A genuine FBR invoice is one that the restaurant's point of sale has reported to the Board's computerized system, and the Sales Tax Rules, 2006 give buyers ways to check that. Rule 150XB is the general verification facility. The prize chapter, rules 150ZEK and 150ZEL, adds the Tax Asaan app, a WhatsApp route and a reporting procedure, but only for customers of integrated Tier-1 retailers. ### What does the law say? Four provisions work together. - **Rule 150XB** says the Board "shall provide a facility on its website" so that the buyer of an integrated person can verify whether the invoice issued to him has been communicated to the Board's Computerized System. An "integrated person" is a registered person notified by the Board under rule 150Q(2) and required by rule 150R to integrate its invoicing hardware and software. - **Section 56C(1) of the Sales Tax Act, 1990** lets the Board prescribe prize schemes "to encourage the general public to make purchases only from registered persons issuing tax invoices". - **Rule 150ZEK** limits the prize chapter to customers of Tier-1 retailers that have integrated their outlets for real-time reporting of sales. - **Rule 150ZEL** sets out the procedure: verify, receive a status, report if unverified, and have the Commissioner authenticate the claim. Restaurants have their own chapter too. Rule 150ZA applies Chapter XIV-A to registered restaurants, cafes, coffee shops, eateries, snack bars and hotels, and rule 150ZB(3)(e) deals with printing a QR code and an FBR fiscal invoice number on the sale invoice. ### How does verification work in practice? Under rule 150ZEL(2), the customer verifies the electronically generated invoice either through the "tax asaan" application or by WhatsApp, on a number "to be communicated through an order by the Board". That order is not part of this corpus, so this page does not give a number. Rule 150ZEL(3) says the app or WhatsApp number tells the customer whether the invoice is "Verified" or "unverified". If it is unverified, rule 150ZEL(4) requires the report, made through the same app or number, to include: | Item | What the rule asks for | | --- | --- | | (a) | Name of the customer | | (b) | CNIC of the customer | | (c) | Mobile number of the customer | | (d) | IBAN of the customer | | (e) | Proof of digital payment | | (f) | Picture of the unverified invoice | | (g) | GPS tagged picture of the business premises that issued the invoice | Rule 150ZEL(5) then says an alert is generated in the IRIS login of the Commissioner Inland Revenue, who authenticates the unverified invoice to decide whether the customer is entitled to the prize. ### What does the prize scheme look like now? The current rule 150ZEL(1) entitles customers "who reports unverified invoices issued by tier-l retailer" to prizes. According to the footnotes in the consolidated rules, that wording replaced a random computerized draw of names and CNICs, and the WhatsApp route replaced an SMS to 9966, both by S.R.O. 1513(I)/2024 dated 26 September 2024. So the prize is now tied to reporting an unverified invoice, not to entering a draw with a valid one. Rule 150ZEL(9) leaves the total prize money and the denomination of prizes to the Board. No amount is stated in the rules. ### Worked example (illustrative figures) Hamza has dinner with his family at a cafe in F-7, Islamabad. The bill is Rs. 6,500 and he pays by debit card. The receipt has a QR code. He scans it in the Tax Asaan app and the status comes back "unverified". To report it under rule 150ZEL(4), Hamza gathers: 1. his name, CNIC, mobile number and IBAN; 2. the card slip or bank alert for Rs. 6,500 as proof of digital payment; 3. a photo of the receipt; 4. a GPS tagged photo of the cafe's front. He submits these through the app. The Commissioner receives an alert and authenticates the invoice. Whether Hamza gets a prize depends on that authentication and on the cafe being an integrated Tier-1 retailer, which is the condition in rule 150ZEK. Had Hamza paid Rs. 6,500 in cash, the proviso to rule 150ZEL(4) says his right to claim the prize would be forfeited. ### What if the restaurant is not a Tier-1 retailer? The prize chapter speaks only of Tier-1 retailers. Section 2(43A) of the Sales Tax Act defines them by category, for example a unit of a chain, a shop in an air-conditioned mall, or electricity bills above Rs. 1,200,000 in the preceding twelve months. The rules do not say in terms whether every integrated restaurant falls in this chapter. If the restaurant is not a Tier-1 retailer, rule 150XB still gives the buyer a website check, but rules 150ZEK and 150ZEL do not describe a report or prize for that case. **What if the bill has no QR code or FBR number at all?** Rule 150ZB(3)(k) mentions "reporting of failure of registered person to transfer sale data by the customer", but it does so by applying rules 150ZEB, 150ZEC and 150ZEG. Those rules do not appear in the Sales Tax Rules as amended to 30 June 2025. The rules as held here therefore do not set out a separate reporting route for a bill with no FBR number. ### Common mistakes - **Assuming a printed QR code proves the invoice is genuine.** The rules make the status the test: the app or WhatsApp reply says "Verified" or "unverified". - **Paying cash and expecting a prize.** Without proof of digital payment the prize claim is forfeited. - **Skipping the GPS tagged picture.** It is one of the seven listed items, and rule 150ZEL(6) puts the onus for delay on the customer if particulars are incomplete. - **Treating the prize amount as fixed.** Rule 150ZEL(9) leaves it to the Board. ### What to check in the official text Read rules 150XB, 150ZA, 150ZB, 150ZEK and 150ZEL in the Sales Tax Rules, 2006 as amended to 30 June 2025, and section 56C of the Sales Tax Act, 1990. Then check the Board's order giving the WhatsApp number and any Board decision on prize amounts, since neither is in this corpus. If the question is whether a particular restaurant is a Tier-1 retailer, read section 2(43A) of the Act. ### Frequently asked #### Where do I check a restaurant bill? Rule 150XB requires the Board to provide a facility on its website for buyers of an integrated person to check whether their invoice reached the Board's computerized system. For customers of integrated Tier-1 retailers, rule 150ZEL names the Tax Asaan application or a WhatsApp number that the Board communicates by order. #### What details do I need to report an unverified bill? Rule 150ZEL(4) lists your name, CNIC, mobile number and IBAN, proof of digital payment, a picture of the unverified invoice, and a GPS tagged picture of the business premises that issued it. If your particulars are incorrect or incomplete, rule 150ZEL(6) puts the onus for any delay in the prize on you. #### I paid the restaurant in cash. Can I still get a prize? No. The proviso to rule 150ZEL(4) says the right to claim the prize stands forfeited if proof of digital payment is not provided. The rule does not say the report itself is disregarded. #### How big is the prize? Rule 150ZEL(9) leaves the total prize money and the denomination of prizes to the Board. The rules state no amount, and no Board decision on amounts is held on this site. ### Citations - [Sales Tax Rules, 2006, section 150XB (Provision of verification facility by the Board)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150xb-provision-of-verification-facility-by-the-board), as amended to 2025-06-30: "The Board shall provide a facility on its website to the buyer of an integrated person to verify if the invoice issued to him by such integrated person has been communicated to the Board’s Computerized System." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZEK (Application)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zek-application), as amended to 2025-06-30: "The provisions of this chapter shall apply to the customers of tier-1 retailers who have integrated their retail outlets with the Board’s computerized system for real- time reporting of sales" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZEL (Procedure for prize scheme)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zel-procedure-for-prize-scheme), as amended to 2025-06-30: "Provided that if the proof of digital payment is not provided by the customer, the right to claim the prize shall stand forfeited." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, section 56C (Prize schemes to promote tax culture)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#56c-prize-schemes-to-promote-tax-culture), as amended to 2026-06-30: "The Board may prescribe prize schemes to encourage the general public to make purchases only from registered persons issuing tax invoices." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 150ZA (Application)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150za-application), as amended to 2025-06-30: "The provisions of this Chapter shall be applicable to the registered persons being restaurants, cafes, coffee shops, eateries, snack bars and hotels having any of such business activities" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "(c) a retailer whose cumulative electricity bill during the immediately preceding twelve consecutive months exceeds Rupees" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Is a restaurant meal charged federal sales tax as goods, or taxed as a service? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/federal-sales-tax-restaurant-food-exempt Law current to: 30 June 2026 (Sales Tax Act); 30 June 2025 (ICT Ordinance). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer As a service, not as goods. Serial 53 of Table-2 of the Sixth Schedule, read with section 13 of the Sales Tax Act, exempts prepared food supplied by restaurants and caterers from federal sales tax on goods. In Islamabad, restaurant services are taxed under the ICT (Tax on Services) Ordinance at 5% for card payments and 15% for cash. **Applies to:** Restaurant, cafe and caterer owners, and diners, who want to know which tax law applies to a meal bill. Federal sales tax on goods does not apply to a restaurant meal, because the Sales Tax Act, 1990 exempts prepared food supplied by restaurants and caterers. The tax you see on a restaurant bill is a tax on services. In Islamabad that is the Islamabad Capital Territory (Tax on Services) Ordinance, 2001. In the provinces it is provincial law, which this site does not hold. ### What does the law say? **The goods side.** Section 3(1) of the Sales Tax Act charges sales tax at eighteen per cent on taxable supplies of goods. Section 13(1) then says that, notwithstanding section 3, the supply or import of goods specified in the Sixth Schedule shall be exempt, subject to conditions the Federal Government may specify. Table-2 of the Sixth Schedule is headed "Local Supplies only". Serial 53 reads: | Serial | Description | Heading | | --- | --- | --- | | 53 | Prepared food or foodstuff supplied by Restaurants and caterers | Respective heading | A footnote in the consolidated Act says serials 52 to 54 were added by the Finance Act, 2022. Note 1 to the Schedule says exemption is admissible on the basis of the description of goods in column 2, and the tariff headings are for reference. **The services side.** Section 3(1) of the ICT Ordinance charges sales tax "at rates specified in column (4) of Table-1 of the Schedule" on the value of taxable services rendered or provided in the Islamabad Capital Territory. Serial 1 of Table-1, substituted by the Finance Act, 2023, has two parts: | Part | Who | Rate | | --- | --- | --- | | 1(i) | Hotels, motels, guest houses, farmhouses, marriage halls, lawns, clubs and caterers | Fifteen percent | | 1(ii) | Restaurants including cafes, food (including ice-cream) parlors, coffee house, coffee shops, deras, food huts, eateries, resorts and similar cooked, prepared or ready-to-eat food service outlets | (a) Five percent where payment is received through debit or credit cards, mobile wallets or QR scanning, with no input tax adjustment or refund; (b) Fifteen percent where payment is received in cash | ### How does it work in practice? The two laws look at the same meal from different angles. The Sales Tax Act treats the food as goods and exempts it. The ICT Ordinance treats the restaurant as providing a service and taxes that service. The exemption in serial 53 does not carry across to the ICT Ordinance. Section 3(2A) of the Ordinance applies only listed parts of the Sales Tax Act to services. From section 13 it lists sub-sections (2), (3), (6) and (7), and from the Sixth Schedule it lists serials 48, 147 and 163 of Table 1. Serial 53 of Table-2 is not on that list. Section 3(1) of the ICT Ordinance also carries a proviso letting the Board require service providers in Table-1 and Table-2 to integrate with the Board's computerized system for real-time reporting, from a date prescribed by general order. ### Worked example (illustrative figures) A family eats at a restaurant in Jinnah Super, Islamabad. The food and service total Rs. 8,000 before tax. **Federal sales tax on goods:** serial 53 exempts the prepared food, so no tax at eighteen per cent under section 3(1) of the Sales Tax Act. **ICT sales tax on services, serial 1(ii):** | Payment | Rate | Tax | Bill | | --- | --- | --- | --- | | Debit card | 5% | Rs. 8,000 x 5% = Rs. 400 | Rs. 8,400 | | Cash | 15% | Rs. 8,000 x 15% = Rs. 1,200 | Rs. 9,200 | The difference of Rs. 800 comes entirely from the payment mode. If the same Rs. 8,000 of food were supplied by a caterer at an event in Islamabad, serial 1(i) applies instead, and it sets fifteen percent without a card and cash split: Rs. 1,200. ### What if ...? **What if I order takeaway or delivery?** Serial 53 covers prepared food "supplied by" restaurants and caterers, and serial 1(ii) covers services "provided or rendered by" restaurants. Neither text mentions dine-in, takeaway or delivery, and the law does not distinguish them. This page does not resolve how a particular takeaway order is treated. **What if the restaurant is in Lahore, Karachi or Peshawar?** Section 1(2) of the ICT Ordinance says it extends to the whole of Islamabad Capital Territory, so its rates do not apply there. The tax on restaurant services in the provinces is provincial law outside this corpus. Serial 53 of the Sixth Schedule still exempts the food from federal sales tax on goods. **What if a bakery sells bread and cakes, not meals?** Bread, nans and chapattis have their own entry at serial 54 of Table-2. Cakes and sweets are not in serial 53 or 54. ### Common mistakes - **Calling the tax on a restaurant bill "18% GST".** The eighteen per cent in section 3(1) of the Sales Tax Act is on goods, and prepared restaurant food is exempt from it. - **Reading serial 53 as a full exemption for the diner.** It exempts the goods, not the service tax charged under the ICT Ordinance or provincial law. - **Applying 5% to cash bills.** Under serial 1(ii) the five percent rate is tied to card, mobile wallet or QR payment. Cash is fifteen percent. - **Using 5% for caterers.** Caterers are in serial 1(i) at fifteen percent. ### What to check in the official text Read section 13 and Table-2 of the Sixth Schedule in the Sales Tax Act, 1990 as amended to 30 June 2026, including the Notes at the end of Table-2. Note 3 names serial 53 among entries to which Chapter 99 of the Customs tariff applies, without saying which table it means, so read it alongside Table-1, where serial 53 is omitted. Then read sections 1 and 3 and serial 1 of Table-1 in the ICT (Tax on Services) Ordinance, 2001 as amended to 30 June 2025. For a restaurant outside Islamabad, the provincial sales tax on services law is the place to look. ### Frequently asked #### Is restaurant food exempt from sales tax? It is exempt from federal sales tax on goods. Serial 53 of Table-2 of the Sixth Schedule to the Sales Tax Act covers prepared food or foodstuff supplied by restaurants and caterers, and section 13(1) makes Sixth Schedule supplies exempt. That exemption does not remove the tax on restaurant services under the ICT Ordinance or provincial law. #### What is the rate on a restaurant bill in Islamabad? Serial 1(ii) of Table-1 of the Schedule to the ICT (Tax on Services) Ordinance sets five percent where payment is received by debit or credit card, mobile wallet or QR scanning, with no input tax adjustment or refund, and fifteen percent where payment is received in cash. #### Is takeaway or home delivery taxed differently from dine-in? Neither serial 53 of the Sixth Schedule nor serial 1(ii) of the ICT Schedule mentions dine-in, takeaway or delivery. The texts do not draw that distinction, and this page does not add one. ### Citations - [Sales Tax Act, 1990, section 13 (Exemption)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#13-exemption), as amended to 2026-06-30: "supply of goods or import of goods specified in the Sixth Schedule shall, subject to such conditions as may be specified by the" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Sixth Schedule, Table-2 (Local Supplies only), serial number 53](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, section 3 (Scope of tax)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30#3-scope-of-tax), as amended to 2025-06-30: "there shall be charged, levied and paid a tax known as sales tax at rates specified in column (4) of Table-1 of the Schedule to this Ordinance of the value of the taxable services rendered or provided in the Islamabad Capital Territory" Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, Schedule, Table-1, serial number 1 (hotels, caterers, restaurants and similar food service outlets)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "there shall be charged, levied and paid a tax known as sales tax at the rate of" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Is bread, naan or roti from a bakery or tandoor exempt from sales tax? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/bread-naan-roti-sales-tax-exempt Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 13(1) of the Sales Tax Act exempts goods in the Sixth Schedule, and serial 54 of Table-2 covers all types of breads, nans and chapattis on local supply, with no brand or seller carve-out. Buns, rusk and sheer mal sit in a separate Eighth Schedule entry at 10%, and cakes and sweets are in neither entry. **Applies to:** Bakery and tandoor owners who make or sell bread, naan or roti in Pakistan, and customers who want to know whether tax applies. Bread, naan and roti supplied within Pakistan are exempt from federal sales tax. The exemption is serial 54 of Table-2 of the Sixth Schedule to the Sales Tax Act, 1990, and section 13(1) is what gives Sixth Schedule entries their effect. The entry is short and broad, but it names only breads, nans and chapattis, so other bakery products need their own answer. ### What does the law say? Section 3(1) of the Sales Tax Act charges sales tax at eighteen per cent of the value of taxable supplies. Section 13(1) then says that, notwithstanding section 3, the supply or import of goods specified in the Sixth Schedule "shall, subject to such conditions as may be specified by the Federal Government, be exempt from tax under this Act". Table-2 of the Sixth Schedule is headed "Local Supplies only". Serial 54 reads: | Serial | Description | Heading | | --- | --- | --- | | 54 | All types of breads, nans and chapattis | Respective headings | A footnote in the consolidated Act says serials 52 to 54 were added by the Finance Act, 2022. Note 1 to the Schedule says exemption is admissible on the basis of the description of goods in column 2, and the customs headings are given for reference and classification only. ### What does "all types" cover, and what does it not? The words "All types" and the absence of any exclusion matter. Serial 54 does not exclude: - bread sold under a brand name; - bread sold by a Tier-1 retailer or in a mall; - factory-made bread as opposed to a tandoor's naan. The contrast is visible in the same table. Serial 56 exempts milk but excludes milk "sold under a brand name" or supplied by corporate dairy farms. Serial 54 has no such words. What serial 54 does not reach: | Product | Where the Act deals with it | | --- | --- | | Buns, rusk, sheer mal, vermicelli | Eighth Schedule, Table-1, serial 87: local supply at 10%, "excluding those sold in bakeries, and sweet shops falling in the category of Tier-1 retailers" | | Cakes, pastries, mithai | Not named in serial 53 or 54 of Table-2 | | Imported bread | Table-2 is for local supplies only | A footnote says serials 84 to 88 of the Eighth Schedule were inserted by the Finance Act, 2024. ### Worked example (illustrative figures) Bilal runs a registered bakery in an air-conditioned shopping mall in Rawalpindi, which makes him a Tier-1 retailer under section 2(43A)(b). His made-up sales for one day: | Item | Sales | Treatment | | --- | --- | --- | | Double roti and naan | Rs. 40,000 | Exempt, serial 54 | | Buns and rusk | Rs. 10,000 | Not serial 54; serial 87 excludes bakeries that are Tier-1 | | Cakes | Rs. 20,000 | Not serial 54 | Step 1: the bread and naan carry no sales tax. Rs. 40,000 x 0 = Rs. 0. Step 2: the buns and rusk fall outside serial 87 because Bilal's bakery is a Tier-1 retailer. That entry does not itself give a rate for the excluded case. If the general rate in section 3(1) applies with no other provision reducing it, the tax is Rs. 10,000 x 18% = Rs. 1,800. Step 3: the cakes are not in serial 54. On the same assumption, Rs. 20,000 x 18% = Rs. 3,600. Had Bilal's bakery not been a Tier-1 retailer, serial 87 would describe the buns and rusk at 10%: Rs. 10,000 x 10% = Rs. 1,000. How a non-Tier-1 retailer actually pays sales tax is a separate question. ### What if ...? **What if I run a tandoor that sells naan and roti only?** Serial 54 covers nans and chapattis of all types on local supply. It does not depend on the size of the business or on registration. **What if I am registered and integrated with FBR?** The exemption still applies, but rule 150R(9) of the Sales Tax Rules, 2006 says electronic invoices for exempt items are also issued through the integrated system. **What if I serve naan with a meal in my restaurant?** Prepared food supplied by restaurants and caterers has its own exemption from federal sales tax at serial 53. A restaurant bill may still carry a tax on the service under the ICT (Tax on Services) Ordinance in Islamabad or provincial law elsewhere. ### Common mistakes - **Assuming branded bread is taxable.** Serial 54 has no brand exclusion. - **Treating buns and rusk as "bread".** They have their own entry at serial 87 of the Eighth Schedule. - **Treating the exemption as a reason not to invoice.** Rule 150R(9) applies to exempt items for integrated persons. - **Applying serial 54 to imports.** Table-2 is for local supplies only. ### What to check in the official text Read section 13 and Table-2 of the Sixth Schedule, including its Notes, and serial 87 of Table-1 of the Eighth Schedule, in the Sales Tax Act, 1990 as amended to 30 June 2026. Section 13(1) makes the exemption subject to conditions the Federal Government may specify, so check for any notification attaching conditions to serial 54. ### Frequently asked #### Is branded or packaged bread also exempt? Serial 54 of Table-2 of the Sixth Schedule says "All types of breads, nans and chapattis" and contains no exclusion for branded bread or for bread sold by Tier-1 retailers. Other entries in the same table do carve out brands, for example serial 56 on milk excludes milk sold under a brand name, but serial 54 does not. #### Are buns and rusk covered by the bread exemption? They are not named in serial 54. Buns, rusk, sheer mal and vermicelli have their own entry at serial 87 of Table-1 of the Eighth Schedule, at 10% on local supply, excluding those sold in bakeries and sweet shops that are Tier-1 retailers. #### Does an integrated bakery still need to issue an invoice for bread? Yes. Rule 150R(9) of the Sales Tax Rules, 2006 says electronic invoices for exempt items are also issued through the system integrated with the Board's computerized system. ### Citations - [Sales Tax Act, 1990, section 13 (Exemption)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#13-exemption), as amended to 2026-06-30: "supply of goods or import of goods specified in the Sixth Schedule shall, subject to such conditions as may be specified by the" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Sixth Schedule, Table-2 (Local Supplies only), serial number 54](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Eighth Schedule, Table-1, serial number 87 (vermicillies, sheer mal, bun and rusk)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "(b) a retailer operating in an air-conditioned shopping mall, plaza or centre, excluding kiosks;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "there shall be charged, levied and paid a tax known as sales tax at the rate of" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 150R (Obligations and requirements)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150r-obligations-and-requirements), as amended to 2025-06-30: "(9) In case of supply of exempt items, the electronic invoices shall also be issued through system integrated with the Board’s Computerized System under these rules." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf --- ## Is it mandatory for my restaurant to integrate its POS with FBR? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/restaurant-pos-integration-fbr-mandatory Law current to: 30 June 2026 (Sales Tax Act); 30 June 2025 (Sales Tax Rules and ICT Ordinance). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, in three situations. The proviso to section 23(6) of the Sales Tax Act requires every Tier-1 retailer to integrate. Rules 150ZA and 150ZB of the Sales Tax Rules require registered restaurants, cafes, coffee shops, eateries and snack bars to register every branch and every point of sale. Islamabad service providers face a separate integration proviso. **Applies to:** Owners of restaurants, cafes, coffee shops, bakeries, eateries and snack bars in Pakistan, especially those registered for sales tax, those that are Tier-1 retailers, and those providing food services in Islamabad. A restaurant, cafe or bakery can be bound to integrate its point of sale with FBR through more than one route. The duty depends on whether the outlet is a Tier-1 retailer, whether it is registered for sales tax as a restaurant-type business, and whether it provides food services in Islamabad. Any one route is enough to make integration compulsory. ### What does the law say? **Route 1: Tier-1 retailers.** Section 23(6) of the Sales Tax Act, 1990 has a proviso: "from such date, and in such mode and manner, as prescribed by the Board, all Tier-1 retailers shall integrate their retail outlets with Board's computerized system for real-time reporting of sales." Section 23(5) also lets the Board require any person or class of persons to integrate their electronic invoicing system by notification. **Route 2: registered restaurants and similar outlets.** Chapter XIV-A of the Sales Tax Rules, 2006 is titled "Monitoring or tracking of certain registered persons by electronic or other means". Rule 150ZA applies it to "registered persons being restaurants, cafes, coffee shops, eateries, snack bars and hotels having any of such business activities". Rule 150ZB(1) requires such a person to install the fiscal electronic device and software approved by the Board. Rule 150ZB(2) requires registration of all branches and each point of sale, giving: - POS registration number; - name of business; - branch name and branch address; - POS identification number; and - registration date. **Route 3: Islamabad service providers.** The second proviso to section 3(1) of the Islamabad Capital Territory (Tax on Services) Ordinance, 2001 requires any service provider in Table-1 or Table-2 of its Schedule to integrate with the Board's computerized system for real-time reporting, from the date and in the manner the Board prescribes by general order. Restaurant, cafe and similar food services appear at serial 1(ii) of Table-1. ### How does it work in practice? Once integrated, the general integration chapter of the Rules (Chapter XIV) sets duties for an "integrated person". Rule 150XA requires the outlet to: - make all electronic invoicing hardware and software, including payment counters comprising point of sale at each outlet, available for installation of the systems; - be responsible for the smooth functioning of that hardware and software; - report to the Board and the concerned Commissioner within twenty-four hours any operational failure, damage, disruption or tampering; and - report any inoperative invoicing hardware or software within twenty-four hours, with reasons and documentary evidence, to the Commissioner. Rule 150XC deals with outages: invoices generated while the invoicing or point of sale software is down, including because of internet or power failure, must be clearly marked as issued in offline mode and uploaded within 24 hours of restoration. For restaurant-type outlets, rule 150ZB(3) applies rules 150ZEB, 150ZEC and 150ZEG to sales from each registered branch, on matters that include recording of sales, printing of the QR code and FBR fiscal invoice number, transmission of invoice data, bearing the cost of equipment, and display of the FBR logo. Those three rules do not appear in the edition of the Rules held here, so their detail cannot be checked in this corpus. Rule 150ZB(4) adds that restaurants, bakeries, caterers and sweetmeat shops supplying prepared food, foodstuff and sweetmeats must show prices and the amount of tax separately on menu cards or menu boards. ### Worked example (illustrative figures) Nimco and Bakes is a made-up registered bakery and snack bar chain in Faisalabad. It has three branches: Kohinoor City with three counters, D Ground with two, and Madina Town with one. | Step | What the Rules require | Count | | --- | --- | --- | | Register branches | Rule 150ZB(2): all branches that make supplies | 3 branches | | Register points of sale | Rule 150ZB(2): each POS | 3 + 2 + 1 = 6 POS | | Menu boards | Rule 150ZB(4): price and tax shown separately | At all 3 branches | If the owner opens a seasonal counter at a fourth site, that branch and its counter also have to be registered before supplies are made from it. ### What if ...? **What if my bakery is not registered and not Tier-1?** Chapter XIV-A applies to registered persons, and the section 23(6) proviso applies to Tier-1 retailers. The Act separately deals with whether a business must register, which is outside this page. **What if I am in Lahore, Karachi or Peshawar?** Provincial sales tax on restaurant services, and any provincial invoicing systems, are outside this corpus. This page covers only the federal and Islamabad rules. **What if a POS machine breaks down?** Rule 150XA(d) requires the outlet to report inoperative invoicing hardware or software within twenty-four hours, with reasons and documentary evidence, to the Commissioner with jurisdiction. ### Common mistakes - **Integrating one till only.** Rule 150ZB(2) speaks of each point of sale and all branches. - **Treating offline bills as done.** Under rule 150XC they still have to be uploaded within 24 hours of restoration. - **Ignoring the menu board rule.** Prices and tax must be shown separately under rule 150ZB(4). ### What to check in the official text Read section 23(5) and (6) of the Sales Tax Act as amended to 30 June 2026; Chapter XIV (including rules 150XA and 150XC) and rules 150ZA to 150ZE of the Sales Tax Rules as amended to 30 June 2025; and section 3(1) of the ICT (Tax on Services) Ordinance. The Board's notifications and general orders fixing dates and the manner of integration are not held in this corpus. ### Frequently asked #### Do I need to integrate every counter, or only the main one? Rule 150ZB(2) requires a specified registered person to register all branches from which supplies are made and each point of sale to activate integration. Rule 150XA(a) similarly refers to payment counters comprising point of sale at each outlet. The text does not allow integrating only a main counter. #### What must my menu card show? Rule 150ZB(4) makes it mandatory for restaurants, bakeries, caterers and sweetmeat shops supplying prepared food, foodstuff and sweetmeats to show prices and the amount of tax separately on menu cards or menu boards displayed in their outlets for end consumers. #### What happens to bills issued when the internet is down? Rule 150XC says invoices generated during a failure of the invoicing or point of sale software, including disruption from internet or power failure, must be clearly identified as offline invoices and uploaded within 24 hours of restoration. ### Citations - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "all Tier-1 retailers shall integrate their retail outlets with Board’s computerized system for real-time reporting of sales." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 150ZA (Application)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150za-application), as amended to 2025-06-30: "The provisions of this Chapter shall be applicable to the registered persons being restaurants, cafes, coffee shops, eateries, snack bars and hotels having any of such business activities for the purpose of monitoring or tracking of taxable activities by electronic or other means." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZB (Electronic Invoice System)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zb-electronic-invoice-system), as amended to 2025-06-30: "shall register all his branches with the Board’s computerized system, from which they make or intend to make supplies and shall also register each point of sale (POS) to activate the integration" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150XA (Responsibilities of the Integrated Persons)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150xa-responsibilities-of-the-integrated-persons), as amended to 2025-06-30: "make all electronic invoicing hardware and software including payment counters comprising point of sale at each outlet, available for installation of the systems;" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, section 3 (Scope of tax)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30#3-scope-of-tax), as amended to 2025-06-30: "any service provider as mentioned in Table 1 and Table 2 of the Schedule shall integrate his businesses with the Board’s computerized system for real-time reporting of provision of services." Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Sales Tax Rules, 2006, Rule 150XC (printed within the rule 150XB entry)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf --- ## Is my restaurant, cafe or bakery a Tier-1 retailer? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/is-my-restaurant-a-tier-1-retailer Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Your outlet is Tier-1 if it meets any one limb of section 2(43A) of the Sales Tax Act as amended to 30 June 2026: a unit of a national or international chain, a shop in an air-conditioned mall or plaza (not a kiosk), electricity bills above Rs. 1,200,000 over twelve months, turnover above Rs. 200 million, or Board notification. **Applies to:** Owners of restaurants, cafes, bakeries, sweet shops and similar food outlets in Pakistan who want to test whether the Tier-1 retailer rules of the Sales Tax Act, 1990 reach their outlet. A food outlet is a Tier-1 retailer when it meets at least one of the categories in clause (43A) of section 2 of the Sales Tax Act, 1990. One limb is enough. The categories were reshaped by the Finance Act, 2026, so a checklist written before July 2026 may test your outlet against rules that no longer exist. ### What does the law say? Section 2(43A) defines a "Tier-1 retailer" as "a retailer falling in any one or more of the following categories". As amended to 30 June 2026, the categories still in force are: | Limb | Who it covers | | --- | --- | | (a) | A retailer operating as a unit of a national or international chain of stores | | (b) | A retailer operating in an air-conditioned shopping mall, plaza or centre, excluding kiosks | | (c) | A retailer whose cumulative electricity bill during the immediately preceding twelve consecutive months exceeds Rs. 1,200,000 | | (d) | A wholesaler-cum-retailer with turnover of more than Rs. 200 million, engaged in bulk import and supply of consumer goods wholesale to retailers and retail to consumers | | (gb) | A retailer with turnover exceeding Rs. 200 million in the immediately preceding twelve consecutive months, declared or worked back from tax deducted under section 236G or 236H of the Income Tax Ordinance | | (h) | Any other person or class of persons prescribed by the Board | A proviso added to limb (h) by the Finance Act, 2026 also lets the Board exclude any person or class of persons by notification in the official Gazette. ### Does a restaurant or bakery count as a "retailer" at all? Section 2(28) defines a retailer as a person supplying goods to the general public for the purpose of consumption. The Act does not say in terms whether a sit-down restaurant serving meals is a retailer. It does, however, refer to food outlets in the Tier-1 context. Serial 87 of Table-1 of the Eighth Schedule gives a reduced rate for local supply of vermicelli, sheer mal, bun and rusk, but excludes "those sold in bakeries, and sweet shops falling in the category of Tier-1 retailers". So the Act itself treats a bakery or sweet shop as capable of being Tier-1. ### How do I test my own outlet? Take the limbs one at a time and stop when one fits. 1. **Chain or franchise.** Is the outlet one unit of a national or international chain of stores? If yes, limb (a) applies. The Act does not define "chain" or mention franchises, so a franchise outlet has to be tested against those words. 2. **Location.** Is the outlet inside an air-conditioned shopping mall, plaza or centre? A cafe or bakery counter there is caught by limb (b) whatever its size, unless it is a kiosk. The Act does not define "kiosk". 3. **Electricity.** Add up the outlet's electricity bills for the last twelve consecutive months. Ovens, chillers and air-conditioning make this limb more relevant for food businesses than for many shops. Above Rs. 1,200,000, limb (c) applies. 4. **Turnover.** Is turnover over the last twelve consecutive months above Rs. 200 million, declared or worked back from advance income tax collected under section 236G or 236H? If yes, limb (gb) applies. 5. **Board notification.** Has the Board prescribed your outlet or its class under limb (h)? Such notifications are not held in this corpus. ### Worked example (illustrative figures) Three made-up food outlets in Karachi: | Outlet | Facts | Result | | --- | --- | --- | | Shireen Bakers, Tariq Road | Street-level bakery, one branch, bills Rs. 85,000 a month, turnover Rs. 40 million | 12 x Rs. 85,000 = Rs. 1,020,000. Below Rs. 1,200,000. No other limb fits, so not Tier-1 on these facts | | Chai Corner, food court of an air-conditioned mall | Small cafe unit with its own counter, bills Rs. 30,000 a month | Limb (b) can fit, unless the unit is a kiosk. Size and bill do not matter for this limb | | Karahi House, Clifton | Single restaurant, bills Rs. 110,000 a month | 12 x Rs. 110,000 = Rs. 1,320,000. Above Rs. 1,200,000, so limb (c) applies | If Shireen Bakers' monthly bill rose to Rs. 105,000, the twelve-month total would be 12 x Rs. 105,000 = Rs. 1,260,000, and limb (c) would then apply. ### What changes once an outlet is Tier-1? **Sales tax.** Section 3(9) charges retailers other than Tier-1 through their monthly electricity bills. Section 3(9A) instead makes Tier-1 retailers pay sales tax "at the rate as applicable to the goods sold". The general rate in section 3(1) is eighteen per cent, with other rates and exemptions set by the schedules. For restaurants, Table-2 of the Sixth Schedule (local supplies) lists "Prepared food or foodstuff supplied by Restaurants and caterers" as an exempt supply at serial 53. The Act does not explain separately how that exemption sits with section 3(9A), so this page does not resolve it. **Integration.** The proviso to section 23(6) requires all Tier-1 retailers to integrate their retail outlets with the Board's computerized system for real-time reporting of sales, from the date and in the manner the Board prescribes. **Provincial tax.** Sales tax on restaurant services in Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan is levied under provincial laws that are outside this corpus. ### Common mistakes - **Thinking every limb must be met.** The definition says "any one or more". - **Measuring the floor.** Shop area has not been a test since the Finance Act, 2023. - **Counting only one month's bill.** Limb (c) looks at the cumulative bill over the immediately preceding twelve consecutive months. - **Relying on the card machine.** The card-payment limb was omitted by the Finance Act, 2026. ### What to check in the official text Read clause (28) and clause (43A) of section 2, section 3(9) and (9A), and the proviso to section 23(6) of the Sales Tax Act as amended to 30 June 2026. Check serial 53 of Table-2 of the Sixth Schedule and serial 87 of Table-1 of the Eighth Schedule in the official PDF. Check also whether the Board has issued a notification under limb (h) naming or excluding food outlets. Those notifications are not in this corpus. ### Frequently asked #### Is a franchise outlet of a food brand a Tier-1 retailer? Limb (a) of section 2(43A) covers a retailer operating as a unit of a national or international chain of stores. The Act does not use the word franchise or define chain, so whether a particular franchise arrangement counts as a unit of a chain is not settled by the text itself. #### My bakery is in an air-conditioned plaza but is very small. Does size matter? Not under limb (b). That limb covers any retailer operating in an air-conditioned shopping mall, plaza or centre, excluding kiosks, and says nothing about floor area, turnover or electricity use. Floor area stopped being a Tier-1 test when the Finance Act, 2023 omitted old limb (e). #### Does the law mention bakeries and sweet shops as Tier-1? Section 2(43A) does not name them, but serial 87 of Table-1 of the Eighth Schedule refers to bakeries and sweet shops falling in the category of Tier-1 retailers. That entry shows the Act treats a bakery or sweet shop as capable of being Tier-1 when it meets a limb. ### Citations - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "(b) a retailer operating in an air-conditioned shopping mall, plaza or centre, excluding kiosks;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "Notwithstanding anything contained in this Act, Tier-1 retailers shall pay sales tax at the rate as applicable to the goods sold under relevant provisions of this Act or a notification issued there under" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "all Tier-1 retailers shall integrate their retail outlets with Board’s computerized system for real-time reporting of sales." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Eighth Schedule, Table-1, serial 87](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Sixth Schedule, Table-2 (Local Supplies only), serial 53](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Why do Islamabad restaurants charge 5% tax when I pay by card but 15% in cash? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/islamabad-restaurant-5-percent-card-15-cash Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Serial 1(ii) of Table-1 of the Schedule to the Islamabad Capital Territory (Tax on Services) Ordinance charges restaurant and cafe services at five per cent where payment is received by debit or credit card, mobile wallet or QR scanning, with no input tax adjustment or refund, and fifteen per cent where payment is received in cash. **Applies to:** Diners at restaurants, cafes, coffee shops, food huts and similar outlets in the Islamabad Capital Territory, and the owners who run them. The difference on your Islamabad restaurant bill comes straight from the Schedule to the Islamabad Capital Territory (Tax on Services) Ordinance, 2001. One entry, serial 1(ii) of Table-1, sets a five per cent rate for restaurant services paid by card, mobile wallet or QR code and a fifteen per cent rate for the same services paid in cash. The restaurant is not choosing the rate. The way you pay decides it. ### What does the law say? Section 3(1) of the Ordinance charges sales tax "at rates specified in column (4) of Table-1 of the Schedule" on the value of taxable services rendered or provided in the Islamabad Capital Territory. Section 3(2) says the tax is charged and levied as if it were sales tax under the Sales Tax Act, 1990. Serial 1 of Table-1 has two parts: | Serial | Services covered | Rate (column 4) | |---|---|---| | 1(i) | Hotels, motels, guest houses, farmhouses, marriage halls, lawns, clubs and caterers | Fifteen per cent | | 1(ii) | Restaurants including cafes, food (including ice-cream) parlours, coffee houses, coffee shops, deras, food huts, eateries, resorts and similar cooked, prepared or ready-to-eat food service outlets | (a) Five per cent where payment is received through debit or credit cards, mobile wallets or QR scanning, subject to the condition that no input tax adjustment or refund shall be admissible; (b) fifteen per cent where payment is received in cash | The footnote in the official text records that serial 1 and its entries were substituted by the Finance Act, 2023. The edition used here is amended to 30 June 2025. ### Who gets the lower rate? The five per cent rate attaches to the payment method, not to the size or type of restaurant. A small dera on the outskirts of Islamabad and a coffee shop in a Blue Area plaza both fall under serial 1(ii) if they serve cooked, prepared or ready-to-eat food. If the bill is settled by debit card, credit card, mobile wallet or a QR scan, the entry says five per cent. If it is settled in cash, the entry says fifteen per cent. The five per cent comes with a condition for the owner: no input tax adjustment or refund. A restaurant cannot take the lower rate on card sales and also claim back sales tax it paid on its own purchases against those sales. Hotels, marriage halls, lawns, clubs and caterers are listed separately in serial 1(i), which shows only fifteen per cent. The card rate in serial 1(ii) is not written into serial 1(i). ### Worked example (illustrative figures) A family eats at a restaurant in F-7, Islamabad. The menu prices of the food ordered add up to Rs. 8,000, and the menu states that tax is added at the till. The rates are those in serial 1(ii); the Rs. 8,000 is invented. **Paid by debit card:** 1. Value of the service: Rs. 8,000 2. Tax at five per cent: 8,000 x 5 / 100 = Rs. 400 3. Bill total: 8,000 + 400 = Rs. 8,400 **Paid in cash:** 1. Value of the service: Rs. 8,000 2. Tax at fifteen per cent: 8,000 x 15 / 100 = Rs. 1,200 3. Bill total: 8,000 + 1,200 = Rs. 9,200 The difference is Rs. 800 on the same meal, entirely because of how the bill was paid. ### What if I pay part in cash and part by card? The Schedule describes payment "received through debit or credit cards, mobile wallets or QR scanning" and payment "received in cash". It does not say how a split payment is to be treated. This page does not guess. Any Board order or notification on split payments is not part of the corpus used here. ### What if the restaurant is outside Islamabad? Section 3(1) charges tax on services "rendered or provided in the Islamabad Capital Territory". A restaurant in Rawalpindi, Lahore, Karachi or Peshawar is not covered by this Ordinance. Restaurant services in the provinces are taxed under provincial sales tax laws, which this site does not hold, so their rates are not stated here. ### Does the restaurant have to report card and cash sales to FBR? A proviso to section 3(1), added by the Finance Act, 2025, says that from a date and in a manner prescribed by the Board through a general order, any service provider mentioned in Table 1 or Table 2 of the Schedule shall integrate its business with the Board's computerized system for real-time reporting of provision of services. The date and manner depend on the Board's general order, which is not reproduced in this corpus. Section 3(3) also applies the Sales Tax Act, 1990 and its rules to the collection and payment of this tax, including registration, records, audit, enforcement and penalties. ### Common mistakes - **"Five per cent is a discount the restaurant offers."** It is a statutory rate in serial 1(ii)(a). The restaurant does not set it. - **"The card rate applies to wedding catering too."** Caterers and marriage halls are in serial 1(i), which shows only fifteen per cent. See the separate page on catering in Islamabad for the Table-2 entry that also mentions them. - **"A restaurant on the card rate can still claim input tax."** The five per cent rate is subject to the condition that no input tax adjustment or refund is admissible. - **"This rate applies across Pakistan."** It applies to services in the Islamabad Capital Territory only. ### What to check in the official text Read section 3 of the Islamabad Capital Territory (Tax on Services) Ordinance, 2001 and serial 1 of Table-1 of its Schedule in the edition amended to 30 June 2025. Confirm that no later Finance Act has changed serial 1 after that date. For the integration requirement, the proviso to section 3(1) depends on a Board general order, so check whether one has been issued and from what date it applies. ### Frequently asked #### Which outlets does the 5% card rate cover in Islamabad? Serial 1(ii) of Table-1 covers restaurants including cafes, food (including ice-cream) parlours, coffee houses, coffee shops, deras, food huts, eateries, resorts and similar cooked, prepared or ready-to-eat food service outlets. Hotels, marriage halls, lawns, clubs and caterers sit under serial 1(i), which carries fifteen per cent with no card rate. #### Can the restaurant claim input tax on the 5% card sales? No. The five per cent rate in serial 1(ii) applies subject to the condition that no input tax adjustment or refund shall be admissible. The fifteen per cent cash rate carries no such condition in the Schedule. #### Does the 5% card rate apply in Lahore, Karachi or Peshawar? No. The Islamabad Capital Territory (Tax on Services) Ordinance applies to services rendered or provided in the Islamabad Capital Territory. Restaurant services in the provinces are taxed under provincial sales tax laws, which are outside this site's corpus. ### Citations - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, section 3 (Scope of tax)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30#3-scope-of-tax), as amended to 2025-06-30: "there shall be charged, levied and paid a tax known as sales tax at rates specified in column (4) of Table-1 of the Schedule to this Ordinance of the value of the taxable services rendered or provided in the Islamabad Capital Territory" Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, Schedule, Table-1, serial 1(ii) (restaurants, cafes and similar food service outlets)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, Schedule, Table-1, serial 1(i) (hotels, motels, guest houses, farmhouses, marriage halls, lawns, clubs and caterers)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, section 3 (Scope of tax)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30#3-scope-of-tax), as amended to 2025-06-30: "any service provider as mentioned in Table 1 and Table 2 of the Schedule shall integrate his businesses with the Board’s computerized system for real-time reporting of provision of services." Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf --- ## What is the penalty if my restaurant does not integrate with the FBR POS system? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/penalty-restaurant-not-integrated-pos Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Serial 25A of the section 33 table sets Rs. 500,000 for a first default, then Rs. 1 million, Rs. 2 million and Rs. 3 million at fifteen-day intervals, with the first penalty waived if you integrate before the second is imposed. The premises can be sealed, and section 8B(6) cuts adjustable input tax by 60% for each non-integrated tax period. **Applies to:** Restaurants, cafes, bakeries and sweet shops that are Tier-1 retailers, or are otherwise required to integrate with FBR's computerized system, and have not done so. A Tier-1 restaurant, cafe or bakery that does not integrate its outlets with FBR faces three separate consequences under the Sales Tax Act, 1990: a fixed penalty that grows with each default, liability to have the premises sealed, and a cut in the input tax it can adjust. The Board can also have gas and electricity cut off for notified outlets. ### What does the law say? The duty itself is in the proviso to section 23(6): from the date and in the manner prescribed by the Board, all Tier-1 retailers shall integrate their retail outlets with the Board's computerized system for real-time reporting of sales. The penalties sit in the table to section 33. **Serial 25A** covers a person required to integrate under section 23 or section 40C(4) who fails to register, or if registered, fails to integrate in the manner required by the law and rules, or fails to issue electronic invoices after integration. Column (2) sets: | Default | Penalty | | --- | --- | | First default | Rs. 500,000 | | Second default, after fifteen days of the order for the first | Rs. 1,000,000 | | Third default, after fifteen days of the order for the second | Rs. 2,000,000 | | Fourth default, after fifteen days of the order for the third | Rs. 3,000,000 | Notwithstanding these amounts, the business premises "shall be liable to be sealed" by an officer of Inland Revenue in the manner prescribed. A proviso says that if the retailer integrates before the penalty for the second default is imposed, the Commissioner shall waive the first-default penalty. **Serial 25**, as substituted by the Finance Act, 2026, covers a person required to integrate with the Board who fails to register or fails to integrate within the time notified by the Board. It sets a penalty of up to Rs. 1 million, and if the offence continues one month after the first penalty, a second penalty of up to Rs. 5 million. The premises are liable to be sealed with or without a penalty. Serial 25 and serial 25A overlap. The Act does not say which one applies in a given case, and this page does not decide it. The sealing rules for non-integrated Tier-1 retailers refer to serial 25A. ### What happens to input tax? Section 8B(6) says that if a Tier-1 retailer does not integrate his retail outlet as prescribed during a tax period or part of it, the adjustable input tax for the whole of that tax period is reduced by 60%. This works alongside the general rule in section 8B(1) that input tax cannot be adjusted beyond ninety per cent of output tax. ### Worked example (illustrative figures) Crust and Crumb is a made-up bakery in an air-conditioned plaza in Rawalpindi, so it is Tier-1 under limb (b) of section 2(43A). It has not integrated. **Penalties if it never integrates (serial 25A):** | Order | Penalty | Running total | | --- | --- | --- | | First default | Rs. 500,000 | Rs. 500,000 | | Second default | Rs. 1,000,000 | Rs. 1,500,000 | | Third default | Rs. 2,000,000 | Rs. 3,500,000 | | Fourth default | Rs. 3,000,000 | Rs. 6,500,000 | **If it integrates after the first order but before the second penalty:** the Rs. 500,000 is waived by the Commissioner, so the serial 25A penalty is Rs. 0. **Input tax for one month it was not integrated:** suppose its input tax on flour, sugar, ghee and packaging for the month is Rs. 300,000. - Reduction under section 8B(6): 60% x Rs. 300,000 = Rs. 180,000. - Input tax left to adjust: Rs. 300,000 minus Rs. 180,000 = Rs. 120,000. The example ignores the separate ninety per cent cap in section 8B(1) and any Board notification changing it. ### What if ...? **What if my outlet is integrated but a POS stops working?** Rule 150X of the Sales Tax Rules says an integrated person who tampers with the system, makes sales otherwise than as the chapter prescribes, or contravenes its provisions, is subject to penalty under section 33. Serial 25A also covers failing to issue electronic invoices after integration. **What if FBR cuts my electricity?** Section 14AB lets the Board, through a Sales Tax General Order, direct gas and electricity companies to disconnect notified Tier-1 retailers who are registered but not integrated. The Board shall notify restoration upon integration. **What if I am a registered restaurant but not Tier-1?** Section 8B(6) and the sealing chapter of the Rules speak of Tier-1 retailers. Chapter XIV-A of the Sales Tax Rules, which covers registered restaurants, cafes, coffee shops, eateries and snack bars, ends by saying that a registered person who fails to comply with it is liable to penal action as provided in the Act, without naming a serial of the section 33 table. ### Common mistakes - **Waiting for the second notice.** The first-default waiver only works if integration happens before the second-default penalty is imposed. - **Integrating the main counter only.** A Tier-1 outlet must integrate its retail outlets, and the Rules speak of each point of sale. - **Assuming the input tax cut is prorated.** Section 8B(6) applies to the whole tax period. ### What to check in the official text Read serials 25 and 25A of the table in section 33, sections 8B, 14AB and 23(6) of the Sales Tax Act as amended to 30 June 2026, and rule 150X of the Sales Tax Rules. Note that section 8B(6) still refers to integration "prescribed under sub-section (9A) of section 3", although the Finance Act, 2025 omitted the proviso to section 3(9A); the integration duty is now in section 23(6). Board notifications fixing integration dates are not held in this corpus. ### Frequently asked #### Can the first Rs. 500,000 penalty be waived? Yes. The proviso to serial 25A says that if the retailer integrates with the Board's Computerized System before the penalty for the second default is imposed, the Commissioner shall waive the penalty for the first default. #### Does the input tax cut apply for the whole month if I integrate halfway through? Section 8B(6) says that if a Tier-1 retailer does not integrate during a tax period or part of it, the adjustable input tax for the whole of that tax period is reduced by 60%. On that wording, being non-integrated for part of the month is enough. #### Can FBR cut my restaurant's gas and electricity? Section 14AB lets the Board, through a Sales Tax General Order, direct gas and electricity companies to discontinue connections of notified Tier-1 retailers who are registered but not integrated. The Board must notify restoration once the retailer integrates. ### Citations - [Sales Tax Act, 1990, Section 33, Table, serial 25A](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 33, Table, serial 25 (as substituted by Finance Act, 2026)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8B (Adjustable input tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8b-adjustable-input-tax), as amended to 2026-06-30: "In case a Tier-1 retailer does not integrate his retail outlet in the manner as prescribed under sub-section (9A) of section 3, during a tax period or part thereof, the adjustable input tax for whole of that tax period shall be reduced by" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 150X (Consequences of non-compliance or contravention)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150x-consequences-of-non-compliance-or-contravention), as amended to 2025-06-30: "The integrated person who is found to have tampered with the system or made sales in the manner otherwise than as prescribed in this Chapter, or who contravenes any of the provisions of this Chapter, shall be subject to penalty under section 33" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "Notified tier-1 retailers registered but not integrated with the Board’s Computerized System" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "all Tier-1 retailers shall integrate their retail outlets with Board’s computerized system for real-time reporting of sales." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Do I deduct tax from my restaurant staff's salaries, and are free staff meals taxable? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/restaurant-staff-salary-tax-free-meals Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, where a salary is above the taxable limit. Section 149 of the Income Tax Ordinance requires whoever pays a salary to deduct tax at the employee's average rate. Free or subsidised food that a hotel or restaurant gives its employees during duty hours is exempt under clause (53A) of Part I of the Second Schedule. **Applies to:** Owners of restaurants, cafes, hotels and similar food businesses in Pakistan who pay salaries to cooks, waiters, managers and other staff. A restaurant that pays salaries is responsible for deducting income tax from them. Section 149 of the Income Tax Ordinance, 2001 puts that duty on every person responsible for paying salary, whether the employer is a hotel chain or a single cafe. Staff meals are a separate question, and the Ordinance answers it with a specific exemption for hotels and restaurants. ### What does the law say about deducting tax from salaries? Section 149(1) requires every person responsible for paying salary to deduct tax at the time of payment. The tax is worked out at the employee's average rate of tax, using the rates in Division I of Part I of the First Schedule, on the employee's estimated salary income for the tax year. Before deducting, the employer adjusts for tax already withheld from the employee under other heads and for admissible tax credits, on documentary evidence. Section 149(2) gives the formula: the average rate is A divided by B, where A is the tax on the estimated salary and B is the estimated salary. Section 12 defines salary widely. It includes pay, wages, overtime, bonus and commission, "any perquisite, whether convertible to money or not", and any allowance the employer provides. ### What are the salary rates for tax year 2027? The Ordinance as amended to 30 June 2026 carries the rates for tax year 2027, which covers salary paid from 1 July 2026 to 30 June 2027. Clause (2) of Division I applies where salary is more than seventy-five per cent of the person's taxable income, which is the usual position for restaurant staff. | Taxable income | Tax | | --- | --- | | Up to Rs. 600,000 | 0% | | Rs. 600,001 to Rs. 1,200,000 | 1% of the amount above Rs. 600,000 | | Rs. 1,200,001 to Rs. 2,200,000 | Rs. 6,000 + 11% of the amount above Rs. 1,200,000 | | Rs. 2,200,001 to Rs. 3,200,000 | Rs. 116,000 + 20% of the amount above Rs. 2,200,000 | | Rs. 3,200,001 to Rs. 4,100,000 | Rs. 316,000 + 25% of the amount above Rs. 3,200,000 | | Rs. 4,100,001 to Rs. 5,600,000 | Rs. 541,000 + 29% of the amount above Rs. 4,100,000 | | Rs. 5,600,001 to Rs. 7,000,000 | Rs. 976,000 + 32% of the amount above Rs. 5,600,000 | | Above Rs. 7,000,000 | Rs. 1,424,000 + 35% of the amount above Rs. 7,000,000 | ### Are free staff meals taxable? Not when they meet the conditions of clause (53A) of Part I of the Second Schedule. Part I lists incomes that are exempt from tax, and section 53 gives the Second Schedule its effect. Clause (53A) exempts certain perquisites received by an employee by virtue of employment. Sub-clause (ii) covers "free or subsidized food provided by hotels and restaurants to its employees during duty hours". Three conditions are built into those words: 1. The food is provided by a hotel or restaurant to its own employees. 2. It is food, free or subsidised, not money. 3. It is given during duty hours. A meal that meets all three is not added to the employee's salary when working out the tax under section 149. ### Worked example (illustrative figures) Spice Route, a restaurant in Gulberg, Lahore, pays three staff members the same amount every month of tax year 2027 and gives all staff a free lunch on shift. The salaries are invented; the rates are from the table above. **Waiter, Rs. 45,000 a month** - Annual salary: Rs. 45,000 x 12 = Rs. 540,000. - Rs. 540,000 does not exceed Rs. 600,000, so tax is 0%. Nothing is deducted. **Head chef, Rs. 150,000 a month** - Annual salary: Rs. 150,000 x 12 = Rs. 1,800,000. - Amount above Rs. 1,200,000: Rs. 1,800,000 - Rs. 1,200,000 = Rs. 600,000. - Tax: Rs. 6,000 + 11% x Rs. 600,000 = Rs. 6,000 + Rs. 66,000 = Rs. 72,000. - Average rate: Rs. 72,000 / Rs. 1,800,000 = 4%. - Monthly deduction: 4% x Rs. 150,000 = Rs. 6,000. **Manager, Rs. 300,000 a month** - Annual salary: Rs. 300,000 x 12 = Rs. 3,600,000. - Amount above Rs. 3,200,000: Rs. 400,000. - Tax: Rs. 316,000 + 25% x Rs. 400,000 = Rs. 316,000 + Rs. 100,000 = Rs. 416,000. - Monthly deduction: Rs. 416,000 / 12 = Rs. 34,666.67. The free shift lunches do not change any of these figures, because clause (53A)(ii) exempts them. ### What if the employer is a bakery or a cafe, not a restaurant? Clause (53A)(ii) names "hotels and restaurants". The Ordinance, as held in this corpus, does not define "restaurant" for this clause, and it does not say whether a cafe, bakery or sweet shop that serves food counts. The law does not settle this, and this page does not fill that gap. ### What if the restaurant pays a food allowance instead? The exemption speaks of food provided. A cash food allowance is an allowance provided by the employer, and section 12(2)(c) includes such allowances in salary. The clause says nothing about cash in place of meals. ### What if staff take meals home or eat on a day off? The clause is limited to food given during duty hours. Meals outside duty hours, or food for family members, are not described by sub-clause (ii). How such a perquisite would be valued is not covered on this page. ### Common mistakes - **Treating only large restaurants as employers who must deduct.** Section 149 applies to every person responsible for paying salary. - **Deducting a flat percentage.** Section 149 requires the employee's average rate on estimated annual salary, not a fixed rate. - **Ignoring salary changes during the year.** Section 149(1) allows adjustment for any excess or shortfall from earlier deductions, so the estimate should follow pay rises and bonuses. - **Assuming all benefits are exempt.** Clause (53A) lists specific perquisites. Other perquisites remain part of salary under section 12. ### What to check in the official text Read section 149 and section 12 in the Income Tax Ordinance as amended to 30 June 2026, and the salary table in clause (2) of Division I of Part I of the First Schedule. For meals, read clause (53A) of Part I of the Second Schedule; sub-clause (v) also lets the Board notify other no-cost perquisites, and any such notification is not held in this corpus. ### Frequently asked #### Does a small restaurant have to deduct tax from salaries? Section 149 applies to every person responsible for paying salary, and it sets no minimum business size. What decides whether any tax is deducted is the employee's estimated salary for the tax year: under the tax year 2027 salary table, no tax is due where taxable income does not exceed Rs. 600,000. #### Are free staff meals added to a waiter's taxable salary? A perquisite is normally part of salary under section 12. Clause (53A)(ii) of Part I of the Second Schedule exempts free or subsidized food provided by hotels and restaurants to their employees during duty hours, so those meals are not taxed. #### Is a cash food allowance covered by the same exemption? Clause (53A)(ii) speaks of food provided, not money paid. Section 12 includes any allowance provided by an employer in salary, so a cash food allowance falls within the salary definition and the clause does not mention it. ### Citations - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "(b) any perquisite, whether convertible to money or not;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 53 (Exemptions and tax concessions in the Second Schedule)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#53-exemptions-and-tax-concessions-in-the-second-schedule), as amended to 2026-06-30: "exempt from tax under this Ordinance, subject to any conditions and to the extent specified therein;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2) (rates where salary exceeds seventy-five per cent of taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (53A), sub-clause (ii)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is the tax on my restaurant bill in Lahore, Karachi or Peshawar charged under FBR law? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/restaurant-tax-lahore-karachi-provincial Law current to: 30 June 2026 (Sales Tax Act); 30 June 2025 (ICT Ordinance). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Not under the federal laws on this site. Section 1(2) of the ICT (Tax on Services) Ordinance limits it to Islamabad Capital Territory, and serial 53 of Table-2 of the Sixth Schedule exempts prepared restaurant food from federal sales tax on goods. The tax on a provincial restaurant bill comes from provincial law, not held here. **Applies to:** Diners and restaurant owners in Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan who see a tax line on a restaurant bill. The tax line on a restaurant bill in Lahore, Karachi or Peshawar is not charged under the federal laws this site holds. The federal law that taxes restaurant services, the Islamabad Capital Territory (Tax on Services) Ordinance, 2001, extends only to Islamabad. The federal Sales Tax Act, 1990 exempts prepared restaurant food as goods. What is left is provincial law, and this corpus does not contain it. ### What does the law say? **The ICT Ordinance stops at Islamabad.** Section 1(2) of the Ordinance says: "It extends to whole of Islamabad Capital Territory." Section 3(1) then charges sales tax on "the value of the taxable services rendered or provided in the Islamabad Capital Territory". Serial 1(ii) of Table-1 of its Schedule, which covers restaurants, cafes, coffee shops, deras, food huts, eateries and similar outlets, is part of that Ordinance and so has the same reach. **Federal sales tax on goods exempts restaurant food.** Section 13(1) of the Sales Tax Act exempts supplies of goods specified in the Sixth Schedule, subject to conditions the Federal Government may specify. Table-2 of that Schedule, headed "Local Supplies only", has serial 53: "Prepared food or foodstuff supplied by Restaurants and caterers". Nothing in that entry limits it to Islamabad. **Provincial sales tax on services is outside this corpus.** Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan each have their own law on sales tax on services. This site holds none of them, so it gives no provincial rate, threshold or procedure. ### How does it work in practice? For a diner outside Islamabad, the federal laws answer two questions and leave a third open: | Question | Answer in this corpus | | --- | --- | | Is the food charged federal sales tax as goods? | No, serial 53 of Table-2 of the Sixth Schedule exempts it | | Do the ICT rates of 5% (card) and 15% (cash) apply? | No, the ICT Ordinance extends only to Islamabad Capital Territory | | What tax is on the bill, and at what rate? | Provincial law, not covered here | The bill itself may still show an FBR invoice number or QR code if the restaurant is integrated with FBR under the Sales Tax Rules, 2006. That is a question of invoicing and reporting, not of which law charges the tax on the service. ### Worked example (illustrative figures) Three friends have lunch at a restaurant on MM Alam Road, Lahore. The bill shows food of Rs. 5,000 and a separate tax line. 1. **Federal sales tax on goods.** The food is prepared food supplied by a restaurant, so serial 53 of Table-2 of the Sixth Schedule exempts it. There is no federal charge at the eighteen per cent rate in section 3(1) of the Sales Tax Act on the Rs. 5,000. 2. **ICT Ordinance.** The restaurant is in Lahore, not Islamabad Capital Territory. Section 1(2) means the ICT rates do not apply, whether they pay by card or cash. 3. **The tax line.** On these facts it would rest on Punjab's law on sales tax on services. This site cannot say what rate that law sets or whether the figure on the bill is right. Compare the same Rs. 5,000 lunch in F-6, Islamabad. There, serial 1(ii) of the ICT Schedule applies: Rs. 5,000 x 5% = Rs. 250 if paid by card, or Rs. 5,000 x 15% = Rs. 750 if paid in cash. ### What if ...? **What if the restaurant chain has branches in both Islamabad and Karachi?** Section 3(1) of the ICT Ordinance looks at services rendered or provided in Islamabad Capital Territory. The Islamabad branch is taxed under it. The Karachi branch is not, and any tax on its services would come from provincial law outside this corpus. **What if the bill says "GST" or "sales tax"?** The label on the bill does not tell you which law applies. The federal Sales Tax Act exempts the food, so a tax line on a restaurant meal outside Islamabad points to provincial law. **What if I think the tax on my Lahore bill is wrong?** How a provincial tax is challenged is set by provincial law, which this site does not cover. FBR's invoice verification under the Sales Tax Rules, 2006 is a separate process. ### Common mistakes - **Assuming every tax on a bill is an FBR tax.** The federal laws here either do not reach the provinces (ICT Ordinance) or exempt the food (Sales Tax Act). - **Quoting Islamabad's 5% or 15% for another city.** Those rates are in the ICT Schedule and apply only in Islamabad Capital Territory. - **Treating serial 53 as covering the service.** It exempts the food as goods. It does not decide the tax on the restaurant's service under any law. ### What to check in the official text Read sections 1 and 3 and serial 1 of Table-1 of the Schedule in the ICT (Tax on Services) Ordinance, 2001 as amended to 30 June 2025, and section 13 with Table-2 of the Sixth Schedule in the Sales Tax Act, 1990 as amended to 30 June 2026. For the rate on a restaurant bill in Punjab, Sindh, Khyber Pakhtunkhwa or Balochistan, the provincial sales tax on services law of that province is the text to read. ### Frequently asked #### Does FBR collect the tax on my restaurant bill in Lahore? The federal laws on this site do not charge it. The ICT (Tax on Services) Ordinance extends only to Islamabad Capital Territory under section 1(2), and prepared restaurant food is exempt from federal sales tax on goods under serial 53 of Table-2 of the Sixth Schedule. The tax on the bill comes from provincial law, which is not covered here. #### What is the rate on a restaurant bill in Karachi? This site does not hold the Sindh law that sets it, so no rate is given. The five and fifteen percent rates in serial 1(ii) of the ICT Schedule apply only to restaurant services in Islamabad Capital Territory. #### Can a restaurant in Peshawar charge 18% federal sales tax on food? The eighteen per cent in section 3(1) of the Sales Tax Act is a tax on goods, and section 13(1) with serial 53 of Table-2 of the Sixth Schedule exempts prepared food or foodstuff supplied by restaurants and caterers. The Act does not provide an eighteen per cent federal charge on that food. ### Citations - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, section 1 (Short title, extent and commencement)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30#1-short-title-extent-and-commencement), as amended to 2025-06-30: "It extends to whole of Islamabad Capital Territory." Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, section 3 (Scope of tax)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30#3-scope-of-tax), as amended to 2025-06-30: "of the value of the taxable services rendered or provided in the Islamabad Capital Territory" Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Sales Tax Act, 1990, section 13 (Exemption)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#13-exemption), as amended to 2026-06-30: "supply of goods or import of goods specified in the Sixth Schedule shall, subject to such conditions as may be specified by the" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Sixth Schedule, Table-2 (Local Supplies only), serial number 53](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "there shall be charged, levied and paid a tax known as sales tax at the rate of" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What sales tax does a bakery or sweet shop charge on cakes and mithai? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/sales-tax-cakes-mithai-sweet-shops Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It depends on whether the shop is Tier-1. Under section 3(9A) of the Sales Tax Act, a Tier-1 bakery or sweet shop charges the rate applicable to the goods, which is 18% under section 3(1) unless a schedule says otherwise. No Sixth Schedule entry exempts cakes or loose mithai. Other shops pay through the electricity bill under section 3(9). **Applies to:** Owners of bakeries, sweet shops and mithai houses in Pakistan who want to know how federal sales tax under the Sales Tax Act, 1990, as amended to 30 June 2026, applies to cakes, pastries and mithai. Cakes and mithai have no rate of their own in the Sales Tax Act, 1990. How much federal sales tax a shop deals with depends first on whether the shop is a Tier-1 retailer, and only then on the goods. ### What does the law say? Three provisions decide the answer: 1. **Section 3(9A).** Tier-1 retailers "shall pay sales tax at the rate as applicable to the goods sold under relevant provisions of this Act or a notification issued there under". 2. **Section 3(1).** The general rate is eighteen per cent of the value of a taxable supply. 3. **Section 3(9).** Retailers other than Tier-1 are charged "through their monthly electricity bills", at 5% where the monthly bill does not exceed Rs. 20,000 and 7.5% where it does. Section 13 exempts only goods specified in the Sixth Schedule. The local-supply table of that Schedule (Table-2) exempts "All types of breads, nans and chapattis" at serial 54 and "Prepared food or foodstuff supplied by Restaurants and caterers" at serial 53. No entry in the Sixth Schedule names cakes, pastries, mithai or sweetmeats, whether loose or packed. ### How does it work in practice? **Is the shop Tier-1?** Clause (43A) of section 2 lists the categories. A shop meeting any one is Tier-1: for example a unit of a national or international chain, a shop in an air-conditioned mall or plaza (not a kiosk), or one whose electricity bills over the preceding twelve consecutive months exceed Rs. 1,200,000. **If Tier-1:** the shop charges the rate for the goods. For cakes and loose mithai, no reduced rate or exemption was found in the schedules, so the general 18% applies on the value excluding tax. **If not Tier-1:** the shop's federal sales tax is collected through its commercial electricity bill under section 3(9). The Act does not ask it to add a percentage to each box of mithai. **Packaged goods on the shelf.** The Third Schedule lists goods taxed on printed retail price, including "Biscuits in retail packing with brand name" (serial 47) and "Sugar confectionery, sold in retail packing" (serial 57, added by the Finance Act, 2026). Under section 3(2)(a), tax on these is charged at 18% of the retail price, which the manufacturer or importer must print on the pack. **Related items.** Serial 87 of Table-1 of the Eighth Schedule gives 10% on local supply of vermicelli, sheer mal, bun and rusk, but excludes those sold in bakeries and sweet shops that are Tier-1. ### Worked example (illustrative figures) **Tier-1: Shahi Sweets, a branch of a chain in Rawalpindi.** One day's counter sales, excluding tax: | Item | Value | Sales tax at 18% | | --- | --- | --- | | Mithai, 20 kg at Rs. 1,500 per kg | Rs. 30,000 | Rs. 5,400 | | Cakes, 10 at Rs. 2,500 | Rs. 25,000 | Rs. 4,500 | | Total | Rs. 55,000 | Rs. 9,900 | Check: Rs. 55,000 x 18% = Rs. 9,900. Customers pay Rs. 64,900 in total. If the shop prices tax-inclusive at Rs. 1,770 per kg of mithai, the value is Rs. 1,770 / 1.18 = Rs. 1,500 and the tax is Rs. 270. **Not Tier-1: Madina Sweets, a street shop in Multan.** 1. Monthly commercial electricity bill: Rs. 18,000. This does not exceed Rs. 20,000, so the rate is 5%. 2. Rs. 18,000 x 5% = Rs. 900 collected with the bill. 3. If the bill were Rs. 30,000, the rate would be 7.5%: Rs. 30,000 x 7.5% = Rs. 2,250. Section 3(9) states the rate by reference to "the monthly bill amount" but does not spell out the base in so many words. The arithmetic above applies the rate to the bill amount, which is how the wording reads. ### What if ...? **What if my bakery also serves customers at tables?** Serial 53 of Table-2 of the Sixth Schedule exempts prepared food supplied by restaurants and caterers. The Act does not define "restaurant" or say whether a bakery cafe is one. This page does not resolve that. **What if I sell bread and cakes together?** Bread falls under serial 54 of Table-2 and is exempt. Cakes have no exemption. A Tier-1 shop selling both is dealing in taxable and exempt goods, which affects how much input tax it can claim. **What if I bake to order for weddings?** The rate rules above are about goods. Any provincial tax on catering or services is levied under provincial laws that are outside this corpus. ### Common mistakes - **Assuming mithai is a food staple and so exempt.** The Sixth Schedule exempts named items, and mithai is not one of them. - **Adding 18% at a non-Tier-1 shop.** Section 3(9) collects tax from non-Tier-1 retailers through the electricity bill. - **Using the 10% rusk rate for cakes.** Serial 87 covers only vermicelli, sheer mal, bun and rusk, and excludes Tier-1 bakeries and sweet shops even for those. ### What to check in the official text Read section 3(1), 3(2)(a), 3(9) and 3(9A), section 13 and clause (43A) of section 2 of the Sales Tax Act as amended to 30 June 2026. In the official PDF, check serials 53 and 54 of Table-2 of the Sixth Schedule, serials 47 and 57 of the Third Schedule and serial 87 of Table-1 of the Eighth Schedule. Notifications under section 3(2)(b) or 3(6) could change a rate for particular goods. They are not in this corpus. ### Frequently asked #### Is loose mithai sold by weight exempt from sales tax? No entry in the Sixth Schedule exempts mithai or sweetmeats, whether sold loose or packed. A Tier-1 sweet shop therefore charges the rate that section 3(9A) points to, which is the 18% general rate in section 3(1) unless another schedule or a notification applies. #### My sweet shop is small and not Tier-1. Do I add 18% to my prices? Section 3(9) charges retailers other than Tier-1 through their monthly electricity bills, at 5% where the bill does not exceed Rs. 20,000 and 7.5% where it does. On the Act's wording, that is how a non-Tier-1 shop's federal sales tax is collected, rather than as a percentage added to each sale. #### Does the restaurant exemption cover a bakery cafe? Serial 53 of Table-2 of the Sixth Schedule exempts prepared food supplied by restaurants and caterers. The Act does not define restaurant, so whether a bakery with seating counts is not settled by the text. ### Citations - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "tax shall be charged from retailers, other than those falling in Tier-1, through their monthly electricity bills, at the rate of five percent where the monthly bill amount does not exceed rupees twenty thousand and at the rate of seven and half percent where the monthly bill amount exceeds the aforesaid amount" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“Tier-1 retailer” means a retailer falling in any one or more of the following categories, namely:-" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 13 (Exemption)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#13-exemption), as amended to 2026-06-30: "be exempt from tax under this Act" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Sixth Schedule, Table-2 (Local Supplies only), serials 53 and 54](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Third Schedule, serials 47 and 57](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Eighth Schedule, Table-1, serial 87](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Is income tax deducted from my payouts when I sell through Foodpanda or other delivery apps? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/delivery-app-tax-deduction-restaurant-payouts Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, if your app orders count as digitally ordered goods. Section 153(2A) of the Income Tax Ordinance makes payment intermediaries and courier services, defined to include food delivery platforms, collect tax from the seller: 1% where the customer pays digitally and 2% on cash on delivery, for tax year 2027. **Applies to:** Restaurants, cloud kitchens, bakeries and home cooks in Pakistan who sell food through delivery apps or other online platforms. Money a restaurant earns from app orders is taxed differently from money it takes over the counter. Since the Finance Act, 2025, the Income Tax Ordinance, 2001 has a separate charge on payments for digitally ordered goods and services, collected by whoever handles the money between the customer and the seller. ### What does the law say? Two provisions work together. **Section 6A** is the charging section. It imposes tax, at the rate in Division IVA of Part I of the First Schedule, on every person who receives payment for supply of digitally ordered goods or services delivered from within Pakistan using locally operated online platforms, including online marketplaces or websites. Section 6A(2) applies the rate to the gross amount of the receipts. **Section 153(2A)** is the collection section. It requires: 1. every payment intermediary, when processing payment through digital means on behalf of a seller of digitally ordered goods or services through locally operated e-commerce platforms, and 2. every courier business collecting cash from a buyer under cash on delivery terms on behalf of such a seller, to collect tax from the gross amount payable to the seller, including sales tax if any, and deposit it in the government treasury. Section 153(7) defines "courier service" to include logistics services, ride-hailing services, "food delivery platforms" and e-commerce services. It defines "payment intermediary" as a third party such as a bank, financial institution, exchange company or payment gateway that facilitates the transfer of funds without being the ultimate source or recipient of the payment. ### What are the rates for tax year 2027? | How the customer pays | Who collects | Rate | | --- | --- | --- | | Digital means or banking channels | Payment intermediary | 1% of gross amount paid or payable | | Cash on delivery | Courier service | 2% of gross amount paid or payable | The same two rates appear in Division IVA of Part I and in clause (3A) of Division III of Part III of the First Schedule. Section 153(2A) points to Division IVA; clause (3A) also refers to payments under section 153(2A). The figures match, so the cross-reference does not change the amount. ### How does it work in practice? The app or the payment processor keeps back the tax from what it passes on to the restaurant and deposits it. The restaurant receives its payout net of that tax. Section 181(1A) adds that an online marketplace or courier service shall not allow any vendor to use its platform for e-commerce transactions unless the vendor is registered under the Ordinance. Section 8 makes tax imposed under section 6A a final tax on the amount it is charged on. Section 6A(3), added by the Finance Act, 2026, changes that for a person whose turnover in a tax year exceeds Rs. 200 million: for them the tax is adjustable. A person with turnover up to Rs. 200 million may opt out of the final tax regime when filing the return for tax year 2027 and later years. ### Worked example (illustrative figures) Zaiqa Kitchen, a cloud kitchen in Gulshan-e-Iqbal, Karachi, sells only through a delivery app. In one month its app orders total Rs. 500,000, including any sales tax. Customers paid Rs. 300,000 by card or wallet and Rs. 200,000 in cash to the rider. - Digital payments: 1% x Rs. 300,000 = Rs. 3,000. - Cash on delivery: 2% x Rs. 200,000 = Rs. 4,000. - Total tax collected for the month: Rs. 3,000 + Rs. 4,000 = Rs. 7,000. If every order had been paid digitally, the tax would have been 1% x Rs. 500,000 = Rs. 5,000, which is Rs. 2,000 less. ### What does the law not spell out? Several points that matter for restaurants are not settled in the text: - **Whether every app is "locally operated".** Section 6A and section 153(2A) apply to locally operated platforms. The Ordinance does not define that phrase. - **Who collects on digital payments.** The duty falls on the "payment intermediary". Whether that is the app itself or the bank or gateway behind it depends on how the payment is routed, and the text does not name food apps in that definition. - **The base when the app keeps a commission.** The tax is on the "gross amount payable" to the seller under section 153(2A) and on gross receipts under section 6A. The Ordinance does not say how an app commission deducted before payout is treated in that base. Where the law is silent, this page does not fill the gap. ### What if I also sell at the counter? Section 6A reaches only payments for digitally ordered goods or services delivered through online platforms. Dine-in, takeaway and phone orders are outside it and are taxed under the ordinary rules for business income, which this page does not cover. ### Common mistakes - **Reading the deduction as the app's fee.** The 1% or 2% is income tax collected under section 153(2A), separate from any commission the platform charges. - **Assuming the tax is always final.** Above Rs. 200 million turnover it is adjustable under section 6A(3), and smaller sellers may opt out from tax year 2027. - **Selling on an app without registering.** Section 181(1A) bars platforms from letting unregistered vendors trade. ### What to check in the official text Read sections 6A, 8, 153 and 181 of the Income Tax Ordinance as amended to 30 June 2026, with Division IVA of Part I and clause (3A) of Division III of Part III of the First Schedule. Sales tax on restaurant services is levied by the provinces and, in Islamabad, under the ICT (Tax on Services) Ordinance; provincial laws are outside this corpus. ### Frequently asked #### What rate is deducted from delivery app orders paid by card or wallet? Clause (3A) of Division III of Part III, and Division IVA of Part I, of the First Schedule both set 1% of the gross amount paid or payable where payment is through digital means or banking channels by a payment intermediary. This is the rate in the Ordinance as amended to 30 June 2026, for tax year 2027. #### What rate applies to cash on delivery orders? 2% of the gross amount paid or payable, collected by the courier service. Section 153(7) defines courier service to include food delivery platforms that deliver digitally ordered goods and collect cash on behalf of the seller. #### Is this tax the end of my income tax on app sales? Section 8 makes tax under section 6A a final tax. Section 6A(3) makes it adjustable instead for a person whose turnover in a tax year exceeds Rs. 200 million, and lets a person with turnover up to Rs. 200 million opt out of the final tax regime when filing the return from tax year 2027. ### Citations - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "every courier business providing courier services collecting cash from a buyer under Cash on Delivery (CoD) payment terms on behalf of a seller for the supply of digitally ordered goods and services through e-commerce platforms (including websites);" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 6A (Tax on payments for digital transactions in e-commerce platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#6a-tax-on-payments-for-digital-transactions-in-e-commerce-platforms), as amended to 2026-06-30: "on every person who receives payment for supply of digitally ordered goods or services which are delivered from within Pakistan using locally operated online platforms including online marketplace or websites" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 8 (General provisions relating to taxes imposed under sections 5, 5A, 5AA, 6, 6A, 7, 7A, 7B and 7G)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#8-general-provisions-relating-to-taxes-imposed-under-sections-5-5a-5aa-6-6a-7-7a-7b-and-7g), as amended to 2026-06-30: "shall be a final tax on the amount in respect of which the tax is imposed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 181 (Taxpayer’s registration)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181-taxpayer-s-registration), as amended to 2026-06-30: "shall not allow any vendor to use its platform services to carry out e-commerce transactions unless such vendors have been registered under this Ordinance." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IVA (Rate of Tax on Payments for Digital Transactions in E-commerce Platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III, clause (3A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much tax is deducted when a franchise pays royalty or franchise fee to a foreign food brand? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/franchise-royalty-foreign-food-brand-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Where the payment is a royalty, 15% of the gross amount. Section 6 of the Income Tax Ordinance taxes a non-resident's Pakistan-source royalty at the Division IV rate of 15%, and section 152 requires the franchisee to deduct it when paying. A tax treaty may reduce this, but treaties are not held in this corpus. **Applies to:** Pakistani restaurants, cafes and bakeries that operate under a franchise or licence from a foreign food brand and pay it royalty or franchise fees. A Pakistani franchisee of an international burger, pizza or coffee brand usually pays the brand owner two kinds of money: an upfront franchise fee and a running royalty on sales. Under the Income Tax Ordinance, 2001, both are likely to be royalty, and royalty paid to a non-resident is taxed at 15% of the gross amount, deducted by the payer. ### What counts as royalty? Section 2(54) defines royalty as any amount paid or payable, however described or computed, "whether periodical or a lump sum", as consideration for, among other things: - the use of, or right to use, any patent, invention, design or model, secret formula or process, trademark or other like property or right; - the supply of any technical, industrial, commercial or scientific knowledge, experience or skill; - the use of, or right to use, industrial, commercial or scientific equipment; - assistance that is ancillary to enabling the use of any of those rights. The word "franchise" does not appear in this definition. A franchise agreement for a food brand typically grants the right to use a trademark, recipes and operating methods, which fall within the listed items. Whether a specific payment is royalty depends on what the contract pays for. A payment for something else, such as buying imported ingredients, is not royalty merely because it goes to the franchisor. ### What does the law say about the tax? **Section 6(1)** imposes tax, at the rate in Division IV of Part I of the First Schedule, on every non-resident person who receives any Pakistan-source royalty. Section 6(2) applies that rate to the gross amount. **Section 101(8)** makes a royalty Pakistan-source income if it is paid by a resident person, unless it relates to a business the resident carries on outside Pakistan through a permanent establishment there. **Division IV** sets the rate at "15% of the gross amount of royalty or fee for technical services", with 10% in any other case. **Section 152(1)** requires every person paying royalty or fees for technical services to a non-resident, where the amount is chargeable under section 6, to deduct tax from the gross amount paid at the Division IV rate. Section 6(3)(a) excludes a royalty where the right giving rise to it is effectively connected with a permanent establishment in Pakistan of the non-resident. A foreign brand that licenses from abroad, with no Pakistani branch, is not in that position. ### Worked example (illustrative figures) Crust and Co., a pizza franchise in DHA, Lahore, pays a foreign brand owner under a contract with made-up terms: a one-time franchise fee of Rs. 8,000,000 for a new outlet, and a monthly royalty of 6% of sales. Sales in one month are Rs. 15,000,000. The rate applied is the real one from Division IV. **Monthly royalty** - Royalty due: 6% x Rs. 15,000,000 = Rs. 900,000. - Tax to deduct: 15% x Rs. 900,000 = Rs. 135,000. - Remitted to the brand owner: Rs. 900,000 - Rs. 135,000 = Rs. 765,000. **One-time franchise fee** - Fee: Rs. 8,000,000, a lump sum, which section 2(54) still treats as royalty if it pays for the listed rights. - Tax to deduct: 15% x Rs. 8,000,000 = Rs. 1,200,000. - Remitted: Rs. 8,000,000 - Rs. 1,200,000 = Rs. 6,800,000. ### What if a tax treaty applies? Section 107 lets the Federal Government enter into agreements for the avoidance of double taxation, and gives them effect so far as they provide relief from tax under the Ordinance. The treaties themselves are not held in this corpus, so this page cannot say which rate applies to a brand from any particular country. Section 152(5) is relevant here. Where a person intends to pay a non-resident without deducting tax, other than a payment liable to a reduced rate under a double taxation agreement, the payer must first give the Commissioner written notice with the non-resident's name and address and the nature and amount of the payment. ### What if part of the payment is for something else? Franchise agreements often bundle royalty with charges for training, marketing funds, software or supplies. Division IV applies 15% to royalty and fees for technical services. Payments to a non-resident that are not covered by section 152(1) fall under other sub-sections of section 152, at rates in Division II of Part III of the First Schedule, which this page does not cover. ### Common mistakes - **Treating the upfront fee as outside the tax because it is paid once.** Section 2(54) covers lump sums as well as periodical payments. - **Deducting on the net remittance.** Section 152(1) requires deduction from the gross amount paid. - **Applying a treaty rate without checking the treaty.** The Ordinance gives treaties effect under section 107, but the rate comes from the treaty text, which is not in this corpus. - **Calling every payment to the franchisor royalty.** Payment for goods is a sale, not the use of a right. ### What to check in the official text Read section 2(54), sections 6, 101(8), 107 and 152 of the Income Tax Ordinance as amended to 30 June 2026, and Division IV of Part I of the First Schedule for the 15% rate, which applies in tax year 2027. Check the franchise contract to see what each payment is for, and the relevant double taxation agreement, which is not held here. ### Frequently asked #### Is a franchise fee the same as a royalty for income tax? The Ordinance does not use the word franchise in its royalty definition. Section 2 defines royalty as any amount, periodical or lump sum, paid for the use of or right to use a trademark or similar right, or for the supply of commercial knowledge, experience or skill, which is what most franchise fees pay for. #### Is the 15% worked out on the net or gross payment? On the gross amount. Section 6(2) applies the rate to the gross amount of the receipts, and section 152(1) requires deduction from the gross amount paid. #### Can a tax treaty reduce the 15%? Section 107 gives effect to double taxation agreements so far as they provide relief from tax under the Ordinance. The individual treaties are not held in this corpus, so this page cannot say what rate any treaty allows. ### Citations - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "(d) the supply of any technical, industrial, commercial or scientific knowledge, experience or skill;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 6 (Tax on certain payments to non-residents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#6-tax-on-certain-payments-to-non-residents), as amended to 2026-06-30: "The tax imposed under sub-section (1) on a non-resident person shall be computed by applying the relevant rate of tax to the gross" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 152 (Payments to non-residents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#152-payments-to-non-residents), as amended to 2026-06-30: "or fees for technical services to a non-resident person that is chargeable to tax under section 6 shall deduct tax from the gross amount paid" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IV (Rate of Tax on Certain Payments)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 101 (Geographical source of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#101-geographical-source-of-income), as amended to 2026-06-30: "(a) paid by a resident person, except where the royalty is payable in respect of any right, property, or information used, or services utilised for the purposes of a business carried on by the resident outside Pakistan through a permanent establishment; or" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 107 (Agreements for the avoidance of double taxation and prevention of fiscal evasion)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#107-agreements-for-the-avoidance-of-double-taxation-and-prevention-of-fiscal-evasion), as amended to 2026-06-30: "relief from the tax payable under this Ordinance;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What is the tax rate on catering services in Islamabad? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/islamabad-caterers-marriage-halls-tax-rate Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer The Islamabad Capital Territory (Tax on Services) Ordinance lists caterers twice. Table-1, serial 1(i) charges hotels, marriage halls, lawns, clubs and caterers at fifteen per cent. Table-2, serial 10 charges marriage halls, lawns, pandal and shamiana services and caterers at five per cent with no input tax adjustment. The Ordinance does not expressly reconcile the two. **Applies to:** Caterers, marriage hall and lawn owners, and pandal or shamiana providers in the Islamabad Capital Territory, and families booking them. Catering in Islamabad appears in two places in the Schedule to the Islamabad Capital Territory (Tax on Services) Ordinance, 2001, with two different rates. Table-1 lists caterers at fifteen per cent. Table-2 lists caterers at five per cent with no input tax adjustment or refund. The text of the Ordinance does not say in so many words how the two entries fit together, and this page sets out both rather than picking one. ### What does the law say? Section 3(1) is the charging provision. It charges sales tax on the value of taxable services rendered or provided in the Islamabad Capital Territory at the rates in column (4) of Table-1. Its first proviso adds that "the services specified in Table-2 of the Schedule shall be charged to tax at such rates and subject to such conditions and limitations as specified therein". The two entries that mention caterers are: | Where | Services described | Rate | |---|---|---| | Table-1, serial 1(i), PCT heading 98.01 | Services provided or rendered by hotels, motels, guest houses, farmhouses, marriage halls, lawns, clubs and caterers | Fifteen per cent | | Table-2, serial 10, respective headings | Services provided or rendered by marriage halls and lawns, by whatever name called, including "pandal" and "shamiana" services and caterers | Five per cent, subject to the condition that no input tax adjustment or refund shall be admissible | The footnotes in the official text record that Table-2 was inserted by the Finance (Supplementary) Act, 2022, and that serial 1 of Table-1 and its entries were substituted by the Finance Act, 2023. The edition used here is amended to 30 June 2025. ### Why is this unclear? Marriage halls, lawns and caterers are named in both tables. The proviso to section 3(1) tells the reader that Table-2 services are charged at Table-2 rates and conditions. At the same time, serial 1(i) of Table-1 still names the same businesses at fifteen per cent, and nothing in the Schedule says that serial 1(i) is subject to serial 10 of Table-2, or that the five per cent rate is optional. The Ordinance does not settle whether the two entries are meant to apply to different situations, or whether one displaces the other. This site reports what the text says. It does not resolve the overlap, and it does not rely on how the rates are applied in practice. ### Does the card rate help a caterer? No. The five per cent rate for payment by debit or credit card, mobile wallet or QR scanning is written into serial 1(ii) of Table-1, which covers restaurants, cafes, coffee shops, food huts and similar food outlets. Neither serial 1(i) nor serial 10 of Table-2 makes the rate depend on how the customer pays. ### Worked example (illustrative figures) A caterer in Islamabad serves a walima for 300 guests at a lawn in E-11. The catering bill before tax is Rs. 600,000. The amount is invented; the rates are the two in the Schedule. **Under Table-1, serial 1(i):** 1. Value of the service: Rs. 600,000 2. Tax at fifteen per cent: 600,000 x 15 / 100 = Rs. 90,000 3. Total: Rs. 690,000 **Under Table-2, serial 10:** 1. Value of the service: Rs. 600,000 2. Tax at five per cent: 600,000 x 5 / 100 = Rs. 30,000 3. Total: Rs. 630,000 4. Condition: the caterer cannot adjust or claim a refund of input tax against this supply. The gap between the two readings is Rs. 60,000 on this one event. The Ordinance text alone does not tell you which figure is right. ### What if the event is held at a marriage hall? Two different taxes can then touch the same function. The sales tax on services described above is one. The other is advance income tax under section 236CB of the Income Tax Ordinance, 2001, which the owner, lessee, operator or manager of the marriage hall, marquee, hotel, restaurant, lawn or club collects from the person holding the function. Section 236CB(2) extends that collection to food, service or any other facility provided by another person, so an outside caterer's bill is included. The separate page on section 236CB explains the rate. ### What if the caterer works outside Islamabad? The Ordinance applies to services rendered or provided in the Islamabad Capital Territory. Catering in Rawalpindi, Lahore or any other provincial city is taxed under provincial sales tax laws, which are outside this site's corpus. ### Common mistakes - **"Caterers always pay five per cent in Islamabad."** Table-2, serial 10 says five per cent, but Table-1, serial 1(i) still names caterers at fifteen per cent. Both are in the text. - **"The five per cent rate still allows input tax."** Serial 10 of Table-2 applies subject to the condition that no input tax adjustment or refund is admissible. - **"Sales tax on the hall covers the income tax too."** The advance income tax under section 236CB is a separate levy under a different law. ### What to check in the official text Read section 3(1) and its first proviso, serial 1 of Table-1 and serial 10 of Table-2 of the Schedule, in the edition amended to 30 June 2025. Check whether any Finance Act after that date, or any notification by the Board, has addressed the overlap between the two entries. Such notifications are not part of this corpus. ### Frequently asked #### Does the 5% card rate for Islamabad restaurants apply to caterers? No. The card rate is written into serial 1(ii) of Table-1, which covers restaurants, cafes and similar food outlets. Caterers are named in serial 1(i) of Table-1 at fifteen per cent and in serial 10 of Table-2 at five per cent with no input tax, and neither entry depends on how the customer pays. #### Which entry wins, Table-1 or Table-2? The Ordinance does not say so in terms. Section 3(1) charges Table-1 services at Table-1 rates and has a proviso that Table-2 services are charged at the rates and subject to the conditions in Table-2, but serial 1(i) of Table-1 still names marriage halls, lawns and caterers. This page does not resolve that overlap. #### Is there also income tax on a wedding held at a marriage hall? Yes, a separate one. Section 236CB of the Income Tax Ordinance, 2001 requires the owner, lessee, operator or manager of a marriage hall, lawn or similar venue to collect advance income tax on the function bill, including food supplied by an outside caterer. That is income tax, not sales tax on services. ### Citations - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, section 3 (Scope of tax)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30#3-scope-of-tax), as amended to 2025-06-30: "Provided that the services specified in Table-2 of the Schedule shall be charged to tax at such rates and subject to such conditions and limitations as specified therein:" Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, Schedule, Table-1, serial 1(i) (hotels, motels, guest houses, farmhouses, marriage halls, lawns, clubs and caterers)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, Schedule, Table-2, serial 10 (marriage halls and lawns, pandal and shamiana services and caterers)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Income Tax Ordinance, 2001, section 236CB (Advance tax on functions and gatherings)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236cb-advance-tax-on-functions-and-gatherings), as amended to 2026-06-30: "(2) Where the food, service or any other facility is provided by any other person, the prescribed person shall also collect advance tax on the payment for such food, service or facility" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What must a restaurant or bakery receipt and menu show under the sales tax law? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/what-restaurant-receipt-must-show Law current to: 30 June 2026 (Sales Tax Act); 30 June 2025 (Sales Tax Rules). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 23 of the Sales Tax Act lists invoice particulars such as the supplier's name and registration number, date, description, value and tax. The Sales Tax Rules add an FBR invoice number and QR code from an integrated POS, six year electronic records under rule 150S, and, under rule 150ZB(4), prices and tax shown separately on menus. **Applies to:** Registered restaurants, cafes, bakeries, caterers and sweetmeat shops, and diners who want to know what their bill should contain. A restaurant or bakery bill has to carry the ordinary tax invoice particulars from section 23 of the Sales Tax Act, 1990, and, where the business is integrated with FBR, a unique FBR invoice number and a printed QR code. Separately, the menu card or menu board has to show prices and the amount of tax separately. Each of these comes from a different provision. ### What does section 23 require on every invoice? Section 23(1) requires a registered person to issue a serially numbered tax invoice, in Urdu or English, containing: | Clause | Particular | | --- | --- | | (a) | Name, address and registration number of the supplier | | (b) | Name, address and registration number of the recipient | | (c) | Date of issue of invoice | | (d) | Description and quantity of goods | | (e) | Value exclusive of tax | | (f) | Amount of sales tax | | (g) | Value inclusive of tax | As amended by the Finance Act, 2026, section 23(1) also says a registered person making a taxable "as well as exempt supply" shall issue a tax invoice "bearing a verifiable and unique FBR invoice number". A new proviso says that condition applies "from the time as notified by the Board". Section 23(2) adds that no one other than a registered person or a person paying retail tax may issue an invoice under this section. Clause (b) comes with an explanation defining an "ordinary consumer" as someone buying for his own consumption. The section as printed does not spell out how clause (b) applies to a walk-in diner, so this page does not fill that in. ### What must an integrated restaurant's receipt show? Rule 150ZA brings registered restaurants, cafes, coffee shops, eateries, snack bars and hotels into Chapter XIV-A of the Sales Tax Rules, 2006. Rule 150ZB(3)(e) covers "printing and contents of sale invoice including printing of QR code and FBR fiscal invoice number thereon", and rule 150ZB(3)(h) covers display of the FBR logo and banner text. The detailed invoice content sits in Chapter XIV, which applies to integrated persons notified under rule 150Q(2): - **Rule 150R(4)(e)**: the point of sale must generate a QR code from the unique FBR invoice number and print it on the receipt. - **Rule 150R(13)** lists what the electronic invoice contains, including the unique FBR invoice number (in the format XXXXXX-DDMMYYHHMMSS-0001), a 7x7 mm QR code, the POS software registration number, the logo of the FBR digital invoicing system, seller name, address and registration number, date, description, quantity, value exclusive of tax, sales tax rate and amount of sales tax. Its proviso says some items, such as further tax and SRO numbers, may not apply to a retailer issuing electronic invoices to the general public. - **Rule 150R(9)** says exempt items are also invoiced through the integrated system. - **Rule 150R(11)** requires a signboard with FBR's logo, the text "Integrated with FBR" and the POS registration number, verifiable through the Board's verification services. ### How long must the records be kept? Rule 150S(1) requires an integrated person to issue "a real-time verifiable electronic sales tax invoice for every taxable supply and service" and to retain it for six years on electronic media, as provided in section 24 of the Act. Rule 150S(2) applies the same to debit and credit notes, and rule 150S(3) covers online sales. Rule 150XB then lets the buyer check on the Board's website whether the invoice reached the Board's system. ### What must the menu show? Rule 150ZB(4) says it is "mandatory for all the restaurants, bakeries, caterers and sweetmeat shops supplying prepared food, foodstuff and sweetmeats to show prices and amount of tax separately on menu cards or menu board displayed in their outlets for the end consumers". Footnote 251 in the consolidated rules says this sub-rule was inserted in May 2020. This is wider than Chapter XIV-A's list in rule 150ZA, because it names bakeries, caterers and sweetmeat shops as well. ### Worked example (illustrative figures) Sana runs a bakery-cafe in Blue Area, Islamabad, that is registered and integrated. A customer orders a club sandwich and a cold coffee and pays by debit card. For a restaurant or cafe in Islamabad, serial 1(ii) of Table-1 of the Schedule to the Islamabad Capital Territory (Tax on Services) Ordinance, 2001 sets five percent where payment is received by card, mobile wallet or QR scanning. The menu prices are made up: | Menu line | Price | Tax at 5% | Total | | --- | --- | --- | --- | | Club sandwich | Rs. 900 | Rs. 45 | Rs. 945 | | Cold coffee | Rs. 500 | Rs. 25 | Rs. 525 | Rule 150ZB(4) asks for the price and the tax to be shown separately, rather than a single figure of Rs. 945. The same serial sets fifteen percent where payment is received in cash, so on a cash payment the tax on the sandwich would be Rs. 135. The rule does not say how a menu should present two rates that depend on payment mode. The card receipt should carry Sana's name, address and registration number, the date, each item and quantity, Rs. 1,400 value exclusive of tax, Rs. 70 tax and Rs. 1,470 inclusive, plus the FBR invoice number and QR code from her POS. Outside Islamabad, the tax on a restaurant meal is charged under provincial law that this corpus does not hold, so no provincial rate is given here. ### What if ...? **What if the internet is down?** Rule 150XC says invoices issued during a software, internet or power failure must be clearly identified as offline invoices and uploaded within 24 hours of restoration. **What if the bakery only sells exempt bread?** Section 23(1) now speaks of taxable "as well as exempt" supply, and rule 150R(9) says exempt items are also invoiced through the integrated system. ### Common mistakes - **Showing only a tax-inclusive price on the menu.** Rule 150ZB(4) asks for price and tax separately. - **Thinking the menu rule covers only restaurants.** It names bakeries, caterers and sweetmeat shops too. - **Relying on rule 150ZB(3) alone for invoice content.** It applies rules 150ZEB, 150ZEC and 150ZEG, which do not appear in the rules as amended to 30 June 2025. The current invoice content is in rule 150R(13). ### What to check in the official text Read section 23 of the Sales Tax Act as amended to 30 June 2026, and rules 150R, 150S, 150XB, 150ZA and 150ZB of the Sales Tax Rules, 2006 as amended to 30 June 2025. Check any Board notification under the new proviso to section 23(1) on when the FBR invoice number condition applies, and any notification under rule 150Q(2) naming your class of business. ### Frequently asked #### Does the menu have to show the tax separately? Yes, for restaurants, bakeries, caterers and sweetmeat shops supplying prepared food, foodstuff and sweetmeats. Rule 150ZB(4) makes it mandatory to show prices and the amount of tax separately on menu cards or menu boards displayed in the outlet for end consumers. #### What must be printed on an integrated restaurant's receipt? Rule 150R(4)(e) requires the point of sale to print a QR code generated from the unique FBR invoice number, and rule 150R(13) lists the invoice particulars, including the FBR invoice number, the POS registration number, seller details, date, description, quantity, value exclusive of tax, rate and amount of sales tax. #### How long must a restaurant keep its electronic invoices? Rule 150S(1) requires an integrated person to retain the invoice as record for six years on electronic media, as provided in section 24 of the Act. Rule 150S(2) applies the same to debit and credit notes. ### Citations - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "(a) name, address and registration number of the supplier;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 150ZB (Electronic Invoice System)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zb-electronic-invoice-system), as amended to 2025-06-30: "it is also mandatory for all the restaurants, bakeries, caterers and sweetmeat shops supplying prepared food, foodstuff and sweetmeats to show prices and amount of tax separately on menu cards or menu board displayed in their outlets for the end consumers." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150R (Obligations and requirements)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150r-obligations-and-requirements), as amended to 2025-06-30: "(e) generate the QR Code on the base of unique FBR invoice number and print the QR Code on receipt;" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150S (Issuance of electronic invoice and record)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150s-issuance-of-electronic-invoice-and-record), as amended to 2025-06-30: "The integrated person shall issue a real-time verifiable electronic sales tax invoice for every taxable supply and service." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150XB (Provision of verification facility by the Board)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150xb-provision-of-verification-facility-by-the-board), as amended to 2025-06-30: "The Board shall provide a facility on its website to the buyer of an integrated person to verify if the invoice issued to him by such integrated person has been communicated to the Board’s Computerized System." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, Schedule, Table-1, serial number 1(ii) (restaurants, cafes and similar food service outlets)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf --- ## When does a bakery or restaurant have to register for federal sales tax? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/when-bakery-restaurant-register-sales-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 14(1)(b) of the Sales Tax Act requires a retailer liable to pay sales tax to register, but excludes retailers who pay through the electricity bill under section 3(9). In practice a Tier-1 bakery or restaurant must register, while a non-Tier-1 retail outlet generally need not. A bakery that also manufactures for others can fall under the manufacturer category. **Applies to:** Owners of bakeries, restaurants, cafes and sweet shops in Pakistan checking whether federal sales tax registration under the Sales Tax Act, 1990, as amended to 30 June 2026, is compulsory for them. Registration for federal sales tax turns on the categories in section 14(1) of the Sales Tax Act, 1990. For food outlets that sell to the public, the deciding category is the retailer one, and the deciding fact within it is whether the outlet is Tier-1. ### What does the law say? Section 14(1) requires every person making taxable supplies in Pakistan, in the course of a taxable activity, to register if it falls in any of these categories: | Clause | Category | | --- | --- | | (a) | A manufacturer who is not running a cottage industry | | (b) | A retailer liable to pay sales tax under the Act or rules, excluding a retailer required to pay through the electricity bill under section 3(9) | | (c) | An importer | | (d) | An exporter who intends to obtain sales tax refund on zero-rated supplies | | (e) | A wholesaler, dealer or distributor | | (f) | A person required under another federal or provincial law to register for a levy collected as if it were sales tax | Section 2(28) defines a retailer as a person supplying goods to the general public for the purpose of consumption. ### How does the Tier-1 test connect to registration? Section 3(9) charges retailers "other than those falling in Tier-1" through their monthly electricity bills. Section 3(9A) makes Tier-1 retailers pay sales tax at the rate applicable to the goods sold. So: - **A Tier-1 bakery or restaurant** is a retailer liable to pay sales tax under section 3(9A), and it is not paying under section 3(9). Clause (b) of section 14(1) catches it. - **A non-Tier-1 retail outlet** pays through the electricity bill and is expressly excluded from clause (b). Tier-1 status comes from clause (43A) of section 2: any one of being a unit of a national or international chain, operating in an air-conditioned mall or plaza (not a kiosk), electricity bills above Rs. 1,200,000 over the preceding twelve consecutive months, turnover above Rs. 200 million, or being prescribed by the Board. **Other categories still apply.** A bakery that manufactures rusk or cakes and supplies them to other shops may be a manufacturer under clause (a), whatever its retail status. Section 2(16) treats preparing, mixing and packaging goods as manufacture. ### What does registration trigger? - **Monthly returns.** Section 26(1) requires every registered person to file a return by the due date, indicating purchases, supplies, tax due and tax paid. - **Tax invoices.** Section 23(1) requires a registered person making taxable as well as exempt supplies to issue a tax invoice bearing a verifiable and unique FBR invoice number (a condition that applies from the time the Board notifies), with particulars such as value, tax and value including tax. - **Integration.** The proviso to section 23(6) requires all Tier-1 retailers to integrate their retail outlets with the Board's computerized system for real-time reporting of sales, from the date and in the manner the Board prescribes. - **Input tax.** Only a registered person can deduct input tax under the Act. ### Worked example (illustrative figures) Three made-up food businesses in Karachi: | Business | Facts | Registration position | | --- | --- | --- | | Zam Zam Tikka, Saddar | Single street restaurant, electricity bills Rs. 70,000 a month | 12 x Rs. 70,000 = Rs. 840,000, below Rs. 1,200,000. Not Tier-1 on these facts, pays via electricity bill, so outside section 14(1)(b) | | Crumbs Cafe, air-conditioned mall on Shahrah-e-Faisal | Cafe unit with its own counter, not a kiosk | Tier-1 under limb (b) of section 2(43A), so must register under section 14(1)(b) | | Al-Noor Bakers, Korangi | Street bakery, bills Rs. 60,000 a month, also supplies packed rusk to 40 shops | Not Tier-1 (12 x Rs. 60,000 = Rs. 720,000), but supplying manufactured goods to shops may bring it under clause (a) as a manufacturer | If Zam Zam Tikka's bills rose to Rs. 105,000 a month, the twelve-month total would be 12 x Rs. 105,000 = Rs. 1,260,000, which crosses the limb (c) threshold and brings it under section 14(1)(b). ### What if the outlet does not register? Section 14(2A) lets the Commissioner, or another officer the Board authorises, compulsorily register a person after inquiry and a hearing. Section 14AB lets the Board direct gas and electricity companies to disconnect any person, including a Tier-1 retailer, who fails to register, and notified Tier-1 retailers who are registered but not integrated. Section 14AC sets out a staged bar on bank accounts for unregistered suppliers of taxable goods, but it comes into force only on a date the Board notifies. ### Common mistakes - **Thinking turnover alone decides registration.** Clause (b) turns on liability to pay sales tax, which for retailers turns on Tier-1 status. - **Forgetting the manufacturer category.** Supplying baked goods to other shops can bring a small bakery into clause (a). - **Confusing federal and provincial registration.** Provincial sales tax on restaurant services is a separate regime outside this corpus. ### What to check in the official text Read section 14, including sub-sections (1), (2A), 14AB and 14AC, sections 3(9) and 3(9A), clauses (16), (28) and (43A) of section 2, section 23 and section 26 of the Sales Tax Act as amended to 30 June 2026. Section 14(3) leaves the registration procedure to be prescribed by the Board by notification, so check the current notifications for the steps. ### Frequently asked #### My restaurant is not Tier-1. Do I need a federal sales tax registration? Section 14(1)(b) excludes a retailer required to pay sales tax through the electricity bill under section 3(9). A non-Tier-1 retail outlet is not caught by that clause, although another category in section 14(1), such as manufacturer or importer, could still apply. #### Can FBR register my bakery without an application? Yes. Section 14(2A) lets the Commissioner, or an officer authorised by the Board, compulsorily register a person believed to be liable to registration, after inquiry and an opportunity of being heard. #### Is provincial registration for restaurant services the same thing? No. Section 14 is about federal sales tax on goods. Registration for provincial sales tax on restaurant services in Punjab, Sindh, Khyber Pakhtunkhwa or Balochistan is governed by provincial laws that are outside this corpus. ### Citations - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "(b) a retailer who is liable to pay sales tax under the Act or rules made thereunder, excluding such retailer required to pay sales tax through his electricity bill under sub-section (9) of section 3;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "Notwithstanding anything contained in this Act, Tier-1 retailers shall pay sales tax at the rate as applicable to the goods sold under relevant provisions of this Act or a notification issued there under" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "supplying goods to general public for the purpose of consumption" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "all Tier-1 retailers shall integrate their retail outlets with Board’s computerized system for real-time reporting of sales." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 26 (* Return)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#26-return), as amended to 2026-06-30: "indicating the purchases and the supplies made during a tax period, the tax due and paid and such other information, as may be prescribed" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Sections 14AB and 14AC (printed within section 14 in the consolidated text)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Does a company deduct withholding tax when it pays my restaurant for food or catering? Source: https://qanoondigest.com/faq/restaurants-cafes-bakeries/company-paying-restaurant-withholding-153 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It depends on how you are paid. Section 153 of the Income Tax Ordinance makes companies and other prescribed persons deduct tax from payments for goods and services. Clause (46AA)(vii) of Part IV of the Second Schedule switches section 153 off for hotels and restaurants receiving payments in cash for providing food, but not for bank-paid invoices. **Applies to:** Restaurant, cafe, bakery and catering owners in Pakistan who supply food to companies, government offices or other large business clients. When a company pays a restaurant's invoice, the answer turns on the method of payment. Section 153 of the Income Tax Ordinance, 2001 makes companies deduct tax from payments for goods and services, and Part IV of the Second Schedule carves out restaurants paid in cash for food. A bank-paid catering invoice falls back under the ordinary rule. ### What does the law say? Section 153(1) requires every prescribed person making a payment, in full or in part and including an advance, to a resident person: - for the sale of goods, except where payment is less than seventy-five thousand rupees in aggregate during a financial year; - for the rendering of or providing of services, except where payment is less than thirty thousand rupees in aggregate during a financial year; - on the execution of a contract, to deduct tax from the gross amount payable, including sales tax, at the rate in Division III of Part III of the First Schedule. Section 153(7) defines "prescribed person". It includes the Federal Government, a company, an association of persons constituted by or under law, a non-profit organisation, a foreign contractor or consultant, a consortium or joint venture, and individuals, associations of persons and sales tax registered persons with turnover of one hundred million rupees or more in any of the preceding tax years. Clause (46AA) of Part IV of the Second Schedule lists recipients to whom "the provisions of section 153 shall not apply". Sub-clause (vii) is "hotels and restaurants receiving payments in cash for providing accommodation or food or both, as the case may be". ### What does that mean for a restaurant? | How the company pays for food | Section 153 deduction? | | --- | --- | | Cash | No, clause (46AA)(vii) applies | | Cheque, bank transfer or other non-cash method | Yes, if the payer is a prescribed person and the yearly threshold is crossed | The clause is tied to the form of payment, not to the type of business alone. A restaurant does not escape section 153 on a bank-paid invoice simply because it is a restaurant. ### Which rate applies to a bank-paid invoice? This is where the law is not clear. Division III of Part III has one rate for goods and several for services, for tax year 2027: | Category in Division III | Rate | | --- | --- | | Sale of goods (other than toll manufacturing), recipient a company | 5% of gross amount | | Sale of goods (other than toll manufacturing), other recipients | 5.5% of gross amount | | Services listed in paragraph (2)(i), which include "hotel services" | 7% of gross amount | | Services other than those in sub-paragraphs (i) to (iv) | 14% of gross amount | The Ordinance, as held in this corpus, does not say whether a restaurant supplying cooked food or catering is selling goods or providing a service. Restaurant and catering services are not named in paragraph (2)(i). The text does not settle which row applies, and this page does not choose one. ### Worked example (illustrative figures) Tandoor House, a restaurant run by a sole proprietor in Blue Area, Islamabad, caters lunch for a private limited company. The invoice for one month is Rs. 400,000, including sales tax. The company pays by bank transfer, and its payments to Tandoor House during the year are well above both thresholds. - Clause (46AA)(vii) does not apply, because the payment is not in cash. - If the payment is treated as a sale of goods to a recipient that is not a company: 5.5% x Rs. 400,000 = Rs. 22,000 deducted, Rs. 378,000 paid. - If it is treated as a service outside paragraph (2)(i) to (iv): 14% x Rs. 400,000 = Rs. 56,000 deducted, Rs. 344,000 paid. The gap between the two readings is Rs. 56,000 - Rs. 22,000 = Rs. 34,000 on a single invoice, which is why the classification matters. The same company then pays Rs. 25,000 in cash for a staff dinner at the restaurant. Clause (46AA)(vii) applies, so section 153 does not. ### What if the payer is a small business or an individual? Section 153 applies only to prescribed persons. An individual or an association of persons below the one hundred million rupee turnover test in section 153(7), and not otherwise in the list, is not required to deduct under section 153. ### What if the restaurant wants a lower deduction? Section 153(4) lets the Commissioner allow deduction at a reduced rate, but only where the tax deductible is not minimum tax. Section 153(3) makes tax deductible under sub-section (1) a minimum tax on a resident person's income, with exceptions for goods sold by manufacturer companies and listed public companies. The reduced rate route is therefore narrow for most restaurants. ### Common mistakes - **Assuming all restaurant income is outside section 153.** The clause (46AA)(vii) carve-out is limited to payments received in cash. - **Ignoring sales tax in the base.** Section 153(1) applies the rate to the gross amount payable including sales tax. - **Treating a card payment as cash.** The clause says "in cash" and does not define it. Whether a card payment counts is not addressed in the text. ### What to check in the official text Read section 153 of the Income Tax Ordinance as amended to 30 June 2026, clause (46AA) of Part IV of the Second Schedule, and Division III of Part III of the First Schedule. Sales tax on restaurant services is provincial, or in Islamabad falls under the ICT (Tax on Services) Ordinance; provincial laws are outside this corpus. ### Frequently asked #### Who has to deduct tax under section 153? Only a prescribed person under section 153(7). That list includes the Federal Government, companies, associations of persons constituted by law, non-profit organisations, and individuals, associations of persons and sales tax registered persons with turnover of one hundred million rupees or more in any preceding tax year. #### Does the cash exemption cover a bank transfer? No. Clause (46AA)(vii) of Part IV of the Second Schedule covers hotels and restaurants receiving payments in cash for providing accommodation or food. A payment by cheque or bank transfer is not described by that clause, so section 153 applies to it in the ordinary way. #### Is the tax deducted under section 153 my final tax? Section 153(3) makes tax deductible under sub-section (1) a minimum tax on the income of a resident person, subject to exceptions for goods sold by manufacturer companies and listed public companies. It is not simply a credit that can be refunded in full. ### Citations - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "deduct tax from the gross amount payable (including sales tax, if any) at the rate specified in Division III of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "except where payment is less than thirty thousand Rupees in aggregate, during a financial year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clause (46AA), sub-clause (vii)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III, paragraph (1)(b) (sale of goods)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III, paragraph (2) (services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- # E-commerce and online sellers Tax on online stores, marketplaces, courier-collected payments and digital sales. ## What happens if a customer pays more than Rs. 200,000 in cash on delivery? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/cash-on-delivery-over-rs-200000 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 21(s) of the Income Tax Ordinance disallows fifty percent of the expenditure claimed against a sale where you receive more than Rs. 200,000 against a single invoice otherwise than through a banking channel or digital means. It applies when business income is computed with deductions, not to receipts taxed as final under section 6A. **Applies to:** Online and offline sellers in Pakistan who compute income under the head Income from Business and sometimes collect large payments in cash. A large cash payment does not create a new tax, but it can cost you half of the expenses you would otherwise claim against that sale. Section 21(s) of the Income Tax Ordinance, added by the Finance Act, 2025, is a rule about deductions. It applies for tax year 2027, which covers income earned from 1 July 2026 to 30 June 2027, under the Ordinance as amended to 30 June 2026. ### What does the law say? Section 20(1) allows a deduction for expenditure incurred wholly and exclusively for the purposes of business when computing income under the head "Income from Business". Section 21 then lists amounts that are not deductible "except as otherwise provided in this Ordinance". Clause (s) disallows: > fifty percent of the expenditure claimed in respect of sale where the taxpayer received payment exceeding two hundred thousand rupees otherwise than through a banking channel or digital means against a single invoice containing one or more than one transactions of supply of goods or provisions of services. Broken into parts, the clause bites when: | Element | What the clause says | |---|---| | Amount | payment received exceeding Rs. 200,000 | | Channel | otherwise than through a banking channel or digital means | | Unit | against a single invoice, which may contain one or more transactions | | Consequence | 50% of the expenditure claimed in respect of that sale is not deductible | **Digital means** is defined in section 2(17B): digital payments and financial services including online payment portals, online interbank fund transfers, online bill and invoice payment, over the counter digital payment services, and card payments through point of sale terminals, QR codes, mobile devices, ATMs or kiosks. The Ordinance does not define "banking channel" in section 2. ### When does it matter for an online seller? Section 21 works only where income is computed under the head Income from Business. That is where the interaction with section 6A comes in. - **Section 6A receipts taxed as final.** Section 6A taxes payments for digitally ordered goods or services at a rate applied to gross receipts. Section 8(1) makes a section 6A tax a final tax on the amount, and section 8(1)(b) says no deduction is allowable for expenditure incurred in deriving that amount. With no deduction to claim, section 21(s) has nothing to reduce. - **Section 6A tax that is adjustable.** Section 6A(3) makes the tax adjustable for a person whose turnover in a tax year exceeds Rs. 200 million, and lets a person with turnover up to Rs. 200 million opt out of the final tax regime when filing the return for tax year 2027 onwards. Where the tax is adjustable, income is computed with deductions, and section 21(s) can apply. - **Sales that are not digitally ordered.** Walk-in or phone sales outside section 6A are computed under the business head, so section 21(s) can apply to them. ### Worked example (illustrative figures) Kamran sells refurbished laptops in Rawalpindi through his website and has opted out of the final regime for tax year 2027, so his business income is computed with deductions. A buyer orders a gaming laptop for Rs. 350,000 and pays the full amount in cash to Kamran's own delivery rider at the door, against one invoice. Step 1, test the amount: Rs. 350,000 exceeds Rs. 200,000. Step 2, test the channel: cash handed over, not a banking channel or digital means. Step 3, expenditure claimed against the sale: purchase cost and repair parts Rs. 310,000. Clause (s) does not set out how expenditure is attributed to a single sale, so this figure is illustrative. Step 4, disallowed amount: 50% x Rs. 310,000 = Rs. 155,000. Step 5, profit from this sale for tax purposes: Rs. 350,000 minus the allowed Rs. 155,000 = Rs. 195,000, against an actual profit of Rs. 350,000 minus Rs. 310,000 = Rs. 40,000. Step 6, increase in taxable income: Rs. 195,000 minus Rs. 40,000 = Rs. 155,000. Had the buyer paid by bank transfer or card, Step 2 would fail and the full Rs. 310,000 would remain deductible, subject to the rest of the Ordinance. ### What if ...? **What if the buyer pays cash to a third-party courier on cash on delivery?** The Ordinance does not say whether clause (s) looks at how the buyer paid the courier or how the courier remitted the money to you. That question is left open by the text. **What if the buyer pays Rs. 150,000 in cash and Rs. 200,000 by bank transfer on one invoice?** Clause (s) speaks of "payment exceeding two hundred thousand rupees otherwise than through a banking channel or digital means". On the text, the cash part is Rs. 150,000, which does not exceed Rs. 200,000. The clause does not deal with split payments expressly. **What if the order is split over several invoices?** Clause (s) tests each single invoice. It does not address invoices that are split, and this page does not suggest splitting. ### Common mistakes - **Reading it as a penalty or extra tax.** It is a limit on deductions under section 21. - **Applying it to final-regime receipts.** Section 8(1)(b) already allows no deduction for them. - **Thinking all of the sale's expenses are lost.** Only fifty percent of the expenditure claimed in respect of that sale is disallowed. - **Treating a card or QR payment as cash.** Section 2(17B) treats these as digital means. ### What to check in the official text Read section 21(s) with the opening words of section 21, section 20(1) for the general deduction rule, section 2(17B) for digital means, and section 6A(3) with section 8(1) for when section 6A receipts are final. The Ordinance version amended to 30 June 2026 governs tax year 2027. ### Frequently asked #### Is exactly Rs. 200,000 in cash caught? No. Section 21(s) applies where the payment received is exceeding two hundred thousand rupees against a single invoice. A cash receipt of exactly Rs. 200,000 on one invoice does not exceed that figure. #### Does section 21(s) apply if my online income is taxed as final under section 6A? Section 8 says no deduction is allowable for expenditure incurred in deriving an amount taxed under section 6A as a final tax. With no expenditure claimed against those receipts, section 21(s) has nothing to halve. It matters where the section 6A tax is adjustable or you opt out of the final regime. #### Does a courier's cash on delivery count as cash received by me? The Ordinance does not say. Section 21(s) looks at whether the taxpayer received payment otherwise than through a banking channel or digital means, but does not address a buyer paying cash to a courier who then remits to the seller. ### Citations - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "fifty percent of the expenditure claimed in respect of sale where the taxpayer received payment exceeding two hundred thousand rupees otherwise than through a banking channel or digital means against a single invoice containing one or more than one transactions of supply of goods or provisions of services." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: ""digital means" means digital payments and financial services including but not limited to- online portals or platforms for digital payments/receipts; online interbank fund transfer services" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 6A (Tax on payments for digital transactions in e-commerce platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#6a-tax-on-payments-for-digital-transactions-in-e-commerce-platforms), as amended to 2026-06-30: "the tax imposed under this section on a person, whose turnover in a tax year exceeds two hundred million rupees, shall be adjustable" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 8 (General provisions relating to taxes imposed under sections 5, 5A, 5AA, 6, 6A, 7, 7A, 7B and 7G)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#8-general-provisions-relating-to-taxes-imposed-under-sections-5-5a-5aa-6-6a-7-7a-7b-and-7g), as amended to 2026-06-30: "no deduction shall be allowable under this Ordinance for any expenditure incurred in deriving the amount;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 20 (Deductions in computing income chargeable under the head “Income from Business”)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#20-deductions-in-computing-income-chargeable-under-the-head-income-from-business), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What happens if my courier or payment gateway does not deduct the tax? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/courier-or-gateway-fails-to-deduct-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer The courier or gateway becomes personally liable for the tax under section 161 and faces a penalty equal to 100% of the tax under entry 12B of the section 182 table. It can recover the tax from you, and section 162 also lets the Commissioner recover the undeducted tax directly from the seller who was paid. **Applies to:** Online sellers paid through a courier (cash on delivery) or a payment intermediary, and the couriers, banks and gateways required to deduct tax under section 153(2A). When a courier or payment gateway pays out a seller's money without taking the e-commerce tax, the Ordinance does not treat the tax as forgiven. It makes the courier or gateway answer for it, adds a penalty, and leaves the seller exposed to recovery as well. ### What does the law say? **The duty to deduct.** Section 153(2A) requires two kinds of collector to take tax when an online seller is paid: - every payment intermediary processing a payment through digital means for a seller of digitally ordered goods or services on locally operated e-commerce platforms (including websites); and - every courier business collecting cash from a buyer on cash on delivery terms for a seller of digitally ordered goods and services. Each "shall collect tax from the gross amount payable (including sales tax, if any) to the seller" at the rate in Division IVA of Part I of the First Schedule, and deposit it. For tax year 2027 (1 July 2026 to 30 June 2027) that rate is 1% for payments through digital means or banking channels and 2% for cash on delivery. **Liability of the collector.** Section 161(1) says that where a person fails to deduct tax from a payment as required under Division III of Part V of Chapter X (section 153 sits in that Division), or deducts it but fails to pay it to the Commissioner as required, "the person shall be personally liable to pay the amount of tax to the Commissioner". Section 161(1A) says no recovery can be made without first giving an opportunity of being heard. **The penalty.** Entry 12B of the section 182 Table, inserted by the Finance Act, 2025, covers a banking company, payment gateway or courier service provider that fails to deduct tax when paying a seller, or fails to pay the deducted tax as required, for digitally ordered goods or digitally delivered services using an e-commerce platform. The penalty is equal to 100% of the amount of tax involved. The general entry 15 for failure to deduct expressly excludes section 153(2A), so entry 12B is the one that applies here. **Recovery from the seller.** Section 162(1) lets the Commissioner "recover the amount not collected or deducted from the person from whom the tax should have been collected or to whom the payment was made". Section 161(2) separately entitles a collector held liable to recover the tax from the person from whom it should have been deducted. ### How does it work in practice? Three things follow from one missed deduction: | Who | What the Ordinance provides | Section | |---|---|---| | Courier or gateway | Personally liable for the tax not deducted or not paid over | 161(1) | | Courier or gateway | Penalty equal to 100% of the tax involved | 182, entry 12B | | Seller | Tax can be recovered directly from the seller who was paid | 162(1) | | Seller | Collector held liable may recover the tax from the seller | 161(2) | Section 162(2) says that recovering the tax from the seller does not free the collector from other legal action, from default surcharge, or from the disallowance of the related expense. Where the seller has already paid the tax by the time recovery is taken up, section 161(1B) says no recovery of the tax is made from the collector. The collector is instead liable for default surcharge at twelve per cent per annum from the date it failed to deduct to the date the tax was paid. For the seller, the missed deduction also matters under section 8. Section 8(1)(e)(ii) discharges the final tax liability only "to the extent that" the tax payable has been deducted at source under Division III of Part V of Chapter X. Receipts on which nothing was deducted are not covered by that discharge. ### Worked example (illustrative figures) Bilal's courier company in Multan collects Rs. 3,000,000 in cash on delivery for an online seller, Ayesha, during tax year 2027, and remits it all to her without deduction. 1. Tax that should have been deducted: Rs. 3,000,000 x 2% = Rs. 60,000. 2. Courier's personal liability under section 161(1): Rs. 60,000. 3. Penalty under entry 12B: 100% x Rs. 60,000 = Rs. 60,000. 4. Courier's total exposure: Rs. 60,000 + Rs. 60,000 = Rs. 120,000. 5. Section 161(2) lets the courier recover the Rs. 60,000 of tax from Ayesha. The Ordinance gives no matching right to pass on the penalty. **Variation.** Ayesha pays the Rs. 60,000 herself before recovery is taken up, six months after the courier should have deducted it. Under section 161(1B) no tax is recovered from the courier. Default surcharge instead: Rs. 60,000 x 12% x 6/12 = Rs. 3,600. Section 161(1B) does not say whether the entry 12B penalty still applies in that case. ### What if ...? **What if the courier deducted the tax but never deposited it?** Entry 12B also covers failure to pay the deducted tax as required, and section 161(1)(b) makes the collector personally liable for it. The seller's evidence that tax was deducted is the collector's certificate and payment receipt, covered on a separate page. **What if I received the money by bank transfer straight from the buyer?** Section 153(2A) places the duty on payment intermediaries and couriers. Whether a particular transfer is a payment processed by a payment intermediary is covered on a separate page. ### Common mistakes - **Treating a missed deduction as a saving.** Section 162(1) allows recovery from the seller who was paid. - **Assuming the penalty is the general 10% one.** Entry 15 excludes section 153(2A). Entry 12B sets 100% of the tax involved. - **Assuming final tax covers undeducted receipts.** Section 8(1)(e)(ii) discharges liability only to the extent tax was deducted at source. ### What to check in the official text Read section 153(2A) and the rate in Division IVA of Part I of the First Schedule, then sections 161 and 162. Read entries 12B and 15 of the section 182 Table in the source PDF, because the site text does not reproduce the table. Any Board procedure for the courier's or gateway's statements and deposits is not covered on this page. ### Frequently asked #### What penalty does a courier face for not deducting the tax? Entry 12B of the section 182 table sets a penalty equal to one hundred percent of the amount of tax involved. It applies where a banking company, payment gateway or courier service provider fails to deduct the tax when paying a seller, or fails to pay the deducted tax as the Ordinance requires. #### Can FBR come to me, the seller, for the tax that was not deducted? Yes. Section 162(1) lets the Commissioner recover the amount not deducted from the person to whom the payment was made. Separately, section 161(2) lets the courier or gateway, once held liable, recover the tax from you. #### Is my final tax discharged if nothing was deducted? Not for the part that was not deducted. Section 8(1)(e)(ii) discharges the liability only to the extent the tax payable has been deducted at source, so undeducted tax on those receipts stays outstanding. ### Citations - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "shall collect tax from the gross amount payable (including sales tax, if any) to the seller at the rate specified in Division IVA of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 161 (Failure to pay tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#161-failure-to-pay-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be personally liable to pay the amount of tax to the Commissioner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 162 (Recovery of tax from the person from whom tax was not collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#162-recovery-of-tax-from-the-person-from-whom-tax-was-not-collected-or-deducted), as amended to 2026-06-30: "recover the amount not collected or deducted from the person from whom the tax should have been collected or to whom the payment was made" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IVA (Rate of Tax on Payments for Digital Transactions in E-commerce Platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 182, Table, S. No. 12B (banking company, payment gateway or courier fails to deduct or pay tax under section 153(2A))](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 8 (General provisions relating to taxes imposed under sections 5, 5A, 5AA, 6, 6A, 7, 7A, 7B and 7G)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#8-general-provisions-relating-to-taxes-imposed-under-sections-5-5a-5aa-6-6a-7-7a-7b-and-7g), as amended to 2026-06-30: "the tax payable has been deducted at source under Division III of Part V of Chapter X" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do foreign sites like Temu or AliExpress pay tax on sales to Pakistani buyers? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/digital-presence-tax-on-foreign-sellers Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer As enacted by section 12 of the Finance Act, 2025, the Digital Presence Proceeds Tax Act charges 5% on proceeds of foreign vendors with significant digital presence in Pakistan, collected by banks and payment gateways when they remit payment abroad. The law names no platform, and this corpus cannot confirm later changes or exemptions. **Applies to:** Pakistani online sellers comparing their own tax with that of foreign vendors selling digitally ordered goods and services to buyers in Pakistan. Local sellers often ask why they lose 1% or 2% on every order while a parcel from a foreign site seems to arrive untouched. The Finance Act, 2025 answered that with a separate law aimed at foreign vendors. What follows is that law as enacted. It is a separate Act, not part of the Income Tax Ordinance, and this corpus does not hold any later amendment, exemption notification or rules made under it. ### What does the law say? **The Act.** Section 12 of the Finance Act, 2025 enacts the Digital Presence Proceeds Tax Act, 2025. Section 1(2) of that Act says it comes into force at once. **Who is charged.** Section 3(1) of the Act charges tax on "every foreign vendor having significant digital presence in Pakistan" on proceeds of every supply made from outside Pakistan of digitally ordered services or goods, "irrespective of whether delivered digitally or physically". Section 3(3) attributes proceeds to Pakistani users where the transaction is carried out through a foreign online marketplace or e-store, it concerns digitally ordered services or goods, and a Pakistani user is a party. Section 3(4) treats a user as Pakistani where, among other things, payment for the order has been electronically paid from within Pakistan. **The significant digital presence test.** Section 4 says a foreign vendor has significant digital presence where it supplies digitally ordered services and goods from outside Pakistan to users in Pakistan above one million rupees in a financial year, together with one of these factors: - a user base and associated data input; - billing or collection in local currency or with a local form of payment; - responsibility for final delivery of goods and services to Pakistani consumers; - responsibility for aftersales support, repairs or maintenance; or - continued marketing and sales promotion to attract customers. **The rate.** The Schedule to the Act sets 5% of the payment for services (including advertisement on social media platforms) and 5% of the payment made to the foreign provider for goods. **Collection.** Section 5(1) requires every payment intermediary, including a banking company, financial institution, licensed exchange company or payment gateway, that remits the proceeds outside Pakistan to a foreign vendor to deduct the tax from the gross amount paid. Section 5(3) requires deposit before the 7th of the following month. Section 5(4) says Customs shall ensure no courier delivers a consignment without evidence that this tax has been paid. Section 7 makes an intermediary that fails to collect or deposit personally liable, with default surcharge at KIBOR plus 3% per annum. ### How does it work in practice? The Income Tax Ordinance, amended to 30 June 2026, still refers to this tax. A proviso to section 148 says the Collector of Customs shall not collect import tax where the recipient of the goods is also liable under the Digital Presence Proceeds Tax Act, 2025 and the tax has been collected by the payment intermediary. A similar proviso in section 152(1C) stops banks deducting non-resident tax where this tax has been collected. The Finance Act, 2026 held in this corpus does not mention the Act. Compare the local position. Under section 153(2A) of the Ordinance, a payment intermediary or courier collects tax from a Pakistani seller on locally operated e-commerce platforms, at 1% for digital payments or 2% for cash on delivery. | Seller | Law | Who collects | Rate | |---|---|---|---| | Pakistani seller, local platform, card | Ordinance, section 153(2A) | Payment intermediary | 1% | | Pakistani seller, local platform, cash on delivery | Ordinance, section 153(2A) | Courier | 2% | | Foreign vendor with significant digital presence, goods | Digital Presence Proceeds Tax Act, 2025 | Payment intermediary remitting abroad | 5% | ### Worked example (illustrative figures) Zara in Islamabad buys a Rs. 10,000 kitchen gadget from a foreign e-store, paying by debit card. Assume the vendor meets the section 4 test. 1. Tax under the Schedule: Rs. 10,000 x 5% = Rs. 500. 2. The payment intermediary remitting the payment abroad deducts Rs. 500 from the gross amount paid to the vendor. 3. For comparison, a Pakistani seller on a local platform receiving the same Rs. 10,000 by card has Rs. 10,000 x 1% = Rs. 100 collected under section 153(2A). ### What if ...? **What if the foreign vendor sells less than one million rupees a year to Pakistan?** Section 4 is not met on the amount alone, so the vendor does not have significant digital presence under the Act. **What if the foreign company has a branch in Pakistan?** Section 3(5) excludes goods supplied from within Pakistan where the payment is effectively connected with the vendor's Pakistan branch, and services rendered through that branch. **What if the government exempts a country or class of goods?** Section 15 of the Act lets the Federal Government exempt any country, class of goods or services, or class of persons by notification. No such notification is held in this corpus. ### Common mistakes - **Assuming a named platform is taxed.** The Act sets a test and names no business. - **Treating the Act as part of the Ordinance.** It is a separate Act enacted by section 12 of the Finance Act, 2025. - **Assuming the text shown is current.** This corpus holds the Act only as enacted and cannot confirm withdrawal, amendment or exemptions after that. ### What to check in the official text Read section 12 of the Finance Act, 2025, especially sections 3, 4, 5 and 15 of the enacted Act and its Schedule. Check the provisos to sections 148 and 152(1C) of the Income Tax Ordinance. Confirm with official FBR sources whether the Act has since been amended or any exemption notified, since those instruments are not held here. ### Frequently asked #### What rate does the Digital Presence Proceeds Tax charge? The Schedule to the Act, as enacted in the Finance Act, 2025, sets 5% of the payment for services, including advertisement on social media platforms, and 5% of the payment made to the foreign provider for goods. #### Who actually collects it? Section 5 of that Act puts the duty on payment intermediaries, including banks, financial institutions, licensed exchange companies and payment gateways, that remit the proceeds outside Pakistan to a foreign vendor. They deduct the tax from the gross amount paid. #### Does the law say Temu or AliExpress is covered? No. The Act names no platform. It applies to a foreign vendor with significant digital presence, which means sales to Pakistani users above one million rupees in a financial year plus at least one listed factor, and whether a particular site meets that test depends on facts the law text does not record. ### Citations - [Finance Act, 2025, section 12 (Enactment of the Digital Presence Proceeds Tax Act, 2025)](https://qanoondigest.com/acts/finance-act/finance-act-2025#12-enactment-of-the-digital-presence-proceeds-tax-act-2025), as amended to 2025: "There is hereby enacted the Digital Presence Proceeds Tax Act, 2025, in the manner as follows" Official source: https://download1.fbr.gov.pk/Docs/2025629106147620FInanceAct2025.pdf - [Finance Act, 2025, Section 12, Digital Presence Proceeds Tax Act, 2025, section 4 (Significant digital presence in Pakistan)](https://qanoondigest.com/acts/finance-act/finance-act-2025), as amended to 2025: "if the aggregate amount exceeds one million rupees in a financial year along with one of the following additional factors" Official source: https://download1.fbr.gov.pk/Docs/2025629106147620FInanceAct2025.pdf - [Finance Act, 2025, Section 12, Digital Presence Proceeds Tax Act, 2025, section 5 (Responsibility to collect) and Schedule (rates)](https://qanoondigest.com/acts/finance-act/finance-act-2025), as amended to 2025: "shall deduct tax from the gross amount paid at the rate specified in Schedule to this Act" Official source: https://download1.fbr.gov.pk/Docs/2025629106147620FInanceAct2025.pdf - [Income Tax Ordinance, 2001, section 152 (Payments to non-residents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#152-payments-to-non-residents), as amended to 2026-06-30: "Provided that the banking company and financial institution shall not deduct the tax under this sub-section where the recipient is also liable to Digital Presence" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 148 (Imports)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#148-imports), as amended to 2026-06-30: "Provided also that the Collector of Customs, shall not collect tax under this section, where the recipient of goods is also liable under the Digital Presence" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "every payment intermediary at the time of processing payment through digital means, on behalf of a seller of digitally ordered goods or services through locally operated e-commerce platforms (including websites)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do I need sales tax registration (STRN) to sell goods online, or is an NTN enough? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/do-online-sellers-need-sales-tax-registration Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer An NTN alone is not enough for most sellers of goods. Section 14(1A) of the Sales Tax Act requires every person selling digitally ordered goods from within Pakistan through a marketplace, website or app to register for sales tax. The only exceptions are a cottage industry and retailers who pay sales tax through their electricity bills. **Applies to:** People and businesses in Pakistan selling physical goods that buyers order through an online marketplace, a website or a mobile app. Selling goods online brings two separate registrations into play: income tax registration, which gives you an NTN, and sales tax registration, which gives you an STRN. Since the Finance Act, 2025, the Sales Tax Act names online sellers of goods directly, and most of them need both. ### What does the law say? **Income tax registration.** Section 181(1) of the Income Tax Ordinance requires every taxpayer, "including a person selling digitally ordered goods or services from within Pakistan using online marketplace or a courier service", to apply for registration. Section 181(1A) then bars an online marketplace or courier service from letting any vendor use its platform for e-commerce unless the vendor is registered under the Ordinance. **Sales tax registration.** Section 14(1A) of the Sales Tax Act requires every person, including a non-resident person, selling digitally ordered goods from within Pakistan through an online marketplace, website or software application to apply for registration. It names two exceptions: 1. a person running a cottage industry; and 2. retailers who are required to pay sales tax through their electricity bills under section 3(9). Section 14(1B) then says an online marketplace or courier involved in supplying digitally ordered goods shall not allow any person to use their services for e-commerce "unless it holds NTN and in case sub-section (1A) of this section applies also holds sales tax registration". So the answer turns on whether you fall inside one of the two exceptions. If you do not, an NTN is not enough. ### Who falls inside the exceptions? **Cottage industry.** Section 2(5AB) defines a cottage industry as a manufacturing concern that meets every one of these conditions: | Condition | Text of section 2(5AB) | |---|---| | (a) | does not have an industrial gas or electricity connection | | (b) | is located in a residential area | | (c) | does not have a total labour force of more than ten workers | | (d) | annual turnover from all supplies does not exceed eight million rupees | It must be a manufacturing concern. A person who buys finished goods and resells them online is not manufacturing, so the cottage industry exception does not fit a pure reseller on the text. **Retailers paying through electricity bills.** Section 3(9) charges sales tax from retailers, other than Tier-1 retailers, through their monthly electricity bills. The exception in section 14(1A) covers retailers "who are required to pay sales tax through electricity bills" under that sub-section. The Act does not say how a seller who trades only online, with no shop electricity connection, is treated under this exception. That point is not settled by the text we hold. ### How does it work in practice? Section 3(3)(c) puts the duty to collect and pay sales tax on digitally ordered goods on the payment intermediary, when the buyer pays digitally, and on the courier, when goods are sent cash on delivery. The rate is in S. No. 8 of the Eleventh Schedule: 2% of the gross value of supplies, withheld by payment intermediaries and couriers from persons supplying digitally ordered goods from within Pakistan through an online marketplace, website or software application. Section 3(7A) says that this withheld tax is the final discharge of sales tax liability on digitally ordered goods for two groups: a cottage industry as defined in section 2(5AB), and retailers other than Tier-1 retailers. For other registered sellers the Act does not state in section 3(7A) that the withheld amount ends their liability. ### Worked example (illustrative figures) Three sellers, each selling through an online marketplace: - **Sana, Multan.** Stitches embroidered shawls at home with three helpers, domestic electricity only, annual turnover Rs. 5,000,000. She is a manufacturing concern meeting all four conditions of section 2(5AB). Section 14(1A) does not require her to register for sales tax. She still needs income tax registration under section 181. - **Bilal, Karachi.** Buys phone covers in bulk and resells them online. He does not manufacture, so the cottage industry exception does not apply. Unless he is a retailer required to pay through his electricity bill, section 14(1A) requires him to register. - **Hina, Faisalabad.** Makes bedsheets with a staff of 14. She fails condition (c), more than ten workers, so she is not a cottage industry and must register. For Sana, suppose a month's cash on delivery orders total Rs. 150,000. The courier withholds sales tax at 2%: Rs. 150,000 x 2% = Rs. 3,000. Under section 3(7A) that Rs. 3,000 is her final discharge of sales tax on those supplies. ### What if ...? **What if I sell services, not goods?** Section 14(1A) speaks of digitally ordered goods. Services are largely taxed under provincial sales tax laws, which are outside this corpus. **What if I also have a physical shop?** The shop's position under section 3(9) and the Tier-1 retailer definition matters. This is covered on a separate page. **What if my cottage industry turnover crosses Rs. 8 million?** Condition (d) is no longer met, so the cottage industry exception in section 14(1A) no longer applies on the text. ### Common mistakes - **Treating the NTN as covering sales tax.** Section 181 and section 14 are separate registrations under separate laws. - **Calling any home business a cottage industry.** Section 2(5AB) requires a manufacturing concern and all four conditions together. - **Assuming the marketplace will sort it out.** Section 14(1B) makes the marketplace or courier refuse unregistered sellers. It does not register them. S. No. 1B of the section 33 Table sets a penalty of five lac rupees for the first default and one million rupees for each later default on a marketplace or courier that allows unregistered persons. ### What to check in the official text Read section 14(1A) and (1B) and the definition of cottage industry in section 2(5AB) of the Sales Tax Act as amended to 30 June 2026, then section 3(3)(c), 3(7A) and 3(9). Confirm the 2% in S. No. 8 of the Eleventh Schedule. Section 14(1A) says registration is made "in the prescribed form and in the prescribed manner", so the procedure sits in rules and FBR portal steps that are not covered here. ### Frequently asked #### Is an NTN the same as sales tax registration? No. The NTN comes from registration under section 181 of the Income Tax Ordinance. Sales tax registration is a separate registration under section 14 of the Sales Tax Act, and section 14(1A) requires it for online sellers of goods unless an exception applies. #### Which online sellers do not need sales tax registration? Section 14(1A) names two: a person running a cottage industry, and retailers who are required to pay sales tax through their electricity bills under section 3(9). A cottage industry must be a manufacturing concern meeting all four conditions in section 2(5AB). #### Can a marketplace or courier refuse to work with me without an STRN? Section 14(1B) says an online marketplace or courier shall not allow a person to use its services for e-commerce unless the person holds an NTN and, where section 14(1A) applies, also holds sales tax registration. Section 33 sets penalties for a marketplace or courier that allows unregistered persons. ### Citations - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "Every person including a non-resident person except who is running a cottage industry and the retailers who are required to pay sales tax through electricity bills under sub-section (9) of section 3, selling digitally ordered goods from within Pakistan through online marketplace, website or software application as the case may be, shall apply in the prescribed form and in the prescribed manner for registration." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“cottage industry” means a manufacturing concern, which fulfils each of following conditions, namely:-" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "in the case of supply of digitally ordered taxable goods by online market place, website and software application from within Pakistan during the course of e-commerce, the liability to collect and pay tax shall be of payment intermediary including a banking company, a financial institution, licensed exchange company or payment gateway in case the payment is made digitally" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Eleventh Schedule, S. No. 8 (payment intermediaries and couriers in respect of digitally ordered goods)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Income Tax Ordinance, 2001, section 181 (Taxpayer’s registration)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181-taxpayer-s-registration), as amended to 2026-06-30: "Every online marketplace or courier service, involved in e-commerce by supplying or delivering digitally ordered goods or services from within Pakistan, shall not allow any vendor to use its platform services to carry out e-commerce transactions unless such vendors have been registered under this Ordinance." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Sales Tax Act, 1990, Section 33, Table, S. No. 1B (online marketplace or courier allowing unregistered persons to use its services)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Do I need an NTN to sell online, and why does my courier refuse to book parcels without it? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/do-i-need-ntn-to-sell-online Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 181(1) of the Income Tax Ordinance names a person selling digitally ordered goods or services through an online marketplace or courier service as a taxpayer who must register. Section 181(1A) bars marketplaces and couriers from letting unregistered vendors use their services, and section 14(1B) of the Sales Tax Act requires them to check for an NTN. **Applies to:** People in Pakistan who sell goods or services online and use an online marketplace or a courier service to reach buyers. A courier refusing to book your parcels is not a company policy choice. Since the Finance Act, 2025, the Income Tax Ordinance and the Sales Tax Act both put a legal duty on online marketplaces and couriers to deal only with registered sellers. The seller, in turn, is expressly named as someone who must register. ### What does the law say? **The seller's duty.** Section 181(1) of the Income Tax Ordinance says every taxpayer, "including a person selling digitally ordered goods or services from within Pakistan using online marketplace or a courier service, as the case may be", shall apply in the prescribed form and manner for registration. The words about online sellers were added by the Finance Act, 2025. **The marketplace and courier's duty.** Section 181(1A) says every online marketplace or courier service involved in e-commerce "shall not allow any vendor to use its platform services to carry out e-commerce transactions unless such vendors have been registered under this Ordinance". It covers both goods and services. **The Sales Tax Act rule.** Section 14(1A) of the Sales Tax Act requires every person, including a non-resident, selling digitally ordered goods from within Pakistan through an online marketplace, website or software application to apply for sales tax registration. It excludes a person running a cottage industry and retailers who pay sales tax through electricity bills under section 3(9). Section 14(1B) then says an online marketplace or courier supplying digitally ordered goods "shall not allow any person to use their services to carry out e-commerce transactions unless it holds NTN and in case sub-section (1A) of this section applies also holds sales tax registration". **CNIC as NTN.** Section 181(4) says that from tax year 2015 onwards, for individuals with a CNIC issued by NADRA, the CNIC shall be used as the National Tax Number. ### How does it work in practice? Two different registrations can be in play, and the courier may ask for either or both: | What is checked | Law | Who it applies to | |---|---|---| | Registration under the Income Tax Ordinance (NTN) | Section 181(1) and (1A), Income Tax Ordinance; section 14(1B), Sales Tax Act | Every online seller using a marketplace or courier, goods or services | | Sales tax registration | Section 14(1A) and (1B), Sales Tax Act | Sellers of digitally ordered goods, except a cottage industry and retailers paying through electricity bills | A seller of services, such as online tutoring delivered by video, is caught by section 181 of the Ordinance but not by section 14(1A) of the Sales Tax Act, which speaks only of goods. Provincial sales tax registration for services is outside this corpus. Because the duty sits on the courier and the marketplace, a seller cannot contract out of it. If the courier books parcels for an unregistered vendor, it is the courier that is acting contrary to section 181(1A). ### Worked example (illustrative scenario) Hamza makes handmade leather wallets at home in Sialkot and sells them through his own website. He has not registered for income tax. He tries to book 20 cash on delivery parcels with a courier. 1. **Is Hamza an online seller under section 181(1)?** He sells digitally ordered goods from within Pakistan and uses a courier service. Section 181(1) names him as a taxpayer who must apply for registration. 2. **Can the courier accept his parcels?** Section 181(1A) says a courier involved in e-commerce shall not allow any vendor to use its services for e-commerce transactions unless the vendor is registered under the Ordinance. Section 14(1B) of the Sales Tax Act says the courier must not serve him unless he holds an NTN. The courier refuses. 3. **Does he also need sales tax registration?** That depends on section 14(1A). If his workshop meets the definition of a cottage industry in section 2(5AB) of the Sales Tax Act, section 14(1A) does not apply to him and section 14(1B) asks only for the NTN. If it does not, he also needs sales tax registration before the courier can serve him. 4. **What number does he give?** He is an individual with a CNIC, so once registered, section 181(4) makes his CNIC his National Tax Number. ### What if ...? **What if I sell only through a payment gateway, with my own delivery riders?** Section 181(1) names sellers using an online marketplace or a courier service, and section 181(1A) binds marketplaces and couriers. A seller using neither is not within those specific words, though section 181(1) still applies to "every taxpayer". **What if I am a one-off seller?** Section 181(1A) and section 14(1B) do not set a minimum number of sales or value. A separate page looks at home-based and one-time sellers. **What if I am a non-resident selling goods into Pakistan?** Section 14(1A) of the Sales Tax Act expressly includes a non-resident person selling digitally ordered goods from within Pakistan. ### Common mistakes - **Thinking registration is optional below a certain size.** Neither section 181 nor section 14(1A) sets a turnover threshold for online sellers. - **Treating the NTN and sales tax registration as the same thing.** They come from different laws. Section 14(1B) asks for the NTN in all cases and for sales tax registration only where section 14(1A) applies. - **Assuming a CNIC works without registering.** Section 181(4) makes the CNIC the number, but section 181(1) still requires an application for registration. ### What to check in the official text Read section 181(1), (1A) and (4) of the Income Tax Ordinance and section 14(1A) and (1B) of the Sales Tax Act, all as amended to 30 June 2026. The "prescribed form" and "prescribed manner" for registration are set by rules and portal steps not covered on this page. The definition of cottage industry is in section 2(5AB) of the Sales Tax Act. ### Frequently asked #### Is my CNIC enough as an NTN? Section 181(4) says that from tax year 2015 onwards, for individuals holding a CNIC issued by NADRA, the CNIC shall be used as the National Tax Number. Section 181(1) still requires a taxpayer to apply for registration in the prescribed form and manner, so the CNIC serves as the number once that registration is in place. #### Why does my courier ask for sales tax registration as well? Section 14(1B) of the Sales Tax Act requires the seller to hold an NTN and, where section 14(1A) applies, a sales tax registration too. Section 14(1A) covers persons selling digitally ordered goods through an online marketplace, website or software application, except a cottage industry and retailers paying sales tax through electricity bills. #### Does the same bar apply to payment gateways? Section 181(1A) of the Ordinance and section 14(1B) of the Sales Tax Act name online marketplaces and couriers. Neither names payment intermediaries, so the text of these provisions does not put the same bar on a gateway. ### Citations - [Income Tax Ordinance, 2001, section 181 (Taxpayer’s registration)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181-taxpayer-s-registration), as amended to 2026-06-30: "Every online marketplace or courier service, involved in e-commerce by supplying or delivering digitally ordered goods or services from within Pakistan, shall not allow any vendor to use its platform services to carry out e-commerce transactions unless such vendors have been registered under this Ordinance." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "Every online marketplace or a courier, involved in e-commerce by supplying digitally ordered goods from within Pakistan shall not allow any person to use their services to carry out e-commerce transactions unless it holds NTN" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“cottage industry” means a manufacturing concern, which fulfils each of following conditions" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "tax shall be charged from retailers, other than those falling in Tier-1, through their monthly electricity bills" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Does the online sales tax apply to services I sell online, like courses or digital downloads? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/ecommerce-tax-on-online-courses-services Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer For income tax, yes. Section 6A and section 153(2A) of the Income Tax Ordinance cover digitally ordered goods or services, so a payment intermediary deducts 1% from course fees paid digitally in tax year 2027. The Sales Tax Act e-commerce withholding is written for goods only. Sales tax on services is a separate law. **Applies to:** People in Pakistan who sell online courses, templates, digital files, coaching or other services ordered through a website, app or marketplace. Services are inside the income tax rules for online sales and outside the Sales Tax Act's e-commerce rules. The Income Tax Ordinance speaks of "digitally ordered goods or services" throughout. The Sales Tax Act, 1990 speaks only of goods. Tax on services themselves sits under separate laws. ### What does the Income Tax Ordinance say? **The charge.** Section 6A(1) imposes a tax on every person who receives payment for supply of "digitally ordered goods or services" delivered from within Pakistan using locally operated online platforms, including online marketplaces or websites. Section 6A(2) applies the rate to gross receipts. **The collection.** Section 153(2A)(i) makes every payment intermediary collect the tax when processing a digital payment on behalf of a seller of "digitally ordered goods or services" through locally operated e-commerce platforms, including websites. Section 153(2A)(ii) does the same for couriers collecting cash on delivery for "digitally ordered goods and services". **The definition.** Section 2 defines e-commerce as the "sale or purchase of goods and services" over computer networks, through websites, mobile applications or online marketplaces with digital ordering features. **The rates for tax year 2027.** Division IVA of Part I of the First Schedule sets the rate for payment for "digitally ordered goods or digitally ordered services" at 1% of the gross amount through digital means or banking channels by a payment intermediary, and 2% for cash on delivery by a courier. Paragraph (3A) of Division III of Part III repeats the same rates for the deduction under section 153(2A). One small difference in wording: paragraph (3A) says "digitally delivered services", while section 6A, section 153(2A) and Division IVA say "digitally ordered". The rates are the same in both places. ### What does the Sales Tax Act say? The e-commerce rules in the Sales Tax Act are written around goods: - section 2 defines e-commerce as the "sale or purchase of goods" over computer networks; - section 2 defines a payment intermediary by reference to payments "with respect to goods"; - section 3(3)(c) puts the collection duty on payment intermediaries and couriers for "digitally ordered taxable goods"; and - serial number 8 of the Eleventh Schedule sets the 2% withholding for persons supplying "digitally ordered goods". On that text, a course, coaching session or other service is not within these rules. Sales tax on services in Islamabad is dealt with under the Islamabad Capital Territory (Tax on Services) Ordinance, 2001, and in each province under a provincial law. This page does not cover whether any of those taxes apply to a particular online service. The provincial laws are outside the texts held here. ### Worked example (illustrative figures) Usman lives in Rawalpindi and sells a recorded Excel course on his own website at Rs. 4,000 per student. Buyers pay by card through a payment gateway. In November 2026, in tax year 2027, 60 students bought the course. Step 1, gross receipts: 60 x Rs. 4,000 = Rs. 240,000. Step 2, income tax collected by the gateway at 1%: Rs. 240,000 x 1% = Rs. 2,400. Step 3, amount settled to Usman before the gateway's own fees: Rs. 240,000 minus Rs. 2,400 = Rs. 237,600. No sales tax withholding under serial number 8 of the Eleventh Schedule applies on the text, because the course is a service. The sales figures are made up. The 1% rate is the tax year 2027 rate. ### What if ...? **What if I sell a printed workbook alongside the course?** The workbook is a good. If it is sent by courier on cash on delivery, section 153(2A)(ii) and the 2% rate apply to that part, and the Sales Tax Act e-commerce rules can apply to it as goods. **What if my students are abroad?** The proviso to section 6A(1) keeps export proceeds that are subject to withholding under the export provisions of the Ordinance outside section 6A. Export orders are covered on a separate page. **What if I sell templates or other files for download?** The Ordinance covers goods or services, so the income tax rules apply either way. Whether a download is goods for the Sales Tax Act is not settled by the text held here. ### Common mistakes - **Assuming the online sales tax is only for physical products.** The Ordinance says goods or services at every step. - **Assuming the 2% sales tax withholding covers courses.** The Sales Tax Act rules speak of goods only. - **Treating services tax as covered here.** Services tax in the provinces and in Islamabad sits under separate laws. ### What to check in the official text Read section 6A, section 153(2A) and the definition of e-commerce in section 2 of the Income Tax Ordinance as amended to 30 June 2026, with Division IVA of Part I and paragraph (3A) of Division III of Part III of the First Schedule. Then read the definitions of e-commerce and payment intermediary in section 2, and section 3(3)(c), of the Sales Tax Act, 1990. For tax on the service itself, check the Islamabad or provincial services tax law that applies to you. ### Frequently asked #### Is a course fee paid by card taxed at 1% or 2%? For tax year 2027, Division IVA of Part I of the First Schedule sets 1% of the gross amount where payment is through digital means or banking channels by a payment intermediary. The 2% rate is for cash on delivery collected by a courier, which does not usually arise for a course. #### Does the 2% sales tax withholding apply to my course? The Sales Tax Act e-commerce rules are written for goods. Section 3(3)(c) speaks of digitally ordered taxable goods, and the Act's definitions of e-commerce and payment intermediary refer to goods only. So on the text they do not reach a service. #### Is a downloadable file a good or a service? The texts held here do not classify digital downloads either way. For income tax the point matters less, because section 6A covers both goods and services. For sales tax it is not settled by the text. ### Citations - [Income Tax Ordinance, 2001, section 6A (Tax on payments for digital transactions in e-commerce platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#6a-tax-on-payments-for-digital-transactions-in-e-commerce-platforms), as amended to 2026-06-30: "on every person who receives payment for supply of digitally ordered goods or services which are delivered from within Pakistan using locally operated online platforms including online marketplace or websites" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "every payment intermediary at the time of processing payment through digital means, on behalf of a seller of digitally ordered goods or services through locally operated e-commerce platforms (including websites)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "“e-commerce” means sale or purchase of goods and services" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IVA and Part III, Division III, paragraph (3A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“e-commerce” means sale or purchase of goods conducted over computer networks" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "in the case of supply of digitally ordered taxable goods by online market place, website and software application from within Pakistan during the course of e-commerce" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Is the e-commerce tax deducted on orders I ship abroad from my online store? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/ecommerce-tax-on-export-orders Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Not where the export proceeds are taxed as exports. The proviso to section 6A says export proceeds subjected to withholding under sections 154 and 154A fall outside the e-commerce tax. For tax year 2027, section 154 deducts 1.25% of the proceeds when an authorised dealer realises foreign exchange for exported goods. **Applies to:** Online sellers in Pakistan whose store or marketplace listings receive orders from buyers outside Pakistan. Online sellers who ship a parcel to Dubai or London often see the same order screens as for a Lahore buyer and assume the same tax applies. The Ordinance separates the two. Export proceeds taxed as exports are carved out of the e-commerce tax and dealt with under the export sections, at a different rate and with different consequences. ### What does the law say? **The e-commerce tax and its scope.** Section 6A(1) imposes tax on every person who receives payment for digitally ordered goods or services "which are delivered from within Pakistan using locally operated online platforms including online marketplace or websites". The rate, from Division IVA of Part I of the First Schedule, is 1% for payment through digital means or banking channels and 2% for cash on delivery. **The export carve-out.** A proviso to section 6A(1) says export proceeds "subjected to withholding under section 154 and 154A shall not fall within the ambit of this section". **Exports of goods: section 154.** Section 154(1) requires every authorised dealer in foreign exchange, "at the time of realisation of foreign exchange proceeds on account of the export of goods" by an exporter, to deduct tax from the proceeds. Section 154(3C) also requires the Collector of Customs to collect tax on the gross value of goods when clearing them for export. Division IV of Part III of the First Schedule sets the rate for both at 1.25% of the proceeds of the export (the Finance Act, 2026 raised it from 1%). Section 154(4) makes the tax a minimum tax on the income from those transactions. **Exports of services: section 154A.** Section 154A(1) requires the authorised dealer to deduct tax when realising foreign exchange for, among other things, IT and IT-enabled services by PSEB-registered exporters and services rendered outside Pakistan or exported from Pakistan. Division IVA of Part III of the First Schedule sets 0.25% for PSEB-registered IT exporters for tax years 2024 to 2029, and 1% in any other case. Section 154A(2) makes it a final tax if the return is filed, withholding statements are filed where required, and sales tax returns are filed where required. The same sub-section says no credit for foreign taxes paid is allowed. ### How does it work in practice? | Order type | Which provision | Rate for tax year 2027 | Nature | |---|---|---|---| | Local order, card or wallet | Section 6A and 153(2A) | 1% | Final, subject to section 6A(3) | | Local order, cash on delivery | Section 6A and 153(2A) | 2% | Final, subject to section 6A(3) | | Goods exported, proceeds realised in foreign exchange | Section 154 | 1.25% | Minimum tax | | Services exported, proceeds realised in foreign exchange | Section 154A | 1% (0.25% for PSEB-registered IT) | Final, on conditions | The deciding feature in the proviso is that the proceeds are "subjected to withholding" under section 154 or 154A. Both sections operate through the authorised dealer at the point foreign exchange proceeds are realised (and, for goods, also through Customs at clearance). ### Worked example (illustrative figures) Ahmed sells hand-stitched leather gloves from Sialkot through his own website during tax year 2027. 1. Local cash on delivery orders: Rs. 1,000,000 x 2% = Rs. 20,000, collected by couriers under section 153(2A). 2. Export orders, where foreign buyers pay into his bank and the bank realises the foreign exchange: Rs. 2,000,000 x 1.25% = Rs. 25,000, deducted under section 154. 3. The Rs. 2,000,000 export proceeds are outside section 6A because of its proviso, so no e-commerce tax is charged on them. 4. Total deducted: Rs. 20,000 + Rs. 25,000 = Rs. 45,000. 5. The two amounts are treated differently. The Rs. 20,000 is final tax on those receipts (subject to section 6A(3)). The Rs. 25,000 is minimum tax under section 154(4). ### What if ...? **What if a foreign buyer pays by card through a Pakistani payment gateway on my site?** Section 153(2A)(i) requires a payment intermediary processing a digital payment for a seller on a locally operated e-commerce platform to collect tax. The proviso to section 6A excludes proceeds that are "subjected to withholding" under section 154 or 154A. The Ordinance does not spell out how a card payment processed by a local gateway is treated when no section 154 deduction is made on it. That point is not settled by the text held here. **What if I sell through a marketplace run from outside Pakistan?** Section 6A(1) refers to "locally operated online platforms", and section 153(2A)(i) to "locally operated e-commerce platforms". A platform operated from abroad is not within those words, and the export sections then govern proceeds realised in foreign exchange. **What if I ship both from Pakistan and from a warehouse abroad?** Section 6A covers goods "delivered from within Pakistan". Goods delivered from outside Pakistan fall outside those words. ### Common mistakes - **Applying 1% or 2% to every order.** The proviso to section 6A removes export proceeds withheld under sections 154 and 154A. - **Treating the export deduction as final.** For goods, section 154(4) makes it a minimum tax. Only section 154A (services) is final, and only on conditions. - **Using last year's rate.** Division IV of Part III was changed from 1% to 1.25% by the Finance Act, 2026. ### What to check in the official text Read section 6A(1) with its proviso, section 153(2A), and sections 154 and 154A, then Divisions IV and IVA of Part III of the First Schedule in the source PDF for the rates. Sales tax treatment of exports and any State Bank or customs procedure for courier exports are outside this page. ### Frequently asked #### Does the 1% or 2% e-commerce tax apply to my foreign orders? Not to export proceeds that are subjected to withholding under section 154 or 154A. The proviso to section 6A(1) takes those proceeds outside the e-commerce tax, so they are taxed under the export provisions instead. #### What rate applies to exported goods instead? Division IV of Part III of the First Schedule sets 1.25% of the proceeds of the export for deductions under section 154. Section 154(4) makes that deduction a minimum tax on the income from the export transactions. #### What if I sell digital services to foreign buyers? Section 154A covers services rendered outside Pakistan or exported from Pakistan, with deduction by the authorised dealer when the foreign exchange is realised. The rate is 1% of proceeds in general, or 0.25% for PSEB-registered IT exporters for tax years 2024 to 2029. ### Citations - [Income Tax Ordinance, 2001, section 6A (Tax on payments for digital transactions in e-commerce platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#6a-tax-on-payments-for-digital-transactions-in-e-commerce-platforms), as amended to 2026-06-30: "subjected to withholding under section 154 and 154A shall not fall within the ambit of this section" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154 (Exports)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154-exports), as amended to 2026-06-30: "shall, at the time of realisation of foreign exchange proceeds on account of the export of goods" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "shall be a final tax on the income arising from the transactions referred to in this section, upon fulfilment of the following conditions" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "every payment intermediary at the time of processing payment through digital means, on behalf of a seller of digitally ordered goods or services through locally operated e-commerce platforms (including websites)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IV (Exports), clause (1)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IVA (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Does the e-commerce tax apply to my own website or Instagram store, or only to marketplaces like Daraz? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/ecommerce-tax-own-website-or-marketplace Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It is not limited to marketplaces. Section 6A of the Income Tax Ordinance covers digitally ordered goods or services delivered from within Pakistan using locally operated online platforms, expressly including online marketplaces or websites. Your own website is named. Social media stores are not named, and the Ordinance does not define locally operated platform, so their position is less clear. **Applies to:** People in Pakistan who sell goods or services through their own website, a social media page, a messaging app or an online marketplace. The e-commerce tax is not a marketplace-only tax. The words of section 6A reach sellers on their own websites as well as sellers on marketplaces. Social media and messaging-app stores are where the text gets thin, because the Ordinance does not name them and leaves a key phrase undefined. ### What does the law say? **The charge in section 6A.** Section 6A(1) of the Income Tax Ordinance imposes tax on every person who receives payment for "digitally ordered goods or services" delivered from within Pakistan "using locally operated online platforms including online marketplace or websites". Three things have to be present: the goods or services are digitally ordered, they are delivered from within Pakistan, and a locally operated online platform is used. The word "including" shows that marketplaces and websites are examples of such platforms, not the whole list. **The collection rule in section 153(2A).** A payment intermediary deducts the tax when processing a digital payment on behalf of a seller of digitally ordered goods or services "through locally operated e-commerce platforms (including websites)". A courier deducts it when collecting cash on delivery for digitally ordered goods and services "through e-commerce platforms (including websites)". **Definitions in section 2.** The Ordinance defines "e-commerce" as sale or purchase of goods and services over computer networks by methods designed for receiving or placing orders "either through websites, mobile applications or online marketplace having digital ordering features", using a mobile phone, tablet or automated ordering system. It defines "online marketplace" in section 2 as an information technology platform run by an e-commerce entity that acts as a facilitator between a buyer and a seller, including online interfaces that, for a fee, let multiple buyers and multiple sellers deal directly. **The Sales Tax Act definition.** Section 2(9C) of the Sales Tax Act defines "e-commerce" in almost the same words, but for goods only. Its separate definition of "online marketplace" in section 2(18A) also speaks of goods. ### How does it work in practice? | Where you sell | Named in the text? | Position on the text | |---|---|---| | Online marketplace | Yes, "online marketplace" in section 6A and defined in section 2 | Covered | | Your own website with a checkout | Yes, "websites" in section 6A and section 153(2A) | Covered | | Mobile app for your store | "Mobile applications" appear in the section 2 definition of e-commerce | Not named in section 6A, which gives marketplaces and websites as examples. The e-commerce definition points towards coverage but section 6A does not use that term | | Social media page or messaging app | Not named | Unclear: depends on whether it is a "locally operated online platform" and whether the order is "digitally ordered" | Two phrases carry the weight: "digitally ordered" and "locally operated". Neither is defined in the Ordinance. A reader could argue that a buyer placing an order by direct message has ordered digitally. A reader could also ask whether a global social network is "locally operated". The text does not answer either point, and this page does not resolve them. In practice, collection runs through section 153(2A). If a courier collects cash on delivery, or a payment intermediary processes the payment, for goods or services it treats as digitally ordered, it will deduct. The law does not make the courier or gateway decide the platform question in any stated way. ### Worked example (illustrative figures) Three sellers in Karachi each make Rs. 100,000 of sales in a month of tax year 2027, all paid by cash on delivery through a courier. - **Sana** sells on an online marketplace. The marketplace fits the section 2 definition, so section 6A applies. Courier deduction at 2%: Rs. 100,000 x 2% = Rs. 2,000. - **Imran** sells through his own website. Section 6A names websites. Courier deduction: Rs. 2,000. - **Hina** takes orders through her Instagram page and books parcels with a courier on cash on delivery. If the courier treats her orders as digitally ordered goods, it deducts Rs. 2,000 under section 153(2A). Whether section 6A properly reaches her sales depends on the two undefined phrases above. The arithmetic is the same in each case. The difference is how clearly the law reaches the seller. ### What if ...? **What if my buyer pays me directly by cash at a pickup point?** Section 153(2A) only names payment intermediaries processing digital payments and couriers collecting cash on delivery. A direct cash payment has no collecting agent under that section. Section 6A still charges the person receiving payment, if the sale falls within it. **What if I sell to buyers abroad?** The proviso to section 6A(1) excludes export proceeds that are subject to withholding under the export provisions of the Ordinance. **What if I also have a physical shop?** Section 6A looks at the sale, not the seller. Only sales made through a covered online platform fall within it. ### Common mistakes - **Assuming only marketplace sellers are taxed.** Section 6A names websites alongside marketplaces. - **Assuming social media sales are clearly outside.** The Ordinance does not exclude them. It simply does not name them. - **Reading the Sales Tax Act definition as covering services.** Section 2(9C) of the Sales Tax Act speaks of goods only. The income tax definition covers goods and services. ### What to check in the official text Read section 6A(1) with the definitions of "e-commerce", "digital means" and "online marketplace" in section 2 of the Income Tax Ordinance, and section 153(2A). For sales tax, read section 2(9C) and (18A) of the Sales Tax Act. Any Board clarification on what counts as a locally operated platform is not held in this corpus. ### Frequently asked #### Is my own Shopify or WordPress store covered? Section 6A covers locally operated online platforms including online marketplace or websites, and section 153(2A) refers to e-commerce platforms including websites. A seller's own website is named in both. The software used to build it is not something the Ordinance addresses. #### Is an Instagram or Facebook page covered? The Ordinance does not name social media stores. Section 2 defines e-commerce as ordering through websites, mobile applications or online marketplaces having digital ordering features, and section 6A refers to locally operated online platforms, a phrase it does not define. Whether a social media page fits these words is not settled by the text. #### Does it matter if I use a courier or a payment gateway? It matters for collection. Section 153(2A) makes the payment intermediary or the cash on delivery courier deduct the tax. Where neither handles the money, for example cash paid directly to the seller, section 153(2A) has no one to collect it, even though the charge in section 6A is on the recipient. ### Citations - [Income Tax Ordinance, 2001, section 6A (Tax on payments for digital transactions in e-commerce platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#6a-tax-on-payments-for-digital-transactions-in-e-commerce-platforms), as amended to 2026-06-30: "a tax shall be imposed, at the rate specified in Division IVA of Part I of the First Schedule, on every person who receives payment for supply of digitally ordered goods or services which are delivered from within Pakistan using locally operated online platforms including online marketplace or websites" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "an information technology platform run by e-commerce entity over an electronic network that acts as a facilitator in transactions that occur between a buyer and a seller" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "every payment intermediary at the time of processing payment through digital means, on behalf of a seller of digitally ordered goods or services through locally operated e-commerce platforms (including websites); and" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "(9C) “e-commerce” means sale or purchase of goods conducted over computer networks by methods specifically designed for the purpose of receiving or placing of orders either through websites, mobile applications or online marketplace having digital ordering features" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## I sell from home or only sold a few items once. Is there an exemption from registering? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/home-based-or-one-time-seller-exemption Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Not in general. Section 181 of the Income Tax Ordinance and section 14(1A) of the Sales Tax Act apply to every person selling digitally ordered goods, with no volume or home-based test. The only written sales tax exceptions are a cottage industry and retailers paying through electricity bills. We found no separate exemption for home-based women or one-time sellers. **Applies to:** People in Pakistan who sell goods online from home, part time, or only occasionally, including through social media shops, marketplaces or their own website. News reports and social media posts often mention exemptions for home-based sellers, women entrepreneurs or people who sell only a little. The text of the law as amended to 30 June 2026 is narrower than those reports suggest. It contains two written exceptions from sales tax registration for online sellers, one income tax reduction for woman-owned startups, and no exemption based on working from home or selling rarely. ### What does the law say? **Income tax registration.** Section 181(1) of the Income Tax Ordinance requires every taxpayer to apply for registration, and since the Finance Act, 2025 it says this includes "a person selling digitally ordered goods or services from within Pakistan using online marketplace or a courier service". There is no carve-out for home-based sellers or small sellers in that sub-section. Section 181(1A) bars online marketplaces and courier services from letting an unregistered vendor use their platform for e-commerce. **Sales tax registration.** Section 14(1A) of the Sales Tax Act requires every person selling digitally ordered goods from within Pakistan through an online marketplace, website or software application to apply for registration, except: 1. a person running a cottage industry; and 2. retailers required to pay sales tax through electricity bills under section 3(9). Those are the only two exceptions written into section 14(1A). ### Does selling from home make me a cottage industry? Only if you manufacture and meet every condition. Section 2(5AB) defines a cottage industry as a manufacturing concern that: - does not have an industrial gas or electricity connection; - is located in a residential area; - does not have a total labour force of more than ten workers; and - has annual turnover from all supplies not exceeding eight million rupees. A home kitchen making pickles, a woman stitching clothes at home, or a family making handicrafts may fit. A person reselling goods bought from a wholesaler is not a manufacturing concern, so working from a residential address alone does not qualify. ### Is there anything for women sellers? Clause (19) of Part III of the Second Schedule to the Income Tax Ordinance reduces by 25% the tax payable by a woman enterprise on profit and gains chargeable under the head "Income from Business". A woman enterprise means a startup established on or after 1 July 2021 as a sole proprietorship owned by a woman, an AOP whose members are all women, or a company wholly owned by women. A business formed by splitting or reconstituting an existing business does not qualify. This is a reduction in tax payable. It does not remove the need to register under section 181 or section 14(1A). The clause refers to tax on business income; it does not say whether it reaches the separate tax on e-commerce receipts in section 6A, and we do not resolve that here. ### What about a one-time or occasional seller? Section 14(1A) contains no minimum number of sales, no minimum period and no minimum amount. It applies to every person "selling digitally ordered goods". The Sales Tax Act's definition of "taxable activity" in section 2(35) includes "a one-off adventure or concern in the nature of a trade", and excludes "an activity carried on by an individual as a private recreational pursuit or hobby". Section 14(1A) itself does not use the term taxable activity, so how these words bear on someone who sells a few personal belongings once is not stated in the text. The law leaves that question open. ### Worked example (illustrative figures) - **Rabia, Lahore.** Bakes cakes at home with her sister, domestic electricity, annual turnover Rs. 1,800,000, orders through Instagram and a delivery app. She is a manufacturing concern meeting all four cottage industry conditions, so section 14(1A) does not require sales tax registration. Section 181 still applies for income tax. If she started the business in 2023 as a sole owner, clause (19) may reduce her tax on business income by 25%: tax of Rs. 40,000 would become Rs. 40,000 x 75% = Rs. 30,000. - **Usman, Peshawar.** Resells imported sneakers from his flat through a marketplace. He works from home but does not manufacture, so the cottage industry exception does not fit. Section 14(1A) applies. - **Nadia, Islamabad.** Sold her old camera and two jackets on a marketplace once. The text does not answer whether this is a one-off trade or not a business at all. ### Common mistakes - **Treating "home-based" as a legal category.** Neither section 181 nor section 14(1A) uses it. The residential-area test is only one of four cottage industry conditions. - **Reading the woman enterprise clause as an exemption.** Clause (19) cuts tax payable by 25%. It says nothing about registration. - **Assuming small sales are below a limit.** Section 14(1A) has no threshold. The Rs. 8 million figure is part of the cottage industry test only. ### What to check in the official text Read section 181(1) and (1A) of the Income Tax Ordinance, and section 14(1A) with the definitions of cottage industry and taxable activity in section 2 of the Sales Tax Act, all as amended to 30 June 2026. Check clause (19) of Part III of the Second Schedule for the woman enterprise conditions. Any scheme announced for home-based sellers through an SRO, a notification or an FBR circular is outside the corpus we hold and is not covered here. ### Frequently asked #### Is there a sales tax exemption for women selling from home? Section 14(1A) of the Sales Tax Act does not mention women or home-based sellers. Its only exceptions are a cottage industry and retailers paying through electricity bills. A home-based woman who makes her goods may qualify as a cottage industry if all four conditions in section 2(5AB) are met. #### What is the woman enterprise benefit in the Income Tax Ordinance? Clause (19) of Part III of the Second Schedule reduces by 25% the tax payable by a woman enterprise on business income. It covers startups set up on or after 1 July 2021 and owned entirely by women. It is a reduction in tax, not an exemption from registering. #### Does selling a few things once count? Section 14(1A) has no minimum number of sales. The Sales Tax Act's definition of taxable activity includes a one-off adventure in the nature of a trade and leaves out a private hobby. How that applies to a single sale of personal belongings online is not spelled out. ### Citations - [Income Tax Ordinance, 2001, section 181 (Taxpayer’s registration)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181-taxpayer-s-registration), as amended to 2026-06-30: "including a person selling digitally ordered goods or services from within Pakistan using online marketplace or a courier service, as the case may be," Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "Every person including a non-resident person except who is running a cottage industry and the retailers who are required to pay sales tax through electricity bills under sub-section (9) of section 3, selling digitally ordered goods from within Pakistan through online marketplace, website or software application as the case may be, shall apply in the prescribed form and in the prescribed manner for registration." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“taxable activity”, means any economic activity carried on by a person whether or not for profit, and includes" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part III, clause (19) (reduction in tax for woman enterprises)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much income tax is deducted from my online sales paid by cash on delivery or by card? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/tax-deducted-on-cod-and-card-orders Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer For tax year 2027, section 6A and section 153(2A) of the Income Tax Ordinance set two rates. A courier collecting cash on delivery deducts 2% of the gross amount. A payment intermediary processing a card or other digital payment deducts 1%. Both apply to the gross amount payable to the seller, including any sales tax. **Applies to:** People and businesses in Pakistan selling goods or services that are ordered online and paid through a courier's cash on delivery service or a digital payment channel. Two rates apply to online sales in tax year 2027, and which one you pay depends on how the buyer pays. Cash collected at the door by a courier carries 2%. Money that reaches you through a card, bank transfer or other digital channel handled by a payment intermediary carries 1%. The tax is taken before the money reaches you. ### What does the law say? **The charge.** Section 6A(1) of the Income Tax Ordinance imposes a tax on every person who receives payment for digitally ordered goods or services delivered from within Pakistan using locally operated online platforms, "including online marketplace or websites". Section 6A(2) says the tax is computed by applying the rate to the gross amounts of receipts. The proviso to section 6A(1) keeps export proceeds that are already subject to withholding under the export provisions of the Ordinance outside this charge. **The rates.** Division IVA of Part I of the First Schedule sets the rate for payment through: | How the buyer pays | Who handles the money | Rate for tax year 2027 | |---|---|---| | Digital means or banking channels | Payment intermediary | 1% of gross amount paid or payable | | Cash on delivery | Courier service | 2% of gross amount paid or payable | **Who deducts it.** Section 153(2A) puts the collection duty on two kinds of businesses, "notwithstanding" the general withholding rule in section 153(1): - every payment intermediary, when it processes a payment through digital means on behalf of a seller of digitally ordered goods or services through locally operated e-commerce platforms, including websites; and - every courier business collecting cash from a buyer under cash on delivery terms on behalf of a seller of digitally ordered goods and services through e-commerce platforms, including websites. Each must collect tax "from the gross amount payable (including sales tax, if any) to the seller" and deposit it to the government treasury. Paragraph (3A) of Division III of Part III of the First Schedule repeats the same two rates, 1% and 2%, for deductions under section 153(2A). **Who counts as an intermediary or courier.** Section 153(7) defines a "payment intermediary" as a third party such as a banking company, financial institution, licensed exchange company or payment gateway that routes or settles payments without being the source or recipient of the money. A "courier service" includes logistics services, ride-hailing services, food delivery platforms and e-commerce services that deliver goods and collect cash on the seller's behalf. ### How does it work in practice? The deduction happens at the point the money passes through a third party. The courier keeps 2% of the cash it collected before it remits the balance to you. The gateway, bank or wallet provider keeps 1% of the card or digital payment before settling it to your account. "Digital means" is defined in section 2 and is broad: online payment portals, interbank fund transfers, bill payment services, over the counter digital payments, and card payments through point of sale terminals, QR codes, mobile devices, ATMs or kiosks. So a buyer paying by debit card, by QR code or by a bank transfer routed through an intermediary all fall on the 1% side. ### Worked example (illustrative figures) Ayesha runs a clothing store from her own website in Lahore. In August 2026, which falls in tax year 2027, her sales were: - orders paid by cash on delivery through a courier: Rs. 300,000 collected from buyers; - orders paid by card through a payment gateway: Rs. 200,000. Step 1, cash on delivery: Rs. 300,000 x 2% = Rs. 6,000 deducted by the courier. Step 2, card orders: Rs. 200,000 x 1% = Rs. 2,000 deducted by the gateway. Step 3, total income tax deducted for the month: Rs. 6,000 + Rs. 2,000 = Rs. 8,000. Step 4, as a share of her Rs. 500,000 of sales: Rs. 8,000 / Rs. 500,000 = 1.6%. The figure is on sales, not profit. If her costs were Rs. 400,000, the deduction is still Rs. 8,000. This example covers income tax only. The courier or gateway may also withhold sales tax, which is a separate tax. ### What if ...? **What if a buyer pays half in advance by bank transfer and half in cash?** The law ties each rate to the payment channel, so on the text each part would carry its own rate: 1% on the digital part, 2% on the cash part. **What if I sell services, not goods?** Section 6A and section 153(2A) both cover digitally ordered goods and services, so the income tax rates apply to both. **What if the order is from a buyer abroad?** The proviso to section 6A(1) keeps export proceeds that are subject to withholding under the export provisions outside section 6A. Export orders are covered on a separate page. ### Common mistakes - **Assuming the rate is the same for every order.** It depends on the payment channel: 2% for cash on delivery, 1% for digital means. - **Working the tax out on the price before sales tax.** Section 153(2A) says the gross amount includes sales tax, if any. - **Reading a 4% cut as the income tax rate.** Where a courier also withholds sales tax on goods, the two taxes appear together on the statement. The income tax part is 2%. - **Treating the courier's delivery fee as tax.** The Ordinance sets the tax rate. Charges the courier makes for its own service are a separate matter the Ordinance does not set. ### What to check in the official text Read section 6A(1) and (2) for the charge and section 153(2A) for who collects it. Confirm the rates in Division IVA of Part I and paragraph (3A) of Division III of Part III of the First Schedule, both in the version amended to 30 June 2026. Whether a higher rate applies to a seller who is not on the active taxpayers' list is not covered on this page. How the tax is treated when you file, final or adjustable, is covered on a separate page. ### Frequently asked #### What rate applies to cash on delivery orders? Division IVA of Part I of the First Schedule sets 2% of the gross amount paid or payable where payment is collected as cash on delivery by a courier service. The same 2% appears in paragraph (3A) of Division III of Part III for the courier's deduction under section 153(2A). #### What rate applies to card, bank transfer or wallet payments? Payments through digital means or banking channels by a payment intermediary are taxed at 1% of the gross amount paid or payable for tax year 2027. Section 2 defines digital means widely, including card payments, QR codes, online portals and interbank transfers. #### Is the tax worked out on my profit or on my sales? On sales. Section 6A(2) applies the rate to the gross amounts of receipts, and section 153(2A) says tax is collected from the gross amount payable to the seller, including sales tax if any. Your costs do not reduce the amount on which the tax is worked out. ### Citations - [Income Tax Ordinance, 2001, section 6A (Tax on payments for digital transactions in e-commerce platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#6a-tax-on-payments-for-digital-transactions-in-e-commerce-platforms), as amended to 2026-06-30: "a tax shall be imposed, at the rate specified in Division IVA of Part I of the First Schedule, on every person who receives payment for supply of digitally ordered goods or services which are delivered from within Pakistan using locally operated online platforms including online marketplace or websites" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "every courier business providing courier services collecting cash from a buyer under Cash on Delivery (CoD) payment terms on behalf of a seller for the supply of digitally ordered goods and services through e-commerce platforms (including websites);" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "means digital payments and financial services including but not limited to- online portals or platforms for digital payments/receipts; online interbank fund transfer services" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IVA (Rate of Tax on Payments for Digital Transactions in E-commerce Platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), paragraph (3A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is there 18% sales tax on everything I sell online? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/is-18-percent-sales-tax-on-online-sales Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No. Section 3(1) of the Sales Tax Act sets 18% on the value of taxable supplies made by a registered person, with exceptions for exempt and specially rated goods. The 2% in serial 8 of the Eleventh Schedule is not an extra rate: it is tax a courier or payment intermediary withholds from the gross value of online sales. **Applies to:** People and businesses in Pakistan selling goods that buyers order through a website, online marketplace or app and pay for by card, bank transfer or cash on delivery. Two numbers show up when online sellers read about sales tax: 18% and 2%. They come from different parts of the Sales Tax Act and do different jobs. The 18% is the standard rate of the tax itself. The 2% is the share of each online sale that a courier or payment intermediary holds back and pays to the government on the seller's behalf. ### What does the law say about 18%? Section 3(1) of the Sales Tax Act charges sales tax at eighteen per cent of the value of taxable supplies made by a registered person in the course or furtherance of a taxable activity, and of goods imported into Pakistan. Section 2(46) defines the value of a supply as the consideration in money the supplier receives, excluding the amount of tax. Section 2(25) defines a registered person to include a person who is liable to be registered, not only one who already holds a registration. The 18% is the default, not a universal rate. Section 3 itself carves out: - **Third Schedule goods.** Section 3(2)(a) charges these at 18% of the retail price, which the manufacturer or importer must print on the pack. - **Eighth Schedule goods.** Section 3(2)(aa) charges these at the rates and conditions set in that Schedule. - **Exempt goods.** Section 13(1) exempts goods specified in the Sixth Schedule, subject to conditions. Whether your product sits in one of these schedules decides whether 18% applies at all. The schedules are long and are not reproduced here. ### Where does the 2% come from? Section 3(3)(c), added by the Finance Act, 2025, deals with digitally ordered taxable goods sold through an online marketplace, website or software application from within Pakistan. It puts the liability to collect and pay the tax on the payment intermediary (a bank, financial institution, licensed exchange company or payment gateway) where the buyer pays digitally, and on the courier where goods go out on cash on delivery, "at the rates provided in the Eleventh Schedule". Serial 8 of the Eleventh Schedule sets that rate. The withholding agents are "Payment intermediaries and couriers in respect of digitally ordered goods from within Pakistan". The supplier category is persons supplying digitally ordered goods from within Pakistan through an online marketplace, website or software applications. The rate is **2% of gross value of supplies**. ### How do the 18% and the 2% relate? That depends on who the seller is. Section 3(7A) says the tax withheld under the Eleventh Schedule by the payment intermediary or courier is the final discharge of tax liability on taxable supplies of digitally ordered goods by two groups only. | Seller | What the Act says about the 2% | |---|---| | Cottage industry, as defined in section 2(5AB) | Final discharge of sales tax on those online supplies, section 3(7A)(i) | | Retailer other than a Tier-1 retailer | Final discharge of sales tax on those online supplies, section 3(7A)(ii) | | Any other registered person, such as a manufacturer that is not a cottage industry, a Tier-1 retailer, a wholesaler or an importer | Not made final. Liability is worked out under section 7: output tax at the applicable rate, less input tax | For the third group, section 7(1) lets a registered person deduct input tax from output tax, and section 7(2) limits that to input tax backed by a tax invoice in the person's name and registration number. The Act in this corpus does not spell out how the 2% withheld from such a seller is credited against that liability. That is covered on a separate page. ### Worked example (illustrative figures) **Sana, cottage industry in Multan.** She embroiders cushion covers at home and meets all four conditions in section 2(5AB). In one month her online orders total Rs. 150,000: Rs. 90,000 paid cash on delivery and Rs. 60,000 paid by card. Step 1: courier withholds 2% of Rs. 90,000 = Rs. 1,800. Step 2: gateway withholds 2% of Rs. 60,000 = Rs. 1,200. Step 3: total withheld = Rs. 1,800 + Rs. 1,200 = Rs. 3,000. Under section 3(7A)(i), the Rs. 3,000 is the final discharge of her sales tax on those online supplies. No 18% calculation follows. **Bilal, registered manufacturer in Sialkot.** His firm is not a cottage industry. In one month he sells sports gloves online with a value of Rs. 500,000 before tax. Step 1: output tax at 18% = Rs. 500,000 x 18% = Rs. 90,000. Buyers pay Rs. 590,000 in total. Step 2: input tax on invoiced purchases for the month, say Rs. 40,000. Step 3: under section 7, Rs. 90,000 minus Rs. 40,000 = Rs. 50,000. Step 4: the courier and gateway also withhold 2% of gross value. Serial 8 does not define "gross value". If it is taken on the full Rs. 590,000 buyers paid, 2% is Rs. 11,800. If it is taken on the Rs. 500,000 value, 2% is Rs. 10,000. Section 3(7A) does not make this amount final for Bilal. ### What if ...? **What if my goods are in the Third Schedule?** The Eleventh Schedule's opening words say withholding under the Schedule does not apply to the goods and supplies listed in the clauses after the Table. Clause (vi) lists goods specified in the Third Schedule. Other listed items include vegetable ghee and cooking oil, and supplies by importers who paid value addition tax at import. **What if my buyer is a registered business?** Clause (viii) after the Table excludes supplies made by an Active Taxpayer to another registered person, except the supplies at serial numbers 5, 7, 9, 10, 11, 12 and 13. Serial 8 is not in that exception, so on the text the 2% withholding does not apply to such a sale. **What if I sell services, not goods?** Section 3(3)(c) and serial 8 both speak of digitally ordered goods. Sales tax on most services is levied under provincial laws, which are outside this corpus. ### Common mistakes - **Adding 18% and 2% together.** The Act does not create a 20% charge. The 2% is a withholding, final for some sellers and not for others. - **Applying 18% to the tax-inclusive price.** Section 2(46) excludes the tax from the value. - **Assuming the 2% is always final.** Section 3(7A) limits finality to cottage industry and retailers other than Tier-1. - **Assuming no tax is due until you register.** Section 2(25) counts a person liable to be registered as a registered person. ### What to check in the official text Read section 3(1), 3(2), 3(3)(c) and 3(7A), then serial 8 of the Eleventh Schedule and the clauses after its Table. Check the Third, Sixth and Eighth Schedules for your goods. Section 3(2)(b) and 3(6) let the government change rates by notification, and such notifications are not held in this corpus. ### Frequently asked #### Is the 2% withheld on online orders added on top of 18%? The Act does not describe it that way. Serial 8 of the Eleventh Schedule sets 2% of gross value as the amount a courier or payment intermediary withholds. For a cottage industry or a retailer other than a Tier-1 retailer, section 3(7A) makes that 2% the final discharge of sales tax on those online supplies. #### Does every product carry 18%? No. Section 3(2) sends Third Schedule goods to tax on their printed retail price and Eighth Schedule goods to the rates in that Schedule, and section 13 exempts goods in the Sixth Schedule. Those schedules are not reproduced on this page, so check where your goods fall. #### Is the 18% worked out on the price the buyer pays? Section 2(46) defines value of supply as the consideration the supplier receives, excluding the amount of tax. So 18% is applied to the price before sales tax, and the tax is added on top of that value. ### Citations - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "in the case of supply of digitally ordered taxable goods by online market place, website and software application from within Pakistan during the course of e-commerce, the liability to collect and pay tax shall be of payment intermediary including a banking company, a financial institution, licensed exchange company or payment gateway in case the payment is made digitally" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Eleventh Schedule, Table, S. No. 8 (Payment intermediaries and couriers in respect of digitally ordered goods from within Pakistan) and clauses (i) to (ix) after the Table](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "which the supplier receives from the recipient for that supply but excluding the amount of tax" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 7 (Determination of tax liability)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#7-determination-of-tax-liability), as amended to 2026-06-30: "A registered person shall not be entitled to deduct input tax from output tax unless,-" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 13 (Exemption)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#13-exemption), as amended to 2026-06-30: "be exempt from tax under this Act" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Is the 2% sales tax withheld on my online orders my full liability, or can I adjust it against input tax? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/withheld-sales-tax-final-or-input-adjustable Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 3(7A) of the Sales Tax Act makes the 2% withheld by a courier or payment intermediary the final discharge only for a cottage industry and for retailers other than Tier-1 retailers. Other registered sellers work out tax under section 7, output tax less input tax, and the Act does not state how the withheld 2% is credited. **Applies to:** Sales tax registered sellers of digitally ordered goods whose couriers or payment intermediaries withhold sales tax under serial 8 of the Eleventh Schedule. The 2% that a courier or payment gateway holds back from your online sales is final for some sellers and not for others. The Sales Tax Act draws the line by type of seller, not by amount. If you fall outside the two named groups, the 2% does not settle your sales tax, and your liability is worked out the ordinary way. ### What does the law say? **The withholding.** Section 3(3)(c) puts the liability to collect and pay sales tax on digitally ordered goods on the payment intermediary, where payment is digital, and on the courier, where goods go cash on delivery. Serial 8 of the Eleventh Schedule sets the rate at 2% of gross value of supplies. **Who it is final for.** Section 3(7A), added by the Finance Act, 2025, says the tax withheld under the Eleventh Schedule by the payment intermediary or courier "shall be final discharge of tax liability in respect of taxable supplies of digitally ordered goods by": 1. a cottage industry as defined in clause (5AB) of section 2; and 2. retailers other than Tier-1 retailers. **Everyone else.** A registered person outside those two groups is not covered by section 3(7A). Section 7(1) lets such a person deduct input tax paid or payable for the tax period from the output tax due. Section 7(2)(i) allows the deduction only where the person holds a tax invoice in his name bearing his registration number. ### Why the withheld tax is not "input tax" Section 2(14) defines input tax as tax levied on the supply of goods to the person, on goods the person imports, excise in sales tax mode on goods or services acquired, provincial sales tax on services received (subject to exclusions), and tax on supplies received under the AJK version of the Act. Tax withheld from your own sales is none of these. So the real question for a registered seller is not whether the 2% is input tax, but whether and how it is set against output tax. ### How does it work in practice for other registered sellers? This is where the corpus runs out. The Sales Tax Act, amended to 30 June 2026, does not contain a provision stating how the 2% withheld under serial 8 is credited to a seller for whom it is not final. The closest text is in rule 18 of the Sales Tax Rules, 2006, in the edition amended to 30 June 2025. Rule 18(4A) speaks of a "claim of credit of sales tax withheld" and a "reduction in output tax", and denies it where the seller declares the withheld amount but not the corresponding sales. Rule 18(5)(ii) gives a provisional reduction in output tax where the buyer has not yet declared the withheld amount. Two cautions apply: - These rules describe withholding by a **buyer** acting as withholding agent. In e-commerce, the courier or gateway is not the buyer. - Serial 8 in its current form was substituted by the Finance Act, 2025. The rules edition held here does not refer to it. Section 26 does require every payment intermediary and courier to file a monthly statement showing, supplier by supplier, the amount paid and tax due. That creates a record of what was withheld from you, but the section does not itself say how you claim it. ### Worked example (illustrative figures) Hina runs a leather bag workshop in Karachi with 18 workers, so she is not a cottage industry under section 2(5AB)(c). She is a registered manufacturer. In one month: Step 1, value of online sales before tax: Rs. 800,000. Step 2, output tax at 18%: Rs. 800,000 x 18% = Rs. 144,000. Buyers pay Rs. 944,000. Step 3, input tax on invoiced purchases of leather and fittings: Rs. 60,000. Step 4, section 7 result: Rs. 144,000 minus Rs. 60,000 = Rs. 84,000. Step 5, withheld by courier and gateway: serial 8 does not define "gross value". Taken on the full Rs. 944,000 buyers paid, 2% is Rs. 18,880. Step 6: if the rule 18 approach of reducing output tax by the withheld amount were applied, the balance would be Rs. 84,000 minus Rs. 18,880 = Rs. 65,120. The Act does not confirm that this is how serial 8 withholding is treated, so treat Step 6 as unresolved rather than settled. Compare Sana, a home embroiderer in Multan who meets all four cottage industry conditions. On Rs. 150,000 of online orders, 2% is Rs. 3,000. Under section 3(7A)(i) that Rs. 3,000 settles her sales tax on those supplies. There is no Step 3 or Step 4 for her. ### What if ...? **What if I am a retailer but also Tier-1?** Section 3(7A)(ii) excludes Tier-1 retailers, so the 2% is not final. Section 3(9A) says Tier-1 retailers pay sales tax at the rate applicable to the goods sold. **What if I stop meeting a cottage industry condition mid-year?** The Act does not say from when finality stops. Section 2(5AB)(d) measures turnover annually but does not define the year. **What if my courier withholds but does not deposit the tax?** That is a separate question about the withholding agent's failure, covered on another page. ### Common mistakes - **Treating the 2% as final for every seller.** Section 3(7A) limits it to two groups. - **Calling the withheld amount input tax.** Section 2(14) does not include it. - **Assuming the rules settle the credit.** The rules edition in this corpus was written for buyer withholding and predates serial 8 as it now reads. - **Forgetting the invoice condition.** Section 7(2)(i) requires a tax invoice in your name and registration number to deduct input tax. ### What to check in the official text Read section 3(7A) and serial 8 of the Eleventh Schedule for finality, section 7 for the output and input tax calculation, and section 2(14) for what counts as input tax. Check the definition of Tier-1 retailer in section 2(43A). For the crediting mechanism, look for Sales Tax Rules amendments or Board notifications issued after 30 June 2025, which this corpus does not hold. ### Frequently asked #### Who gets the 2% as a final settlement? Section 3(7A) names two groups: a cottage industry as defined in section 2(5AB), and retailers other than Tier-1 retailers. For them, the tax withheld by the courier or payment intermediary is the final discharge of sales tax on their taxable supplies of digitally ordered goods. #### Is the withheld 2% my input tax? Not on the definition. Section 2(14) defines input tax as tax levied on supplies of goods to you, on your imports and similar items. Tax withheld from your own sales is not in that list, which is why the question is how it is credited, not whether it is input tax. #### How does a manufacturer or Tier-1 retailer get credit for the 2%? The Sales Tax Act in this corpus does not say. The Sales Tax Rules, 2006, amended to 30 June 2025, refer in rule 18 to a claim of credit of sales tax withheld and a reduction in output tax, but they were written for withholding by buyers and predate the current serial 8. ### Citations - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "The tax withheld as provided in the Eleventh Schedule by the payment intermediary or the courier, as the case may be, shall" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Eleventh Schedule, Table, S. No. 8 (Payment intermediaries and couriers in respect of digitally ordered goods from within Pakistan)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 7 (Determination of tax liability)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#7-determination-of-tax-liability), as amended to 2026-06-30: "A registered person shall not be entitled to deduct input tax from output tax unless,-" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "tax levied under this Act on supply of goods to the person;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 26 (* Return)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#26-return), as amended to 2026-06-30: "every payment intermediary and courier shall furnish not later than the due date a true, complete and correct monthly statement in the prescribed form, indicating the supplier-wise amount paid and tax due" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 18 (Electronic filing of Sales Tax return)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#18-electronic-filing-of-sales-tax-return), as amended to 2025-06-30: "in respect of claim of credit of sales tax withheld, where a registered person declares an amount of sales tax withheld by a withholding agent, but does not declare the corresponding sales to such withholding agent in his return" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf --- ## Is the tax deducted on my online sales a final tax, and when can it be adjusted instead? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/is-online-sales-tax-final-or-adjustable Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Usually final. Section 8 of the Income Tax Ordinance makes section 6A tax a final tax on online receipts. Section 6A(3) makes it adjustable where turnover in a tax year exceeds Rs. 200 million. A seller with turnover up to Rs. 200 million may opt out of the final regime when filing, from tax year 2027. **Applies to:** Online sellers in Pakistan whose sales have had income tax deducted by a courier or payment intermediary under the e-commerce provisions. For most online sellers the tax taken by the courier or payment intermediary is the end of the income tax on those receipts. The Ordinance sets one exception by size and one choice for smaller sellers. Which of the three positions you are in depends on turnover and, for smaller sellers, on a decision made when the return is filed. ### What does the law say? **The default: final tax.** Section 8(1) of the Income Tax Ordinance lists the taxes that are final, and section 6A is on the list. For those taxes, section 8(1) says: - the amount is not chargeable to tax under any head of income in computing taxable income; - no deduction is allowed for any expenditure incurred in deriving it; - the amount is not reduced by any deductible allowance or the set off of any loss; - the tax is not reduced by any tax credits; and - under section 8(1)(e)(ii), the liability is discharged to the extent the tax has been deducted at source under Division III of Part V of Chapter X, the part of the Ordinance that contains the courier and payment intermediary deduction. **The exception: over Rs. 200 million.** Section 6A(3) starts "Notwithstanding the provisions of section 8" and says the tax on a person "whose turnover in a tax year exceeds two hundred million rupees, shall be adjustable". **The choice: up to Rs. 200 million.** The proviso to section 6A(3) says a person "having turnover up to two hundred million rupees may opt out of the final tax regime at the time of filing of return for the tax year 2027 and onwards". **What "turnover" means.** Section 2(70A) defines turnover by reference to sub-section (3) of section 113. An Explanation in section 113 says the definition "covers receipts from all business activities". So the Rs. 200 million test looks at your total business turnover, not only your online sales. ### How does it work in practice? | Turnover in the tax year | Treatment of the section 6A tax | What it means | |---|---|---| | Up to Rs. 200 million, no opt-out | Final under section 8 | Online receipts stay out of taxable income; costs cannot be deducted against them | | Up to Rs. 200 million, opted out at filing (tax year 2027 onwards) | Out of the final tax regime | The proviso does not itself spell out the computation that follows | | Above Rs. 200 million | Adjustable under section 6A(3) | Online receipts are part of the normal computation, and the tax deducted counts towards the tax due | Where the tax is not final, section 168(2) allows a person a tax credit for tax deducted from a payment under Division III of Part V of Chapter X in computing the tax due for the year in which it was deducted. The main reason a seller might prefer the adjustable route is costs. Under the final regime, section 8(1)(b) bars any deduction for expenses. A seller with thin margins, or a loss, still bears the full 1% or 2% on gross receipts. Outside the final regime, the online business is taxed on income, and the tax deducted goes towards that. ### Worked example (illustrative figures) Two sellers in Lahore, tax year 2027. **Zainab, turnover Rs. 30,000,000, all online.** 1. Cash on delivery sales: Rs. 20,000,000 x 2% = Rs. 400,000 deducted by couriers. 2. Card and wallet sales: Rs. 10,000,000 x 1% = Rs. 100,000 deducted by payment intermediaries. 3. Total deducted: Rs. 400,000 + Rs. 100,000 = Rs. 500,000. 4. Turnover is under Rs. 200 million. If she does not opt out, section 8 makes Rs. 500,000 her final tax on these receipts. Her costs do not reduce it. 5. If she opts out when filing, the final regime no longer applies. Her tax would be worked out on her income under the normal rules, which this page does not compute. **Faisal, turnover Rs. 250,000,000, all online by card.** 1. Deducted: Rs. 250,000,000 x 1% = Rs. 2,500,000. 2. Turnover exceeds Rs. 200 million, so section 6A(3) makes the Rs. 2,500,000 adjustable. 3. His business income is computed under the normal rules, and the Rs. 2,500,000 is taken into account against the tax due. Whether he then pays more or is owed a refund depends on that computation. ### What if ...? **What if part of my turnover is from a physical shop?** Section 113(3), as explained, covers receipts from all business activities, so shop sales count towards the Rs. 200 million test. **What if my turnover crosses Rs. 200 million only in a later year?** Section 6A(3) looks at turnover "in a tax year", so the test is applied year by year. **What if some of my online sales were never taxed at source?** Section 8(1)(e)(ii) discharges the liability only "to the extent" tax has been deducted at source. Sales paid directly to you, without a courier or intermediary, are covered on a separate page. ### Common mistakes - **Deducting expenses against final-tax receipts.** Section 8(1)(b) does not allow it. - **Counting only online sales towards Rs. 200 million.** Turnover is defined through section 113(3), which covers all business receipts. - **Treating the opt-out as available for earlier years.** The proviso applies from tax year 2027 onwards. ### What to check in the official text Read section 6A(3) and its proviso with section 8(1), then section 168(2) for credits where the tax is not final. Check the definition of turnover in section 2(70A) and section 113(3). Any Board procedure for recording the opt-out in the return is not held in this corpus. ### Frequently asked #### What does it mean that the tax is final? Section 8(1) says the receipts are not chargeable under any head of income, no deduction is allowed for expenditure incurred in earning them, and they are not reduced by allowances or losses. The tax is also not reduced by tax credits. The deduction is the whole income tax on those receipts. #### What happens above Rs. 200 million turnover? Section 6A(3) says the tax on a person whose turnover in a tax year exceeds two hundred million rupees shall be adjustable, notwithstanding section 8. The online receipts then sit inside the normal computation and the tax deducted is taken into account against the tax due. #### How do I opt out if my turnover is below Rs. 200 million? The proviso to section 6A(3) lets a person with turnover up to two hundred million rupees opt out of the final tax regime at the time of filing the return, for tax year 2027 onwards. The Ordinance text held here does not set out a separate form for the choice. ### Citations - [Income Tax Ordinance, 2001, section 6A (Tax on payments for digital transactions in e-commerce platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#6a-tax-on-payments-for-digital-transactions-in-e-commerce-platforms), as amended to 2026-06-30: "Notwithstanding the provisions of section 8, the tax imposed under this section on a person, whose turnover in a tax year exceeds two hundred million rupees, shall be adjustable" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 8 (General provisions relating to taxes imposed under sections 5, 5A, 5AA, 6, 6A, 7, 7A, 7B and 7G)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#8-general-provisions-relating-to-taxes-imposed-under-sections-5-5a-5aa-6-6a-7-7a-7b-and-7g), as amended to 2026-06-30: "shall be a final tax on the amount in respect of which the tax is imposed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "means turnover as defined in sub-section (3) of section 113" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "the definition of turnover covers receipts from all business activities" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IVA (Rate of Tax on Payments for Digital Transactions in E-commerce Platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is there a turnover limit below which online sellers pay no tax? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/turnover-limit-for-online-seller-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No. For tax year 2027, sections 6A and 153(2A) of the Income Tax Ordinance apply the 1% and 2% rates to every e-commerce payment, with no minimum turnover. The figures quoted online are other tests: Rs. 200 million decides whether the tax is adjustable, and Rs. 8 million is part of the sales tax cottage industry definition. **Applies to:** Small and new online sellers in Pakistan who want to know whether their sales are below any threshold for e-commerce tax. Figures such as Rs. 8 million and Rs. 200 million circulate as "tax-free limits" for online sellers. Neither works that way. The income tax on e-commerce receipts starts with the first rupee, and those two figures decide other things: whether a maker is a cottage industry for sales tax, and whether the income tax is final or adjustable. ### What does the law say? **The charge has no floor.** Section 6A(1) of the Income Tax Ordinance imposes tax "on every person who receives payment for supply of digitally ordered goods or services" delivered from within Pakistan through locally operated online platforms. Section 6A(2) applies the rate to the gross amounts of receipts. Neither sub-section sets a minimum. **The collection has no floor.** Section 153(2A) requires every payment intermediary processing a digital payment, and every courier collecting cash on delivery, to "collect tax from the gross amount payable (including sales tax, if any) to the seller". It sets no minimum payment or minimum turnover. **The rates.** Division IVA of Part I of the First Schedule sets, for tax year 2027: | Payment channel | Rate | |---|---| | Digital means or banking channels, by payment intermediary | 1% of gross amount paid or payable | | Cash on delivery, by courier service | 2% of gross amount paid or payable | ### Which thresholds do exist? | Figure | Where | What it decides | |---|---|---| | Rs. 200 million | Income Tax Ordinance, section 6A(3) | Above it in a tax year, the e-commerce tax is adjustable. Up to it, a person may opt out of the final tax regime when filing the return for tax year 2027 onwards. | | Rs. 8 million | Sales Tax Act, section 2(5AB)(d) | Annual turnover limit that, with three other conditions, makes a manufacturing concern a cottage industry, which is outside the sales tax registration duty in section 14(1A). | | Rs. 200 million | Sales Tax Act, section 2(43A)(gb) | A retailer with turnover above it in the preceding twelve months is a Tier-1 retailer. | None of these switches off the 1% or 2% collection under section 153(2A). **Rs. 200 million in section 6A(3).** The sub-section says that "notwithstanding the provisions of section 8", tax under section 6A on a person whose turnover in a tax year exceeds Rs. 200 million "shall be adjustable". Its proviso lets a person with turnover up to Rs. 200 million opt out of the final tax regime at the time of filing the return for tax year 2027 and onwards. What happens after opting out is on a separate page. **Rs. 8 million in the Sales Tax Act.** A cottage industry must be a manufacturing concern with no industrial gas or electricity connection, located in a residential area, with no more than ten workers, and annual turnover from all supplies not exceeding eight million rupees. Section 14(1A) excludes a cottage industry from the duty to register for sales tax, and section 3(7A) makes the sales tax withheld by the payment intermediary or courier its final discharge on digitally ordered goods. It is a sales tax test, not an income tax one. **Rs. 200 million for Tier-1 retailers.** Section 3(7A) makes withheld sales tax a final discharge for retailers other than Tier-1 retailers. A retailer above the Rs. 200 million turnover in clause (gb) is Tier-1 and falls outside that rule. ### Worked example (illustrative figures) Zainab sells handmade jewellery from Hyderabad through her own website. In tax year 2027 her sales are small: - card and bank transfer orders: Rs. 60,000 for the year; - cash on delivery orders: Rs. 90,000 for the year. Step 1, digital orders: Rs. 60,000 x 1% = Rs. 600 collected by the payment intermediary. Step 2, cash on delivery orders: Rs. 90,000 x 2% = Rs. 1,800 collected by the courier. Step 3, total income tax collected: Rs. 600 + Rs. 1,800 = Rs. 2,400. Her turnover of Rs. 150,000 is far below every threshold in the table, but tax is still collected on each payment. Her turnover is below Rs. 200 million, so the section 6A(3) proviso gives her the option to leave the final tax regime when she files her return. ### What if ...? **What if my income is below the basic exemption slab for individuals?** Section 6A is a separate charge on gross receipts, not on taxable income, and the collection under section 153(2A) happens regardless. How the tax interacts with the normal slabs once a seller opts out of the final regime is covered on the final or adjustable page. **What if I am not on the active taxpayers' list?** The Tenth Schedule increases the rates of deduction. That is covered on a separate page. ### Common mistakes - **Reading Rs. 8 million as an income tax exemption.** It is part of a sales tax definition and applies only to manufacturing concerns. - **Reading Rs. 200 million as a registration threshold.** Section 6A(3) decides whether the tax is final or adjustable. It does not exempt anyone from section 181 or section 14(1A). - **Expecting the courier to skip small parcels.** Section 153(2A) has no minimum amount. ### What to check in the official text Read section 6A(1) to (3) and section 153(2A) of the Income Tax Ordinance as amended to 30 June 2026, and confirm the rates in Division IVA of Part I of the First Schedule. In the Sales Tax Act, read section 2(5AB), section 2(43A)(gb), section 3(7A) and section 14(1A) and (1B). Section 14(1B) also means a marketplace or courier should not accept a seller without an NTN, whatever the turnover. ### Frequently asked #### Is there a minimum sale below which the 1% or 2% is not deducted? No minimum appears in section 153(2A) or in Division IVA of Part I of the First Schedule. The rate applies to the gross amount payable to the seller on each payment, including sales tax if any. #### What does the Rs. 200 million figure do? Under section 6A(3), the e-commerce tax of a person whose turnover in a tax year exceeds Rs. 200 million is adjustable. A person with turnover up to Rs. 200 million may opt out of the final tax regime when filing the return for tax year 2027 onwards. #### Is the Rs. 8 million figure a tax-free limit? No. Rs. 8 million is one of four conditions in the Sales Tax Act definition of cottage industry, which applies only to manufacturing concerns. It decides whether a maker is exempt from sales tax registration under section 14(1A). It does not stop income tax being deducted. ### Citations - [Income Tax Ordinance, 2001, section 6A (Tax on payments for digital transactions in e-commerce platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#6a-tax-on-payments-for-digital-transactions-in-e-commerce-platforms), as amended to 2026-06-30: "Notwithstanding the provisions of section 8, the tax imposed under this section on a person, whose turnover in a tax year exceeds two hundred million rupees, shall be adjustable" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "shall collect tax from the gross amount payable (including sales tax, if any) to the seller at the rate specified in Division IVA of Part I of the First Schedule to the Ordinance and deposit to government treasury." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IVA (Rate of Tax on Payments for Digital Transactions in E-commerce Platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "a retailer having turnover exceeding two hundred million rupees either by way of declaration or from worked back value of turnover from tax deduction under section 236G or 236H of Income Tax Ordinance, 2001" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "shall not allow any person to use their services to carry out e-commerce transactions unless it holds NTN and in case sub-section (1A) of this section applies also holds sales tax registration." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Is more tax deducted from my online sales if I am not on the Active Taxpayers List? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/online-seller-not-on-active-taxpayers-list Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 100BA and rule 1 of the Tenth Schedule to the Income Tax Ordinance increase the rate of deduction by hundred percent for persons not on the active taxpayers' list. For tax year 2027 that turns the section 153(2A) rates of 1% on digital payments into 2%, and 2% on cash on delivery into 4%. **Applies to:** Online sellers in Pakistan whose name does not appear on FBR's active taxpayers' list, and who are paid through a payment intermediary or a courier collecting cash on delivery. A seller who is not on the active taxpayers' list pays double the normal e-commerce income tax rate at source. The doubling comes from the Tenth Schedule to the Income Tax Ordinance, which section 100BA makes override the rest of the Ordinance. ### What does the law say? **Section 100BA.** Sub-section (1) says the collection or deduction of advance income tax, and the computation of income and tax, for a person not appearing on the active taxpayers' list "shall be determined in accordance with the rules in the Tenth Schedule". Sub-section (2) gives the Tenth Schedule effect "notwithstanding anything to the contrary contained in this Ordinance". **Rule 1 of the Tenth Schedule.** Where tax is to be deducted or collected under any provision of the Ordinance from persons not appearing on the active taxpayers' list, "the rate of tax required to be deducted or collected, as the case may be, shall be increased by hundred percent of the rate specified in this Ordinance". Its provisos set special rates for sections 231B, 236K, 236C, 236G and 236H. None of them concerns e-commerce. **The base rates.** Section 153(2A) makes payment intermediaries and courier businesses collect tax from the gross amount payable to sellers of digitally ordered goods or services, at the rates in Division IVA of Part I of the First Schedule: | Payment channel | Rate for tax year 2027, on the list | Rate after rule 1, not on the list | |---|---|---| | Digital means or banking channels, by payment intermediary | 1% | 2% | | Cash on delivery, by courier service | 2% | 4% | **Exclusions.** Rule 10 of the Tenth Schedule lists the taxes to which the Schedule does not apply, including tax under sections 149, 152 (in part), 154, 154A, 231AB, 235 and 236. Section 153 is not listed, so the section 153(2A) collection falls under rule 1. ### How does it work in practice? Section 181A gives the Board power to institute the active taxpayers' list and says it is "regulated as may be prescribed". How names are added to the list is set by rules and FBR procedure outside this corpus. The payment intermediary or courier applies the higher rate at the time of payment. Rule 2 of the Tenth Schedule lets a withholding agent who is satisfied that a person not on the list was not required to file a return under section 114 notify the Commissioner electronically before deducting. If the Commissioner does not pass an order within thirty days, the contention is treated as accepted. ### Worked example (illustrative figures) Kamran sells car accessories from Rawalpindi through his own website and is not on the active taxpayers' list. In October 2026, which falls in tax year 2027: - orders paid by card and bank transfer: Rs. 400,000; - orders paid cash on delivery: Rs. 250,000. If he were on the list: Step 1, digital: Rs. 400,000 x 1% = Rs. 4,000. Step 2, cash on delivery: Rs. 250,000 x 2% = Rs. 5,000. Step 3, total: Rs. 4,000 + Rs. 5,000 = Rs. 9,000. Because he is not on the list, rule 1 increases each rate by hundred percent: Step 4, digital: Rs. 400,000 x 2% = Rs. 8,000. Step 5, cash on delivery: Rs. 250,000 x 4% = Rs. 10,000. Step 6, total: Rs. 8,000 + Rs. 10,000 = Rs. 18,000. The extra income tax collected for the month is Rs. 18,000 minus Rs. 9,000 = Rs. 9,000. Sales tax withheld under the Sales Tax Act is separate; the Tenth Schedule is part of the Income Tax Ordinance and does not change sales tax rates. ### What if ...? **What if I do not file a return at all?** Rule 3 lets the Commissioner make a provisional assessment within sixty days of the due date, imputing income from the tax collected under rule 1 and treating it as concealed income for section 111(1)(d). Under rule 4, that becomes final after forty-five days unless returns for the year and the preceding year are filed within forty-five days of the order. **What if I am on the list but filed late?** Section 100BA(1) also mentions persons on the list who did not file by the due date. Rule 1A, which set rates for them, was omitted by the Finance Act, 2026. Rule 1 by its words covers only persons not appearing on the list. **What if I file my return after the deduction?** Rule 4(3) makes the tax deducted under rule 1 adjustable against tax payable in the return filed, where returns are filed before provisional assessment or within the rule 4(2) period. ### Common mistakes - **Reading 4% on cash on delivery as the normal rate.** The Division IVA rate is 2%. It becomes 4% only for a seller not on the list. - **Assuming the doubling covers sales tax.** Rule 1 applies to tax deducted or collected under the Income Tax Ordinance. - **Assuming registration alone is enough.** Rule 1 turns on appearing on the active taxpayers' list, not on having an NTN. ### What to check in the official text Read section 100BA, section 153(2A) and section 181A of the Income Tax Ordinance as amended to 30 June 2026, the rates in Division IVA of Part I of the First Schedule, and rules 1 to 4 and rule 10 of the Tenth Schedule. The Second Schedule contains clauses that switch off rule 1 for particular cases, such as clauses (111A) to (111AC) of Part IV. None of those we read concerns e-commerce, but check the Second Schedule for your situation. ### Frequently asked #### What rates apply to me if I am not on the active taxpayers' list? Rule 1 of the Tenth Schedule increases the rate by hundred percent of the rate specified in the Ordinance. For tax year 2027 the digital payment rate of 1% becomes 2%, and the cash on delivery rate of 2% becomes 4%. #### Is section 153 excluded from the higher rate? Rule 10 of the Tenth Schedule lists the sections to which the Schedule does not apply, such as sections 149, 154 and 235. Section 153 is not on that list in the version amended to 30 June 2026. #### Can I get the extra tax back? Rule 4(3) of the Tenth Schedule says that where returns are filed before a provisional assessment, or within the period in rule 4(2), the tax deducted under rule 1 is adjustable against the tax payable in the return for that year. The rule does not spell out how this works with the final tax regime in section 6A. ### Citations - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "The provisions of the Tenth Schedule shall have effect notwithstanding anything to the contrary contained in this Ordinance." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (Rate of deduction or collection of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "every payment intermediary at the time of processing payment through digital means, on behalf of a seller of digitally ordered goods or services through locally operated e-commerce platforms (including websites); and" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IVA (Rate of Tax on Payments for Digital Transactions in E-commerce Platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 181A (Active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181a-active-taxpayers-list), as amended to 2026-06-30: "The Board shall have the power to institute active taxpayers’ list." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rules 2 to 4 and rule 10](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What is the penalty for selling online without registering with FBR? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/penalty-selling-online-without-registration Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under entry 15A of the section 182 table, an online seller who fails to register under the Income Tax Ordinance pays Rs. 500,000 for the first default and Rs. 1 million for every later default. Separately, serial 7 of the Sales Tax Act section 33 table sets Rs. 50,000 or 5% of the tax involved, whichever is higher. **Applies to:** People and businesses in Pakistan selling digitally ordered goods or services online who have not registered under the Income Tax Ordinance or the Sales Tax Act. Two separate laws put a price on selling online without registering. The Income Tax Ordinance has a fixed penalty that grows after the first default. The Sales Tax Act has a penalty tied to the tax involved, and a criminal route if registration is delayed. A seller who should be registered under both can face both. ### What does the law say? **Income tax registration.** Section 181(1) of the Income Tax Ordinance says every taxpayer, "including a person selling digitally ordered goods or services from within Pakistan using online marketplace or a courier service", shall apply for registration in the prescribed form and manner. Section 181(1A) adds that an online marketplace or courier service shall not let any vendor use its platform for e-commerce unless the vendor is registered under the Ordinance. **The income tax penalty.** Section 182(1) makes a person who commits an offence in the Table liable to the penalty set against it. Entry 15A, added by the Finance Act, 2025, covers "any seller supplying digitally ordered goods and digitally delivered services through online marketplace" who is required to register under the Ordinance and fails to register. The penalty in column (3) is: | Default | Penalty under entry 15A | |---|---| | First default | Rs. 500,000 | | Every subsequent default | Rs. 1,000,000 | Section 182(1) says this penalty is in addition to, and not in derogation of, any other punishment under the Ordinance or any other law. **Sales tax registration.** Section 14(1A) of the Sales Tax Act requires every person, including a non-resident, selling digitally ordered goods from within Pakistan "through online marketplace, website or software application" to apply for registration. Two groups are left out: a person running a cottage industry, and retailers who pay sales tax through their electricity bills. **The sales tax penalty.** Serial 7 of the Table in section 33 applies to a person required to apply for registration who fails to do so before making taxable supplies. The penalty is Rs. 50,000 or five per cent of the amount of tax involved, whichever is higher. A proviso adds that if the person fails to get registered within sixty days of starting taxable activity, the person is further liable, upon conviction by a Special Judge, to imprisonment of up to three years, or a fine of up to the amount of tax involved, or both. ### How does it work in practice? The two regimes are separate. Registering for income tax (an NTN, which for an individual is the CNIC under section 181(4)) does not by itself meet the sales tax registration duty in section 14(1A), and the reverse is also true. The platforms are also pushed to check. Section 14(1B) of the Sales Tax Act says an online marketplace or courier shall not let any person use its services for e-commerce unless that person holds an NTN, and also holds sales tax registration where section 14(1A) applies. Serial 1B of the section 33 Table penalises a marketplace or courier that allows unregistered persons to use its services: five lac rupees for the first default and one million rupees for each subsequent default. In practice this means an unregistered seller may be refused service, apart from any penalty. Both laws also let the department act on its own. Section 181(2) of the Ordinance lets the Commissioner register a taxpayer where the facts require it, and section 14(2A) of the Sales Tax Act lets the Commissioner compulsorily register a person liable to register, after giving an opportunity of being heard. ### Worked example (illustrative figures) Sana runs an online clothing store from Faisalabad, selling through a local marketplace and her own website. She has registered with neither income tax nor sales tax. 1. **Income tax, first default.** Entry 15A applies: Rs. 500,000. 2. **Income tax, a later default.** If a further default is established, entry 15A applies again at the higher figure: Rs. 1,000,000. 3. **Income tax total on these two defaults:** Rs. 500,000 + Rs. 1,000,000 = Rs. 1,500,000. 4. **Sales tax.** Suppose the sales tax involved on her unregistered supplies is found to be Rs. 1,400,000 (an invented figure). Five per cent of that is Rs. 1,400,000 x 5% = Rs. 70,000. That is higher than Rs. 50,000, so the serial 7 penalty is Rs. 70,000. 5. **If the tax involved were only Rs. 600,000:** Rs. 600,000 x 5% = Rs. 30,000. That is lower than Rs. 50,000, so the penalty would be Rs. 50,000. These penalties sit on top of any tax found to be payable. They are not a substitute for it. ### What if ...? **What if I sell only through my own website, not a marketplace?** Section 181(1) covers sellers using an online marketplace or a courier service, and section 14(1A) of the Sales Tax Act names websites expressly. The wording of entry 15A, however, refers to sellers "through online marketplace". The Table does not say whether a website-only seller falls within entry 15A. That point is not settled by the text. **What if I run a cottage industry?** Section 14(1A) of the Sales Tax Act excludes a person running a cottage industry from the online sales tax registration duty. That exclusion is in the Sales Tax Act only. Section 181 of the Ordinance has no matching exclusion. **What counts as a "subsequent default"?** Entry 15A does not define how one default is separated from the next, for example by tax year or by notice. The Ordinance text held here does not settle it. ### Common mistakes - **Treating an NTN as full compliance.** The income tax and sales tax registration duties are separate, under section 181 of the Ordinance and section 14(1A) of the Sales Tax Act. - **Assuming the penalty replaces the tax.** Section 182(1) says the penalty is in addition to any other punishment, and the sales tax penalty is measured against the tax involved, which remains due. - **Ignoring the sixty-day point.** Serial 7 of the section 33 Table opens a criminal route, on conviction by a Special Judge, once registration is more than sixty days late. ### What to check in the official text Read section 181(1) and (1A) with entry 15A of the section 182 Table in the Income Tax Ordinance. In the Sales Tax Act, read section 14(1A), (1B) and (2A), then serials 1B and 7 of the section 33 Table in the source PDF, because the site text does not reproduce that table. The prescribed registration forms and procedure are set by rules not covered on this page. ### Frequently asked #### How much is the income tax penalty for not registering as an online seller? Entry 15A of the section 182 table sets a penalty of five hundred thousand rupees for the first default and one million rupees for every subsequent default. The entry refers back to section 181, which requires online sellers to apply for registration. #### Is there a separate sales tax penalty? Yes. Serial 7 of the section 33 table in the Sales Tax Act applies to a person required to register who fails to apply before making taxable supplies. The penalty is fifty thousand rupees or five per cent of the tax involved, whichever is higher, and a person who is still unregistered sixty days after starting taxable activity can also face prosecution before a Special Judge. #### Can the marketplace or courier be penalised too? Yes, under the Sales Tax Act. Serial 1B of the section 33 table sets five lac rupees for the first default and one million rupees for each later default where an online marketplace or courier allows unregistered persons to use its services for e-commerce. ### Citations - [Income Tax Ordinance, 2001, section 181 (Taxpayer’s registration)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181-taxpayer-s-registration), as amended to 2026-06-30: "including a person selling digitally ordered goods or services from within Pakistan using online marketplace or a courier service" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 182 (Offences and penalties)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182-offences-and-penalties), as amended to 2026-06-30: "be liable to the penalty mentioned against that offence in column (3) thereof" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 182, Table, S. No. 15A (seller supplying digitally ordered goods through online marketplace fails to register)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "selling digitally ordered goods from within Pakistan through online marketplace, website or software application as the case may be, shall apply in the prescribed form and in the prescribed manner for registration." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 33, Table, serial 7 (failure to apply for registration before making taxable supplies)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 33, Table, serial 1B (online marketplace or courier allowing unregistered persons)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## How do I get proof of the tax my courier or payment gateway deducted? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/tax-certificate-from-courier-or-gateway Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 164 of the Income Tax Ordinance requires the person deducting tax to give you, at the time of deduction, a certificate of the tax deducted with copies of the Computerized Payment Receipt. Section 165C separately makes couriers and payment intermediaries file quarterly seller-wise statements. Section 168 treats the deducted amount as tax paid by you. **Applies to:** Online sellers in Pakistan whose cash on delivery or digital payments have had income tax deducted by a courier or payment intermediary. The proof comes from the courier or payment intermediary that took the tax. Section 164 of the Income Tax Ordinance requires it to hand you a certificate and receipt copies when it deducts. A second, separate record goes to FBR through the quarterly statement under section 165C. The two together are what connect the deduction to your name. ### What does the law say? **The certificate.** Section 164(1) applies to every person deducting tax from a payment under Division III of Part V of Chapter X. Section 153, which contains the e-commerce collection rule in sub-section (2A), sits in that Division. The deducting person must, "at the time of collection or deduction of the tax", give the seller: - copies of the Computerized Payment Receipt (CPR), or another equivalent document; and - a certificate setting out the amount of tax deducted and any other particulars that are prescribed. A proviso says that where a person is notified as a SWAPS agent, the SWAPS Payment Receipt (SPR) replaces the CPR. **Attaching it to your return.** Section 164(2) says a person required to file a return for a tax year attaches copies of the CPR or SPR on which the certificate is based, for tax deducted in that year. **The statement to FBR.** Section 165C (printed on this site inside the section 165B heading, because of how the source PDF is laid out) requires every payment intermediary and courier service deducting under section 153(2A) to file a quarterly withholding statement. For each seller it shows: - name, identification number (NTN or CNIC) and address; - transaction date, invoice number and total transaction value; - total tax deducted at the time of payment to the seller; and - any other particulars prescribed. Section 165C(3) borrows the general withholding statement rules for due dates, revisions, annual statements and reconciliation. **Credit.** Section 168(1)(b) says tax deducted "shall be treated as tax paid by the person from whom the tax was collected or deducted". Section 168(6) adds that no amount may be deducted on account of service charges from tax withheld. ### How does it work in practice? What the certificate does for you depends on how the e-commerce tax is treated on your return. - **Where the tax is final.** Section 8(1) makes tax imposed under section 6A a final tax. Section 8(1)(e)(ii) says the liability is discharged to the extent the tax has been deducted at source under Division III of Part V of Chapter X. The certificate and CPR copies show that it was. - **Where the tax is adjustable.** Section 6A(3) makes the tax adjustable for a person whose turnover in a tax year exceeds Rs. 200 million, and lets a person with lower turnover opt out of the final regime when filing, from tax year 2027. Section 168(2) then allows a tax credit for the tax deducted in the year it was deducted. In both cases the figures on the certificates should match what the courier or intermediary reported under section 165C, because both describe the same deductions. ### Worked example (illustrative figures) Sana sells skincare products from her website in Karachi. Over tax year 2027 (1 July 2026 to 30 June 2027): - her payment gateway processed Rs. 1,200,000 of card payments and deducted 1%; - her courier collected Rs. 800,000 of cash on delivery and deducted 2%. Step 1, gateway: Rs. 1,200,000 x 1% = Rs. 12,000. Step 2, courier: Rs. 800,000 x 2% = Rs. 16,000. Step 3, total she expects to see across her certificates: Rs. 12,000 + Rs. 16,000 = Rs. 28,000. If her certificates add up to Rs. 26,500, the Rs. 1,500 gap is a sign that one certificate is missing or that a deduction was not deposited under her name. The rates are the tax year 2027 rates in Division IVA of Part I of the First Schedule. The sales figures are made up. ### What if ...? **What if the courier or gateway does not give me a certificate?** Section 164(1) places the duty on the deducting person, at the time of deduction. The Ordinance text held here does not set out a separate procedure for a seller to demand one. **What if the statement filed by the courier has a mistake?** Section 165C(3) applies the general rule allowing a revised statement. A revised statement can be filed within sixty days of the original. **What if the courier deducts a "service charge" from the tax?** Section 168(6) says no amount shall be deducted on account of service charges from tax withheld. Section 168(7) makes a person who does so liable to pay that amount to the Federal Government. ### Common mistakes - **Treating the courier's settlement sheet as the certificate.** Section 164(1) describes a certificate setting out the tax, along with CPR copies. A payout report is not described in the section. - **Assuming a final tax needs no proof.** Section 8(1)(e)(ii) discharges the liability only to the extent the tax was deducted at source. - **Mixing up income tax and sales tax.** A courier may withhold both. Section 164 deals with income tax deducted under the Ordinance only. ### What to check in the official text Read section 164, section 165C (inside the section 165B heading on this site), section 168 and section 8 of the Income Tax Ordinance as amended to 30 June 2026. The "prescribed" particulars of the certificate and the form of the statement are set by rules and FBR forms. Any SWAPS notification that applies to your courier or gateway is not part of the texts held here. ### Frequently asked #### When should the courier or gateway give me the certificate? Section 164(1) says at the time of collection or deduction of the tax. The certificate sets out the amount of tax deducted, and it comes with copies of the Computerized Payment Receipt or an equivalent document. #### What do I do with the certificates when filing? Section 164(2) says a person required to file a return attaches copies of the Computerized Payment Receipt (or SWAPS Payment Receipt) on the basis of which the certificate was given, for tax deducted in that year. #### Does FBR already know about the tax deducted from my sales? Section 165C requires every payment intermediary and courier deducting under section 153(2A) to file a quarterly statement with your name, NTN or CNIC, address, each transaction and the tax deducted. That statement is filed with the Commissioner, separate from the certificate given to you. ### Citations - [Income Tax Ordinance, 2001, section 164 (Certificate of collection or deduction of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#164-certificate-of-collection-or-deduction-of-tax), as amended to 2026-06-30: "shall, at the time of collection or deduction of the tax, furnish to the person from whom the tax has been collected or to whom the payment from which tax has been deducted has been made," Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 165B (Furnishing of information by financial institutions including banks)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#165b-furnishing-of-information-by-financial-institutions-including-banks), as amended to 2026-06-30: "every payment intermediary and courier service responsible for deducting tax under sub-section (2A) of section 153 of the Ordinance shall file a quarterly withholding statement to the Commissioner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "shall be treated as tax paid by the person from whom the tax was collected or deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "shall collect tax from the gross amount payable (including sales tax, if any) to the seller" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 8 (General provisions relating to taxes imposed under sections 5, 5A, 5AA, 6, 6A, 7, 7A, 7B and 7G)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#8-general-provisions-relating-to-taxes-imposed-under-sections-5-5a-5aa-6-6a-7-7a-7b-and-7g), as amended to 2026-06-30: "shall be a final tax on the amount in respect of which the tax is imposed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 6A (Tax on payments for digital transactions in e-commerce platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#6a-tax-on-payments-for-digital-transactions-in-e-commerce-platforms), as amended to 2026-06-30: "Notwithstanding the provisions of section 8, the tax imposed under this section on a person, whose turnover in a tax year exceeds two hundred million rupees, shall be adjustable" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do I still have to file an income tax return if tax is already deducted on my online sales? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/file-return-when-online-tax-deducted Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 114(1)(ae) of the Income Tax Ordinance requires a return from every person whose income for the year is subject to final taxation, and section 8 makes the section 6A e-commerce tax a final tax. Section 164(2) says the return must attach the payment receipts behind the deduction certificates you received. **Applies to:** Online sellers in Pakistan whose sales have had income tax deducted at source by a courier or payment intermediary under the e-commerce provisions. A common belief among online sellers is that once the courier or payment gateway has taken its cut, there is nothing more to do. The Ordinance says otherwise. Final tax closes the tax bill on those receipts, but a separate clause of section 114 still requires a return. ### What does the law say? **The filing duty.** Section 114(1) lists who must furnish a return of income for a tax year. Clause (ae) covers "every person whose income for the year is subject to final taxation under any provision of this Ordinance". Clause (b)(vii) separately covers a person who has obtained a National Tax Number. **Why online sales count as final taxation.** Section 6A imposes tax on every person who receives payment for digitally ordered goods or services delivered from within Pakistan through locally operated online platforms. Section 8(1) lists section 6A among the taxes that "shall be a final tax on the amount in respect of which the tax is imposed". Under section 8(1)(a) that amount is not chargeable under any head of income in computing taxable income. So a seller's online receipts sit outside taxable income, but the seller's income is still "subject to final taxation", which is exactly what clause (ae) catches. **What goes with the return.** Section 164(2) says a person required to furnish a return shall attach copies of the Computerized Payment Receipt (CPR), or SWAPS Payment Receipt (SPR), on the basis of which a deduction certificate was given for tax deducted in that year. Section 114(2) says a return must be in the prescribed form, must be accompanied by a wealth statement where one is required, and lets the Board prescribe different returns for persons subject to final taxation. **A choice made at filing.** Section 6A(3) makes the tax adjustable where turnover in a tax year exceeds Rs. 200 million. Its proviso lets a person with turnover up to Rs. 200 million opt out of the final tax regime at the time of filing the return, for tax year 2027 and onwards. The return is therefore the point where that decision is recorded. ### How does it work in practice? For tax year 2027 (1 July 2026 to 30 June 2027), Division IVA of Part I of the First Schedule sets the rates: 1% of the gross amount where payment comes through digital means or banking channels by a payment intermediary, and 2% where a courier collects cash on delivery. | Step | What the Ordinance provides | |---|---| | Tax deducted during the year | Courier or intermediary takes 1% or 2% under section 6A and the First Schedule | | Treatment of the receipts | Final tax under section 8, outside taxable income | | Filing duty | Return required under section 114(1)(ae) | | Attachments | CPR or SPR copies under section 164(2), wealth statement where required under section 114(2) | | Filing-time choice | Opt out of final regime if turnover is up to Rs. 200 million (tax year 2027 onwards) | ### Worked example (illustrative figures) Hina sells embroidered clothes from Karachi through her own website during tax year 2027. 1. Cash on delivery sales: Rs. 6,000,000 x 2% = Rs. 120,000 deducted by couriers. 2. Card and wallet sales: Rs. 2,000,000 x 1% = Rs. 20,000 deducted by payment intermediaries. 3. Total deducted: Rs. 120,000 + Rs. 20,000 = Rs. 140,000. 4. Her turnover is Rs. 8,000,000, well under Rs. 200 million. If she stays in the final regime, Rs. 140,000 is her final tax on these receipts under section 8. 5. She still has to file a return for tax year 2027 under section 114(1)(ae), attaching the CPR copies behind her courier and gateway certificates under section 164(2). 6. If she opts out at filing, her online business would be taxed under the normal rules instead. This page does not compute that. ### What if ...? **What if I do not file?** Entry 1 of the section 182 Table applies to a person who fails to furnish a return within the due date. The penalty is the higher of 0.1% of the tax payable for each day of default or Rs. 1,000 for each day of default. The minimum is Rs. 10,000 for an individual with 75% or more of income from salary, and Rs. 50,000 in all other cases. The maximum is 200% of the tax payable. The penalty is reduced by 75%, 50% or 25% if the return is filed within one, two or three months after the due date. Section 114(4) also lets the Commissioner issue a notice requiring the return. **What if my online sales are my only income and the amount is small?** Clause (ae) has no amount threshold. It turns on income being subject to final taxation, not on its size. **What if a deduction was never made on some orders?** Section 8(1)(e)(ii) discharges the liability only to the extent the tax was deducted at source. Undeducted receipts are dealt with on a separate page. ### Common mistakes - **Treating final tax as "no return needed".** Section 114(1)(ae) is written for exactly this case. - **Filing without the payment receipts.** Section 164(2) requires the CPR or SPR copies to be attached. - **Missing the opt-out.** The proviso to section 6A(3) ties the choice to the time of filing, from tax year 2027 onwards. - **Deducting expenses against final-tax receipts.** Section 8(1)(b) allows no deduction for expenditure incurred in deriving them. ### What to check in the official text Read section 114(1)(ae) and 114(2), section 8(1), section 6A(3) and its proviso, and section 164(2). Read entry 1 of the section 182 Table in the source PDF, since the site text does not reproduce the table, and check how "tax payable" is defined in its Explanation. The return form, the due date and the IRIS filing steps are set outside the sections quoted here and are not covered on this page. ### Frequently asked #### If the tax deducted is final, why file a return at all? Because section 114(1)(ae) says so directly: every person whose income for the year is subject to final taxation under any provision of the Ordinance must furnish a return. Final tax settles the tax on those receipts. It does not remove the filing duty. #### What do I attach to the return? Section 164(2) requires copies of the Computerized Payment Receipts (CPR) or SWAPS Payment Receipts (SPR) on the basis of which the deduction certificates were given to you for that year. Section 114(2) also requires a wealth statement where the Ordinance calls for one. #### Is there a choice to make when filing? For tax year 2027 onwards, the proviso to section 6A(3) lets a seller with turnover up to two hundred million rupees opt out of the final tax regime at the time of filing the return. Above that turnover, section 6A(3) makes the tax adjustable in any case. ### Citations - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "every person whose income for the year is subject to final taxation under any provision of this Ordinance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 8 (General provisions relating to taxes imposed under sections 5, 5A, 5AA, 6, 6A, 7, 7A, 7B and 7G)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#8-general-provisions-relating-to-taxes-imposed-under-sections-5-5a-5aa-6-6a-7-7a-7b-and-7g), as amended to 2026-06-30: "shall be a final tax on the amount in respect of which the tax is imposed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 164 (Certificate of collection or deduction of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#164-certificate-of-collection-or-deduction-of-tax), as amended to 2026-06-30: "A person required to furnish a return of taxable income for a tax year shall attach to the return" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 6A (Tax on payments for digital transactions in e-commerce platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#6a-tax-on-payments-for-digital-transactions-in-e-commerce-platforms), as amended to 2026-06-30: "Provided that a person having turnover up to two hundred million rupees may opt out of the final tax regime at the time of filing of return for the tax year 2027 and onwards." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IVA (Rate of Tax on Payments for Digital Transactions in E-commerce Platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 182, Table, S. No. 1 (failure to furnish a return of income within the due date)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## I have a physical shop and also sell online. Which sales tax rules apply to my online orders? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/shop-owner-also-selling-online Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It turns on whether you are a Tier-1 retailer. If not, section 3(9) of the Sales Tax Act collects tax on your shop through the electricity bill, section 14(1A) does not require registration for online selling, and section 3(7A) makes the 2% withheld on online orders final. Tier-1 retailers must register and pay the applicable rate. **Applies to:** Retailers in Pakistan with a physical shop who also sell goods through a website, online marketplace, social media shop or app. For a shopkeeper who also sells online, the Sales Tax Act asks one question first: are you a Tier-1 retailer? If you are not, sales tax on the shop is collected through your electricity bill, you are not required to register for online selling, and the 2% withheld from online orders settles the sales tax on them. If you are Tier-1, you register and pay tax at the rate that applies to your goods. ### What does the law say? **Who is Tier-1.** Section 2(43A) defines a Tier-1 retailer as a retailer in one or more of these categories: | Clause | Category | |---|---| | (a) | a unit of a national or international chain of stores | | (b) | a retailer operating in an air-conditioned shopping mall, plaza or centre, excluding kiosks | | (c) | cumulative electricity bill in the immediately preceding twelve consecutive months above Rs. 1,200,000 | | (d) | a wholesaler-cum-retailer with turnover of more than two hundred million, engaged in bulk import and supply of consumer goods to retailers and to consumers | | (gb) | a retailer with turnover above Rs. 200 million, by declaration or worked back from certain income tax deducted under the Income Tax Ordinance, in the preceding twelve consecutive months | | (h) | any other person or class prescribed by the Board | The Board may also exclude persons by notification. Clauses (d) and (gb) in their current form come from the Finance Act, 2026. **Retailers other than Tier-1: the shop.** Section 3(9) charges these retailers through their monthly electricity bills, at 5% where the monthly bill does not exceed Rs. 20,000 and 7.5% where it does. The first proviso makes this tax additional to the tax on the electricity supply itself. Section 3(12) lets the Federal Government levy a different amount through the bill by notification; notifications are not held in this corpus. **Retailers other than Tier-1: registration.** Section 14(1)(b) excludes from compulsory registration a retailer required to pay through the electricity bill under section 3(9). Section 14(1A), which requires online sellers to register, contains the same exception. **Retailers other than Tier-1: online orders.** Serial 8 of the Eleventh Schedule has couriers and payment intermediaries withhold 2% of gross value of supplies of digitally ordered goods. Section 3(7A)(ii) makes that withheld tax the final discharge of tax liability on those supplies by "retailers other than tier-I retailers". **Tier-1 retailers.** Section 3(9A) says Tier-1 retailers pay sales tax at the rate applicable to the goods sold. Section 14(1A) applies to them, so they register for online selling, and section 3(7A) does not make the 2% withheld final for them. ### How do the shop and the online rules fit together? For a retailer other than Tier-1, the two collections run side by side: the electricity bill amount for the shop, and the 2% withheld on digitally ordered goods. The Act does not provide for one to be set off against the other. It also does not say that the electricity bill amount covers online sales, or that the 2% covers counter sales. ### Worked example (illustrative figures) Imran runs a shoe shop on a street market in Faisalabad, not in a mall and not part of a chain. His turnover is well below Rs. 200 million. Step 1, Tier-1 check on electricity: his monthly bill is about Rs. 18,000. Over twelve months, Rs. 18,000 x 12 = Rs. 216,000, below Rs. 1,200,000. Not Tier-1 under clause (c), and no other category fits. Step 2, sales tax through the bill: the bill does not exceed Rs. 20,000, so 5% applies. Rs. 18,000 x 5% = Rs. 900 for the month, on top of tax on the electricity. Step 3, online orders for the month: Rs. 250,000 through his marketplace store and courier. 2% x Rs. 250,000 = Rs. 5,000 withheld. Step 4, under section 3(7A)(ii), the Rs. 5,000 is the final discharge on those online supplies. Step 5, sales tax borne through both routes for the month: Rs. 900 + Rs. 5,000 = Rs. 5,900. ### What if ...? **What if I move the shop into an air-conditioned mall?** Clause (b) of section 2(43A) makes you Tier-1 unless you trade from a kiosk. Section 3(9A) then applies, and section 3(7A) no longer makes the 2% final. **What if the electricity supplier keeps charging me as a retailer after I become Tier-1?** The second proviso to section 3(9) says the Commissioner having jurisdiction issues an order to the electricity supplier to exclude a Tier-1 retailer or a person who is not a retailer. **What if my online sales are to other shops, not the public?** Section 2(28) defines a retailer as a person supplying goods to the general public for consumption. Bulk supplies to other businesses raise the wholesaler question, which is outside this page. ### Common mistakes - **Assuming the shop's electricity bill tax covers online sales.** The Act treats the two separately. - **Forgetting the twelve-month bill total.** Clause (c) looks at cumulative bills over twelve consecutive months, not one month. - **Assuming a small shop inside a mall is exempt from Tier-1.** Only kiosks are carved out of clause (b). - **Skipping the NTN.** Section 14(1B) bars marketplaces and couriers from serving a seller without one. ### What to check in the official text Read section 2(43A) for Tier-1, section 3(9), 3(9A) and 3(12) for how tax is collected from retailers, section 14(1), (1A) and (1B) for registration, and section 3(7A) with serial 8 of the Eleventh Schedule for online orders. Board notifications adding or excluding Tier-1 categories are not held in this corpus. ### Frequently asked #### How is sales tax collected on my shop if I am not Tier-1? Section 3(9) charges retailers other than Tier-1 through their monthly electricity bills: 5% where the monthly bill does not exceed Rs. 20,000 and 7.5% where it does. This is in addition to the sales tax on the electricity itself. #### Do I need to register for sales tax to sell online as a small shopkeeper? Section 14(1A) requires online sellers to register but excepts retailers who are required to pay sales tax through electricity bills under section 3(9). Section 14(1B) still requires you to hold an NTN before a marketplace or courier can serve you. #### When does a shopkeeper become a Tier-1 retailer? Section 2(43A) lists the categories. They include a unit of a national or international chain, a shop in an air-conditioned mall, plaza or centre other than a kiosk, cumulative electricity bills over Rs. 1,200,000 in the preceding twelve months, and turnover over Rs. 200 million. ### Citations - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“Tier-1 retailer” means a retailer falling in any one or more of the following categories, namely:-" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "tax shall be charged from retailers, other than those falling in Tier-1, through their monthly electricity bills, at the rate of five percent where the monthly bill amount does not exceed rupees twenty thousand" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "a retailer who is liable to pay sales tax under the Act or rules made thereunder, excluding such retailer required to pay sales tax through his electricity bill under sub-section (9) of section 3;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Eleventh Schedule, Table, S. No. 8 (Payment intermediaries and couriers in respect of digitally ordered goods from within Pakistan)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Is tax deducted when customers pay me through JazzCash, Easypaisa or a direct bank transfer? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/wallet-or-bank-transfer-payment-intermediary Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Possibly, but the text does not settle it. Section 153(2A) of the Income Tax Ordinance makes a payment intermediary, which includes banks and financial institutions, collect 1% when processing a digital payment for a seller of digitally ordered goods or services through locally operated e-commerce platforms. Whether a direct wallet or IBAN transfer meets that description is not spelled out. **Applies to:** People in Pakistan who sell through social media, messaging apps or their own pages and take payment by mobile wallet or bank transfer. The law reaches wallet and bank payments in principle, but it does not clearly say whether it reaches a customer sending money straight to your personal account after ordering in a chat. Banks and financial institutions can be payment intermediaries, and bank transfers are digital means. The unsettled part is whether such a sale runs "through locally operated e-commerce platforms". ### What does the law say? **The collection rule.** Section 153(2A)(i) of the Income Tax Ordinance requires "every payment intermediary at the time of processing payment through digital means, on behalf of a seller of digitally ordered goods or services through locally operated e-commerce platforms (including websites)" to collect tax from the gross amount payable to the seller. For tax year 2027 the rate in Division IVA of Part I of the First Schedule is 1% of the gross amount paid or payable through digital means or banking channels by a payment intermediary. **Who is a payment intermediary.** Section 153(7) defines it as any third party entity, including a banking company, financial institution, licensed foreign exchange company or payment gateway, that facilitates the transfer of funds or payment instructions "to enable, process, route or settle payments in a financial transaction, without being the ultimate source or recipient of the payment". A bank or a wallet provider that moves money from a buyer to a seller fits the first part of that description. **What digital means covers.** Section 2 defines digital means to include online portals or platforms for digital payments, online interbank fund transfer services, over the counter digital payment services, and card payments by point of sale terminal, QR code, mobile device, ATM or kiosk. **What e-commerce covers.** Section 2 defines e-commerce as the sale or purchase of goods and services over computer networks by methods designed for receiving or placing orders "either through websites, mobile applications or online marketplace having digital ordering features". **The charge on the seller.** Section 6A(1) imposes the tax on every person who receives payment for digitally ordered goods or services delivered from within Pakistan "using locally operated online platforms including online marketplace or websites". ### Where is the text unclear? Four conditions have to line up for section 153(2A)(i) to apply, and the text does not say how each one works for a direct transfer: 1. **"On behalf of a seller".** When a buyer sends money from a wallet to your personal account, the provider is carrying out the buyer's instruction. The text does not say whether that is processing a payment on the seller's behalf. 2. **"Locally operated".** The phrase is not defined in the Ordinance text held here. It is not stated whether a social media or messaging app counts as a locally operated e-commerce platform. 3. **"Digitally ordered".** The phrase is also not defined. An order placed in a chat message is digital in a loose sense, but the Ordinance does not say so. 4. **Knowledge of the intermediary.** A bank moving an ordinary transfer may have no information that it relates to an online sale. The text does not deal with this. This page does not resolve these points. They are questions for FBR guidance or a decided case, neither of which is in the texts held here. ### Worked example (illustrative figures) Hina sells handmade jewellery through an Instagram page from Peshawar. In October 2026, in tax year 2027, buyers paid her Rs. 150,000 by mobile wallet and Rs. 50,000 by bank transfer to her IBAN. Step 1, if both payments were treated as processed by a payment intermediary under section 153(2A)(i): Rs. 150,000 x 1% = Rs. 1,500, and Rs. 50,000 x 1% = Rs. 500. Step 2, total: Rs. 1,500 + Rs. 500 = Rs. 2,000. Step 3, if no intermediary treats the transfers as e-commerce payments, nothing is deducted at source. Whether Hina still owes tax under section 6A on these sales then depends on the same unclear conditions above. The amounts are made up. The 1% rate is the tax year 2027 rate in Division IVA. ### What about sales tax? Section 3(3)(c) of the Sales Tax Act makes a payment intermediary, including a banking company or financial institution, liable to collect and pay sales tax on digitally ordered taxable goods supplied "by online market place, website and software application from within Pakistan" where the payment is made digitally. The same questions arise: the Act does not say whether a sale arranged on a social media app counts as a supply by a "software application". The rate is set in serial number 8 of the Eleventh Schedule. ### Common mistakes - **Assuming wallets are outside the law.** Banks and financial institutions are named in the definition of payment intermediary, and interbank transfers are named in digital means. - **Assuming every transfer is caught.** Section 153(2A)(i) has further conditions, and the text does not clearly apply them to direct personal transfers. - **Reading "no deduction" as "no tax".** Section 6A places the charge on the seller who receives the payment. ### What to check in the official text Read section 153(2A) and (7), section 6A(1), and the definitions of digital means and e-commerce in section 2 of the Income Tax Ordinance as amended to 30 June 2026. For sales tax, read section 3(3)(c) of the Sales Tax Act, 1990. Look for any FBR notification or clarification on wallet and social commerce payments, which is not part of the texts held here. ### Frequently asked #### Is a mobile wallet or bank a payment intermediary? Section 153(7) defines a payment intermediary as any third party entity including a banking company, financial institution, licensed foreign exchange company or payment gateway that transfers or settles payments without being the ultimate source or recipient. Banks and financial institutions are named in that list. #### Does an IBAN transfer count as digital means? Section 2 defines digital means to include online interbank fund transfer services and online portals for digital payments. So the payment channel itself falls within the definition. The open question is whether the transfer is processed on behalf of a seller through a locally operated e-commerce platform. #### If nothing is deducted, is there no tax? Section 6A imposes the tax on the person who receives payment for digitally ordered goods or services delivered through locally operated online platforms. The charge is on the seller, whether or not an intermediary collected it. Whether a given sale falls inside section 6A is the same open question. ### Citations - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "every payment intermediary at the time of processing payment through digital means, on behalf of a seller of digitally ordered goods or services through locally operated e-commerce platforms (including websites)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "“e-commerce” means sale or purchase of goods and services" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 6A (Tax on payments for digital transactions in e-commerce platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#6a-tax-on-payments-for-digital-transactions-in-e-commerce-platforms), as amended to 2026-06-30: "on every person who receives payment for supply of digitally ordered goods or services which are delivered from within Pakistan using locally operated online platforms including online marketplace or websites" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IVA (Rate of Tax on Payments for Digital Transactions in E-commerce Platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "the liability to collect and pay tax shall be of payment intermediary including a banking company, a financial institution, licensed exchange company or payment gateway in case the payment is made digitally" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Eleventh Schedule, serial number 8 (payment intermediaries and couriers in respect of digitally ordered goods from within Pakistan)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Is the online sales tax worked out on the full order value, including delivery charges and returned parcels? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/what-amount-ecommerce-tax-calculated-on Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer On the gross amount. Section 6A(2) of the Income Tax Ordinance applies the rate to gross receipts, and section 153(2A) says the courier or payment intermediary collects tax on the gross amount payable to the seller, including sales tax. The text does not say how delivery charges or returned parcels are treated. **Applies to:** Online sellers in Pakistan whose cash on delivery or digital payments pass through a courier or payment intermediary that deducts tax. The income tax that couriers and payment intermediaries take from online sales is worked out on the gross amount, not on profit. The law adds sales tax into that gross amount. It says nothing specific about delivery charges or about parcels that come back, so those two points are left open by the text. ### What does the law say about the amount? Three provisions describe the base, each in slightly different words. - **Section 6A(2)** of the Income Tax Ordinance says the tax "shall be computed by applying the relevant rate of tax to the gross amounts of receipts" for digitally ordered goods or services delivered from within Pakistan through locally operated online platforms. - **Section 153(2A)** puts the collection on the payment intermediary (for digital payments) and the courier (for cash on delivery). Each "shall collect tax from the gross amount payable (including sales tax, if any) to the seller". - **Division IVA of Part I of the First Schedule** sets the rates for tax year 2027 as 1% of the "gross amount paid or payable" through digital means or banking channels by a payment intermediary, and 2% of the "gross amount paid or payable" where a courier collects cash on delivery. On the sales tax side, section 3(3)(c) of the Sales Tax Act makes the payment intermediary or courier liable to collect and pay tax on digitally ordered taxable goods, at the rates in the Eleventh Schedule. Serial number 8 of that Schedule sets the rate at "2% of gross value of supplies". This page does not work out how that phrase interacts with the Act's own rules on value of supply. ### How does it work in practice? **Your costs do not reduce the base.** Stock, packaging, advertising and platform commission are not subtracted. The words used are gross receipts and gross amount payable. **Sales tax is inside the base.** If your price to the buyer includes sales tax, section 153(2A) says the income tax is collected on the amount including that sales tax. **The trigger is money moving through a third party.** Section 153(2A)(i) applies when a payment intermediary is "processing payment through digital means" for the seller. Section 153(2A)(ii) applies to a courier "collecting cash from a buyer" under cash on delivery terms. The duty follows the cash the courier actually collects or the payment the intermediary actually processes. **Delivery charges.** Many sellers add a delivery fee to the order total, and the courier collects the whole amount at the door. The Ordinance does not say whether a delivery fee charged to the buyer is part of the "gross amount payable to the seller". It does not exclude it and it does not include it by name. That question is not answered by the text held here. **Returned parcels.** If a buyer refuses a cash on delivery parcel, the courier collects no cash. Section 153(2A)(ii) is worded around cash collected, so on the text there is no amount from which the courier collects tax for that order. For a card payment that is processed and later refunded to the buyer, the Ordinance does not set out how the tax already collected is reversed or adjusted. ### Worked example (illustrative figures) Bilal sells shoes from his own website in Faisalabad. In September 2026, which falls in tax year 2027, he dispatched 60 orders on cash on delivery. - 52 orders were delivered and paid. The shoes on those orders were priced at Rs. 190,000 in total, and buyers also paid Rs. 10,400 of delivery charges added to the order total. The courier collected Rs. 200,400. - 8 parcels, worth Rs. 32,000, were refused and returned. The courier collected nothing on them. Step 1, returned parcels: no cash collected, so nothing to apply the 2% rate to under section 153(2A)(ii). Step 2, if the courier applies 2% to all cash collected: Rs. 200,400 x 2% = Rs. 4,008. Step 3, if the delivery charges were treated as outside the base: Rs. 190,000 x 2% = Rs. 3,800. Step 4, the difference between the two readings: Rs. 4,008 minus Rs. 3,800 = Rs. 208. The law does not say which reading is right. The example only shows the size of the gap for this made-up month. The sales tax withheld under serial number 8 of the Eleventh Schedule is a separate amount and is not included here. ### What if ...? **What if the buyer pays part in advance and part on delivery?** Each part passes through a different channel. On the text, the digital part falls under section 153(2A)(i) at 1% and the cash part under section 153(2A)(ii) at 2%. **What if the platform deducts its commission before paying me?** Section 153(2A) speaks of the gross amount payable to the seller. The Ordinance does not say whether a platform's commission is taken out first. The text does not settle this point. **What if my sales are above Rs. 200 million in the year?** That changes whether the tax is final or adjustable under section 6A(3). It does not change the amount the tax is worked out on. ### Common mistakes - **Working it out on profit.** Section 6A(2) uses gross receipts. A month with a loss still has tax deducted on sales. - **Leaving sales tax out of the base.** Section 153(2A) expressly includes sales tax, if any. - **Assuming returned parcels are taxed.** For cash on delivery, the courier's duty is tied to cash collected from the buyer. - **Treating a stated position on delivery charges as law.** Whatever a courier's statement shows, the Ordinance itself does not deal with delivery charges by name. ### What to check in the official text Read section 6A(1) and (2) and section 153(2A) of the Income Tax Ordinance as amended to 30 June 2026, then the rates in Division IVA of Part I of the First Schedule. For sales tax, read section 3(3)(c) and serial number 8 of the Eleventh Schedule to the Sales Tax Act, 1990. Any rule, SRO or FBR clarification on delivery charges or refunds is not part of the texts held here. ### Frequently asked #### Is the income tax worked out before or after sales tax? After. Section 153(2A) says the courier or payment intermediary collects tax from the gross amount payable to the seller, including sales tax, if any. So the sales tax element of the price is part of the base. #### Does the courier deduct tax on a parcel the buyer refused? Section 153(2A) ties the courier's duty to collecting cash from a buyer under cash on delivery terms. Where no cash is collected, the text gives no amount from which to collect. The Ordinance does not deal with returns in any other words. #### Is the delivery fee I charge the buyer part of the amount? The Ordinance does not say. It uses the gross amount payable to the seller and gross receipts, without a rule on delivery charges added to an order. That point is not settled by the text held here. ### Citations - [Income Tax Ordinance, 2001, section 6A (Tax on payments for digital transactions in e-commerce platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#6a-tax-on-payments-for-digital-transactions-in-e-commerce-platforms), as amended to 2026-06-30: "shall be computed by applying the relevant rate of tax to the gross amounts of receipts mentioned in sub-section (1)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "shall collect tax from the gross amount payable (including sales tax, if any) to the seller" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IVA (Rate of Tax on Payments for Digital Transactions in E-commerce Platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "the liability to collect and pay tax shall be of payment intermediary including a banking company, a financial institution, licensed exchange company or payment gateway in case the payment is made digitally" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Eleventh Schedule, serial number 8 (payment intermediaries and couriers in respect of digitally ordered goods from within Pakistan)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What counts as a cottage industry for the online sales tax rules? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/cottage-industry-online-seller-rules Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 2(5AB) of the Sales Tax Act, a cottage industry is a manufacturing concern with no industrial gas or electricity connection, located in a residential area, with no more than ten workers and annual turnover from all supplies up to Rs. 8 million. Qualifying online sellers need no sales tax registration, and the 2% withheld is final. **Applies to:** People who make goods at home or in a small workshop in a residential area and sell them through a website, online marketplace or app. A cottage industry, for sales tax, is a small manufacturing concern that passes four tests at once: no industrial gas or electricity connection, a residential location, ten workers or fewer, and annual turnover of no more than Rs. 8,000,000. Meeting all four changes two things for an online seller: registration and what happens to the 2% withheld on online orders. ### What does the law say? Section 2(5AB) of the Sales Tax Act defines "cottage industry" as a manufacturing concern which fulfils **each** of these conditions: | Condition | Text of section 2(5AB) | |---|---| | (a) | does not have an industrial gas or electricity connection | | (b) | is located in a residential area | | (c) | does not have a total labour force of more than ten workers | | (d) | annual turnover from all supplies does not exceed eight million rupees | The turnover figure was raised to eight million by the Finance (Supplementary) Act, 2022. ### What does qualifying change for an online seller? **No sales tax registration for online selling.** Section 14(1A), added by the Finance Act, 2025, requires every person selling digitally ordered goods from within Pakistan through an online marketplace, website or software application to apply for registration. It excepts two groups: a person running a cottage industry, and retailers who pay sales tax through electricity bills under section 3(9). **No registration as a manufacturer either.** Section 14(1)(a) lists among those who must register "a manufacturer who is not running a cottage industry". **An NTN is still needed.** Section 14(1B) says an online marketplace or courier shall not let anyone use its services for e-commerce unless that person holds an NTN, and also sales tax registration where section 14(1A) applies. For a cottage industry, section 14(1A) does not apply, so the NTN is the requirement the marketplace or courier checks. **The 2% withheld is final.** Serial 8 of the Eleventh Schedule has couriers and payment intermediaries withhold 2% of gross value of supplies of digitally ordered goods. Section 3(7A)(i) says that withheld tax is the final discharge of tax liability on taxable supplies of digitally ordered goods by a cottage industry as defined in section 2(5AB). ### Who is a "manufacturing concern"? The definition begins with a manufacturing concern, so it is about making things. Section 2(16) defines "manufacture" widely: any process that converts articles into a distinct product, printing and publishing, and operations such as assembling, mixing, cutting, diluting, bottling, packaging, repacking or preparing goods. Stitching garments, cooking pickles, making candles or carving wood would naturally fall within that language. Section 2(5AB) does not say whether a business that only repackages goods it bought in counts as a manufacturing concern for this purpose. The text does not resolve that case. ### Worked example (illustrative figures) Rukhsana makes ralli quilts in her house in Hyderabad, with four women from the neighbourhood helping her. The house has an ordinary domestic electricity connection. She sells through her own Instagram-linked website and at two craft exhibitions a year. Step 1, check condition (a): domestic connection, no industrial connection. Met. Step 2, check condition (b): her house is in a residential area. Met. Step 3, check condition (c): Rukhsana plus four helpers is five people, not more than ten. Met. Step 4, check condition (d): annual turnover from **all** supplies, online Rs. 3,600,000 plus exhibition sales Rs. 900,000 = Rs. 4,500,000. Not more than Rs. 8,000,000. Met. Step 5, the 2% in one month: online orders of Rs. 300,000 x 2% = Rs. 6,000 withheld by the courier and gateway. Under section 3(7A)(i) this is the final discharge of sales tax on those online supplies. ### What if ...? **What if I hire more help for Eid season?** Condition (c) is about total labour force "of more than ten workers". If Rukhsana takes on eight extra helpers, she has 13 and fails (c). The Act does not say whether a short seasonal peak counts, or over what period labour force is measured. **What if my exhibition sales push me over Rs. 8 million?** Condition (d) counts turnover "from all supplies", not only online sales. Rs. 3,600,000 online plus Rs. 4,700,000 offline is Rs. 8,300,000, which fails (d). Section 2(5AB) says "annual" but does not define the twelve-month period. **What if I fail one condition?** You are then not a cottage industry. Section 14(1)(a) requires registration as a manufacturer and section 14(1A) requires registration for online selling. Section 3(7A)(i) no longer makes the 2% final. Whether a maker who sells direct to the public could instead rely on section 3(7A)(ii), for retailers other than Tier-1, is not addressed in the text. ### Common mistakes - **Counting only online sales toward the Rs. 8 million.** Condition (d) says all supplies. - **Assuming a home business automatically qualifies.** All four conditions must be met; a residential address alone is not enough. - **Thinking no registration of any kind is needed.** Section 14(1B) still requires an NTN before a marketplace or courier can serve you. - **Treating a trader as a cottage industry.** The definition starts with a manufacturing concern. ### What to check in the official text Read section 2(5AB) for the four conditions, section 2(16) for what counts as manufacture, section 14(1), (1A) and (1B) for registration, and section 3(7A) with serial 8 of the Eleventh Schedule for the 2%. Income tax on the same online sales is a separate matter under the Income Tax Ordinance, covered on other pages. ### Frequently asked #### What are the four cottage industry conditions? Section 2(5AB) requires a manufacturing concern that has no industrial gas or electricity connection, is located in a residential area, has a total labour force of no more than ten workers, and has annual turnover from all supplies of no more than eight million rupees. All four must be met. #### Do I need sales tax registration to sell online as a cottage industry? Section 14(1A) requires online sellers of digitally ordered goods to register, but it expressly excepts a person running a cottage industry. Section 14(1B) still bars marketplaces and couriers from serving a seller who does not hold an NTN. #### Can a reseller of bought-in goods be a cottage industry? Section 2(5AB) starts with the words a manufacturing concern, so the definition is about making goods. A business that only buys and resells finished goods does not fit those words on their face. ### Citations - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“cottage industry” means a manufacturing concern, which fulfils each of following conditions, namely:-" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "Every person including a non-resident person except who is running a cottage industry and the retailers who are required to pay sales tax through electricity bills under sub-section (9) of section 3, selling digitally ordered goods from within Pakistan through online marketplace, website or software application" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "cottage industry as defined in clause (5AB) of section 2 of this Act; and" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Eleventh Schedule, Table, S. No. 8 (Payment intermediaries and couriers in respect of digitally ordered goods from within Pakistan)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What do online marketplaces and couriers report to FBR about my sales? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/what-marketplaces-couriers-report-to-fbr Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Quite a lot. Section 165C of the Income Tax Ordinance makes couriers and payment intermediaries file quarterly statements with each seller's name, NTN or CNIC, transactions and tax deducted, and makes marketplaces file monthly vendor statements with registration numbers and turnover. Section 26 of the Sales Tax Act adds monthly supplier-wise statements. **Applies to:** People and businesses in Pakistan selling through online marketplaces, websites or apps whose orders are delivered by couriers or paid through payment intermediaries. Marketplaces, couriers and payment intermediaries each file their own statements that name you and put figures against your name. The Income Tax Ordinance asks couriers and payment intermediaries for quarterly statements and marketplaces for monthly ones. The Sales Tax Act, 1990 asks all three for monthly statements. Together they give FBR your identity, registration numbers, transactions, turnover and the tax taken. ### What does the Income Tax Ordinance require? Section 165C was inserted by the Finance Act, 2025. On this site it is printed inside the section 165B heading because of the way the source PDF is laid out. **Couriers and payment intermediaries, quarterly.** Section 165C(1) requires every payment intermediary and courier service that deducts tax under section 153(2A) to file a quarterly withholding statement for sales of digitally ordered goods and services. For each seller it sets out: - name, identification number (NTN or CNIC) and address; - transaction date, unique identifier (invoice number) and total transaction value; - total tax deducted at the time of payment to the seller; and - any other particulars prescribed. **Online marketplaces, monthly.** Section 165C(2) requires every online marketplace in Pakistan to submit a monthly statement for every vendor registered on its platform that supplies digitally ordered goods and services. It contains: - the vendor's name and address; - the vendor's sales tax and income tax registration numbers; - the transactional and aggregated amount of the seller's monthly turnover; and - the amount deposited into the vendor's bank account against those sales. **Due dates and reconciliation.** Section 165C(3) applies the general withholding statement rules on due dates, revised statements, notices calling for statements, extensions, annual statements and reconciliation with the annual return. ### What does the Sales Tax Act require? The provisos to section 26(1) of the Sales Tax Act, added by the Finance Act, 2025, add two monthly statements: - **every online marketplace** files a monthly statement "indicating the supplier-wise amount paid and tax due" and other information on taxable supplies of digitally ordered goods from within Pakistan, "irrespective of the economic ownership of the supplies"; and - **every payment intermediary and courier** files a monthly statement giving the supplier-wise amount paid and tax due for taxable supplies of digitally ordered goods made through an online marketplace, website or software application, and delivered or paid through its courier service or payment platform. These statements are about goods. The Sales Tax Act e-commerce rules do not cover services. ### What happens if they do not file? The penalties fall on the reporting business, not on the seller. | Law | Who | Penalty | |---|---|---| | Income Tax Ordinance, section 182 Table, serial 1A | A person who fails to file a statement under section 165, 165A, 165B or 165C by the due date | Rs. 50,000 if the tax was already paid on time and the statement is filed within ninety days of the due date; otherwise Rs. 2,500 per day of default, with a minimum of Rs. 10,000 | | Sales Tax Act, section 33 Table, serial 1A | An online marketplace, payment intermediary or courier that fails to furnish the prescribed monthly statement by the due date | Rs. 300,000 for the first default where the statement is not furnished for two consecutive months; Rs. 1 million for each later default within one year | ### Worked example (illustrative figures) Kamran sells kitchenware from Multan through an online marketplace. In the quarter July to September 2026, in tax year 2027, he had 400 orders worth Rs. 900,000: Rs. 600,000 by card and Rs. 300,000 by cash on delivery. - **The payment intermediary's quarterly statement** would show Kamran's name, NTN or CNIC, address, each card transaction and 1% tax: Rs. 600,000 x 1% = Rs. 6,000. - **The courier's quarterly statement** would show each cash on delivery order and 2% tax: Rs. 300,000 x 2% = Rs. 6,000. - **The marketplace's three monthly statements** would show his registration numbers, his turnover per month adding up to Rs. 900,000 for the quarter, and the amounts paid into his bank account. Total income tax reported against him for the quarter: Rs. 6,000 + Rs. 6,000 = Rs. 12,000. The sales figures are made up. The rates are the tax year 2027 rates in Division IVA of Part I of the First Schedule. ### Common mistakes - **Assuming small sellers are not reported.** Neither section 165C nor section 26 sets a minimum sale value for a seller to appear in the statements. - **Assuming only income tax data is shared.** The marketplace statement under section 165C(2) includes the sales tax registration number too. - **Treating the reporting penalty as a seller penalty.** Serial 1A in both Tables applies to the business that must file the statement. ### What to check in the official text Read section 165C (inside the section 165B heading on this site) and serial number 1A of the Table in section 182 of the Income Tax Ordinance as amended to 30 June 2026. Then read the provisos to section 26(1) and serial number 1A of the Table in section 33 of the Sales Tax Act, 1990. The prescribed forms for these statements are set by rules or FBR forms, which are not part of the texts held here. ### Frequently asked #### How often do couriers and gateways report my sales? Under section 165C of the Income Tax Ordinance, quarterly, for tax deducted under section 153(2A). Under the provisos to section 26(1) of the Sales Tax Act, monthly, for supplies of digitally ordered goods. #### Does the marketplace report my turnover? Yes. Section 165C(2) requires every online marketplace in Pakistan to submit a monthly statement with each vendor's name, address, sales tax and income tax registration numbers, transactional and aggregated monthly turnover, and the amount deposited into the vendor's bank account. #### What happens if the marketplace or courier does not file? The penalty falls on the marketplace, courier or intermediary. Serial number 1A of the section 33 Table of the Sales Tax Act sets Rs. 300,000 for the first default and Rs. 1 million for each later default within a year. Serial number 1A of the section 182 Table sets the income tax penalty. ### Citations - [Income Tax Ordinance, 2001, section 165B (Furnishing of information by financial institutions including banks)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#165b-furnishing-of-information-by-financial-institutions-including-banks), as amended to 2026-06-30: "Every online marketplace in Pakistan shall submit a monthly statement containing name, address, Sales Tax and Income Tax registration number of every vendor registered on its platform" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Sales Tax Act, 1990, section 26 (* Return)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#26-return), as amended to 2026-06-30: "every payment intermediary and courier shall furnish not later than the due date a true, complete and correct monthly statement in the prescribed form, indicating the supplier-wise amount paid and tax due" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Income Tax Ordinance, 2001, section 182 (Offences and penalties), Section 182, Table, serial number 1A (failure to furnish a statement under section 165, 165A, 165B or 165C)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182-offences-and-penalties), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Sales Tax Act, 1990, Section 33, Table, serial number 1A (online marketplace, payment intermediary or courier failing to furnish the monthly statement)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "shall collect tax from the gross amount payable (including sales tax, if any) to the seller" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IVA (Rate of Tax on Payments for Digital Transactions in E-commerce Platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Who deducts tax from my Daraz or other marketplace payout, and at what rate? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/tax-deducted-from-marketplace-seller-payouts Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 153(2A) of the Income Tax Ordinance puts the collection duty on the payment intermediary for digital payments (1% for tax year 2027) and on the courier for cash on delivery (2%). Section 3(3)(c) of the Sales Tax Act does the same for sales tax at 2%. The marketplace itself is not named as a collector; it must report. **Applies to:** Sellers in Pakistan who sell goods or services through an online marketplace and receive payouts after the platform settles buyer payments. When a marketplace pays you less than the order total, part of the gap may be tax. The law does not make the marketplace the tax collector by name. It puts the collection duty on whoever handles the money: the payment intermediary for digital payments and the courier for cash on delivery. The marketplace's own legal duty is to report. ### What does the law say? **Income tax.** Section 153(2A) of the Income Tax Ordinance, "notwithstanding" section 153(1), requires two kinds of businesses to collect tax "from the gross amount payable (including sales tax, if any) to the seller": - every payment intermediary processing a payment through digital means on behalf of a seller of digitally ordered goods or services through locally operated e-commerce platforms, including websites; and - every courier business collecting cash from a buyer under cash on delivery terms on behalf of such a seller. The rate comes from Division IVA of Part I of the First Schedule: for tax year 2027, 1% of the gross amount for payment through digital means or banking channels by a payment intermediary, and 2% for cash on delivery by a courier service. **Sales tax.** Section 3(3)(c) of the Sales Tax Act says that for digitally ordered taxable goods supplied through an online marketplace, website or software application, the liability to collect and pay tax is on the payment intermediary where payment is made digitally, and on the courier where goods are supplied cash on delivery. S. No. 8 of the Eleventh Schedule sets the rate at 2% of the gross value of supplies. ### Is the marketplace a collecting agent? Not by name. Neither section 153(2A) nor section 3(3)(c) lists an online marketplace among the collectors. Section 2(38B) of the Ordinance defines an online marketplace as a platform "that acts as a facilitator in transactions that occur between a buyer and a seller". Two definitions in section 153(7) matter here: - A **payment intermediary** is a third party, including a bank, financial institution, licensed exchange company or payment gateway, that facilitates the transfer of funds to "enable, process, route or settle payments" without being the ultimate source or recipient of the payment. - A **courier service** includes logistics services, ride-hailing services, food delivery platforms and e-commerce services that deliver goods and collect cash on the seller's behalf. So a marketplace that runs its own delivery with cash collection, or routes and settles payments itself, may meet one of these definitions for that part of its business. The text does not say so of any named platform, and we do not decide it. What the law is clear on is the channel: digital payment, 1%; cash on delivery, 2%. ### What must the marketplace report? **Income tax.** Section 165C(2) requires every online marketplace in Pakistan to submit a monthly statement giving, for each vendor on its platform: name, address, sales tax and income tax registration numbers, transaction-level and aggregated monthly turnover, and the amount deposited into the vendor's bank account. Section 165C(1) separately requires payment intermediaries and courier services that deduct under section 153(2A) to file quarterly withholding statements with each seller's name, NTN or CNIC, address, invoice details and tax deducted. **Sales tax.** The provisos to section 26 of the Sales Tax Act require every online marketplace, and every payment intermediary and courier, to furnish a monthly supplier-wise statement of amount paid and tax due on digitally ordered goods. ### Worked example (illustrative figures) Faisal sells kitchenware on a marketplace from Gujranwala. In September 2026 (tax year 2027) buyers pay Rs. 200,000 by card and wallet, and Rs. 100,000 in cash to the delivery rider. Step 1, income tax on digital payments: Rs. 200,000 x 1% = Rs. 2,000. Step 2, income tax on cash on delivery: Rs. 100,000 x 2% = Rs. 2,000. Step 3, sales tax withheld under S. No. 8 of the Eleventh Schedule: Rs. 300,000 x 2% = Rs. 6,000. Step 4, total tax withheld: Rs. 2,000 + Rs. 2,000 + Rs. 6,000 = Rs. 10,000. Commission, shipping and other platform charges in his payout statement are commercial terms. The law does not set them. ### Common mistakes - **Assuming one flat rate for all marketplace orders.** The income tax rate depends on the payment channel. - **Treating the marketplace commission as tax.** Only the amounts collected under section 153(2A) and section 3(3)(c) are tax. - **Assuming unreported sales stay invisible.** Section 165C and section 26 require monthly seller-wise reporting. ### What to check in the official text Read section 153(2A) and the definitions in section 153(7), section 165C and section 2(38B) of the Income Tax Ordinance as amended to 30 June 2026, and the rates in Division IVA of Part I of the First Schedule. In the Sales Tax Act, read section 3(3)(c), section 3(7A), the provisos to section 26 and S. No. 8 of the Eleventh Schedule. The prescribed forms for these statements are set by rules outside this corpus. ### Frequently asked #### Does the marketplace deduct the income tax from my payout? Section 153(2A) names payment intermediaries and courier businesses as the collectors, not online marketplaces. Whether a particular marketplace also acts as a payment intermediary or courier service depends on what it does; the definitions in section 153(7) turn on routing payments or delivering and collecting cash. #### What rates apply to a marketplace sale in tax year 2027? Income tax is 1% of the gross amount where the buyer pays by digital means or banking channels, and 2% where a courier collects cash on delivery. Sales tax withheld under S. No. 8 of the Eleventh Schedule is 2% of the gross value of supplies of goods. #### What does the marketplace tell FBR about me? Section 165C(2) of the Income Tax Ordinance requires a monthly statement with each vendor's name, address, sales tax and income tax registration numbers, monthly turnover and amounts deposited in the vendor's bank account. Section 26 of the Sales Tax Act requires a monthly supplier-wise statement too. ### Citations - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "every payment intermediary at the time of processing payment through digital means, on behalf of a seller of digitally ordered goods or services through locally operated e-commerce platforms (including websites); and" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 165C (Furnishing of information by online marketplace, payment intermediary and courier service)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "Every online marketplace in Pakistan shall submit a monthly statement containing name, address, Sales Tax and Income Tax registration number of every vendor registered on its platform supplying digitally ordered goods and services in e-commerce" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "“online marketplace” means an information technology platform run by e-commerce entity over an electronic network that acts as a facilitator in transactions that occur between a buyer and a seller" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IVA (Rate of Tax on Payments for Digital Transactions in E-commerce Platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "in the case of supply of digitally ordered taxable goods by online market place, website and software application from within Pakistan during the course of e-commerce, the liability to collect and pay tax shall be of payment intermediary including a banking company, a financial institution, licensed exchange company or payment gateway in case the payment is made digitally" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 26 (* Return)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#26-return), as amended to 2026-06-30: "every online marketplace shall furnish not later than the due date a true, complete and correct monthly statement in the prescribed form, indicating the supplier-wise amount paid and tax due" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Why is 4% cut from my COD remittance when the income tax rate is 2%? Source: https://qanoondigest.com/faq/ecommerce-online-sellers/why-4-percent-cut-on-cod-orders Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Because two different taxes are taken. Section 153(2A) of the Income Tax Ordinance makes the courier collect 2% income tax on cash on delivery sales. Separately, section 3(3)(c) of the Sales Tax Act and serial 8 of the Eleventh Schedule make it withhold 2% sales tax on digitally ordered goods. Together they come to about 4%. **Applies to:** Online sellers of goods in Pakistan whose buyers pay cash on delivery to a courier and whose courier statements show a deduction of around 4%. The courier statement shows one deduction line, or two lines that add up to 4%, and the natural reading is that the income tax rate is 4%. It is not. On cash on delivery orders for goods, the courier is acting as a collection agent for two separate federal taxes, each at 2%. One is income tax under the Income Tax Ordinance, 2001. The other is sales tax under the Sales Tax Act, 1990. ### What does the law say? **Income tax: 2%.** Section 6A of the Income Tax Ordinance charges tax on payments received for digitally ordered goods or services delivered from within Pakistan through locally operated online platforms, including marketplaces and websites. Section 153(2A)(ii) requires every courier business that collects cash from a buyer under cash on delivery terms on behalf of an online seller to collect that tax "from the gross amount payable (including sales tax, if any) to the seller" and deposit it. Division IVA of Part I of the First Schedule sets the rate for cash on delivery by a courier service at "2% of the gross amount paid or payable" for tax year 2027. **Sales tax: 2%.** Section 3(3)(c) of the Sales Tax Act says that for digitally ordered taxable goods supplied through an online marketplace, website or software application from within Pakistan, the liability to collect and pay tax is on the payment intermediary where the buyer pays digitally, and "of the courier delivering the goods where those are supplied on Cash on Delivery (CoD) basis at the rates provided in the Eleventh Schedule". Serial number 8 of the Eleventh Schedule names "Payment intermediaries and couriers" as withholding agents for "digitally ordered goods from within Pakistan", with the supplier category being persons supplying such goods through an online marketplace, website or software applications. The rate is "2% of gross value of supplies". | Tax | Law | Who deducts on COD | Rate | |---|---|---|---| | Income tax | Section 153(2A), Income Tax Ordinance; First Schedule, Part I, Division IVA | Courier | 2% of gross amount | | Sales tax | Section 3(3)(c), Sales Tax Act; Eleventh Schedule, serial 8 | Courier | 2% of gross value of supplies | ### How does it work in practice? The courier collects the full price from the buyer, takes out both amounts, and remits the rest, usually after its own delivery charges too. The two taxes go to the same federal government but under different laws, with different consequences for you: - the income tax part is tax on your income under section 6A, and whether it is final or adjustable depends on the Income Tax Ordinance; - the sales tax part is withheld on your supply of goods, and its effect depends on your status under the Sales Tax Act. The sales tax withholding under serial 8 applies to goods only. Section 3(3)(c) and serial 8 both speak of digitally ordered goods. The income tax charge in section 6A covers both goods and services. So a seller of an online service collected by cash on delivery would, on the text, see the 2% income tax but not the serial 8 sales tax withholding. ### Worked example (illustrative figures) Bilal sells phone accessories from Rawalpindi through his website. A buyer in Multan orders a set for Rs. 5,000 and pays cash on delivery. The courier collects Rs. 5,000. Step 1, income tax under section 153(2A): Rs. 5,000 x 2% = Rs. 100. Step 2, sales tax under serial 8 of the Eleventh Schedule: Rs. 5,000 x 2% = Rs. 100. This assumes the "gross value of supplies" is the full Rs. 5,000 collected. The Schedule does not itself say whether that value is taken with or without tax, so the base the courier uses should be checked on its statement. Step 3, total tax withheld: Rs. 100 + Rs. 100 = Rs. 200. Step 4, as a share of the order: Rs. 200 / Rs. 5,000 = 4%. Step 5, amount before the courier's own charges: Rs. 5,000 - Rs. 200 = Rs. 4,800. Any delivery or cash handling fee the courier charges comes off after this and is not a tax. ### What if ...? **What if the buyer paid by card instead?** The income tax rate for payment through digital means by a payment intermediary is 1%, not 2%. Serial 8 applies the same 2% sales tax withholding to payment intermediaries. On the same Rs. 5,000 that would be Rs. 50 plus Rs. 100, or 3%. **What if I run a cottage industry or am a small retailer?** Section 3(7A) of the Sales Tax Act says the tax withheld under the Eleventh Schedule by the payment intermediary or courier is final discharge of tax liability for taxable supplies of digitally ordered goods by a cottage industry as defined in section 2(5AB), and by retailers other than Tier-1 retailers. **What if the deduction is more than 4%?** The statutory rates for these two taxes add to 4% on cash on delivery goods. A higher figure may include courier charges or another tax. This page does not cover whether higher rates apply to a seller not on the active taxpayers' list. ### Common mistakes - **Treating 4% as the income tax rate.** Division IVA sets 2% for cash on delivery. The other 2% is sales tax. - **Claiming the full 4% as an income tax credit.** Only the income tax part is income tax. The sales tax part is dealt with under the Sales Tax Act. - **Assuming the sales tax cut applies to services.** Serial 8 is limited to digitally ordered goods. ### What to check in the official text Read section 153(2A) and Division IVA of Part I of the First Schedule of the Income Tax Ordinance for the income tax part. Read section 3(3)(c) and (7A) of the Sales Tax Act and serial number 8 of the Eleventh Schedule for the sales tax part. Note the opening words of the Eleventh Schedule, which exclude certain goods and supplies listed after the Table from withholding. Provincial sales tax on services is outside this corpus. ### Frequently asked #### Is the 4% one tax or two? Two. The Income Tax Ordinance charges 2% income tax on cash on delivery receipts under section 6A, collected by the courier under section 153(2A). The Sales Tax Act separately makes the courier withhold 2% of the gross value of supplies of digitally ordered goods under serial 8 of the Eleventh Schedule. #### Would I see 4% on a card payment too? Not on the same figures. The income tax rate on digital payments through a payment intermediary is 1%, while serial 8 of the Eleventh Schedule applies the same 2% sales tax withholding to payment intermediaries and couriers. On goods paid by card the two together would come to about 3%. #### Do I get the sales tax part back? It depends on your position under the Sales Tax Act. Section 3(7A) makes the withheld sales tax a final discharge for a cottage industry and for retailers other than Tier-1 retailers. For other sellers, how the withheld amount is dealt with is covered on a separate page. ### Citations - [Income Tax Ordinance, 2001, section 6A (Tax on payments for digital transactions in e-commerce platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#6a-tax-on-payments-for-digital-transactions-in-e-commerce-platforms), as amended to 2026-06-30: "The tax imposed under sub-section (1) shall be computed by applying the relevant rate of tax to the gross amounts of receipts mentioned in sub-section (1)." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "every courier business providing courier services collecting cash from a buyer under Cash on Delivery (CoD) payment terms on behalf of a seller for the supply of digitally ordered goods and services through e-commerce platforms (including websites);" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IVA (Rate of Tax on Payments for Digital Transactions in E-commerce Platforms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "in the case of supply of digitally ordered taxable goods by online market place, website and software application from within Pakistan during the course of e-commerce, the liability to collect and pay tax shall be of payment intermediary" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“cottage industry” means a manufacturing concern, which fulfils each of following conditions" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Eleventh Schedule, Table, serial number 8 (payment intermediaries and couriers in respect of digitally ordered goods)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- # Textile mills and manufacturers Sales tax, input adjustment, export zero-rating and duty on raw materials. ## Is my input tax lost if I paid the supplier in cash instead of through the bank? Source: https://qanoondigest.com/faq/textile-manufacturers/input-tax-cash-payment-section-73 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It can be. Section 73 of the Sales Tax Act requires payments over Rs. 50,000 in aggregate to a single supplier in a tax period to go from your business bank account to the supplier's. Credit purchases must be paid that way within 180 days of the invoice. Otherwise section 73(2) denies input tax, refund and zero-rating. **Applies to:** Sales tax registered manufacturers, including textile mills, that buy yarn, fibre, dyes, chemicals and other inputs from registered suppliers and claim input tax or refunds. Paying a supplier in cash does not always cost the buyer input tax. It does once payments to that supplier in a tax period cross the section 73 threshold. From then on, the Sales Tax Act, 1990 ties the claim to how the money moved as well as to the invoice. ### What does the law say? Section 73(1) requires payment for a transaction exceeding Rs. 50,000 "in aggregate to a single supplier in a tax period" to be made by a crossed cheque, crossed bank draft, crossed pay order or another crossed banking instrument. The payment must show transfer of the sales tax invoice amount to the supplier from the buyer's business bank account. Payments against a utility bill are excluded. The words "in aggregate to a single supplier in a tax period" were inserted by the Finance Act, 2024. Two provisos widen what counts as payment through the bank: - **Online transfer and credit card.** An online transfer from the buyer's business account to the supplier's business account, and a payment by credit card, both count as banking channel transactions if they can be verified from both parties' bank statements. - **Set-off.** Adjusting amounts payable and receivable with the same party counts as payment if sales tax has been charged and paid by both parties where applicable, and the Commissioner's prior approval was sought. Section 73(2) sets the consequence. The buyer is not entitled to input tax credit, adjustment or deduction, or to refund, repayment, drawback or zero-rating, if payment is made otherwise than as sub-section (1) requires. For a transaction on credit, the payment must be transferred in that manner within 180 days of the tax invoice being issued. Section 73(3) applies to the supplier. The money must be deposited in the supplier's business bank account, or the supplier loses the same entitlements. ### What counts as a business bank account? The Explanation to section 73 defines it as a bank account used by the registered person for business transactions and declared to the Commissioner through Form STR-1 or a change of particulars in the registration database. Section 22(1) separately requires registered persons to keep "banking instruments in terms of section 73" among their records. Section 22(1A) lets the Board, by notification, limit the number of business bank accounts a registered person may use for purchase and sale payments. ### Worked example (illustrative figures) A knitting unit in Lahore buys from one dye and chemical supplier during the tax period of March 2027. | Invoice | Invoice amount (including sales tax) | Paid how | |---|---|---| | 4 March | Rs. 30,000 | Cash | | 18 March | Rs. 35,000 | Cash | | Total to this supplier in March | Rs. 65,000 | | 1. The aggregate to this single supplier in the tax period is Rs. 65,000, which exceeds Rs. 50,000. 2. The payments were made in cash, not from the business bank account, so section 73(2) is engaged for this supplier in this period. 3. Section 73 does not say whether only the invoice that takes the total over Rs. 50,000 is affected, or every invoice in the aggregate. The text is silent on that split. Now take a credit purchase of yarn. The invoice is dated 5 January 2027, and the unit pays by online transfer from its declared business account. - Days left in January after the 5th: 26 - February 2027: 28 days (running total 54) - March: 31 (85), April: 30 (115), May: 31 (146), June: 30 (176) - 4 more days in July: 180 The transfer must be made by 4 July 2027 to stay within the 180 days in section 73(2). ### What if I export the goods made from those inputs? Section 73(2) removes refund and zero-rating, not only input tax adjustment. For an exporting mill, input tax on a purchase paid in breach of section 73(1) cannot be recovered through a refund claim either. ### What if the supplier banks the money in a personal account? Section 73(3) puts the consequence on the supplier. He loses input tax, refund and zero-rating entitlements if the amount is not deposited in his business bank account. For online transfers, the proviso to section 73(1) also refers to the supplier's business account and to verification from the supplier's bank statement. A buyer paying into an undeclared supplier account may therefore struggle to show the payment met the proviso. ### Common mistakes - **Counting each invoice separately.** Since the Finance Act, 2024, the Rs. 50,000 test is the aggregate paid to a single supplier in a tax period. - **Setting off balances without approval.** An adjustment of payables and receivables counts only with the Commissioner's prior approval. - **Paying credit invoices late.** A credit purchase paid through the bank after 180 days from the invoice date falls outside section 73(2). - **Stretching the utility bill exclusion.** Section 73(1) excludes only payment against a utility bill. Purchases of yarn, dyes or chemicals are not covered by it. ### What to check in the official text - Section 73(1), (2) and (3) and the Explanation of the Sales Tax Act, 1990, as amended to 30 June 2026. - Section 22(1)(e) and (1A) on records and business bank accounts. - Any Board notification under section 22(1A) limiting the number of business bank accounts. No such notification is held in this corpus. ### Frequently asked #### Does a bank transfer from my personal account count? Section 73(1) requires the payment to come from the business bank account of the buyer, and the proviso on online transfers refers to the business account of both buyer and supplier. The Explanation defines a business bank account as one used for business and declared to the Commissioner through Form STR-1 or a change of particulars in the registration database. #### Is paying by credit card acceptable? Yes. The first proviso to section 73(1) treats payments through credit card as transactions through the banking channel, if they are verifiable from the bank statements of both the buyer and the supplier. #### Can I set off what a supplier owes me against what I owe him? The second proviso to section 73(1) treats such adjustments as satisfying the section only if sales tax has been charged and paid by both parties where applicable, and the registered person has sought the Commissioner's prior approval before making the adjustment. ### Citations - [Sales Tax Act, 1990, section 73 (Certain transactions not admissible)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#73-certain-transactions-not-admissible), as amended to 2026-06-30: "payment of the amount for a transaction exceeding value of fifty thousand rupees" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 73 (Certain transactions not admissible)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#73-certain-transactions-not-admissible), as amended to 2026-06-30: "The buyer shall not be entitled to claim input tax credit, adjustment or deduction, or refund, repayment or draw-back or zero-rating of tax under this Act if payment for the amount is made otherwise than in the manner prescribed in sub-section (1)" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 73 (Certain transactions not admissible)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#73-certain-transactions-not-admissible), as amended to 2026-06-30: "The amount transferred in terms of this section shall be deposited in the business bank account of the supplier" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 22 (Records. ............................................................................ ……....58 23. Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#22-records-58-23-tax-invoices), as amended to 2026-06-30: "banking instruments in terms of section 73" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What counts as a cottage industry for sales tax, and can a small power loom or weaving unit avoid registration? Source: https://qanoondigest.com/faq/textile-manufacturers/cottage-industry-sales-tax-exemption Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer A cottage industry under section 2(5AB) of the Sales Tax Act is a manufacturing concern with no industrial gas or electricity connection, in a residential area, with no more than ten workers and annual turnover up to Rs. 8 million. A power loom unit meeting all four need not register under section 14(1)(a). Failing any one makes registration compulsory. **Applies to:** Owners of small power loom, handloom, weaving, embroidery or stitching units, including units run from homes or residential streets. A small weaving or power loom unit stays outside sales tax registration only while it is a "cottage industry", and that status depends on four tests passed together: no industrial gas or electricity connection, a residential location, ten workers or fewer, and turnover of Rs. 8 million or less a year. Fail one test and the unit is an ordinary manufacturer that section 14 requires to register. ### What does the law say? Section 2(5AB) of the Sales Tax Act, 1990 defines "cottage industry" as a manufacturing concern which fulfils each of these conditions: | Condition | Words of section 2(5AB) | |---|---| | (a) | does not have an industrial gas or electricity connection | | (b) | is located in a residential area | | (c) | does not have a total labour force of more than ten workers | | (d) | annual turnover from all supplies does not exceed eight million rupees | The figure in (d) was changed to eight million by the Finance (Supplementary) Act, 2022. Section 14(1)(a) then lists, among those required to register, "a manufacturer who is not running a cottage industry". So the cottage industry definition is the dividing line. A concern that meets all four conditions is not caught by section 14(1)(a). A concern that fails any one of them is a manufacturer under section 14(1)(a), and there is no separate turnover threshold to fall back on. ### How does it work for a power loom unit? Weaving is manufacture under section 2(16), which covers any process that converts an article into another distinct article. A unit that turns yarn into grey cloth is a manufacturing concern whether it owns the yarn or weaves on job work, because section 2(17) defines a manufacturer "whether or not the raw material ... are owned by him". Of the four tests, the connection test usually decides the matter for power looms. Condition (a) is about the type of connection, not the size of the bill. A unit running looms on an industrial electricity connection fails (a), even with three looms and two workers. Condition (d) counts turnover "from all supplies", so job-work charges, sales of cloth and any other supplies of the concern are all counted. ### Worked example (illustrative figures) Two units in the same mohalla of Faisalabad: **Unit A (Nadeem's looms).** Six power looms in a residential street on a domestic electricity connection, no gas connection, eight workers including Nadeem. Annual supplies: weaving charges Rs. 4,200,000 plus cloth sold Rs. 2,300,000 = Rs. 6,500,000. - (a) no industrial connection: met - (b) residential area: met - (c) eight workers, not more than ten: met - (d) Rs. 6,500,000, not more than Rs. 8,000,000: met Unit A is a cottage industry and section 14(1)(a) does not require it to register. **Unit B (Shahid's looms).** Same street, ten looms, and the electricity company has installed an industrial meter. Nine workers, turnover Rs. 7,000,000. - (a) industrial electricity connection: **not met** Unit B fails (a), so it is not a cottage industry, whatever its size. It is a manufacturer required to register under section 14(1)(a). **Yarn purchases by Unit A.** Unit A buys yarn worth Rs. 1,000,000 from a registered spinning mill. Normal sales tax at 18% = Rs. 180,000. Because Unit A has no registration number, section 3(1A) adds further tax at four percent: Rs. 1,000,000 x 4% = Rs. 40,000. Total tax charged = Rs. 220,000, and as an unregistered person Unit A cannot claim any of it back as input tax, because section 8(3) says no person other than a registered person shall deduct or reclaim input tax. ### What if ...? **What if I take on extra workers for a big order?** Condition (c) says the concern must not have a total labour force of more than ten workers. The Act does not say over what period that is measured or whether a short-term increase counts. The text does not resolve it. **What if turnover crosses Rs. 8 million mid-year?** Condition (d) refers to "annual turnover" but section 2(5AB) does not define the twelve-month period or say from when registration becomes due once it is crossed. **What if I want to export?** Section 14(1)(d) separately requires registration of "an exporter who intends to obtain sales tax refund against his zero-rated supplies". A cottage unit that wants refunds on exports falls under that category. **What if FBR believes I no longer qualify?** Section 14(2A) allows the Commissioner, after inquiry and a hearing, to register a person compulsorily. ### Common mistakes - **Thinking small size is enough.** All four conditions must be met; a small unit with an industrial connection fails. - **Counting only cloth sales.** Condition (d) counts all supplies, including job-work charges. - **Assuming job work is not manufacturing.** Section 2(17) applies whether or not the unit owns the raw material. - **Ignoring the further tax.** Buying from registered mills without a registration number attracts the extra four percent under section 3(1A), subject to any notification excluding the supply. ### What to check in the official text Read section 2(5AB), (16) and (17), section 3(1A) and section 14 of the Sales Tax Act. Section 3(1A) lets the Federal Government exclude supplies from further tax by notification; any such SRO is outside this corpus. Income tax on a small unit is a separate matter under the Income Tax Ordinance. ### Frequently asked #### What are the four cottage industry conditions? Section 2(5AB) requires a manufacturing concern with no industrial gas or electricity connection, located in a residential area, with a total labour force of no more than ten workers, and annual turnover from all supplies of no more than eight million rupees. Each condition must be met. #### Does an industrial electricity connection alone end cottage industry status? Yes, on the words of section 2(5AB)(a). The concern must not have an industrial gas or electricity connection, so a unit with one fails that condition even if it is small and in a residential street. #### Does a cottage unit pay extra tax when it buys yarn? Section 3(1A) charges further tax of four percent, on top of the normal rate, on taxable supplies made to a person who has not obtained a registration number. A cottage unit buying from a registered spinning mill falls within those words unless a notification excludes the supply. ### Citations - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“cottage industry” means a manufacturing concern, which fulfils each of following conditions, namely:-" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "a manufacturer who is not running a cottage industry;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "where taxable supplies are made to a person who has not obtained registration number" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8 (Tax credit not allowed)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8-tax-credit-not-allowed), as amended to 2026-06-30: "No person other than a registered person shall make any deduction or reclaim input tax in respect of taxable supplies made or to be made by him." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What special sales tax and income tax rules apply to a cotton ginning factory? Source: https://qanoondigest.com/faq/textile-manufacturers/cotton-ginners-sales-tax-refund-withholding Law current to: 30 June 2026 (Act and Ordinance), 30 June 2025 (Sales Tax Rules). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Rule 34(1)(a) of the Sales Tax Rules lets cotton ginners claim refund of excess input tax over output tax in any tax period. On income tax, the clause that let a ginner deposit the tax itself instead of suffering deduction under section 153 was omitted by the Finance Act, 2016, so a prescribed buyer deducts 5 or 5.5 percent. **Applies to:** Cotton ginning factories and the spinning mills, companies and other prescribed persons that buy lint from them. A ginning factory in Rahim Yar Khan or Sanghar sits between the cotton grower and the spinning mill. The law gives ginners one clear sales tax advantage, a faster refund route. The income tax position is less favourable than many ginners assume, because a special opt-out they once had is no longer in the Ordinance. ### What does the law say? **Registration.** Section 14(1) of the Sales Tax Act requires every person making taxable supplies in the course of a taxable activity to register if it falls in a listed category, including "(a) a manufacturer who is not running a cottage industry". Section 2(16) defines manufacture to include any process by which an article is "so changed, transformed or reshaped that it becomes capable of being put to use differently or distinctly". The Act does not name ginning specifically, but rule 34(1)(a) of the Sales Tax Rules treats cotton ginners as registered persons filing refund claims. **Refund in any tax period.** Rule 34(1) deals with refund of excess input tax on supplies that are not zero-rated. Clause (a) says gas transmission and distribution companies, manufacturers of fertilizers, cotton ginners, electric power producers and electric power distribution companies "may claim refund of excess input tax over output tax in any tax period". Cotton ginners were added to that list by S.R.O. 1203(I)/2019. Most other registered persons fall under clause (d), which requires excess input tax to stay unadjusted for a minimum consecutive period of twelve months before a claim. **Section 153 deduction.** Section 153(1)(a) of the Income Tax Ordinance requires every prescribed person paying for the sale of goods to deduct tax from the gross amount payable, including sales tax, at the rate in Division III of Part III of the First Schedule. Prescribed persons include a company, and a sales tax registered person with turnover of one hundred million rupees or more in any preceding tax year (section 153(7)). **The omitted ginner clause.** Section 153(5) lists payments to which sub-section (1) does not apply. The footnote to the 30 June 2026 text records that clause (e), which covered "a cotton ginner who deposits in the Government Treasury, an amount equal to the amount of tax deductible on the payment being made to him", was omitted by the Finance Act, 2016. The current section 153(5) has no ginner exclusion. ### How does it work in practice? **Rates for tax year 2027.** Paragraph (1) of Division III sets: | Seller | Sale of goods (not toll manufacturing) | Toll manufacturing | |---|---|---| | Company | 5% of gross amount payable | 9% | | Other than a company | 5.5% of gross amount payable | 11% | The lower 1.5 percent rate in paragraph (1)(a) covers "rice, cotton seed or edible oils". The word "cotton" was omitted from that clause by the Finance Act, 2005, and the Explanation says "cotton seed and edible oils" means cotton seed oil and edible oils. Lint therefore falls in the general sale of goods rate. **Not on the active taxpayers' list.** Rule 1 of the Tenth Schedule increases the deduction rate by hundred percent of the specified rate for persons not appearing in the active taxpayers' list. **Minimum or adjustable.** Under section 153(3), tax deducted under section 153 is minimum tax, but tax deducted under clause (a) is not minimum tax where the payment is received by a company that is a manufacturer of those goods. Section 153(4) lets the Commissioner allow deduction at a reduced rate where the tax is not minimum. ### Worked example (illustrative figures) Sadiq Ginners, a partnership in Rahim Yar Khan, sells cotton lint to a spinning company in Multan. The gross amount payable, including any sales tax, is Rs. 20,000,000. 1. The buyer is a company, so it is a prescribed person under section 153(7). 2. Seller is not a company, rate is 5.5%: 5.5% x Rs. 20,000,000 = Rs. 1,100,000 deducted. 3. Net paid to the ginner: Rs. 20,000,000 minus Rs. 1,100,000 = Rs. 18,900,000. 4. If the partnership is not on the active taxpayers' list, the rate doubles to 11%: 11% x Rs. 20,000,000 = Rs. 2,200,000. 5. If the ginner were a company, the rate would be 5%: Rs. 1,000,000. On the sales tax side, suppose the ginner's input tax for a month (electricity, packing material, services) exceeds its output tax by Rs. 400,000. Under rule 34(1)(a) it may claim that Rs. 400,000 as a refund for that tax period instead of carrying it forward. ### What if ...? **What if the ginner wants the buyer not to deduct?** The deposit-it-yourself route is gone. The remaining route is a certificate from the Commissioner under section 153(4), available only where the tax is not minimum tax. **What if the refund claim is for a period covered by another notification?** Rule 34(6) says a refund under rule 34 shall not be claimed where it has already been claimed or paid under any other notification of the Federal Government or the Board. ### Common mistakes - **Relying on the old treasury-deposit clause.** It was omitted in 2016. - **Applying the 1.5 percent rate to lint.** That rate is for rice, cotton seed and edible oils, with cotton seed read as cotton seed oil. - **Assuming a special sales tax rate on cotton.** The Act in this corpus sets none. The law's silence is not the same as an exemption or a reduced rate. ### What to check in the official text Read section 14 of the Sales Tax Act, rule 34 of the Sales Tax Rules, section 153 of the Income Tax Ordinance with its footnotes, Division III of Part III of the First Schedule and rule 1 of the Tenth Schedule. S.R.O. 1087(I)/2019, referred to in Form STR-7 for purchases of ginned cotton, and any other notification fixing the sales tax treatment of cotton are not held in this corpus. ### Frequently asked #### Can a ginner still deposit the section 153 tax itself to avoid deduction? Not under the current text. The earlier clause that excluded a cotton ginner who deposited an amount equal to the tax deductible was omitted from section 153 by the Finance Act, 2016, according to the footnote in the 30 June 2026 edition. #### How often can a ginner claim a sales tax refund? Rule 34(1)(a) of the Sales Tax Rules names cotton ginners among the persons who may claim refund of excess input tax over output tax in any tax period. The claim is filed electronically on Form STR-7A after the return in which it is claimed, under rule 34(2). #### What rate does a mill deduct when it pays a ginner for lint? For tax year 2027, Division III of Part III of the First Schedule sets 5 percent of the gross amount payable where the ginner is a company and 5.5 percent in other cases, for sale of goods other than toll manufacturing. The Tenth Schedule doubles the rate if the ginner is not on the active taxpayers' list. #### What sales tax rate applies to raw or ginned cotton? The Sales Tax Act text in this corpus does not mention cotton by name, and no rate for lint appears in its schedules. Form STR-7 in the Sales Tax Rules has a row for purchases of ginned cotton covered under SRO 1087(I)/2019, but that SRO is not held here. ### Citations - [Sales Tax Rules, 2006, section 34 (Refund of excess input tax not relating to zero-rated supplies)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#34-refund-of-excess-input-tax-not-relating-to-zero-rated-supplies), as amended to 2025-06-30: "may claim refund of excess input tax over output tax in any tax period;" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "a manufacturer who is not running a cottage industry;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "is so changed, transformed or reshaped that it becomes capable of being put to use differently or distinctly" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "making the payment, deduct tax from the gross amount payable (including sales tax, if any) at the rate specified in Division III of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III, paragraph (1) (rates for sale of goods under section 153(1)(a))](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (persons not appearing in the active taxpayers' list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What special sales tax and income tax rules apply to a cotton ginning factory? Source: https://qanoondigest.com/faq/textile-manufacturers/cotton-ginners-sales-tax-income-tax-rules Law current to: 30 June 2026 (Act and Ordinance), 30 June 2025 (Sales Tax Rules). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Rule 34(1)(a) of the Sales Tax Rules lets cotton ginners claim excess input tax refund in any tax period. Clause (17) of Part III of the Second Schedule caps their income tax at 1 percent of turnover from lint, seed, seed oil and cake as final tax, and clause (47D) keeps section 153 deductions from ginners as minimum tax. **Applies to:** Cotton ginning and oil milling factories, and the spinning mills, companies and other prescribed persons that buy lint or cotton seed from them. A ginning factory in Rahim Yar Khan, Sanghar or Khanewal sits between the cotton grower and the spinning mill. The law treats ginners differently from other manufacturers in three places: a faster sales tax refund route, a 1 percent ceiling on income tax from ginning and oil milling, and a rule that keeps tax deducted from their sales as minimum tax. It also removed, in 2016, a deposit route ginners once had. ### What does the sales tax law say about ginners? **Registration.** Section 14(1) of the Sales Tax Act requires every person making taxable supplies in the course of a taxable activity to register if it falls in a listed category, the first being "(a) a manufacturer who is not running a cottage industry". The Act does not name ginning, but rule 34(1)(a) of the Sales Tax Rules deals with cotton ginners as registered persons filing returns and refund claims. **Refund in any tax period.** Rule 34(1) covers refund of excess input tax on supplies that are not zero-rated. Clause (a) lists gas transmission and distribution companies, fertilizer manufacturers, cotton ginners, electric power producers and electric power distribution companies, who "may claim refund of excess input tax over output tax in any tax period". Cotton ginners were added by S.R.O. 1203(I)/2019. By contrast, rule 34(1)(d) makes most other registered persons wait until the excess has stayed unadjusted for a minimum consecutive period of twelve months. Under rule 34(2) the claim is filed electronically on Form STR-7A after the return in which the refund is claimed, and rule 34(6) bars a claim already made under another notification. **Rate on cotton.** The Sales Tax Act as amended to 30 June 2026 does not mention cotton anywhere in its text or schedules. The law's silence here is not an exemption and not a reduced rate. Form STR-7 in the Sales Tax Rules has a row for purchases of ginned cotton covered under SRO 1087(I)/2019, and that SRO is not held in this corpus. ### What does the income tax law say? **The 1 percent ceiling.** Clause (17) of Part III (Reduction in tax liability) of the Second Schedule to the Income Tax Ordinance reads: "The tax payable by cotton ginners on their income and profits shall not be more than sum of 1% of their turnover from cotton lint, cotton seed, cotton seed oil and cotton seed cake". Its proviso says the tax so payable "shall be final tax in respect of their cotton ginning and oil milling activities only." The footnote says the clause was inserted by the Finance Act, 2021 with effect from 1 July 2019. **Deduction by buyers.** Section 153(1)(a) requires every prescribed person paying for the sale of goods to deduct tax from the gross amount payable, including sales tax, at the rate in Division III of Part III of the First Schedule. Prescribed persons in section 153(7) include a company and a sales tax registered person with turnover of one hundred million rupees or more in any preceding tax year. **Clause (47D).** Section 153(3) makes tax deducted under the section minimum tax, but clause (a) of its proviso says tax deducted on sale of goods is not minimum tax where received by a company that manufactures those goods. Clause (47D) of Part IV of the Second Schedule says that clause (a) "shall not apply to cotton ginners". A ginning company therefore does not get the manufacturer carve-out: tax deducted from its sales stays minimum tax. Section 153(4) allows a reduced-rate certificate only where the tax deductible is not minimum. **The omitted deposit route.** The footnote to section 153(5) in the 30 June 2026 text records that clause (e), covering "a cotton ginner who deposits in the Government Treasury, an amount equal to the amount of tax deductible", was omitted by the Finance Act, 2016. It is not current law. ### What rates do buyers deduct for tax year 2027? Paragraph (1) of Division III sets: | Goods sold by the ginner | Company | Other than a company | |---|---|---| | Cotton seed oil (paragraph (1)(a)) | 1.5% | 1.5% | | Lint, cotton seed and other goods (paragraph (1)(b)) | 5% | 5.5% | The word "cotton" was omitted from paragraph (1)(a) by the Finance Act, 2005, and its Explanation says "cotton seed and edible oils" means cotton seed oil and edible oils. Lint and raw cotton seed therefore fall under paragraph (1)(b). ### Worked example (illustrative figures) Sadiq Ginners, a partnership in Rahim Yar Khan, has turnover for tax year 2027 of Rs. 400,000,000 from lint and Rs. 60,000,000 from cotton seed. 1. Turnover covered by clause (17): Rs. 400,000,000 + Rs. 60,000,000 = Rs. 460,000,000. 2. Ceiling under clause (17): 1% x Rs. 460,000,000 = Rs. 4,600,000, as final tax on ginning income. 3. A spinning company in Multan buys the whole lint output. The ginner is not a company, so the buyer deducts 5.5%: 5.5% x Rs. 400,000,000 = Rs. 22,000,000. 4. The deduction in step 3 is far above the ceiling in step 2. Clause (17), clause (47D) and section 153 as printed in this corpus do not say how that difference is refunded or adjusted. This page does not resolve that point. ### What if the ginner is a company? The deduction rate on lint falls to 5 percent. Because of clause (47D), the company still cannot rely on the manufacturer carve-out in section 153(3)(a), so the deduction remains minimum tax and the section 153(4) reduced-rate certificate is not available on that basis. ### Common mistakes - **Relying on the old treasury-deposit clause.** It was omitted from section 153(5) in 2016. - **Applying 1.5 percent to lint or raw seed.** That rate is for cotton seed oil and edible oils. - **Treating the 1 percent ceiling as covering all income.** The proviso to clause (17) limits final tax treatment to ginning and oil milling activities. - **Assuming a special sales tax rate on cotton.** The Act in this corpus sets none. ### What to check in the official text Read section 14 of the Sales Tax Act, rule 34 of the Sales Tax Rules, section 153 of the Income Tax Ordinance with its footnotes, clause (17) of Part III and clause (47D) of Part IV of the Second Schedule, and Division III of Part III of the First Schedule. S.R.O. 1087(I)/2019 and any other notification fixing the sales tax treatment of cotton are not held in this corpus. ### Frequently asked #### How much income tax does a cotton ginner pay? Clause (17) of Part III of the Second Schedule says the tax payable by cotton ginners on their income and profits shall not be more than 1 percent of their turnover from cotton lint, cotton seed, cotton seed oil and cotton seed cake. The proviso makes that tax final tax for cotton ginning and oil milling activities only. #### Can a ginner still deposit the section 153 tax itself instead of suffering deduction? Not under the current text. The footnote in the 30 June 2026 edition records that the clause of section 153(5) covering a cotton ginner who deposited an amount equal to the tax deductible was omitted by the Finance Act, 2016. #### How often can a ginner claim a sales tax refund? Rule 34(1)(a) of the Sales Tax Rules names cotton ginners among persons who may claim refund of excess input tax over output tax in any tax period. Most other registered persons fall under rule 34(1)(d), which requires the excess to stay unadjusted for twelve consecutive months first. #### What sales tax rate applies to raw cotton or lint? The Sales Tax Act, 1990 as amended to 30 June 2026 does not mention cotton by name, and its schedules set no separate rate for lint. Form STR-7 in the Sales Tax Rules refers to purchases of ginned cotton covered under SRO 1087(I)/2019, but that SRO is not held in this corpus. ### Citations - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "a manufacturer who is not running a cottage industry;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 34 (Refund of excess input tax not relating to zero-rated supplies)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#34-refund-of-excess-input-tax-not-relating-to-zero-rated-supplies), as amended to 2025-06-30: "may claim refund of excess input tax over output tax in any tax period;" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "deduct tax from the gross amount payable (including sales tax, if any) at the rate specified in Division III of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part III (Reduction in tax liability), clause (17)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV (Exemption from specific provisions), clause (47D)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III, paragraph (1) (rates for sale of goods under section 153(1)(a))](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Does federal excise duty apply to anything a textile mill makes or buys? Source: https://qanoondigest.com/faq/textile-manufacturers/federal-excise-duty-textile-manufacturers Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Not on its own yarn, fabric or garments. Section 16 of the Federal Excise Act exempts all goods and services except those in the First Schedule, and the First Schedule has no textile entries. A mill can still bear duty on items it imports or buys, such as lubricating oil, natural gas, banking and insurance services or foreign franchise fees. **Applies to:** Spinning, weaving, processing and garment manufacturers in Pakistan, and anyone checking whether their products or purchases carry federal excise duty. Federal excise duty is a narrow tax in Pakistan. It is charged only on the goods and services named in the First Schedule of the Federal Excise Act, 2005, and textiles are not among them. A mill's own yarn, grey cloth, processed fabric and garments carry no excise duty. The duty can still reach the mill through what it imports or buys. ### What does the law say? **The charging section.** Section 3(1) levies duty on goods produced or manufactured in Pakistan, goods imported, notified goods from non-tariff areas, services provided in Pakistan, and any other item specified in the First Schedule. It sets a general rate of fifteen per cent ad valorem "except the goods and services specified in the First Schedule, which shall be charged to Federal excise duty as, and at the rates, set-forth therein". **The exemption that narrows it.** Section 16(1) then says all goods and services "except such goods and services as are specified in the First Schedule shall be exempt from whole of excise duties" levied under section 3. Read together, only First Schedule items bear duty. **Who is liable.** Section 3(5) places liability on the manufacturer or producer for goods made in Pakistan, on the importer for imported goods, and on the service provider for services. Where a service is rendered from outside Pakistan, the recipient in Pakistan is liable. **What is in the First Schedule (30 June 2026).** | Table | Main entries | |---|---| | Table-I (goods) | Aerated waters and concentrates, sugary juices, tobacco and cigarettes, cement, liquefied and gaseous petroleum gases and natural gas, certain motor vehicles, fertilizers, lubricating oils, naphtha, white spirit and solvent oil, day old chicks | | Table-IA | Special excise duty on imported motor vehicles of 2000cc and above (inserted by Finance Act, 2026) | | Table-II (services) | Advertisements, air travel and air cargo, shipping agents, telecommunication, banking and insurance services, franchise services, royalty and fee for technical services, stock brokers, port and terminal operators, chartered flights | | Table-III | Supply of white crystalline sugar to a manufacturing, processing or packaging entity | No table in the First Schedule has an entry for textiles, yarn, fabric, cotton or garments. ### How does it work in practice? A mill meets excise duty in two ways: 1. **As the person liable.** When the mill itself imports a First Schedule item, section 3(5)(b) makes it liable, and section 3(2) says the duty on imports is collected as if it were customs duty. The same applies to services received from abroad, such as franchise, royalty or technical fees paid to a foreign party. 2. **As a buyer.** When a mill buys natural gas, bank services or insurance locally, the supplier is liable under section 3(5). The Act does not say whether the supplier passes the duty on in its price; that is a commercial matter. **No excise registration is usually needed.** Section 13(1) requires registration only for persons making or providing dutiable goods or services. Under section 13(2), a sales tax registration is deemed to be an excise registration where one is needed. **Adjustment is limited.** Section 6(1) lets duty paid on First Schedule inputs be deducted from duty calculated on the goods made from them. A mill whose output carries no duty has nothing to deduct it from. ### Worked example (illustrative figures) A composite mill in Faisalabad has these purchases in one month: 1. Imports lubricating oil (Table-I, serial 63, five percent ad valorem) valued at Rs. 2,000,000. Duty: 5% x Rs. 2,000,000 = Rs. 100,000, payable by the mill as importer. 2. Pays a foreign brand owner a technical fee of Rs. 5,000,000 for a licensed fabric finish. Table-II, serial 11 sets ten per cent of the charges: 10% x Rs. 5,000,000 = Rs. 500,000, with the mill liable as recipient of a service rendered from outside Pakistan. The Note to Table-II says duty on serial 11 is not levied on services provided in a Province where provincial sales tax has been levied on them, so this depends on the provincial position. 3. Uses 10,000 MMBTU of natural gas. Table-I, serial 36 sets ten rupees per MMBTU: 10,000 x Rs. 10 = Rs. 100,000, for which the gas producer is liable. 4. Sells Rs. 80,000,000 of fabric. Excise duty on the fabric: nil, because fabric is not in the First Schedule. ### What if ...? **What if the mill exports and insures the shipment?** Table-II of the Third Schedule exempts marine insurance for export. **What if the mill buys electricity?** Electricity has no entry in Table-I of the First Schedule, so section 16(1) exempts it from excise duty. Sales tax and income tax collected through electricity bills are separate matters. **What if the mill buys white spirit or solvent oil for processing?** Serial 65 of Table-I charges Rs. 80 per litre, with a conditional exclusion for in-house consumption by licence holders under quota and digital invoicing conditions. ### Common mistakes - **Reading section 3 alone.** The fifteen per cent general rate in section 3(1) is overridden in practice by the section 16(1) exemption for anything outside the First Schedule. - **Assuming the provincial services tax and excise duty always both apply.** The Note to Table-II takes several services out of excise duty where a Province levies sales tax on them. - **Taking a separate excise registration.** Section 13(2) treats a sales tax registration as an excise registration. ### What to check in the official text Read sections 3, 6, 13 and 16 of the Federal Excise Act, 2005, the First Schedule and the Third Schedule. Federal Government notifications under section 16(2) and Board notifications under section 3(3) or (4) can change the position for particular goods and are not held in this corpus. Provincial sales tax on services is outside this corpus. ### Frequently asked #### Is there federal excise duty on yarn, cloth or garments? No entry in the First Schedule of the Federal Excise Act, 2005, as amended to 30 June 2026, covers yarn, fabric, cotton or garments. Section 16(1) exempts all goods and services not specified in the First Schedule from the whole of excise duties levied under section 3. #### Does a textile mill need a separate federal excise registration? Section 13(1) requires registration only for persons manufacturing goods or providing services liable to duty. Under section 13(2), a person already registered under the Sales Tax Act does not need a separate excise registration, and the sales tax registration is deemed to be the excise registration. #### Who pays the duty on excisable services a mill buys? Section 3(5)(c) puts the liability on the person providing or rendering the service. Where the service is rendered from outside Pakistan, the recipient in Pakistan is liable. #### Can a mill adjust excise duty it paid on inputs against its sales tax? Section 6 of the Federal Excise Act allows excise duty paid on First Schedule inputs to be deducted from duty calculated on the goods manufactured from them. It does not provide for setting excise duty against sales tax, and a mill whose output carries no excise duty has no duty to deduct it from. ### Citations - [Federal Excise Act 2005, section 3 (Duties specified in the First Schedule to be levied)](https://qanoondigest.com/acts/federal-excise-act-2005/federal-excise-act-2005-2026-06-30#3-duties-specified-in-the-first-schedule-to-be-levied), as amended to 2026-06-30: "except the goods and services specified in the First Schedule, which shall be charged to Federal excise duty as, and at the rates, set-forth therein." Official source: https://download1.fbr.gov.pk/Docs/20267171373633512FEDAct2005updatedupto30-06-2026.pdf - [Federal Excise Act 2005, section 16 (Exemptions)](https://qanoondigest.com/acts/federal-excise-act-2005/federal-excise-act-2005-2026-06-30#16-exemptions), as amended to 2026-06-30: "All goods imported, produced or manufactured in Pakistan and services provided or rendered except such goods and services as are specified in the First Schedule shall be exempt from whole of excise duties" Official source: https://download1.fbr.gov.pk/Docs/20267171373633512FEDAct2005updatedupto30-06-2026.pdf - [Federal Excise Act 2005, First Schedule, Table-I (goods), Table-IA (special excise duty), Table-II (excisable services) and Table-III](https://qanoondigest.com/acts/federal-excise-act-2005/federal-excise-act-2005-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373633512FEDAct2005updatedupto30-06-2026.pdf - [Federal Excise Act 2005, section 6 (Adjustment of duties of excise)](https://qanoondigest.com/acts/federal-excise-act-2005/federal-excise-act-2005-2026-06-30#6-adjustment-of-duties-of-excise), as amended to 2026-06-30: "the duty already paid on goods specified in the First Schedule and used directly as input goods for the manufacture or production of such goods shall be deducted from the amount of duty calculated on such goods." Official source: https://download1.fbr.gov.pk/Docs/20267171373633512FEDAct2005updatedupto30-06-2026.pdf - [Federal Excise Act 2005, section 13 (Registration)](https://qanoondigest.com/acts/federal-excise-act-2005/federal-excise-act-2005-2026-06-30#13-registration), as amended to 2026-06-30: "Any person engaged in the production or manufacture of goods or providing or rendering services liable to duty of excise under this Act shall, unless otherwise specified, be required to obtain registration" Official source: https://download1.fbr.gov.pk/Docs/20267171373633512FEDAct2005updatedupto30-06-2026.pdf - [Federal Excise Act 2005, Third Schedule, Table-II, serial number 3 (marine insurance for export)](https://qanoondigest.com/acts/federal-excise-act-2005/federal-excise-act-2005-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373633512FEDAct2005updatedupto30-06-2026.pdf --- ## Under the Export Facilitation Scheme, which category does a textile manufacturer fall in, what security must it give, and can it bring in machinery? Source: https://qanoondigest.com/faq/textile-manufacturers/efs-categories-security-machinery Law current to: 30 June 2023. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Rule 874 of the Customs Rules puts a manufacturer-cum-exporter exporting 60 percent or more of production, or at least USD 20 million, in Category A and others in B1 or B2 by export history. Rule 876 sets the bond, PDC or guarantee for each category, rule 883 allows 24 to 60 months, and rule 881 allows machinery kept five years. **Applies to:** Spinning, weaving, processing and garment manufacturer-exporters moving to the Export Facilitation Scheme, 2021 from DTRE or manufacturing bond, and mills supplying exporters as indirect exporters. Under the Export Facilitation Scheme, 2021, rule 874 of the Customs Rules, 2001 sorts every user into a category, and that category decides the security it gives, how long its authorization runs and how long it has to use its inputs. The corpus holds the Customs Rules only as updated to 30 June 2023, so later amendments to Chapter XL are not reflected here. ### Who can use the scheme? Rule 872(1) opens the scheme, subject to authorization and registration in WeBOC or PSW, to six kinds of user. For textile manufacturers the relevant ones are: - persons registered under the Sales Tax Act, 1990 as manufacturer-cum-exporters, who must add value of not less than ten percent in manufacturing and exporting, - manufacturers acting as contracted vendors of a foreign principal as toll manufacturers, and - persons registered as manufacturers and operating as indirect exporters, for example a spinning unit supplying yarn to a garment exporter. ### Which category does a textile mill fall in? Rule 874(1) sets the categories: | Category | Who falls in it | |---|---| | A | Manufacturers-cum-exporters with 60% or above exports of total annual production, or exports of at least USD 20 million, in the last two years | | B1 | Other manufacturers-cum-exporters with more than 3 years of export history | | B2 | Other manufacturers-cum-exporters with less than 3 years of export history | | C1 | Indirect exporters, commercial exporters and international toll manufacturers with more than 3 years of history | | C2 | The same, with less than 3 years of history | Rule 874(2) lets existing users of the earlier schemes, including DTRE and Chapter XV (manufacturing bond), be classified in the matching category if they have a good compliance record. Rule 874(4) places a new exporter with a firm export contract in A or B according to the share of production it claims it will export, reviewed after one year. **Poor compliance.** Under rule 874(5), an applicant with contravention cases adjudged against it, pending recovery cases or pending criminal proceedings in the last three years is downgraded for one year: A to B1, B1 to C1, B2 to C2, C1 to C2, and C2 to no authorization. Rule 874(6) says procedural cases, or cases involving less than rupees five million, do not affect the category. ### What security must the mill give? Rule 876(1) requires a security instrument equal to the duty and taxes being deferred or remitted on the approximate value of input goods during the authorization period. The type depends on category and on whether the factory is owned or rented: | Category | Self-owned facility | Rented facility | |---|---|---| | A | Indemnity bond (Appendix-III) and PDC | Indemnity bond (Appendix-III) and PDC | | B1 | Indemnity bond and PDC | Revolving insurance guarantee covering annual requirement | | B2 | Revolving insurance guarantee | Revolving bank guarantee, until the three-year benchmark is crossed | | C1 | Indemnity bond and PDC | Revolving insurance guarantee | | C2 | Revolving insurance guarantee | Revolving bank guarantee, until the three-year benchmark is crossed | The rule uses the abbreviation "PDC"; other chapters of the same rules use it for a post-dated cheque. Rule 871(n) requires an insurance guarantee to come from an insurance company registered with the Ministry of Commerce with a minimum PACRA rating of "AA". ### How long do the authorization and utilization periods run? | Category | Authorization period (rule 878) | Utilization period (rule 883) | |---|---|---| | A | Five years | 60 months | | B1 | Four years | 48 months | | B2 | Two years | 24 months | | C1 | Four years | 48 months | | C2 | Two years | 24 months | The proviso to rule 883 lets the Chief Collector extend the utilization period by six months, for export of output goods only, in exceptional circumstances, with fresh security under rule 876 for the extension. ### Can the mill bring in machinery? Yes. Rule 881(1) allows a user to acquire plant, machinery, equipment and spares required to make its output goods, subject to authorization by the Regulatory Collector in WeBOC or PSW. Rule 881(2) then requires plant, machinery and equipment to be retained for five years from import, and spares for two years. Earlier disposal pays the duty and taxes leviable at the time of import at these rates: | Plant, machinery or equipment disposed of | Duty and taxes payable | |---|---| | Before three full years | Full | | After three and before four years | 75% | | After four and before five years | 50% | | After five years | 0% | For spares: full before one year, 50 percent between one and two years, nil after two years. Rule 881(3) lets the Regulatory Authority allow transfer of machinery to another EFS user, with security for the remaining period. ### Worked example (illustrative figures) A weaving mill in Faisalabad works from a rented shed. It exported 45 percent of its production in each of the last two years, well under USD 20 million, and has exported for six years with a clean record. 1. 45 percent is below 60 percent, so it is not Category A. Export history is more than three years, so rule 874(1)(ii)(a) places it in B1. 2. Its factory is rented, so rule 876(1)(b) requires a revolving insurance guarantee covering its annual requirement, not an indemnity bond and PDC. 3. Suppose the duty and taxes deferred on its approximate annual inputs come to Rs. 30,000,000. The guarantee must equal that amount. 4. Authorization runs up to four years (rule 878) and each lot of inputs must be used within 48 months (rule 883). 5. It imports air-jet looms on which the duty and taxes leviable at import were Rs. 12,000,000, and sells them four years and two months later. That falls after four and before five years, so 50 percent is payable: Rs. 12,000,000 x 50% = Rs. 6,000,000. Selling after two years would cost the full Rs. 12,000,000; after five years, nothing. ### What if the mill is moving from DTRE or manufacturing bond? Rule 877(2) lets an existing user of the earlier schemes be authorized under EFS, subject to the Regulatory Collector's satisfaction and its compliance history, and stocks of inputs imported under the earlier scheme must be declared in the application. Rule 898(1) kept earlier approvals operative for two years from the issuance of the EFS rules, and rule 898(2) bars running both at once. ### Common mistakes - **Looking only at the export percentage.** Exports of at least USD 20 million also qualify for Category A. - **Assuming ownership does not matter.** In B1, B2, C1 and C2 a rented facility changes the security. - **Mixing up the two periods.** The authorization period in rule 878 and the utilization period in rule 883 are separate limits. ### What to check in the official text Read rules 871 to 883 and 898 of Chapter XL of the Customs Rules, 2001, with Appendix-III (indemnity bond). Any SRO amending Chapter XL after 30 June 2023 is not held in this corpus. ### Frequently asked #### Which EFS category does a textile mill that exports most of its output fall in? Rule 874(1)(i) places a manufacturer-cum-exporter in Category A if it exported 60 percent or more of its total annual production, or exports with a minimum value of USD 20 million, in the last two years. Otherwise it falls in Category B1 with more than three years of export history, or B2 with less. #### Does a mill in a rented factory give the same security as one that owns its factory? Not in every category. Under rule 876(1), Category A gives an indemnity bond and PDC either way, but a B1 mill in a rented facility gives a revolving insurance guarantee instead, and a B2 mill in a rented facility gives a revolving bank guarantee. #### Can an EFS user sell machinery it brought in under the scheme? Rule 881(2) requires plant, machinery and equipment to be kept for five years from import. Earlier disposal pays the duty and taxes leviable at import in full before three years, 75 percent between three and four years and 50 percent between four and five years. Rule 881(3) lets the Regulatory Authority allow transfer to another EFS user. #### Can a mill keep its DTRE approval and use EFS at the same time? No. Rule 898(2) says a user cannot operate under this scheme and the earlier schemes, including DTRE and Chapter XV, simultaneously. Rule 877(2) lets an existing user shift to EFS subject to the Regulatory Collector's satisfaction and its compliance history. ### Citations - [Customs Rules, 2001, section 872 (Scope of the scheme)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#872-scope-of-the-scheme), as amended to 2023-06-30: "persons registered under the Sales Tax Act, 1990, as manufacturer-cum-exporter,who make value-addition in the manufacture and export of goods, which shall not be less than ten per cent" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, section 874 (Categorization of exporters)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#874-categorization-of-exporters), as amended to 2023-06-30: "Category B1: Manufacturers-cum-exporters having more than 3 years of export history." Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, section 876 (Security instrument for authorization)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#876-security-instrument-for-authorization), as amended to 2023-06-30: "The applicant shall submit a security instrument equal to the duty and taxes being deferredorremitted,on the approximate value of input goods, during the authorization periodalong with the application" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, section 881 (Acquisition of plant, machinery and spares)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#881-acquisition-of-plant-machinery-and-spares), as amended to 2023-06-30: "The user shall be allowed to acquire plant, machinery, equipment and spares required for the manufacture of output goods" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, section 883 (Utilization period)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#883-utilization-period), as amended to 2023-06-30: "The input goods acquired under these rules shall be utilized within the time-period prescribed as under:" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, Chapter XL (Export Facilitation Scheme, 2021), rules 871(n), 877(2), 878 and 898 (insurance guarantee definition, shifting from earlier schemes, authorization period, saving)](https://qanoondigest.com/rules/rules-general/customs-rules-2001), as amended to 2023-06-30 Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf --- ## Under the Export Facilitation Scheme, which category does a textile manufacturer fall in, and what security and time limits apply? Source: https://qanoondigest.com/faq/textile-manufacturers/efs-categories-security-utilization-period Law current to: 30 June 2023. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Rule 874 of the Customs Rules places manufacturer-cum-exporters exporting 60 percent or more of production, or at least USD 20 million, in Category A, others in B1 or B2 by export history, and indirect exporters in C. Rule 876 sets an indemnity bond or guarantee for each, and rule 883 sets utilization periods of 24 to 60 months. **Applies to:** Textile manufacturer-exporters and indirect exporters using, or moving to, the Export Facilitation Scheme, 2021 in Chapter XL of the Customs Rules, 2001. The Export Facilitation Scheme, 2021 in Chapter XL of the Customs Rules, 2001 lets exporters acquire inputs without duty and taxes. How much security a textile mill gives, how long its authorization runs and how long it has to use the inputs all follow from one thing: the category rule 874 places it in. The corpus holds the Customs Rules only as updated to 30 June 2023, so later amendments to Chapter XL are not reflected here. ### Who can use the scheme? Rule 872(1) makes the scheme available, subject to authorization and registration in WeBOC or PSW, to: - (a) persons registered under the Sales Tax Act, 1990 as manufacturer-cum-exporters who add at least ten percent value in manufacturing and exporting, - (b) manufacturers acting as contracted vendors of a foreign principal as toll manufacturers, - (c) commercial exporters, - (d) persons registered as manufacturers and operating as indirect exporters, - (e) manufacturers supplying against international tenders, and - (f) Common Export Houses. Rule 871(i) defines a direct exporter as a manufacturer-cum-exporter exporting in the name of its own firm or company. ### Which category does a textile mill fall in? Rule 874(1) sets the categories: | Category | Who | |---|---| | A | Manufacturers-cum-exporters exporting 60% or more of total annual production, or exports of at least USD 20 million, in the last two years | | B1 | Other manufacturers-cum-exporters with more than 3 years of export history | | B2 | Other manufacturers-cum-exporters with less than 3 years of export history | | C1 | Indirect exporters, commercial exporters and toll manufacturers with more than 3 years of history | | C2 | The same, with less than 3 years of history | Rule 874(4) places a new exporter with a firm export contract in A or B according to the claimed share of production to be exported, reviewed after one year. ### What security does each category give? Rule 876(1) requires a security instrument equal to the duty and taxes deferred or remitted on the approximate value of input goods: | Category | Self-owned facility | Rented facility | |---|---|---| | A | Indemnity bond (Appendix III) and post-dated cheque | Same | | B1 | Indemnity bond and post-dated cheque | Revolving insurance guarantee | | B2 | Revolving insurance guarantee | Revolving bank guarantee | | C1 | Indemnity bond and post-dated cheque | Revolving insurance guarantee (also commercial exporters) | | C2 | Revolving insurance guarantee | Revolving bank guarantee (also commercial exporters) | Rule 871(n) requires an insurance guarantee to come from an insurer registered with the Ministry of Commerce with a minimum PACRA rating of AA. ### How long do authorizations and utilization periods run? | Category | Authorization period (rule 878) | Utilization period (rule 883) | |---|---|---| | A | Five years | 60 months | | B1 | Four years | 48 months | | B2 | Two years | 24 months | | C1 | Four years | 48 months | | C2 | Two years | 24 months | Rule 878(3) uploads the authorized value year by year, and the next year's authorization triggers on submission of the annual reconciliation report. ### What about plant and machinery? Rule 881 allows a user to acquire plant, machinery, equipment and spares for making output goods, with the Regulatory Collector's authorization. Plant, machinery and equipment must be kept five years from import, and spares two years. Earlier disposal pays duty and taxes leviable at import at reduced rates: | Plant and machinery disposed of | Duty and taxes | |---|---| | Before three full years | Full | | After three, before four years | 75% | | After four, before five years | 50% | | After five years | 0% | For spares: full before one year, 50 percent between one and two years, nil after two years. Rule 881(3), as amended, lets machinery be transferred to another EFS user with the Regulatory Authority's approval. ### Worked example (illustrative figures) A home-textile mill in Faisalabad with its own factory exported 70 percent of its annual production in each of the last two years and has a clean compliance record. 1. 70 percent is at or above 60 percent, so rule 874(1)(i) places it in Category A. 2. Security under rule 876(1)(a): indemnity bond and post-dated cheque. 3. Authorization period under rule 878: up to five years. Utilization period under rule 883: 60 months from import or local purchase of the inputs. 4. It imports a weaving machine under rule 881 on 1 March 2024 and sells it on 1 September 2027, three and a half years later. Suppose the duty and taxes leviable at import were Rs. 8,000,000. The disposal falls after three and before four years, so 75 percent applies: Rs. 8,000,000 x 75 percent = Rs. 6,000,000. ### What if the mill is moving from DTRE or another earlier scheme? Rule 877(2) lets an existing user of earlier schemes, including DTRE, be authorized under EFS subject to the Regulatory Collector's satisfaction and compliance history. Stocks of inputs imported under the earlier scheme must be declared by description, PCT, quantity and value. Rule 874(2) lets existing users with a good compliance record be classified in the matching category. Rule 898(2) bars operating under EFS and the earlier schemes at the same time. ### Common mistakes - **Counting only the percentage.** Since the amendment to rule 874, exports of at least USD 20 million also qualify for Category A. - **Confusing the two periods.** The authorization period in rule 878 and the utilization period in rule 883 are separate limits. - **Selling machinery early without counting years.** Rule 881 charges full duty and taxes on disposal before three full years. ### What to check in the official text - Rules 871 to 883 and 898 of the Customs Rules, 2001, Chapter XL, as updated to 30 June 2023. - Appendix III (indemnity bond) and the application format in Appendix I. - Any SRO amending Chapter XL after 30 June 2023. None is held in this corpus. ### Frequently asked #### Can a mill stay on DTRE and also use the Export Facilitation Scheme? No. Rule 898(2) says a user cannot operate under this scheme and the earlier schemes, including DTRE, simultaneously. Rule 898(1) let earlier approvals remain operative for two years from the issuance of the EFS rules, after which they stand abolished. #### What if my mill has a poor compliance record? Rule 874(5) downgrades an applicant with contravention cases adjudged against it, pending recovery cases or pending criminal proceedings in the last three years for one year: A to B1, B1 to C1, B2 to C2, C1 to C2, and C2 to no authorization. Procedural cases, or cases involving less than rupees five million, do not affect the category. #### Can the utilization period be extended? Rule 883 lets the Chief Collector of the jurisdiction extend the period by six months, for export of output goods only, in exceptional circumstances. Fresh security under rule 876 covering the extension period must then be obtained. ### Citations - [Customs Rules, 2001, section 872 (Scope of the scheme)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#872-scope-of-the-scheme), as amended to 2023-06-30: "persons registered under the Sales Tax Act, 1990, as manufacturer-cum-exporter,who make value-addition in the manufacture and export of goods, which shall not be less than ten per cent" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, section 874 (Categorization of exporters)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#874-categorization-of-exporters), as amended to 2023-06-30: "Category B:Manufacturers-cum-exporters with less than 60% total annual production being exported" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, section 876 (Security instrument for authorization)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#876-security-instrument-for-authorization), as amended to 2023-06-30: "The applicant shall submit a security instrument equal to the duty and taxes being deferredorremitted,on the approximate value of input goods, during the authorization periodalong with the application" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, section 881 (Acquisition of plant, machinery and spares)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#881-acquisition-of-plant-machinery-and-spares), as amended to 2023-06-30: "The plant, machinery and equipment imported under sub rule (1) shall be retained for a period of five years from the date of importation" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, section 883 (Utilization period)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#883-utilization-period), as amended to 2023-06-30 Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, Chapter XL, Export Facilitation Scheme 2021 (rules 871, 877, 878 and 898)](https://qanoondigest.com/rules/rules-general/customs-rules-2001), as amended to 2023-06-30 Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf --- ## Under EFS, how much output can I sell in the local market and what duty, tax and surcharge apply? Source: https://qanoondigest.com/faq/textile-manufacturers/efs-domestic-sale-limit-20-percent Law current to: 30 June 2023 (Customs Rules, 2001). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Rule 886 of the Customs Rules lets an Export Facilitation Scheme user sell up to 20 percent of output made from EFS inputs in Pakistan, paying duty and taxes assessed as if the goods were imported. Sales above that also carry a surcharge of KIBOR plus 3 percent a year on the value of the inputs used. **Applies to:** Textile mills and other manufacturers authorized under the Export Facilitation Scheme, 2021 (Chapter XL of the Customs Rules, 2001) who want to sell part of their output in Pakistan. An Export Facilitation Scheme (EFS) user brings in yarn, dyes, chemicals and other inputs without paying duty and taxes because the output is meant for export. Chapter XL of the Customs Rules, 2001 still lets part of that output be sold in Pakistan. The price of doing so is that the goods are taxed as if they had just been imported, and anything above a 20 percent share also pays a surcharge. ### What does the law say? **Why local sale is restricted.** Rule 880(1) lets a user acquire input goods "without payment of customs duty, Federal excise duty, sales tax, or withholding tax" as per its authorization. Rule 883 then requires those inputs to be used within a set utilization period (60 months for Category A, 48 months for B1 and C1, 24 months for B2 and C2). Local sale is the exception, not the rule. **Rule 886 sets out five situations:** | Sub-rule | What is sold locally | What is paid | |---|---|---| | 886(1) | Up to 20% of output goods made from input goods | Leviable duty and taxes, assessed on a Goods Declaration as if the goods were imported in that condition | | 886(2) | Output above the 20% share, where the user is unable to export | The same duty and taxes, plus a surcharge of KIBOR plus 3% per annum on the value of input goods used in those goods | | 886(3) | Factory rejects or B grade goods | Leviable duty and taxes, if any, assessed as if imported | | 886(4) | Wastage within the Analysis Certificate | No duty and taxes if destroyed before an officer not below Assistant Collector, or on payment of federal excise duty and sales tax before removal | | 886(5) | Wastage above the Analysis Certificate limit | Duties and taxes on the input goods plus a surcharge of KIBOR plus 3% per annum | Sales under 886(1) and 886(2) are each subject to the satisfaction of the Regulatory Collector. Rule 886(6) adds that where the goods or input goods are banned under the import policy order, domestic sale needs the approval of the Ministry of Commerce. ### How does it work in practice? Each local sale goes through a Goods Declaration, the same document used for imports. The duty and taxes are worked out on the output goods in the condition they are sold, not on the yarn or fabric originally brought in. For a weaving unit that means the finished grey or processed cloth is assessed as if it had arrived at port. The surcharge in rule 886(2) and 886(5) is different. It is charged on the value of the **input goods used**, not on the value of the cloth sold. **Unused inputs.** Rule 887(1) gives the options for inputs that are not consumed, each with the Regulatory Collector's approval: - carry forward into the next year on submission of the reconciliation statement; - transfer to another authorized user before the end of the utilization period, without payment of duty and taxes; - domestic sale after the utilization period ends, on payment of duties and taxes "and a surcharge of KIBOR plus 3%" (banned or restricted goods only if the Ministry of Commerce authorizes it); - re-export, if allowed under the Export Policy Order; - destruction, if the goods are not fit for consumption or sale. **Output that cannot be exported.** Rule 888 allows un-exported output goods to be transferred to another user or destroyed if unfit, again with the Regulatory Collector's approval. ### Worked example (illustrative figures) A Category B1 weaving mill in Faisalabad holds an EFS authorization. In one year it weaves 200,000 metres of fabric from imported polyester yarn. 1. Limit under rule 886(1): 20% x 200,000 metres = 40,000 metres can be sold locally at duty and taxes assessed as if imported. 2. A local buyer wants 55,000 metres. The extra: 55,000 minus 40,000 = 15,000 metres falls under rule 886(2). 3. Suppose the yarn and other inputs used in those 15,000 metres were valued at Rs. 6,000,000. 4. On all 55,000 metres, the mill pays duty and taxes assessed on the fabric as if imported. 5. On the 15,000 metres, it also pays a surcharge of (KIBOR plus 3%) per annum on Rs. 6,000,000. Two numbers are missing from this example on purpose. The customs duty rate for fabric sits in the Customs Tariff, which is not in this corpus, and KIBOR is a market rate that the rule does not state. Rule 886 also does not say over what period the "per annum" surcharge runs, or whether the 20 percent is measured per year, per authorization or per consignment. ### What if ...? **What if some of the cloth is B grade?** Rule 886(3) deals with factory rejects and B grade goods separately, on duty and taxes assessed as if imported. The rule does not tie this category to the 20 percent share or add the surcharge to it. **What if wastage is higher than the Analysis Certificate allows?** Rule 886(4) says no wastage is allowed except as determined in the Analysis Certificate. Under rule 886(5) excess wastage may be sold locally, with the Regulatory Collector's permission, on duties and taxes on the input goods plus the KIBOR plus 3 percent surcharge. **What if an export order is cancelled and yarn is left over?** Rule 887 applies. Transfer to another authorized user before the utilization period ends is the only listed route that expressly avoids duty and taxes. ### Common mistakes - **Treating 20 percent as a free allowance.** Rule 886(1) still requires full duty and taxes as if imported. The 20 percent only marks where the surcharge starts. - **Calculating the surcharge on sale value.** Rule 886(2) applies it to "the value of input goods used in the output goods". - **Selling unused inputs locally before the period ends.** Rule 887(1)(c) allows domestic sale of unused inputs only after expiry of the utilization period. ### What to check in the official text Read rules 880, 883, 886, 887 and 888 in Chapter XL of the Customs Rules, 2001. This corpus holds the rules as updated to 30 June 2023. The Customs Tariff rates used to assess duty, the KIBOR figure and any Board orders on the Goods Declaration procedure for EFS domestic sales are not held here. ### Frequently asked #### Is the 20 percent domestic sale automatic? No. Rule 886(1) makes it subject to the satisfaction of the Regulatory Collector regarding the reasons for the domestic sale, and a Goods Declaration has to be filed. Duty and taxes are assessed as if the goods were imported into Pakistan in that condition. #### What happens if I sell more than 20 percent locally? Rule 886(2) allows it where the user is unable to export, again on duty and taxes assessed as if imported and subject to the Regulatory Collector's satisfaction. A surcharge of KIBOR plus 3 percent per annum is also charged on the value of the input goods used in those extra goods. #### Can B grade cloth and factory rejects be sold locally? Yes. Rule 886(3) allows factory rejects or B grade goods to be sold in the domestic market on payment of leviable duty and taxes, if any, on a Goods Declaration assessed as if imported. The rule does not add the KIBOR surcharge to this category. #### What can I do with imported yarn I did not use? Rule 887 allows carry forward to the next year on a reconciliation statement, transfer to another authorized user before the utilization period ends without duty and taxes, domestic sale after the period ends on duty, taxes and a KIBOR plus 3 percent surcharge, re-export if the Export Policy Order allows, or destruction if unfit. Each option needs the Regulatory Collector's approval. ### Citations - [Customs Rules, 2001, section 886 (Domestic sales)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#886-domestic-sales), as amended to 2023-06-30: "surcharge at the rate of KIBOR plus 3% per annum shall also be charged on the value of input goods used in the output goods being sold in the domestic market under this sub rule." Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, section 887 (Unused input goods)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#887-unused-input-goods), as amended to 2023-06-30: "the user may sell the unused input goods in the domestic market after expiry of utilization period on payment of duties and taxes, and a surcharge of KIBOR plus 3%" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, section 888 (Un-exported outputgoods)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#888-un-exported-outputgoods), as amended to 2023-06-30: "with the approval of the Regulatory Collector, dispose of the un-exported output goods in the following manner:" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, section 883 (Utilization period)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#883-utilization-period), as amended to 2023-06-30: "The input goods acquired under these rules shall be utilized within the time-period prescribed as under:" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, section 880 (Acquisition of input goods)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#880-acquisition-of-input-goods), as amended to 2023-06-30: "A user shall be entitled to acquire input goods without payment of customs duty, Federal excise duty, sales tax, or withholding tax as per his authorization under these rules" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf --- ## How can a manufacturer get an exemption or reduced-rate certificate so buyers or customs deduct less income tax? Source: https://qanoondigest.com/faq/textile-manufacturers/exemption-certificate-withholding-manufacturer Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 159 of the Income Tax Ordinance lets the Commissioner, on a written application in the prescribed form, issue an exemption or lower rate certificate for tax under Division II (such as section 148 on imports), Division III (such as section 153 on supplies) or Chapter XII. For a company, a certificate not issued within fifteen days is deemed issued through Iris. **Applies to:** Textile mills and other manufacturers, especially companies, whose tax collected at import or deducted by buyers runs ahead of their actual tax liability. A manufacturer pays income tax in advance at several points: at import, when buyers pay for goods, and through utility bills. When those amounts run ahead of the tax the business will actually owe, the Income Tax Ordinance, 2001 offers certificates that tell the collecting or deducting person to take less, or nothing. ### What does the law say? Section 159(1) applies to an amount to which Division II or Division III of Part V of Chapter X, or Chapter XII, applies. Division II is advance tax paid to a collection agent, which is where section 148 on imports sits. Division III is deduction at source, which includes section 153 on payments for goods and services. Chapter XII holds other advance taxes, including the one collected through electricity bills. Where the Commissioner is satisfied that the amount is: - (a) exempt from tax under the Ordinance, - (b) subject to tax at a rate lower than the First Schedule rate, or - (c) subject to a hundred percent tax credit under the Ordinance, the Commissioner shall, on a written application in the prescribed form, issue an exemption or lower rate certificate. Three provisos, added by the Finance Act, 2021, apply to companies: 1. The Commissioner shall issue the certificate within fifteen days of the company filing its application. 2. On expiry of fifteen days, the Commissioner is deemed to have issued the exemption certificate, and Iris processes and issues it automatically. 3. The Commissioner may modify or cancel a certificate issued automatically by Iris, for reasons recorded in writing, after giving an opportunity of being heard. Section 159(2) is the other side. The person collecting or deducting tax must take the full amount unless a certificate is in force, and if one is, must comply with it. ### How does section 153(4) fit in? Section 153(4) is a separate power for payments under section 153(1). The Commissioner may, where the tax deductible is not minimum tax, allow payment after deduction at a reduced rate. The reduction "shall not exceed eighty percent of the rate specified in the said Division", except for public limited companies, where the Commissioner may allow payment without any deduction. A company gets the reduced rate certificate within fifteen days if its advance tax liability has been discharged, and it is otherwise deemed issued through Iris. This matters because section 153(3)(a)(i) says tax deducted on sale or supply of goods is not minimum tax where the recipient is a company that manufactures those goods. So a manufacturing company selling its own yarn or fabric is the kind of recipient section 153(4) can reach. ### Where does section 148 come in? Section 148(1) has customs collect advance tax from importers. Section 148(7) makes that tax minimum tax, but says the sub-section does not apply to imports of goods on which tax is collected "by an industrial undertaking for its own use". A mill importing dyes, chemicals or fibre for its own production is therefore outside the minimum tax rule in section 148(7), and section 159(1) is the provision under which the mill may apply for a certificate, if the Commissioner is satisfied that one of its conditions is met. ### Worked example (illustrative figures) A weaving company in Faisalabad sells fabric it manufactures to a Lahore garment company for Rs. 10,000,000, including sales tax. 1. Rate under clause (1)(b)(i) of Division III of Part III for a company, other than toll manufacturing: 5 percent of the gross amount payable. 2. Full deduction: Rs. 10,000,000 x 5 percent = Rs. 500,000. 3. The largest reduction section 153(4) allows is eighty percent of the 5 percent rate, which is 4 percentage points, leaving 1 percent. 4. Deduction at that lowest reduced rate: Rs. 10,000,000 x 1 percent = Rs. 100,000. The actual rate in any certificate is the Commissioner's decision. If the company were a public limited company, section 153(4) lets the Commissioner allow payment with no deduction. ### What if the Commissioner later cancels an Iris certificate? The third proviso to section 159(1) lets the Commissioner modify or cancel the automatically issued certificate, with written reasons and a hearing. Once it is cancelled, section 159(2) returns the buyer or collector to deducting the full amount. ### Common mistakes - **Assuming every business gets the fifteen-day rule.** The deemed issue in section 159(1) and section 153(4) applies to companies. - **Expecting nil deduction under section 153(4).** Only public limited companies can be allowed payment without deduction. For others the reduction is capped at eighty percent of the rate. - **Forgetting the certificate has to be in force.** Section 159(2) ties the buyer's duty to a certificate that is in force at the time. ### What to check in the official text - Section 159(1) and (2), with its three provisos, of the Income Tax Ordinance, 2001, as amended to 30 June 2026. - Section 153(3) and (4), and section 148(1) and (7). - Division III of Part III of the First Schedule for the section 153 rates. - The prescribed application form is set by rules. The Income Tax Rules, 2002 in this corpus are updated only to 24 November 2023. ### Frequently asked #### Can a certificate be issued where the tax is minimum tax? Section 153(4) allows a reduced rate only where the tax deductible under sub-section (1) is not minimum tax. Section 159(1) turns on whether the amount is exempt, taxed at a lower rate, or subject to a hundred percent tax credit under the Ordinance, and the corpus does not add more on minimum tax cases. #### What happens if my company's application is not decided in fifteen days? The provisos to section 159(1) say the Commissioner shall issue the certificate to a company within fifteen days, and on expiry of that period is deemed to have issued it, with Iris processing and issuing it automatically. The Commissioner may later modify or cancel it for recorded reasons after a hearing. #### Does the buyer have to honour the certificate? Yes. Section 159(2) requires the person collecting or deducting tax to collect or deduct the full amount unless a certificate under sub-section (1) is in force, in which case that person must comply with the certificate. ### Citations - [Income Tax Ordinance, 2001, section 159 (Exemption or lower rate certificate)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#159-exemption-or-lower-rate-certificate), as amended to 2026-06-30: "Provided further that the Commissioner shall be deemed to have issued the exemption certificate upon the expiry of fifteen days from filing of application by the aforesaid company and the certificate shall be automatically processed and issued by Iris" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 159 (Exemption or lower rate certificate)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#159-exemption-or-lower-rate-certificate), as amended to 2026-06-30: "shall collect or deduct the full amount of tax specified in Division II or III" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "such reduction shall not exceed eighty percent of the rate specified in the said Division" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 148 (Imports)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#148-imports), as amended to 2026-06-30: "by an industrial undertaking for its own use." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), clause (1)(b)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much income tax is collected through a mill's industrial electricity bill, and can it be adjusted? Source: https://qanoondigest.com/faq/textile-manufacturers/income-tax-on-industrial-electricity-bill Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 235 of the Income Tax Ordinance collects advance tax on an industrial consumer's electricity bill at the Division IV, Part IV rates. On a gross bill above Rs. 20,000 the tax is Rs. 1,950 plus 5 percent of the amount above Rs. 20,000. For a company it is adjustable. For other taxpayers, section 235(4) treats part as minimum tax. **Applies to:** Textile mills and other factories with industrial electricity connections, whether run by a company, an association of persons or an individual. Every monthly electricity bill for a mill's industrial connection carries an income tax line. The Income Tax Ordinance, 2001 sets that charge in section 235 and its rates in the First Schedule, and whether it can later be claimed back depends mainly on whether the mill is run by a company. ### What does the law say? Section 235(1) requires advance tax to be collected at the rates in Division IV of Part IV of the First Schedule on the electricity bill of a commercial, industrial or domestic consumer. Section 235(2) makes the person preparing the bill charge the tax in the same way as the electricity charges. Its Explanation says the bill means the bill "inclusive of sales tax and all incidental charges". Paragraph (1) of Division IV sets the rates for commercial and industrial consumers on the gross amount of the bill: | Gross amount of bill | Tax | |---|---| | Up to Rs. 500 | Rs. 0 | | Above Rs. 500, up to Rs. 20,000 | 10% of the amount | | Above Rs. 20,000, industrial consumer | Rs. 1,950 plus 5% of the amount above Rs. 20,000 | | Above Rs. 20,000, commercial consumer | Rs. 1,950 plus 12% of the amount above Rs. 20,000 | The middle row reads "10% of the amount" and the table does not say whether that means the whole bill or the part above Rs. 500. A mill's industrial bill will usually be well above Rs. 20,000, where the last rows apply. ### Can the tax be adjusted? Section 235(4) splits taxpayers in two: - **Companies.** Clause (c): tax collected is adjustable against tax liability. - **Others (individuals and associations of persons).** Clause (a): tax collected up to a bill amount of Rs. 360,000 per annum is minimum tax, and no refund is allowed. Clause (b): tax collected on a monthly bill over and above Rs. 30,000 per month is adjustable. Section 235(4) does not set out the arithmetic for splitting the tax on a single large bill between the minimum and adjustable parts. This page does not supply one. ### Worked example (illustrative figures) A weaving unit in Faisalabad receives an industrial electricity bill for October 2026 of Rs. 1,500,000, including sales tax and all incidental charges. 1. Amount above Rs. 20,000: Rs. 1,500,000 - Rs. 20,000 = Rs. 1,480,000. 2. 5 percent of that: Rs. 1,480,000 x 5 percent = Rs. 74,000. 3. Add the fixed amount: Rs. 1,950 + Rs. 74,000 = Rs. 75,950. The income tax on this bill is Rs. 75,950. If the unit is run by a company, section 235(4)(c) makes the Rs. 75,950 adjustable against its tax liability for the year. If it is run by a partnership or a sole owner, part of the tax is minimum tax under section 235(4)(a) and the rest adjustable under section 235(4)(b). ### What if the mill holds a certificate? Section 235(3) says the tax is not collected from a person who produces a Commissioner's certificate that the person's income for the tax year is exempt, that advance tax liability under section 147 has been discharged, or that the person's entire income is subject to the final or minimum tax regime under another provision. Section 159(1) separately allows exemption or lower rate certificates for amounts to which Chapter XII applies, and section 235 sits in Chapter XII. Section 159(2) makes the person collecting the tax take the full amount unless such a certificate is in force. ### What if the owner is not on the active taxpayers' list? The proviso to section 235(1) that switches off collection for people on the active taxpayers' list covers domestic consumers only. It does not apply to industrial connections. Rule 1 of the Tenth Schedule increases by one hundred percent the rate of tax to be deducted or collected under any provision of the Ordinance from persons not appearing in the active taxpayers' list. Its text is general and does not exclude section 235. How electricity distribution companies apply it on industrial bills is not set out in this corpus. ### Common mistakes - **Working out the tax on the bill before sales tax.** The Explanation to section 235(2) uses the bill inclusive of sales tax and incidental charges. - **Assuming all of it is refundable for a sole proprietor.** Section 235(4)(a) treats the part up to Rs. 360,000 of bills a year as minimum tax with no refund. - **Using the commercial rate for a factory.** Industrial consumers pay 5 percent above Rs. 20,000, not 12 percent. ### What to check in the official text - Section 235(1) to (4) of the Income Tax Ordinance, 2001, as amended to 30 June 2026. - Paragraph (1) of Division IV of Part IV of the First Schedule, including the wording of the middle row. - Section 159 on certificates for Chapter XII collections. - Sales tax on the electricity bill itself, and input tax on it, is covered on the related sales tax input page. ### Frequently asked #### Is the bill amount for this tax the bill before or after sales tax? The Explanation to section 235(2) says the electricity consumption bill means the bill inclusive of sales tax and all incidental charges. The Division IV table also applies its rates to the gross amount of the bill. #### Can a mill avoid the collection altogether? Section 235(3) says the advance tax is not collected from a person who produces a Commissioner's certificate that the income is exempt, that advance tax liability under section 147 has been discharged, or that the entire income is under the final or minimum tax regime under another provision. #### Is the rate higher for commercial connections? Yes. For bills above Rs. 20,000 the Division IV table sets Rs. 1,950 plus 12 percent of the excess for commercial consumers, against Rs. 1,950 plus 5 percent for industrial consumers. ### Citations - [Income Tax Ordinance, 2001, section 235 (Electricity consumption)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#235-electricity-consumption), as amended to 2026-06-30: "electricity consumption bill referred to in sub-section (2) means electricity bill inclusive of sales tax and all incidental charges" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 235 (Electricity consumption)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#235-electricity-consumption), as amended to 2026-06-30: "in the case of a company, tax collected shall be adjustable against tax liability" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division IV (Electricity Consumption), paragraph (1) Table](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 159 (Exemption or lower rate certificate)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#159-exemption-or-lower-rate-certificate), as amended to 2026-06-30: "shall collect or deduct the full amount of tax specified in Division II or III" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1: rate for persons not appearing in the active taxpayers' list](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## If I supply yarn or fabric to an exporter locally as an indirect exporter, what income tax and sales tax treatment applies? Source: https://qanoondigest.com/faq/textile-manufacturers/indirect-exporter-tax-on-supplies-to-exporters Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 154 of the Income Tax Ordinance deducts 1.25 percent for tax year 2027 from sales to an exporter under an inland back-to-back letter of credit or a firm contract with a DTRE or EFS exporter, and section 154(4) makes it minimum tax. Rule 880 of the Customs Rules lets such local inputs go on zero-rated invoices. **Applies to:** Spinning, weaving and processing mills that sell yarn, fabric or other inputs locally to direct exporters or commercial exporters for use in goods that are exported. A mill that supplies yarn or fabric to an exporter is not itself exporting, but the Income Tax Ordinance, 2001 and the Customs Rules, 2001 can treat it much like one. Which treatment applies depends on how the sale is arranged and whether the buyer is an authorized user of an export scheme. ### What does the Income Tax Ordinance say? Section 154 deals with exports. Two of its sub-sections reach local sales to exporters: - **Section 154(3), inland back-to-back letter of credit.** Every banking company must deduct tax when it realises the proceeds of a sale of goods to an exporter under an inland back-to-back letter of credit, or any other arrangement prescribed by the Board. - **Section 154(3B), firm contract.** Every direct exporter and export house registered under the Duty and Tax Remission for Exports Rules, 2001 and the Export Facilitation Scheme, 2021 must deduct tax when making payment for a firm contract to an indirect exporter as defined in those rules. The words on the Export Facilitation Scheme were inserted by the Finance Act, 2023. Both sub-sections point to Division IV of Part III of the First Schedule. Clause (1) of that Division sets the rate for tax deducted under sub-sections (1), (3), (3A), (3B) or (3C) of section 154 at 1.25 percent. The Finance Act, 2026 substituted 1.25 percent for 1 percent, so this is the rate for tax year 2027. Section 154(4) says the tax deductible under the section is minimum tax on the income arising from the transactions referred to in the section. ### Who counts as an indirect exporter? Section 154(3B) uses the definition in the rules. Rule 871(l) of the Customs Rules defines an indirect exporter as a person with a firm contract or export purchase order from a direct exporter or commercial exporter for the manufacture and supply of goods to that exporter, authorized under the rules. Rule 871(k) says "export" includes supply of goods by an indirect exporter to a direct exporter. Rule 872(1)(d) makes the Export Facilitation Scheme available to persons registered under the Sales Tax Act, 1990 as manufacturers and operating as indirect exporters. Rule 874 places indirect exporters in Category C. ### What about sales tax on the supply? Rule 880(1) lets an authorized user acquire input goods without customs duty, federal excise duty, sales tax or withholding tax, as per its authorization. Clause (b) says local input goods liable to sales tax "shall be supplied against a zero-rated invoice". Rule 880(2) requires the user to upload details of domestic acquisitions in WeBOC or PSW within thirty days. So when a mill supplies yarn to an exporter that holds an EFS authorization covering that yarn, the supply goes on a zero-rated invoice. The Sales Tax Act's own zero-rating provisions are covered on the related zero-rating page. ### Worked example (illustrative figures) A spinning mill in Multan holds a firm contract from a Karachi towel exporter authorized under the Export Facilitation Scheme. In November 2026 it supplies yarn invoiced at Rs. 12,000,000. 1. Sales tax: the yarn is a local input for an EFS user, so rule 880(1)(b) has it supplied on a zero-rated invoice. 2. Income tax under section 154(3B): Rs. 12,000,000 x 1.25 percent = Rs. 150,000, deducted by the exporter when paying. 3. Net received by the mill: Rs. 12,000,000 - Rs. 150,000 = Rs. 11,850,000. 4. Under section 154(4), the Rs. 150,000 is minimum tax on the income from that supply. ### What if the sale is an ordinary local sale? If there is no inland back-to-back letter of credit, no arrangement prescribed by the Board and no firm contract with a DTRE or EFS exporter, section 154 does not reach the sale. The general withholding on payments for goods would then be the relevant rule. It is covered on the related page on tax deducted from supplies of goods. ### Is there a tension in the texts? Rule 880(1) speaks of acquisition "without payment of ... withholding tax", while section 154(3B) requires the exporter to deduct tax when paying the indirect exporter. Rule 898(3) says the Income Tax Ordinance applies to users unless specifically addressed in the rules. The corpus does not expressly reconcile the two, so this page does not resolve it. Section 154(3B) also still names the DTRE rules. Rule 898(1) says DTRE approvals may remain operative for two years from the issuance of the EFS rules and then stand abolished. ### Common mistakes - **Treating the deduction as final tax.** Since the Finance Act, 2024, section 154(4) calls it minimum tax. - **Using 1 percent.** The Division IV rate is 1.25 percent for tax year 2027. - **Zero-rating without an authorization.** Rule 880(1)(b) sits inside the EFS scheme and ties zero-rated supply to the buyer's authorization. ### What to check in the official text - Section 154(3), (3B) and (4) of the Income Tax Ordinance, 2001, as amended to 30 June 2026. - Clause (1) of Division IV of Part III of the First Schedule. - Rules 871, 872, 874, 880 and 898 of the Customs Rules, 2001. The corpus holds the Customs Rules only as updated to 30 June 2023, so later SROs amending Chapter XL are not reflected. - Any Board arrangement prescribed under section 154(3). None is held in this corpus. ### Frequently asked #### Is the tax deducted under section 154(3) or 154(3B) adjustable? No. Section 154(4) says tax deductible under the section is minimum tax on the income arising from the transactions referred to in the section. The Finance Act, 2024 changed the word final to minimum. #### Who deducts the tax on a firm contract supply? Under section 154(3B), the direct exporter or export house registered under the DTRE rules or the Export Facilitation Scheme, 2021 deducts it when paying the indirect exporter. Under section 154(3), for an inland back-to-back letter of credit, the banking company deducts it when the proceeds are realised. #### Can I charge zero-rated sales tax on yarn to any exporter? Rule 880(1)(b) of the Customs Rules lets local input goods liable to sales tax be supplied against a zero-rated invoice to a user acquiring them under its EFS authorization. The corpus does not extend that to exporters who are not authorized users of the scheme. ### Citations - [Income Tax Ordinance, 2001, section 154 (Exports)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154-exports), as amended to 2026-06-30: "Every banking company shall, at the time of realisation of the proceeds on account of a sale of goods to an exporter under an inland back-to- back letter of credit or any other arrangement as prescribed by the" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154 (Exports)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154-exports), as amended to 2026-06-30: "shall, at the time of making payment for a firm contract to an indirect exporter defined under the said rules, deduct tax at the rates specified in Division IV of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IV (Exports), clause (1): rate for section 154](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Customs Rules, 2001, section 871 (Definitions)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#871-definitions), as amended to 2023-06-30: "“indirect exporter” means a person who has a firm contract or export purchase order from a direct exporter or commercial exporterfor the manufacture and supply of goods to such exporter" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, section 880 (Acquisition of input goods)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#880-acquisition-of-input-goods), as amended to 2023-06-30: "local input goods liable to sales tax shall be supplied against a zero-rated invoice" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, Chapter XL, Export Facilitation Scheme 2021 (rules 872, 874 and 898)](https://qanoondigest.com/rules/rules-general/customs-rules-2001), as amended to 2023-06-30 Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf --- ## Which purchases can a registered manufacturer claim as input tax, including sales tax on industrial electricity and gas bills? Source: https://qanoondigest.com/faq/textile-manufacturers/input-tax-claim-manufacturer-electricity-gas Law current to: 30 June 2026 (Act), 30 June 2025 (Rules). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 7 of the Sales Tax Act lets a registered manufacturer deduct input tax on purchases for its taxable supplies if it holds a tax invoice in its name and registration number, or for electricity and gas, a bill bearing its registration number and the connection address. Section 8 bars claims on items such as vehicles, furniture and personal use. **Applies to:** Accountants and owners of registered textile mills and other manufacturers claiming input tax in monthly sales tax returns. A registered mill can deduct the sales tax it paid on inputs used for its taxable supplies, such as yarn, dyes, packing material and industrial electricity and gas, from the output tax it charges. The claim depends on paperwork in the mill's own name and registration number, a time window, and a list of purchases that section 8 excludes outright. ### What does the law say? **What counts as input tax.** Section 2(14) defines input tax to include sales tax levied under the Act on goods supplied to the person and on goods the person imports, federal excise duty charged in sales tax mode, and provincial sales tax on services received (except services the Board excludes by notification). **The right to deduct.** Section 7(1) lets a registered person deduct input tax paid or payable during the tax period "for the purpose of taxable supplies made, or to be made, by him" from the output tax due, subject to sections 8, 8B and 73. The proviso adds that input tax not deducted in the relevant period may be claimed "in the return for any of the six succeeding tax periods". **The paperwork.** Section 7(2) says no input tax may be deducted unless the person holds: | Purchase | Document required by section 7(2) | |---|---| | Local purchase of goods | A tax invoice in his name and bearing his registration number | | Electricity or gas | A bill bearing his registration number and the address where the connection is installed | | Imports | A goods declaration in his name showing his registration number, cleared under section 79, 81 or 104 of the Customs Act | | Goods bought at auction | A treasury challan in his name and registration number showing sales tax paid | A proviso adds that, from a date the Board notifies, the claim is also lost if the supplier has not declared the supply in its return or has not paid the tax due. ### Which purchases never qualify? Section 8(1) says a registered person "shall not be entitled to reclaim or deduct input tax" on, among others: - (a) goods or services used for any purpose other than taxable supplies - (ca) goods or services where the supplier has not deposited the sales tax - (caa) purchases where CREST shows a discrepancy or the input tax is not verifiable in the supply chain - (d) fake invoices - (f) goods and services not related to the taxable supplies made - (g) goods and services acquired for personal or non-business consumption - (h) building and construction materials, paints, electrical and sanitary fittings, pipes, wires and cables used in or attached to immoveable property, excluding pre-fabricated buildings and goods for re-sale or direct use in manufacture - (i) vehicles of Chapter 87 and their parts, electrical and gas appliances, furniture, furnishings and office equipment (other than electronic cash registers), unless acquired for sale or re-sale - (l) from a date the Board notifies, supplies the supplier has not declared or paid tax on Section 8(2) adds that a person making both taxable and non-taxable supplies can reclaim only the proportion of input tax attributable to taxable supplies. ### How does it work for electricity and gas? The industrial electricity or gas bill takes the place of the tax invoice, but only if it bears the mill's registration number and the address of the connection. Rule 22A of the Sales Tax Rules lets distribution companies correct past bills in a later month instead of issuing debit or credit notes, and says the buyer "shall not claim input tax credit in excess of the sales tax amount actually paid against such bills". Section 73(1) normally requires payments above Rs. 50,000 in aggregate to a single supplier in a tax period to go through the banking channel, but it expressly excludes "payment against a utility bill". ### Worked example (illustrative figures) A registered processing mill in Multan reviews its purchases for October: | Purchase | Sales tax on document | Claimable? | Reason | |---|---|---|---| | Grey cloth, invoice in mill's name and registration number | Rs. 1,800,000 | Yes | Section 7(2)(i) | | Industrial electricity bill with registration number and mill address | Rs. 540,000 | Yes | Section 7(2)(i) | | Industrial gas bill with registration number and mill address | Rs. 216,000 | Yes | Section 7(2)(i) | | Electricity bill for the owner's house | Rs. 30,000 | No | Section 8(1)(g), and no registration number on the bill | | New car for the general manager | Rs. 450,000 | No | Section 8(1)(i) | Claimable input tax = Rs. 1,800,000 + Rs. 540,000 + Rs. 216,000 = Rs. 2,556,000. The Rs. 480,000 on the house bill and the car is not claimable. If an August dye invoice was missed, the proviso to section 7(1) lets it be claimed in any of the six succeeding tax periods, September to February. The Rs. 2,556,000 is then subject to section 8B, which does not let input tax adjusted in a tax period exceed 90 percent of output tax (other than on fixed assets or capital goods). That cap is covered on a separate page. ### Common mistakes - **Utility bills in an old name.** Section 7(2)(i) requires the registration number on the bill. A connection still in a previous owner's name does not meet those words. - **Claiming colony or residence bills.** Personal or non-business consumption is barred by section 8(1)(g). - **Assuming a valid invoice is enough.** Section 8(1)(ca), (caa) and (l) look at whether the supplier deposited and declared the tax. - **Paying suppliers in cash.** Section 73(2) denies input tax where a payment that section 73(1) requires through a bank was made otherwise. ### What to check in the official text Read sections 2(14), 7, 8, 8B and 73 of the Sales Tax Act and rule 22A of the Sales Tax Rules. Check whether the Board has notified the dates for the section 7(2)(i) proviso and section 8(1)(l); those notifications are not in this corpus. Wastage limits under section 7(5) are covered on a separate page. ### Frequently asked #### Can a mill claim the sales tax on its industrial electricity bill? Section 7(2)(i) allows it where the mill holds a bill bearing its registration number and the address where the connection is installed, and the electricity is used for its taxable supplies. Rule 22A limits the claim to the sales tax actually paid against such bills. #### What if I forgot to claim an invoice in the right month? The proviso to section 7(1) allows input tax not deducted in the relevant period to be claimed in the return for any of the six succeeding tax periods. After that window the Act gives no further route. #### Can a mill claim input tax on a car or office furniture? No. Section 8(1)(i) bars vehicles of Chapter 87 and their parts, electrical and gas appliances, furniture, furnishings and office equipment other than electronic cash registers, unless acquired for sale or re-sale. #### Is input tax lost if my supplier does not pay the tax? Section 8(1)(ca) bars input tax on goods or services where the supplier has not deposited the sales tax, and section 8(1)(caa) bars purchases where CREST shows a discrepancy or the input tax is not verifiable in the supply chain. ### Citations - [Sales Tax Act, 1990, section 7 (Determination of tax liability)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#7-determination-of-tax-liability), as amended to 2026-06-30: "in case of supply of electricity or gas, a bill bearing his registration number and the address where the connection is installed" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8 (Tax credit not allowed)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8-tax-credit-not-allowed), as amended to 2026-06-30: "goods and services acquired for personal or non-business consumption;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "tax levied under this Act on supply of goods to the person;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 73 (Certain transactions not admissible)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#73-certain-transactions-not-admissible), as amended to 2026-06-30: "excluding payment against a utility bill" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8B (Adjustable input tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8b-adjustable-input-tax), as amended to 2026-06-30: "shall not be allowed to adjust input tax in excess of ninety per cent of the output tax for that tax period:" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 22A (Change in value of supply of electricity or natural gas)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#22a-change-in-value-of-supply-of-electricity-or-natural-gas), as amended to 2025-06-30: "The registered buyer shall not claim input tax credit in excess of the sales tax amount actually paid against such bills." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf --- ## When is input tax disallowed because of the supplier, such as fake invoices, unpaid tax or a blacklisted or non-active supplier? Source: https://qanoondigest.com/faq/textile-manufacturers/input-tax-blocked-fake-blacklisted-suppliers Law current to: 30 June 2026 (Sales Tax Act) and 30 June 2025 (Sales Tax Rules). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 8(1) of the Sales Tax Act bars input tax on fake invoices, on goods where the supplier has not deposited the tax, and on purchases flagged by CREST or not verifiable in the supply chain. Section 21(3) rejects claims on a blacklisted supplier's invoices, before or after blacklisting, and rule 12A bars input tax on a non-active supplier's invoices. **Applies to:** Sales tax registered buyers in the textile chain, such as weaving, knitting, dyeing and garment units, that claim input tax on yarn, fabric, dyes and chemicals bought from registered suppliers. A buyer's input tax depends on the supplier as well as on the buyer's own records. A valid tax invoice and a genuine purchase are not always enough. The Sales Tax Act, 1990 and the Sales Tax Rules, 2006 disallow input tax in several cases that turn on what the supplier did or failed to do. ### What does the law say? Section 8(1) of the Act lists purchases on which a registered person "shall not be entitled to reclaim or deduct input tax". The supplier-related clauses are: | Clause | Input tax is barred on | |---|---| | 8(1)(ca) | goods or services where the supplier has not deposited the sales tax in the Government treasury | | 8(1)(caa) | purchases where CREST shows a discrepancy, or where the input tax cannot be verified in the supply chain | | 8(1)(d) | fake invoices | | 8(1)(l) | from a date notified by the Board, supplies the supplier did not declare in his return, or on which he did not pay the tax due shown in it | Section 21 adds a separate rule for suspended and blacklisted suppliers. Under section 21(3), while a supplier's registration is suspended, his invoices "shall not be entertained" for refund or input tax credit. Once he is blacklisted, input tax or refund claimed against his invoices, "whether prior or after such black listing", is to be rejected. The rejection must come through a self-speaking appealable order, after the buyer has had an opportunity of being heard. ### How does a non-active supplier affect my claim? Section 2(1A) of the Act defines an "active taxpayer". A registered person falls outside the definition if he: - is blacklisted or has his registration suspended under section 21; - fails to file his sales tax return by the due date for two consecutive tax periods; - fails to file his income tax return or statement under the Income Tax Ordinance, 2001 by the due date; or - fails to file a quarterly or annual withholding tax statement under that Ordinance. Under rule 12A of the Sales Tax Rules, such a person automatically becomes non-active and is removed from the active taxpayers list. A non-active taxpayer may not issue sales tax invoices. Rule 12A(3) says no person shall make purchases from a non-active taxpayer. Under rule 12A(4), when a buyer enters a non-active supplier's invoice in Annexure-A of the return, a message appears saying no input tax credit is admissible against it. Rule 12A still refers to "clause (1) of section 2". The Finance Act, 2025 renumbered that definition as clause (1A). The rules in this corpus, amended to 30 June 2025, do not show a matching update. ### How does it work in practice? Rule 12 sets out the suspension and blacklisting procedure, and it reaches buyers directly: - **During suspension:** rule 12(a)(v) says no input tax or refund is allowed to other registered persons on the suspended supplier's invoices, "whether issued prior to or after such suspension", during the currency of suspension. - **On blacklisting:** rule 12(b)(ii) requires the blacklisting order to state the period for which input tax or refund claimed on the supplier's invoices "from the date of his registration" is inadmissible. - **Buyer's notice:** under rule 12(b)(v) and (vi), a system-generated list of the blacklisted supplier's invoices goes to the officers with jurisdiction over the buyers. The officer then issues the buyer a show cause notice and decides through a self-speaking appealable order after a hearing, as section 21(3) requires. Rule 12(b)(vi) still names section 11 of the Act as one basis for that notice, although the Act in this corpus shows section 11 as omitted by the Finance Act, 2024. Separately, section 21(4) lets the Board, the Commissioner or an authorised officer block refunds or input tax adjustments of a person believed to be issuing fake or flying invoices or claiming fraudulent input tax, after recording reasons in writing. Section 8A can also make the buyer liable for the supplier's unpaid tax. It applies where a buyer knows, or has reasonable grounds to suspect, that tax on the supply, or on an earlier or later supply of the same goods, would go unpaid. Section 8A places the burden of proving that knowledge on the department. ### Worked example (illustrative figures) A weaving unit in Faisalabad buys yarn from a registered spinner in October, November and December 2026. It claims input tax of Rs. 420,000, Rs. 380,000 and Rs. 500,000 on those invoices, a total of Rs. 1,300,000. In March 2027 the spinner is blacklisted. 1. Section 21(3) covers invoices issued "prior or after" blacklisting, so all three months are exposed, not only purchases after March. 2. The blacklisting order states the period of inadmissibility, which rule 12(b)(ii) allows to run from the spinner's date of registration. 3. The weaving unit receives a show cause notice, and any rejection of the Rs. 1,300,000 must be through a self-speaking appealable order after a hearing. 4. Had the unit bought from the spinner during an earlier suspension, rule 12(a)(v) would already have barred those claims during the suspension. ### What if the supplier is restored? Rule 12A, through the text headed 12B, lets a non-active taxpayer be restored as active. He must file the missing return or statement with any tax due, the RTO or LTO must recommend restoration after any audit or investigation it needs, and the Board must issue an order. For a suspension, the Commissioner may revoke it after the supplier's reply and hearing. The rules in this corpus do not say whether a buyer's claims that were not entertained during a revoked suspension are then re-admitted. They are silent on that point. ### Common mistakes - **Assuming an older invoice is safe.** Section 21(3) reaches invoices issued before blacklisting. - **Relying on the invoice alone.** Section 8(1)(caa) disallows input tax that is not verifiable in the supply chain, even on an invoice that looks valid. - **Buying from a non-active supplier.** Rule 12A(3) prohibits the purchase, and the return itself flags the invoice. ### What to check in the official text - Section 8(1)(ca), (caa), (d) and (l), and section 8A of the Sales Tax Act, 1990. - Section 21(3) and (4) of the Act, and section 2(1A) for the active taxpayer definition. - Rules 12 and 12A of the Sales Tax Rules, 2006. - Whether the Board has notified the start date for section 8(1)(l). That notification is not in this corpus. ### Frequently asked #### If my supplier is blacklisted after I bought from him, is my old input tax safe? Not under section 21(3). Once a supplier is blacklisted, input tax or refund claimed against his invoices, whether issued before or after the blacklisting, is to be rejected. The rejection must be through a self-speaking appealable order after the buyer is given an opportunity of being heard. #### What is the difference between a suspended and a blacklisted supplier for a buyer? During suspension, section 21(3) says the supplier's invoices are not entertained for input tax or refund. Rule 12 says this covers invoices issued before or after the suspension, during the currency of suspension. Blacklisting leads to rejection of the claims through an appealable order. #### Can I lose input tax if my supplier simply did not pay the tax he charged me? Yes. Section 8(1)(ca) bars input tax on goods or services where the supplier has not deposited the sales tax, and section 8(1)(l) covers supplies the supplier did not declare in his return or on which he did not pay the tax due, from a date notified by the Board. ### Citations - [Sales Tax Act, 1990, section 8 (Tax credit not allowed)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8-tax-credit-not-allowed), as amended to 2026-06-30: "purchases, in respect of which a discrepancy is indicated by CREST or input tax of which is not verifiable in the supply chain" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 21 (De-registration, blacklisting and suspension of registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#21-de-registration-blacklisting-and-suspension-of-registration), as amended to 2026-06-30: "During the period of suspension of registration, the invoices issued by such person shall not be entertained for the purposes of sales Tax refund or input tax credit" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 12A (Non-active taxpayer)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#12a-non-active-taxpayer), as amended to 2025-06-30: "No person, including government departments, autonomous bodies and public sector organizations, shall make any purchases from a non-active taxpayer." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 12 (Blacklisting and suspension of registration)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#12-blacklisting-and-suspension-of-registration), as amended to 2025-06-30: "no input tax adjustment/refund shall be allowed to any other registered persons on the strength of invoices issued by such suspended person (whether issued prior to or after such suspension), during the currency of suspension" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "who is blacklisted or whose registration is suspended" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8A (Joint and several liability of registered persons in supply chain where tax unpaid)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8a-joint-and-several-liability-of-registered-persons-in-supply-chain-where-tax-unpaid), as amended to 2026-06-30: "such person as well as the person making the taxable supply shall be jointly and severally liable for payment of such unpaid amount of tax" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What penalty and default surcharge apply if a manufacturer files the monthly sales tax return late or pays less than due? Source: https://qanoondigest.com/faq/textile-manufacturers/late-sales-tax-return-penalty-default-surcharge Law current to: 30 June 2026 (Act), 30 June 2025 (Sales Tax Rules). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under serial 1 of the section 33 Table, a return filed after the due date attracts a Rs. 50,000 penalty, or Rs. 2,000 per day if filed within ten days. Tax paid late or short also attracts a serial 5 penalty and, under section 34, default surcharge at 12 percent a year or KIBOR plus 3 percent, whichever is higher. **Applies to:** Sales tax registered manufacturers, including textile mills, that file the monthly return late or pay less tax than is due, for example while waiting for a refund. Filing late and paying late are two separate defaults under the Sales Tax Act, and each has its own cost. A mill that files on time but pays less than the return shows still faces a penalty and default surcharge on the unpaid part. The amounts below are from the Act as amended to 30 June 2026. ### What does the law say? **The return.** Section 26(1) requires every registered person to furnish, by the due date, a true, complete and correct return "indicating the purchases and the supplies made during a tax period, the tax due and paid". Section 2(9) defines the due date for a return as the 15th day of the month following the end of the tax period, or another date the Board notifies. Rule 18(9) of the Sales Tax Rules splits it: where the due date is the 15th, tax is deposited by the 15th and the return is submitted electronically by the 18th. **Penalties in the section 33 Table.** | Serial | Offence | Penalty | |---|---|---| | 1 | Fails to furnish a return within the due date | Rs. 50,000. If filed within ten days of the due date, Rs. 2,000 for each day of default | | 5 | Fails to deposit tax due, or any part, in the time or manner laid down | Rs. 50,000 or 5% of the tax involved, whichever is higher. If paid within ten days of the due date, Rs. 5,000 for each day of default | The Finance Act, 2026 substituted these amounts. Serial 5 has two more provisos: no penalty for a miscalculation made for the first time during a year, and, if tax is still unpaid sixty days after a notice from an officer not below Assistant Commissioner, liability on conviction by a Special Judge to imprisonment up to three years, a fine up to the tax involved, or both. **Default surcharge.** Section 34(1) applies when a registered person does not pay tax due in time, claims inadmissible input tax or refund, or wrongly applies zero rate. The rate is "twelve percent per annum or KIBOR plus three percent per annum, whichever is higher" of the tax due. For tax fraud it is two per cent per month. **How the period is counted.** Section 34(2)(b) says the period runs from "the 16th day of a month (following the due date of the tax period to which the default relates)" to the day before the tax is actually paid. The Explanation says tax due does not include penalty. ### How does it work in practice? - A late return with tax paid on time attracts only the serial 1 penalty. - Tax paid late attracts the serial 5 penalty and default surcharge, whether or not the return was on time. - **Extensions.** Section 26AB lets the Commissioner extend the filing date, normally by up to fifteen days. Section 26AB(5) says the extension does not change the due date for payment for default surcharge purposes. - **Voluntary correction.** Section 26(4) says a person who files a revised return voluntarily with the short-paid tax and default surcharge, before receiving a notice of audit, pays no penalty. After an audit points it out but before a show cause notice, the person pays the tax, default surcharge and twenty five percent of the penalty. After a show cause notice, the full penalty applies. ### Worked example (illustrative figures) A weaving mill in Faisalabad owes Rs. 3,000,000 for the August tax period. The deposit date is 15 September and the return date is 18 September under rule 18(9). **Case A, late return only.** Tax is paid on 15 September, but the return is filed on 22 September. 1. Filed within ten days, so the per-day penalty applies. 2. The Act does not say whether "due date" here means the 15th in section 2(9) or the 18th filing date in rule 18(9). Counting from the 18th: 4 days x Rs. 2,000 = Rs. 8,000. Counting from the 15th: 7 days x Rs. 2,000 = Rs. 14,000. **Case B, tax paid late.** The return is filed on time, but the Rs. 3,000,000 is paid on 25 October. 1. Paid more than ten days late, so serial 5 applies: higher of Rs. 50,000 or 5% x Rs. 3,000,000 = Rs. 150,000. Penalty: Rs. 150,000. 2. Default surcharge period, reading section 34(2)(b) as starting on 16 September: 16 to 30 September (15 days) plus 1 to 24 October (24 days) = 39 days. 3. At the 12% floor, on a 365-day year: Rs. 3,000,000 x 12% x 39 / 365 = Rs. 38,466 (rounded). 4. If KIBOR plus 3% is above 12% for the period, that higher rate applies instead. KIBOR is not stated in the Act, and the Act does not state a day-count basis. ### What if ...? **What if the mill is short of cash because its refund is stuck?** Neither serial 5 of the section 33 Table nor section 34 contains an exception for a registered person who is waiting for a refund. Section 34(1) applies to tax not paid in time "whether wilfully or otherwise". **What if the mill claimed input tax that was not admissible?** Section 34(2)(a) counts default surcharge from the date the credit was adjusted or the refund received. **What if the officer asks for a missing return?** Section 26(2A) lets an officer of Inland Revenue require it within fifteen days of a notice, or another period the notice allows. ### Common mistakes - **Treating an extension as stopping default surcharge.** Section 26AB(5) says it does not. - **Filing the return but paying later.** The return being on time does not avoid the serial 5 penalty or default surcharge. - **Counting default surcharge as part of the penalty base.** The Explanation to section 34 says tax due does not include penalty. ### What to check in the official text Read sections 2(9), 26, 26AB, 33 (serials 1 and 5) and 34 of the Sales Tax Act and rule 18 of the Sales Tax Rules. The current KIBOR, any Board notification changing due dates, and any notification exempting persons from penalty or default surcharge are not held in this corpus. ### Frequently asked #### What is the penalty for a sales tax return filed late? Serial 1 of the Table in section 33 sets a penalty of fifty thousand rupees for failing to furnish a return within the due date. If the return is filed within ten days of the due date, the penalty is two thousand rupees for each day of default. Both amounts were set by the Finance Act, 2026. #### What is the default surcharge rate on late sales tax? Section 34(1)(a) sets default surcharge at twelve percent per annum or KIBOR plus three percent per annum, whichever is higher, on the amount of tax due. Where the default is on account of tax fraud, section 34(1)(c) sets two per cent per month instead. #### Does an extension of time to file the return stop default surcharge? No. Section 26AB(5) says an extension granted by the Commissioner or Chief Commissioner shall not, for default surcharge under section 34, change the due date for payment of sales tax. #### Is a first-time calculation mistake penalised? The second proviso to serial 5 of the section 33 Table says no penalty shall be imposed when any miscalculation is made for the first time during a year. Default surcharge on any tax short paid is a separate charge under section 34. ### Citations - [Sales Tax Act, 1990, section 26 (* Return)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#26-return), as amended to 2026-06-30: "indicating the purchases and the supplies made during a tax period, the tax due and paid and such other information, as may be prescribed" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“due date” in relation to the furnishing of a return" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 18 (Electronic filing of Sales Tax return)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#18-electronic-filing-of-sales-tax-return), as amended to 2025-06-30: "In cases where due date has been prescribed as 15th of a month, the tax due shall be deposited by the 15th and the return shall be submitted electronically by 18th of the same month." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, Section 33, Table, serial numbers 1 and 5 (failure to furnish a return within the due date; failure to deposit tax due in time)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 34 (Default Surcharge)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#34-default-surcharge), as amended to 2026-06-30: "the period of default shall be reckoned from the 16th day of a month (following the due date of the tax period to which the default relates) to the day preceding the date on which the tax due is actually paid." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Section 26AB, Extension of time for furnishing returns (printed within section 26 in the site text)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30: "shall not, for the purpose of charge of default surcharge under section 34, change the due date for payment of sales tax under section 6." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Is sales tax charged when a mill imports new machinery, and can it be claimed back? Source: https://qanoondigest.com/faq/textile-manufacturers/sales-tax-on-imported-textile-machinery Law current to: 30 June 2026 (Sales Tax Act), 30 June 2023 (Customs Rules). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 3 of the Sales Tax Act charges 18 percent on goods imported into Pakistan, and the general machinery entries in Table-3 of the Sixth Schedule were omitted in 2022. A registered mill holding the goods declaration can claim the tax as input tax under section 7, and section 8B's 90 percent cap does not apply to capital goods. **Applies to:** Sales tax registered spinning, weaving, processing and garment units that import plant, machinery or spares for their own factories. A mill importing ring frames, air-jet looms or a stenter pays sales tax at import like any other importer, unless an exemption entry fits. For a registered mill that tax is not a final cost: it is input tax, and the 90 percent cap that squeezes monthly input tax does not apply to it. ### What does the law say? **The charge.** Section 3(1) levies sales tax at eighteen per cent of the value of taxable supplies and, under clause (b), of goods imported into Pakistan, irrespective of their final destination in Pakistan. Machinery is not treated differently from other goods unless a schedule says so. Section 3(3)(b) puts the liability to pay on the person importing the goods. **The exemption that used to exist.** Table-3 of the Sixth Schedule exempts plant, machinery, equipment and apparatus listed in its Annexure. Serial numbers 1 to 9, 11, 13 to 15B and 17 of that Annexure were omitted by the Finance (Supplementary) Act, 2022. The entries left in the 30 June 2026 text cover: | Serial | What it covers | |---|---| | 12 | Machinery for hotels, power, water treatment and infrastructure projects within 30 km of the zero point in Gwadar | | 18 | Parts for assembling computers and laptops | | 19 | Plant and machinery for Special Economic Zones, by zone developers and zone enterprises, on one time basis | | 20 | Plant and machinery for electric vehicle assembly or manufacture | | 22 | Machinery for certain power generation projects with implementation agreements signed before 15 January 2022 | | 23 | Machinery for upgrading existing refineries | | 24 | Imports by Karachi Shipyard and Engineering Works Limited | None of these is a textile entry. A mill outside those zones and projects has no Table-3 route. **Claiming it back.** Section 7(1) lets a registered person deduct input tax from output tax. For imports, section 7(2)(ii) requires the person to hold a bill of entry or goods declaration "in his name and showing his sales tax registration number", cleared by customs. **The 90 percent cap.** Section 8B(1) normally stops a registered person adjusting input tax above 90 percent of output tax in a tax period. Its first proviso says this restriction "shall not apply in case of fixed assets or Capital goods". ### How does it work in practice? - **At the port:** the mill pays 18 percent sales tax on the import value, along with customs duty. Customs duty rates are in the Customs Tariff, which is not in this corpus. - **Value addition tax:** the Twelfth Schedule normally adds a 3 percent value addition tax at import. Clause (x) of paragraph (2) of its procedure excludes "plant, machinery and equipment falling in Chapters 84 and 85" imported by a manufacturer "for in-house installation or use". - **In the monthly return:** the sales tax paid at import is claimed as input tax, shown as capital goods, and is not squeezed by the 90 percent limit. - **EFS users:** serial 162 of Table-1 of the Sixth Schedule exempts import of plant and machinery by registered persons authorized under the Export Facilitation Scheme, 2021, on Board conditions. Rule 881 of the Customs Rules lets an authorized user acquire plant, machinery and spares with the Regulatory Collector's authorization. ### Worked example (illustrative figures) A registered spinning mill in Multan, not under EFS, imports new ring frames in October. 1. Value of the ring frames for sales tax at import: Rs. 60,000,000. 2. Sales tax at 18%: 18% x Rs. 60,000,000 = Rs. 10,800,000, paid at import under section 3(1)(b). 3. Value addition tax: nil, if the frames fall in Chapter 84 and are for in-house installation (Twelfth Schedule, paragraph (2)(x)). 4. October output tax on yarn sales: Rs. 9,000,000. Other input tax (cotton, electricity, gas): Rs. 8,500,000. 5. The 90% cap applies to the ordinary input tax: 90% x Rs. 9,000,000 = Rs. 8,100,000. 6. The Rs. 10,800,000 on the ring frames is capital goods input tax, which the first proviso to section 8B(1) keeps outside that cap. The Act does not set out the exact order in which capital goods input tax and other input tax are combined in the return; the return form in the Sales Tax Rules does that. ### What if ...? **What if the mill is in a Special Economic Zone?** Serial 19 of the Table-3 Annexure exempts plant and machinery (except Chapter 87 items) imported for setting up a Special Economic Zone and installed by zone enterprises, on one time basis, as prescribed in the SEZ Act, 2012. **What if the mill is an EFS user and sells the machinery after two years?** Rule 881(2) requires plant, machinery and equipment to be kept for five years. Disposal before three full years pays full duty and taxes leviable at import, then 75 percent between three and four years, 50 percent between four and five years, and nil after five years. Spares have a two year retention period. **What if the mill is not registered for sales tax?** Section 7 input tax is only available to a registered person, so the import tax stays a cost. ### Common mistakes - **Relying on an old Table-3 entry.** The general entries were omitted in 2022. Check the current Annexure. - **Applying the 90 percent cap to machinery.** Section 8B(1) excludes fixed assets and capital goods. - **Importing in someone else's name.** Section 7(2)(ii) needs the goods declaration in the claimant's own name with its registration number. ### What to check in the official text Read sections 3, 7 and 8B of the Sales Tax Act, Table-3 and Table-1 (serial 162) of the Sixth Schedule, and paragraph (2)(x) of the Twelfth Schedule. EFS users should also read rule 881 of the Customs Rules. Customs duty rates, Board conditions for serial 162 and any SROs on machinery are not held in this corpus. ### Frequently asked #### Is there still a general sales tax exemption for industrial machinery? Not in Table-3 of the Sixth Schedule as it stands on 30 June 2026. Serial numbers 1 to 9, 11, 13 to 15B and 17 of its Annexure were omitted by the Finance (Supplementary) Act, 2022, and the entries that remain are tied to specific projects, zones and industries, none of them textile. #### Does the 90 percent input tax cap apply to machinery? No. The first proviso to section 8B(1) says the restriction on adjusting input tax above ninety percent of output tax shall not apply in case of fixed assets or capital goods. #### Is the 3 percent value addition tax charged on imported machinery? No, if the conditions fit. Clause (x) of paragraph (2) of the Twelfth Schedule excludes plant, machinery and equipment falling in Chapters 84 and 85 of the Customs Tariff that a manufacturer imports for in-house installation or use. #### Can an EFS user import machinery without sales tax? Serial 162 of Table-1 of the Sixth Schedule covers import of plant and machinery by registered persons authorized under the Export Facilitation Scheme, 2021, subject to Board conditions. Rule 881 of the Customs Rules requires the machinery to be kept for five years, with duty and taxes payable on a sliding scale if disposed of earlier. ### Citations - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "Subject to the provisions of this Act, there shall be charged, levied and paid a tax known as sales tax at the rate of" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 7 (Determination of tax liability)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#7-determination-of-tax-liability), as amended to 2026-06-30: "he holds bill of entry or goods declaration in his name and showing his sales tax registration number" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8B (Adjustable input tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8b-adjustable-input-tax), as amended to 2026-06-30: "the restriction on the adjustment of input tax in excess of ninety percent of the output tax, shall not apply in case of fixed assets or Capital goods" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Sixth Schedule, Table-3 and its Annexure (serial numbers 1 to 9, 11, 13 to 15B and 17 omitted by Finance (Supplementary) Act, 2022), and Table-1, serial number 162 (EFS imports)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Twelfth Schedule, Procedure and conditions, paragraph (2), clause (x) (plant, machinery and equipment excluded from value addition tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Customs Rules, 2001, section 881 (Acquisition of plant, machinery and spares)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#881-acquisition-of-plant-machinery-and-spares), as amended to 2023-06-30: "The user shall be allowed to acquire plant, machinery, equipment and spares required for the manufacture of output goods by the authorizeduser under these rules" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf --- ## How is sales tax charged when a unit dyes, processes or weaves someone else's yarn or fabric on conversion charges? Source: https://qanoondigest.com/faq/textile-manufacturers/toll-manufacturing-sales-tax-conversion-charges Law current to: 30 June 2026 (Sales Tax Act) and 30 June 2025 (Sales Tax Rules). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 2(17) of the Sales Tax Act counts a unit as a manufacturer even when it does not own the raw material, and section 2(33)(d) makes delivering the processed goods back to the owner a supply. Since the Finance Act, 2026, serial number 14 of the Eleventh Schedule also requires withholding on conversion charges. **Applies to:** Dyeing, processing, sizing, weaving and finishing units that work on yarn or fabric owned by someone else for a conversion charge, and the mills and exporters that send goods to them. A great deal of textile work in Pakistan is done on goods the worker does not own. A sizing unit in Faisalabad sizes a weaver's yarn, a shed weaves a mill's yarn into greige cloth, and a processing house dyes and finishes an exporter's fabric, charging only for the work. The Sales Tax Act, 1990 has specific wording for this arrangement, and the Finance Act, 2026 added a withholding entry for it. ### Is a unit that works on someone else's goods a manufacturer? Yes. Section 2(17) defines a "manufacturer" or "producer" as a person engaged in the production or manufacture of goods "whether or not the raw material of which the goods are produced or manufactured are owned by him". It also includes a person who by any process or operation "prepares goods by any other manner". Section 2(16) says "manufacture" includes any process in which an article is converted into another distinct article, or is so changed, transformed or reshaped that it can be put to use differently or distinctly, and any process incidental or ancillary to completing a manufactured product. Weaving yarn into cloth, or dyeing and finishing greige fabric, is the kind of process that definition describes. So a processing unit does not escape being a manufacturer because the yarn or fabric on its floor belongs to a customer. ### When is there a supply? Ordinarily a supply under section 2(33) is a sale or other transfer of the right to dispose of goods as owner. A processing unit never owns the customer's fabric, so that part of the definition would not reach it. Section 2(33)(d), added by the Finance Act, 2015, closes the gap. It includes as a supply, "in case of manufacture of goods belonging to another person, the transfer or delivery of such goods to the owner or to a person nominated by him". The taxable event is therefore the moment the processed goods go back to the owner, or to someone the owner names, such as a stitching unit or a freight forwarder. Section 3(1)(a) then charges sales tax at eighteen per cent of the value of taxable supplies made by a registered person in the course or furtherance of any taxable activity. ### What is the value of that supply? The Act has no valuation rule written specifically for toll manufacturing. The general definition in section 2(46)(a) takes the value of a taxable supply as the consideration in money, including federal and provincial duties and taxes, that the supplier receives from the recipient for that supply, excluding the tax itself. In a conversion arrangement the money the processing unit receives from the owner is its conversion charge. Section 2(46)(c) provides that where, because of the special nature of a transaction, it is difficult to ascertain the value, the open market price applies. Section 3(1A) adds further tax at four per cent of the value where taxable supplies are made to a person who has not obtained a registration number or is not an active taxpayer. The sub-section lets the Federal Government exclude supplies from further tax by notification. ### What does the new Eleventh Schedule entry add? Section 3(7) requires tax to be withheld at the rate in the Eleventh Schedule by a person, being a purchaser of goods or services, "as withholding agent for the purpose of depositing the same". The Finance Act, 2026 added serial number 14 to the Schedule's Table: | Column | Entry for S. No. 14 | |---|---| | Withholding agent | Registered persons engaged in toll manufacturing | | Supplier category | Person other than registered person | | Rate or extent of deduction | Four times of the tax charged on conversion charges | Clause (viii) after the Table excludes supplies made by an active taxpayer to another registered person, except the supplies at serial numbers 5, 7, 9, 10, 11, 12 and 13. Serial number 14 is not in that exception list, but its supplier category is a person who is not registered, so clause (viii) does not describe the same supplies. The Schedule does not say which side of a toll arrangement the unregistered person sits on, does not define "conversion charges", and does not explain how "the tax charged" is measured where the supplier is unregistered and does not charge tax. The text alone does not settle how the entry is applied. The procedure rules for withholding agents, rules 150ZZH to 150ZZK of the Sales Tax Rules, 2006, are in this corpus only as amended to 30 June 2025, before serial number 14 existed. Rule 150ZZI requires a withholding agent to deduct the Schedule amount, deposit it with its monthly return if registered, and issue the supplier a certificate. Its proviso bars the agent from claiming the withheld tax as input tax. ### Worked example (illustrative figures) A registered processing unit in Faisalabad dyes 40,000 metres of greige fabric owned by a registered, active exporter in Lahore. It charges a conversion charge of Rs. 800,000 and delivers the dyed fabric to the exporter's stitching contractor, whom the exporter has nominated. 1. **Is there a supply?** Yes. Under section 2(33)(d), delivery to a person nominated by the owner is a supply. 2. **Value.** Under section 2(46)(a), the consideration in money the unit receives is Rs. 800,000. 3. **Tax at section 3(1).** Rs. 800,000 x 18% = Rs. 144,000. 4. **Invoice total.** Rs. 800,000 + Rs. 144,000 = Rs. 944,000. If the owner were not registered, section 3(1A) would add further tax of Rs. 800,000 x 4% = Rs. 32,000, bringing the tax to Rs. 176,000, unless a notification excludes the supply. No figure is shown for serial number 14, because the Schedule does not give enough to calculate it with confidence. ### Common mistakes - **Treating job work as outside sales tax because the goods are not owned.** Section 2(17) and section 2(33)(d) are written to cover exactly this case. - **Assuming the income tax and sales tax rules are the same.** Income tax deduction on toll manufacturing falls under the Income Tax Ordinance, 2001, which is a separate law with its own rates. - **Claiming withheld tax as input tax.** The proviso to rule 150ZZI(2) bars the withholding agent from doing so. - **Assuming a sub-contracting mill is a manufacturer-cum-exporter for refunds.** The proviso to section 2(17) says that for refunds only a person who owns or has his own manufacturing facility to make the exported goods is treated as a manufacturer-cum-exporter. ### What to check in the official text - Section 2, clauses (16), (17), (33) and (46), and section 3(1), (1A) and (7) of the Sales Tax Act, 1990. - The Eleventh Schedule, serial number 14 and clauses (i) to (ix) after the Table. - Rules 150ZZH to 150ZZK of the Sales Tax Rules, 2006, and any later amendment covering serial number 14, which this corpus does not hold. - Any notification under section 3(1A) or the proviso to section 2(33) about toll or conversion supplies, and any zero-rating notification for supplies to exporters. None is in this corpus. ### Frequently asked #### Is a dyeing unit a manufacturer if the fabric belongs to its customer? Yes. Section 2(17) of the Sales Tax Act defines a manufacturer as a person engaged in manufacture whether or not the raw material is owned by him, and section 2(16) includes processes that change or transform an article. Ownership of the fabric does not decide the question. #### When does the processing unit make a taxable supply? Section 2(33)(d) says that where goods belonging to another person are manufactured, their transfer or delivery to the owner, or to a person the owner nominates, is a supply. Section 3(1)(a) charges tax on taxable supplies made by a registered person in the course of taxable activity. #### What does the new toll manufacturing withholding entry require? Serial number 14 of the Eleventh Schedule, added by the Finance Act, 2026, names registered persons engaged in toll manufacturing as withholding agents, the supplier as a person other than a registered person, and the deduction as four times the tax charged on conversion charges. The Act does not define conversion charges or explain how the entry is calculated. ### Citations - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "in case of manufacture of goods belonging to another person, the transfer or delivery of such goods to the owner or to a person nominated by him" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "means a person who engages, whether exclusively or not, in the production or manufacture of goods whether or not the raw material of which the goods are produced or manufactured are owned by him" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "as withholding agent for the purpose of depositing the same" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Eleventh Schedule, Table, S. No. 14 (Registered persons engaged in toll manufacturing) and clause (viii) after the Table](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 150ZZI (Responsibility of a withholding agent)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zzi-responsibility-of-a-withholding-agent), as amended to 2025-06-30: "Provided that the withholding agent shall not be entitled to reclaim or deduct the amount of tax withheld from such persons as input tax." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf --- ## What sales tax rate applies to yarn and fabric today, and is any textile supply still zero-rated? Source: https://qanoondigest.com/faq/textile-manufacturers/sales-tax-rate-textiles-zero-rating Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 3(1) of the Sales Tax Act, local supplies of yarn and fabric by a registered mill are taxed at the standard 18 percent of value. Section 4 zero-rates exported goods and Fifth Schedule supplies only. The Act's schedules as amended to 30 June 2026 carry no reduced rate or zero rate for local textile supplies. **Applies to:** Spinning, weaving, processing and garment units that sell yarn, fabric or made-ups in Pakistan or export them. A registered mill selling yarn or fabric inside Pakistan charges sales tax at 18 percent of the value of supply. Exports are the main textile supply still charged at zero percent. In the Act as amended to 30 June 2026, the Fifth Schedule (zero rating) and the Eighth Schedule (reduced rates) contain no entry for local supplies of yarn or fabric. ### What does the law say? **The standard rate.** Section 3(1) of the Sales Tax Act, 1990 charges sales tax "at the rate of eighteen per cent of the value" of taxable supplies made by a registered person in the course of a taxable activity, and on imports. The word "eighteen" was substituted for "seventeen" by the Finance (Supplementary) Act, 2023. **Further tax on unregistered buyers.** Section 3(1A) adds further tax at four percent of the value where taxable supplies are made to a person who has not obtained a registration number or is not an active taxpayer. It is in addition to the rates under section 3(1) and section 4, and the Federal Government may by notification specify supplies on which it is not charged. **Zero rating.** Section 4 says that "notwithstanding the provisions of section 3", listed goods "shall be charged to tax at the rate of zero per cent". Clause (a) is "goods exported, or the goods specified in the Fifth Schedule". The proviso takes out goods exported but intended to be re-imported, goods entered for export but not exported, and exports to a country the Federal Government specifies. A further proviso lets the Federal Government restrict input tax credit claimed by a person making zero-rated supplies. **Exemption.** Section 13(1) exempts supplies and imports in the Sixth Schedule. ### What is in the Fifth Schedule today? The live entries in the Fifth Schedule, as amended to 30 June 2026, are: | Serial | Entry, in short | |---|---| | 2 | Supplies to diplomats, diplomatic missions and privileged persons and organisations | | 5 | Raw materials, components and goods for further manufacture in Export Processing Zones | | 7 | Supplies to exporters under the Duty and Tax Remission Rules, 2001, subject to their conditions | | 8 | Imports or supplies to Gwadar Special Economic Zone | | 8A | Imports or supplies for a qualified investment under the Foreign Investment (Promotion and Protection) Act, 2022 | | 12(xxiii) | Exercise books, and their inputs, subject to conditions | | 13 and 14 | Inputs for manufacture in Gwadar Free Zone, and plant and machinery supplied to manufacturers there | | 20 | Petroleum crude oil | None is a general entry for yarn, fabric or made-ups sold locally. Serials 5 and 7 can reach textile inputs, but only when the supply is to an EPZ unit or to an exporter under the Duty and Tax Remission Rules, 2001, which are not in this corpus. The only textile-related entries found in the other schedules are narrow: the Eighth Schedule, serial 23, charges second hand and worn clothing (heading 6309.0000) at 5 percent, and Table-4 of the Sixth Schedule exempts listed goods, including sewing and embroidery thread, only when supplied within Border Sustenance Markets with Iran and Afghanistan. ### What happened to the old zero-rated textile regime? The Act itself does not describe it. The only trace found in this corpus is a footnote to rule 34 of the Sales Tax Rules: rule 34(1)(a) once let "persons making supplies under Notification No. S.R.O. 1125(I)/2011" claim refunds, and that expression was omitted by S.R.O. 918(I)/2019 dated 7 August 2019. SRO 1125(I)/2011 itself is not held in this corpus, so its terms and its withdrawal are not covered here. ### Worked example (illustrative figures) A registered weaving mill in Faisalabad has these supplies in one month: | Supply | Value | Rate | Tax | |---|---|---|---| | Grey cloth to a registered processing mill | Rs. 5,000,000 | 18% | Rs. 900,000 | | Grey cloth to an unregistered cloth trader | Rs. 1,000,000 | 18% + 4% | Rs. 220,000 | | Grey cloth exported to a buyer abroad | Rs. 8,000,000 | 0% | Rs. 0 | | **Total output tax** | | | **Rs. 1,120,000** | Working: Rs. 5,000,000 x 18% = Rs. 900,000. Rs. 1,000,000 x 18% = Rs. 180,000, plus Rs. 1,000,000 x 4% = Rs. 40,000, total Rs. 220,000. The export is charged at zero percent under section 4(a). On each invoice for yarn or fabric, section 23(1)(d) requires the description to include "count, denier and construction". ### Common mistakes - **Treating local supplies to an exporter as zero-rated.** Section 4 covers goods exported. A local supply to an exporter is zero-rated only if it fits a Fifth Schedule entry, such as serial 7 with its conditions. - **Forgetting the further tax.** Supplies to unregistered buyers carry the extra four percent unless a notification excludes them. - **Relying on an old SRO.** Rates set by notification change often; check the current SRO, which this corpus does not hold. ### What to check in the official text Read section 3(1), (1A), (2)(b) and (6), section 4 and section 13 with the Fifth, Sixth and Eighth Schedules in the source PDF, and section 23 for invoice contents. Any SRO under section 3(2)(b), 3(6), 4(c) or 13(2)(a) affecting textiles is outside this corpus and should be checked separately. ### Frequently asked #### Is local sale of grey cloth zero-rated? Not under the Act as amended to 30 June 2026. Section 4(a) zero-rates goods exported and goods in the Fifth Schedule, and the Fifth Schedule has no entry for local supplies of yarn or fabric. A local sale by a registered mill falls under the 18 percent rate in section 3(1). #### Are textile exports still zero-rated? Yes. Section 4(a) charges goods exported at zero percent, subject to its proviso excluding goods intended to be re-imported, goods entered for export but not exported, and exports to countries the Federal Government notifies. #### What extra tax applies when a mill sells fabric to an unregistered buyer? Section 3(1A) charges further tax at four percent of value, in addition to the normal rate, on taxable supplies to a person without a registration number or who is not an active taxpayer. The Federal Government may exclude supplies from this by notification. #### Could an SRO set a lower rate for textiles? Section 3(2)(b), 3(6) and 13(2)(a) let the Federal Government or the Board set other rates or exemptions by notification. No such SRO is held in this corpus, so this page cannot say whether one currently applies. ### Citations - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "Subject to the provisions of this Act, there shall be charged, levied and paid a tax known as sales tax at the rate of" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 4 (Zero rating)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#4-zero-rating), as amended to 2026-06-30: "goods exported, or the goods specified in the Fifth Schedule" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Fifth Schedule (see section 4), serial numbers 2, 5, 7, 8, 8A, 12(xxiii), 13, 14 and 20; Sixth Schedule, Table-4; Eighth Schedule, Table-1, serial 23](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 13 (Exemption)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#13-exemption), as amended to 2026-06-30: "supply of goods or import of goods specified in the Sixth Schedule shall, subject to such conditions as may be specified by the" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "including count, denier and construction in case of textile yarn and fabric," Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 34 (Refund of excess input tax not relating to zero-rated supplies)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#34-refund-of-excess-input-tax-not-relating-to-zero-rated-supplies), as amended to 2025-06-30: "may claim refund of excess input tax over output tax in any tax period;" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf --- ## Does a factory or manufacturing unit have to register for sales tax, and what does FBR ask a manufacturer for at registration? Source: https://qanoondigest.com/faq/textile-manufacturers/sales-tax-registration-for-manufacturers Law current to: 30 June 2026 (Act), 30 June 2025 (Rules). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 14(1)(a) of the Sales Tax Act requires every manufacturer not running a cottage industry to register, with no turnover threshold. Rule 5 of the Sales Tax Rules asks a manufacturer for GPS-tagged photos of machinery and the industrial meter, biometric verification at NADRA, and allows FBR to verify the unit before or after registration. **Applies to:** People setting up or running a spinning, weaving, processing or garment unit, or any other factory, in Pakistan. Every factory that makes goods in Pakistan has to register for sales tax unless it qualifies as a cottage industry. There is no turnover threshold for a manufacturer, and registration comes before the first taxable supply. The Sales Tax Rules then add manufacturer-specific steps: photographs of machinery and the industrial meter, NADRA biometric checks, and possible field verification. ### What does the law say? Section 14(1) of the Sales Tax Act, 1990 says every person making taxable supplies in Pakistan, including zero-rated supplies, in the course of a taxable activity, who falls in any listed category, "is required to be registered". The first category is "a manufacturer who is not running a cottage industry". Other categories include importers, exporters who want sales tax refunds against zero-rated supplies, and wholesalers, dealers and distributors. Section 2(17) defines a manufacturer widely. It covers a person who engages in production or manufacture "whether or not the raw material of which the goods are produced or manufactured are owned by him", and includes anyone who assembles, mixes, cuts, packages or prepares goods. A dyeing or stitching unit working on a customer's cloth is therefore within the words of the definition. The only exit from section 14(1)(a) is the cottage industry definition in section 2(5AB), which needs all four of its conditions to be met, including no industrial gas or electricity connection. ### What does FBR ask a manufacturer for at registration? Rule 5(1) of the Sales Tax Rules, 2006 requires the application to be made on the computerized system in Form STR-1 "before making any taxable supplies". For a company primarily engaged in manufacture (other than a public limited company, which registers where its registered office is), the jurisdiction is where the factory is. For an unincorporated person with a single manufacturing unit located away from the business premises, it is where the manufacturing unit is. Rule 5(2) lists what the applicant uploads: | Item | Who | |---|---| | Bank account certificate in the name of the business | All applicants | | Registration or consumer number with the gas and electricity supplier | All applicants | | Particulars of all branches | Where there are branches | | GPS-tagged photographs of the business premises | All applicants | | GPS-tagged photographs of machinery and the industrial electricity or gas meter installed | Manufacturers | | Balance sheet showing business capital, assets and liabilities | Individuals, AOPs and single-member companies, other than manufacturers | After registration, rule 5(4) requires a visit to a NADRA e-Sahulat Centre within a month for biometric verification. Failure takes the person off the sales tax Active Taxpayer List. Individuals, AOP members and directors of single-member companies must also re-verify every July. Rule 5(5) adds that for a manufacturer, the Board "may require pre-verification or post-verification or both" through field offices or an authorised third party. Rule 5(6) lets the field office ask for a missing or doubtful document, to be provided within fifteen days. ### What if the machinery is not installed yet? Rule 5A covers a person applying as a manufacturer "without having installed machinery", for the purpose of importing it. Temporary registration is allowed for sixty days on furnishing the full machinery list with the Bill of Lading or Goods Declaration, and the system issues it within seventy-two hours. During that period the person files monthly returns but may not issue sales tax invoices, and no refund is paid; input tax is carried forward. If the rule 5(2) requirements are not met within sixty days, the temporary registration is disabled and post-dated cheques given to customs are encashed. ### Worked example (illustrative figures) Imran and his brother form a partnership to run a 24-loom weaving shed on the Sargodha Road in Faisalabad, with an industrial electricity connection. 1. They are a manufacturer under section 2(17). The industrial connection alone fails condition (a) of the cottage industry definition, so section 14(1)(a) applies whatever their turnover. 2. As an unincorporated person, they apply in Form STR-1 in the jurisdiction where the business is carried on, before their first sale of greige cloth. 3. They upload the bank certificate, electricity and gas consumer numbers, and GPS-tagged photographs of the shed, the looms and the industrial meter. 4. Within a month, a partner completes biometric verification at NADRA. 5. FBR may send a field team to verify the looms before or after registration. ### What if a factory does not register? Section 14(2A) and rule 6 allow the Commissioner, after inquiry, to register the person compulsorily. Rule 6 sets the process: a notice in Form STR-6, a personal hearing if the person contests, then an order. If the person does not reply within the time given, registration is made through the system with intimation by courier. From that date the person must comply with the Act and rules. If it later turns out the person was not liable, rule 6 requires the registration to be cancelled. Section 14 also carries two further measures. Section 14AB lets the Board direct gas and electricity companies to discontinue the connections of any person who fails to register. Section 14AC allows the Commissioner to suspend and then bar operation of bank accounts of an unregistered supplier after three hearing opportunities, but it states that it comes into force on a date the Board notifies. ### Common mistakes - **Waiting for turnover to grow.** Section 14(1)(a) has no threshold for a manufacturer. - **Assuming job work is not manufacturing.** Section 2(17) applies whether or not the raw material is owned by the unit. - **Treating registration as the last step.** Biometric verification under rule 5(4) must follow within a month, or the Active Taxpayer List status is lost. ### What to check in the official text Read section 14 of the Sales Tax Act with the definitions in section 2(5AB) and 2(17), then rules 5, 5A and 6 of the Sales Tax Rules. The portal screens used to file Form STR-1 are not part of this corpus. ### Frequently asked #### Is there a turnover limit below which a factory need not register for sales tax? Section 14(1)(a) sets no turnover limit for a manufacturer. The only turnover figure is inside the cottage industry definition in section 2(5AB), which is one of four conditions a unit must meet together to fall outside section 14(1)(a). #### What does a manufacturer upload at sales tax registration? Rule 5(2) lists a bank account certificate in the business name, the gas and electricity consumer numbers, branch particulars, GPS-tagged photographs of the premises, and for a manufacturer, GPS-tagged photographs of the machinery and the industrial electricity or gas meter. #### Can I register before my imported machinery arrives? Rule 5A allows temporary registration as a manufacturer for sixty days to a person who has not yet installed machinery and wants to import it, on furnishing the machinery list with the Bill of Lading or Goods Declaration. If rule 5(2) is not completed within sixty days, the temporary registration is disabled. #### Does a job-work unit that processes other people's yarn count as a manufacturer? Section 2(17) defines a manufacturer as a person engaged in production or manufacture whether or not the raw material is owned by him. On those words, owning the yarn or fabric is not what decides whether a unit is a manufacturer. ### Citations - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "a manufacturer who is not running a cottage industry;" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "means a person who engages, whether exclusively or not, in the production or manufacture of goods whether or not the raw material of which the goods are produced or manufactured are owned by him" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 5 (46Application for registration)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#5-46application-for-registration), as amended to 2025-06-30: "in case of manufacturer, also the GPS-tagged photographs of machinery and industrial electricity or gas meter installed" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 5A (Temporary registration)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#5a-temporary-registration), as amended to 2025-06-30: "temporary registration as manufacturer shall be allowed to him for a period of sixty days" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 6 (62Compulsory registration)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#6-62compulsory-registration), as amended to 2025-06-30: "he shall issue notice to such person in the Form set out in Form STR-6." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf --- ## Why can FBR suspend or blacklist a manufacturer's sales tax registration, including for not integrating e-invoicing, and how is it restored? Source: https://qanoondigest.com/faq/textile-manufacturers/sales-tax-registration-suspension-blacklisting Law current to: 30 June 2026 (Sales Tax Act) and 30 June 2025 (Sales Tax Rules). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 21(2) of the Sales Tax Act lets the Commissioner suspend or blacklist a registered person for fake invoices, tax fraud, or, since the Finance Act, 2026, non-compliance with e-invoice integration under section 23(5) and (6) or monitoring under section 40C. A show cause notice follows within ten days, and the decision within thirty days of the reply. **Applies to:** Sales tax registered textile mills and other manufacturers, including those required to integrate electronic invoicing with FBR's system or to operate prescribed production monitoring. Suspension stops a registered mill from claiming input tax and refunds. It also stops its buyers from relying on its invoices. Blacklisting goes further and can reach invoices issued before the order. Section 21 of the Sales Tax Act, 1990 sets the grounds and the timeline. Rule 12 of the Sales Tax Rules, 2006 sets the procedure. ### What does the law say? Under section 21(2), where the Commissioner is satisfied that a registered person: - has issued fake invoices; - has committed non-compliance of sub-sections (5) and (6) of section 23 or section 40C; or - has otherwise committed tax fraud, he may issue an order of suspension and blacklisting, or suspend the registration, following the procedure the Board prescribes. The second ground was inserted by the Finance Act, 2026. **Section 23(5) and (6)** let the Board, by notification, require a person or class of persons to integrate their electronic invoicing system with the Board's Computerized System for real-time reporting of sales. A licensed integrator carries out that integration in the prescribed manner. **Section 40C** lets the Board specify registered persons or goods for electronic monitoring or tracking of production, sales, clearances and stocks. As substituted by the Finance Act, 2026, section 40C(2) says that from a prescribed date, taxable goods may not be removed or sold unless they carry tax stamps, banderoles, stickers or labels, or are monitored through a Production Monitoring System, video analytics or another prescribed mechanism. ### What grounds does rule 12 add? Rule 12(a)(i) lets the Commissioner suspend registration through the system, without prior notice and pending inquiry, where he is satisfied the person has issued fake invoices, evaded tax or committed tax fraud. The listed bases include: - non-existence at the given address; - refusing an authorised officer access to business premises, or refusing to furnish records; - activity more than 5 times the sum of capital and liabilities in the balance sheet; - purchases from or supplies to other suspended persons above the thresholds in paragraph (D); - not filing sales tax returns for three consecutive months, or filing null returns for six consecutive months. Under rule 12(a)(iii), a registered person who does not file a return for three consecutive months is suspended through the system without notice. Rule 12 in this corpus is current to 30 June 2025. It does not yet list the e-invoice ground added to section 21(2) in 2026. ### What is the timeline after suspension? | Step | Sales Tax Act, section 21(2A) | Sales Tax Rules, rule 12 | |---|---|---| | Show cause notice | within ten days of the suspension order | within seven days, or the suspension is void ab initio (rule 12(a)(vi), (vii)) | | Hearing | opportunity of hearing after reply | hearing within fifteen days of the notice | | Decision after reply | revoke, or appealable speaking order for blacklisting, within thirty days of the reply | revoke within thirty days of the reply (rule 12(a)(ix)) | | Outer limit for blacklisting | not stated | within ninety days of the notice of hearing, or the suspension becomes void (rule 12(b)(iii)) | The Act, amended by the Finance Act, 2025, says ten days for the show cause notice. The rules, last amended in April 2025, still say seven. The corpus does not reconcile the two figures. ### What does suspension or blacklisting do to refunds and buyers? - **The mill itself:** rule 12(a)(v) allows no input tax adjustment or refund during suspension. - **Its buyers:** section 21(3) says the mill's invoices are not entertained for buyers' refund or input tax credit during suspension. After blacklisting, buyers' claims on its invoices, before or after the blacklisting, are rejected through an appealable order after a hearing. - **Active status:** section 2(1A) excludes a blacklisted or suspended person from the definition of an active taxpayer. Under rule 12A, a non-active taxpayer may not file goods declarations for import or export, issue sales tax invoices, or claim input tax or refund. ### How is registration restored? - **Revocation of suspension:** after the reply and hearing, the Commissioner may revoke the suspension under section 21(2A) and rule 12(a)(ix). - **Suspension falling away:** under rule 12, the suspension is void if the show cause notice is late, or if no blacklisting order is made within ninety days of the notice of hearing. - **Appeal:** a blacklisting order is an appealable speaking order under section 21(2A) and rule 12(b)(i). - **Return to the active list:** the text headed 12B within rule 12A allows restoration as an active taxpayer. The person files the return or statement with any tax due, the RTO or LTO recommends restoration after any audit or investigation it needs, and the Board issues an order. ### Worked example (illustrative scenario) A composite mill in Sialkot is notified under section 23(5) to integrate its e-invoicing but does not do so. On 2 March 2027 the Commissioner suspends its registration. 1. Show cause notice: by 12 March under section 21(2A), or by 9 March under rule 12(a)(vi). 2. The mill replies on 20 March and integrates its system. 3. The Commissioner must revoke the suspension or issue a blacklisting order by 19 April 2027, within thirty days of the reply. 4. Between 2 March and revocation, the mill cannot claim refunds, and its buyers cannot use its invoices for input tax. ### Common mistakes - **Treating suspension as final.** It is an interim step with fixed deadlines, and a late notice voids it under rule 12. - **Assuming only fraud leads to suspension.** Since 2026, failure to integrate e-invoicing or to comply with section 40C monitoring is a listed ground. - **Ignoring return filing.** Three consecutive months of non-filing triggers system suspension under rule 12(a)(iii). ### What to check in the official text - Sections 21, 23(5) and (6), 40C and 2(1A) of the Sales Tax Act, 1990, as amended to 30 June 2026. - Rules 12 and 12A of the Sales Tax Rules, 2006, as amended to 30 June 2025. - The Board notification under section 23(5) naming your class of persons and its start date. It is not held in this corpus. ### Frequently asked #### Can my registration be suspended for not integrating e-invoicing? Yes, under the Act as amended by the Finance Act, 2026. Section 21(2) now names non-compliance with section 23(5) and (6), which cover integration of electronic invoicing with the Board's Computerized System through a licensed integrator, as a ground for suspension and blacklisting. #### How long does FBR have to decide after I reply to the show cause notice? Section 21(2A) requires the Commissioner to either revoke the suspension or issue an appealable speaking order for blacklisting within thirty days of receiving the reply. Rule 12(b)(iii) separately requires any blacklisting order within ninety days of the notice of hearing, failing which the suspension becomes void. #### Can I claim refunds while my registration is suspended? No. Rule 12(a)(v) says no input tax adjustment or refund is admissible to the registered person during the currency of suspension, and section 21(3) stops buyers using the suspended person's invoices for input tax or refund. ### Citations - [Sales Tax Act, 1990, section 21 (De-registration, blacklisting and suspension of registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#21-de-registration-blacklisting-and-suspension-of-registration), as amended to 2026-06-30: "has committed non-compliance of sub-sections (5) and (6) of section 23 or section 40C" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 23 (Tax Invoices)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#23-tax-invoices), as amended to 2026-06-30: "may require any person or class of persons to integrate their electronic invoicing system with the Board’s Computerized System for real time reporting of sales" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 40C (Monitoring or Tracking by Electronic or other means)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#40c-monitoring-or-tracking-by-electronic-or-other-means), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 12 (Blacklisting and suspension of registration)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#12-blacklisting-and-suspension-of-registration), as amended to 2025-06-30: "in case show cause notice is not issued within seven days of the order of suspension, the order of suspension shall become void ab-initio" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 12A (Non-active taxpayer)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#12a-non-active-taxpayer), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "who is blacklisted or whose registration is suspended" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## When a company or government buyer withholds one-fifth of the sales tax on my invoice, how do I account for it in my return? Source: https://qanoondigest.com/faq/textile-manufacturers/sales-tax-withheld-by-company-buyer Law current to: 30 June 2026 (Sales Tax Act) and 30 June 2025 (Sales Tax Rules). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 3(7) of the Sales Tax Act and the Eleventh Schedule let government bodies and companies withhold 1/5th of the sales tax shown on an active taxpayer's invoice. Under rule 150ZZJ, the supplier still declares the full supply in the monthly return and takes credit for the tax withheld, supported by the buyer's deduction certificate under rule 150ZZI. **Applies to:** Sales tax registered manufacturers, including textile mills and garment units, that supply goods to government departments, autonomous bodies, public sector organisations or companies acting as withholding agents. When a buyer acts as a sales tax withholding agent, the supplier does not receive the whole of the sales tax shown on its invoice. Part of it is deducted by the buyer and paid to the government directly. The supplier's job in the return is to declare the full supply and take credit for that deducted part. ### What does the law say? Section 3(7) of the Sales Tax Act, 1990 says tax "shall be withheld" at the rate in the Eleventh Schedule by persons purchasing goods or services, acting as withholding agents, in the manner the Board prescribes. The Eleventh Schedule Table sets the rates. The entries relevant to a manufacturer are: | S. No. | Withholding agent | Supplier | Deduction | |---|---|---|---| | 1 | Federal and provincial government departments, autonomous bodies, public sector organisations, and companies as defined in the Income Tax Ordinance, 2001 | Active taxpayers | 1/5th of sales tax as shown on invoice | | 2 | The same agents | Active taxpayer registered as a wholesaler, dealer or distributor | 1/10th of sales tax as shown on invoice | | 3 | Government departments, autonomous bodies and public sector organisations | Persons other than active taxpayers | Whole of the tax involved, or as applicable on gross value of supplies | | 4 | Companies, associations of persons and individuals as defined in the Income Tax Ordinance, 2001, excluding companies exporting surgical instruments | Persons other than active taxpayers | 5% of gross value of supplies | The Schedule then lists supplies to which withholding does not apply. For a manufacturer the key one is clause (viii): supplies made by an active taxpayer "to another registered person", except the supplies at serial numbers 5, 7, 9, 10, 11, 12 and 13. The other exclusions include electricity, natural gas, certain petroleum products, vegetable ghee and cooking oil, telecommunication services and Third Schedule goods. ### When does the 1/5th deduction actually arise? Reading serial number 1 with clause (viii), the 1/5th deduction falls on an active taxpayer's supplies to a withholding agent that is not itself a registered person. In practice that is most often a government department, autonomous body or public sector organisation, or a company that is not registered for sales tax. The Schedule does not list which buyers are registered, so the supplier has to know its buyer's status. ### How does the buyer handle the deduction? Rule 150ZZI of the Sales Tax Rules, 2006 sets out the withholding agent's side: - the agent's advertisement or notice for the purchase must say sales tax will be deducted; - the agent deducts the Schedule amount and pays the supplier the balance; - a registered agent deposits the amount with its own monthly return, and other agents deposit it by the 15th of the following month; - for government departments, the Drawing and Disbursing Officer shows the withheld amount on the bill and the accounting office credits it to the government; - the agent issues the supplier a certificate showing the supplier's name and registration number, the goods and the tax deducted. The same rule bars the agent from claiming the withheld amount as its own input tax. ### How does the supplier account for it in the return? Rule 150ZZJ has two requirements. The supplier issues a sales tax invoice for every taxable supply to a withholding agent, and it files the monthly return "taking due credit of the sales tax deducted by the withholding agent, in the manner as prescribed in the return". Under rule 150ZZK, the Commissioner checks that suppliers named in the agents' returns are filing and declaring those supplies. The exact return fields are part of the prescribed return form, which is not reproduced in this corpus. ### Worked example (illustrative figures) A Multan yarn mill, an active taxpayer, supplies cotton yarn worth Rs. 2,000,000 (excluding sales tax) to a public sector organisation that is not registered for sales tax. The standard rate under section 3(1) is eighteen per cent. 1. Sales tax on the invoice: Rs. 2,000,000 x 18% = Rs. 360,000. 2. Withheld by the buyer at 1/5th: Rs. 360,000 / 5 = Rs. 72,000. 3. Sales tax paid to the mill: Rs. 360,000 - Rs. 72,000 = Rs. 288,000. 4. Total paid to the mill: Rs. 2,000,000 + Rs. 288,000 = Rs. 2,288,000. 5. In its return the mill declares the Rs. 2,000,000 supply and Rs. 360,000 output tax, and takes credit for the Rs. 72,000 deducted, backed by the buyer's certificate. Rule 150ZZI's own illustration uses the same method, with an older seventeen per cent rate. ### What if I am not on the active taxpayers list? Then serial numbers 3 and 4 apply instead. A government department, autonomous body or public sector organisation withholds the whole of the tax involved, and a company, association of persons or individual withholds 5% of the gross value of supplies. Clause (viii) protects only an active taxpayer. ### Common mistakes - **Treating the withheld amount as a lost sale.** Rule 150ZZJ gives the supplier credit for it in the return. - **Assuming every company withholds.** Clause (viii) removes an active taxpayer's supplies to a registered person. - **Not collecting the certificate.** Rule 150ZZI(8) requires the agent to issue one, and it is the supplier's evidence of the deduction. ### What to check in the official text - Section 3(7) of the Sales Tax Act, 1990 and the Eleventh Schedule, including clauses (i) to (ix) after the Table. - Rules 150ZZI, 150ZZJ and 150ZZK of the Sales Tax Rules, 2006. - The current return form for where the credit is entered, which is not in this corpus. - Rule 150ZZH(1) says the chapter applies to supplies to withholding agents "for the purpose of deduction and deposit of sales tax by persons registered as exporters". Its reference to exporters is not explained in the Rules. ### Frequently asked #### Does every company buyer withhold 1/5th of my sales tax? No. Clause (viii) after the Eleventh Schedule Table excludes supplies made by an active taxpayer to another registered person, apart from serial numbers 5, 7 and 9 to 13. So an active manufacturer selling to a registered company is outside the 1/5th withholding on the text of the Schedule. #### Do I still show the full sales tax as output tax? Rule 150ZZJ requires the supplier to issue a sales tax invoice for every taxable supply to a withholding agent and to file the monthly return taking due credit of the tax deducted. The rule does not reduce the tax charged on the invoice; it gives credit for the part the buyer deducted and deposited. #### What proof do I need of the amount withheld? Rule 150ZZI(8) requires the withholding agent to issue a certificate showing the supplier's name and registration number, a description of the goods and the amount of sales tax deducted. ### Citations - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "at the rate as specified in the Eleventh Schedule, by any person or class of persons" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Eleventh Schedule, Table (S. Nos. 1 to 4) and exclusions (i) to (ix) after the Table](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 150ZZI (Responsibility of a withholding agent)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zzi-responsibility-of-a-withholding-agent), as amended to 2025-06-30: "A certificate showing deduction of sales tax shall be issued to the supplier by the withholding agent duly specifying the name and registration number of supplier, description of goods and the amount of sales tax deducted." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZZJ (Responsibility of the registered supplier)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zzj-responsibility-of-the-registered-supplier), as amended to 2025-06-30: "The registered supplier shall file monthly return as prescribed in Chapter II, taking due credit of the sales tax deducted by the withholding agent, in the manner as prescribed in the return." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZZK (Responsibility of the Commissioner)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zzk-responsibility-of-the-commissioner), as amended to 2025-06-30: "are filing returns under Chapter II, and are duly declaring the supplies made to withholding agents." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZZH (Application)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zzh-application), as amended to 2025-06-30: "for the purpose of deduction and deposit of sales tax by persons registered as exporters." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf --- ## How much income tax is deducted under section 153 when a manufacturer supplies goods, and is it minimum tax or adjustable? Source: https://qanoondigest.com/faq/textile-manufacturers/section-153-tax-on-supply-of-goods Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer For tax year 2027, Division III of Part III of the First Schedule sets the section 153 deduction on goods at 5% of the gross amount for a company and 5.5% for others, doubled under the Tenth Schedule off the active list. Section 153(3) makes it minimum tax, except for a company manufacturing the goods. **Applies to:** Resident suppliers of yarn, fabric, garments and other goods who are paid by a prescribed person, such as a company, the Federal Government or a large association of persons or individual. When a spinning mill sells yarn to a weaving company, the buyer does not pay the full invoice. It deducts income tax under section 153 of the Income Tax Ordinance, 2001 and pays that amount to the government in the mill's name. The Ordinance, amended to 30 June 2026, fixes the rates for tax year 2027, which covers payments from 1 July 2026 to 30 June 2027. ### What does the law say? Section 153(1)(a) requires every "prescribed person" paying a resident person for the sale of goods, including toll manufacturing, to deduct tax at the rate in Division III of Part III of the First Schedule. The deduction is made from the gross amount payable, including sales tax, and it applies to advances as well as full or part payments. It does not apply where payments are less than Rs. 75,000 in aggregate during a financial year. A "prescribed person" under section 153(7) includes the Federal Government, a company, an association of persons constituted by or under law, a non-profit organisation, and an association of persons or individual with turnover of one hundred million rupees or more in any preceding tax year. It also covers a sales tax registered person with turnover of one hundred million rupees or more in any preceding tax year. ### What are the rates for tax year 2027? Paragraph (1) of Division III sets these rates on payments for goods: | Supply | Company | Other than a company | |---|---|---| | Sale of goods other than toll manufacturing | 5% | 5.5% | | Toll manufacturing | 9% | 11% | | Sale of rice, cotton seed or edible oils | 1.5% | 1.5% | Rule 1 of the Tenth Schedule, given effect by section 100BA, increases the rate by one hundred percent where the recipient does not appear in the active taxpayers' list. Rule 10 lists the provisions this does not apply to, and section 153 is not among them. So for a supplier off the list, 5% becomes 10% and 5.5% becomes 11%. ### Is the deduction minimum tax or adjustable? Section 153(3) says the tax deductible under sub-section (1) is minimum tax on the income of a resident person. Its proviso then says tax deducted under clause (a) is not minimum tax where payments for sale or supply of goods are received by: - a company being a manufacturer of such goods; or - a public company listed on a registered stock exchange in Pakistan. For those two, the deduction is an ordinary tax credit. Section 168 treats tax deducted as tax paid, allows it as a credit against tax due for the tax year of deduction, and says any credit that cannot be used for the year is refunded to the taxpayer. For everyone else, including a trader, an individual or an association of persons running a weaving unit, the deduction is minimum tax. The Explanation to section 153(3) says the income it relates to "means the amount on which tax is deductible". Section 153(4) also allows a reduced-rate certificate, capped at eighty percent of the rate, only where the tax is not minimum. "Manufacturer" is defined in section 153(7) as a person engaged in production or manufacturing, including converting materials into a distinct article, or assembling, mixing, cutting or preparing goods. ### Worked example (illustrative figures) A Faisalabad spinning company, on the active taxpayers' list, supplies yarn it has spun to a garment exporter. The invoice is Rs. 5,000,000 plus Rs. 900,000 sales tax. 1. Gross amount payable, including sales tax: Rs. 5,000,000 + Rs. 900,000 = Rs. 5,900,000. 2. Rate for a company, sale of goods: 5%. 3. Tax deducted: Rs. 5,900,000 x 5% = Rs. 295,000. 4. Because the spinner is a company manufacturing the yarn, the Rs. 295,000 is not minimum tax and is credited against its tax for tax year 2027 under section 168. If the same yarn were supplied by a yarn trader operating as an individual, the rate would be 5.5%: Rs. 5,900,000 x 5.5% = Rs. 324,500, treated as minimum tax. If that trader were not on the active taxpayers' list, the rate would double to 11%: Rs. 5,900,000 x 11% = Rs. 649,000. ### What if the buyer is an exporter paying for processing? Payments by an exporter or export house for stitching, dyeing, printing, embroidery, washing, sizing and weaving services fall under section 153(2), at the rate in Division IV of Part III, not the goods rate. Toll manufacturing is covered by the separate higher rates in the table above. ### Common mistakes - **Applying the rate to the value before sales tax.** Section 153(1) uses the gross amount including sales tax. - **Assuming every manufacturer gets adjustable treatment.** The proviso to section 153(3) covers a company manufacturing the goods, not an individual or association of persons. - **Ignoring the active list.** Rule 1 of the Tenth Schedule doubles the rate for a supplier off the list. ### What to check in the official text - Section 153(1), (3), (4) and (7) of the Income Tax Ordinance, 2001. - First Schedule, Part III, Division III, paragraph (1). - Section 100BA and the Tenth Schedule, rules 1 and 10. - Section 168 for how the credit is applied. ### Frequently asked #### Is the 5% deducted from my yarn sales a final tax? Section 153(3) calls tax deductible under sub-section (1) minimum tax, not final tax. Its proviso says the deduction on sale or supply of goods is not minimum tax where the payment is received by a company that manufactures those goods, or by a listed public company. #### Is the rate applied to the amount including sales tax? Yes. Section 153(1) requires the deduction from the gross amount payable, including sales tax, if any, at the rate in Division III of Part III of the First Schedule. #### What rate applies if I am not on the Active Taxpayers List? Rule 1 of the Tenth Schedule increases the rate by one hundred percent for persons not appearing in the active taxpayers' list. Section 153 is not among the exceptions in rule 10, so 5% becomes 10% for a company and 5.5% becomes 11% for others. ### Citations - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "except where payment is less than seventy-five thousand Rupees in aggregate, during a financial year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), paragraph (1), clauses (a) and (b)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (Rate of deduction or collection of tax) and rule 10](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "The provisions of the Tenth Schedule shall have effect notwithstanding anything to the contrary contained in this Ordinance." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What tax does an exporter deduct when paying a unit for stitching, dyeing, printing, embroidery, washing, sizing or weaving? Source: https://qanoondigest.com/faq/textile-manufacturers/exporter-deduction-stitching-dyeing-weaving-services Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 153(2) of the Income Tax Ordinance requires an exporter or export house paying for stitching, dyeing, printing, embroidery, washing, sizing or weaving services to deduct tax at the rate in Division IV of Part III of the First Schedule. For tax year 2027 that rate is 1.25 percent, and section 153(3) makes it minimum tax. **Applies to:** Stitching, dyeing, printing, embroidery, washing, sizing and weaving units that do job work for exporters or export houses, and the exporters who pay them. Job-work units that stitch, dye, print, embroider, wash, size or weave for exporters sit in a separate withholding regime from ordinary service providers. The Income Tax Ordinance, 2001 gives these payments their own sub-section and their own rate. ### What does the law say? Section 153(2) requires every exporter or export house making a payment, in full or in part and including an advance, to a resident person for providing services of "stitching, dying, printing, embroidery, washing, sizing and weaving" to deduct tax at the time of payment. The tax is deducted from the gross amount payable, at the rate in Division IV of Part III of the First Schedule. Clause (3) of that Division sets the rate for section 153(2) at 1.25 percent. The Finance Act, 2026 substituted 1.25 percent for the earlier 1 percent. The Ordinance is amended to 30 June 2026, so 1.25 percent is the rate for tax year 2027, covering payments from 1 July 2026 to 30 June 2027. Section 153(7) lists "an exporter or an export house for the purpose of sub-section (2)" among the prescribed persons, which is how the exporter becomes a withholding agent for these payments. ### Is the deduction final, adjustable or minimum tax? Section 153(3) says tax deductible under sub-section (1) and sub-section (2) on the income of a resident person is minimum tax. The proviso that makes some section 153 deductions not minimum tax covers only clause (a) of sub-section (1), sale of goods by a manufacturer company or listed company, and clause (c) contracts by listed companies. Neither proviso mentions sub-section (2), so job-work payments from exporters stay minimum tax. The Explanation to section 153(3) says the income of the resident person means the amount on which tax is deductible under sub-section (1) or (2). This page does not go further into how minimum tax interacts with the unit's normal tax computation. That sits in other parts of the Ordinance. ### How does it work in practice? - **Who deducts.** Only an exporter or export house. A local brand or buying house that does not export is not covered by sub-section (2). - **Which services.** The seven listed services: stitching, dyeing, printing, embroidery, washing, sizing and weaving. Other services fall outside sub-section (2). - **When.** At the time the payment is made, including an advance payment. - **On what amount.** The gross amount payable. Section 153(2) does not say whether that includes any sales tax on the service. Section 153(1), by contrast, says expressly "(including sales tax, if any)". The corpus does not settle the point for sub-section (2). ### Worked example (illustrative figures) A dyeing and printing unit in Faisalabad processes fabric for an export house during October 2026. The export house pays Rs. 2,400,000 for the work. 1. Rate under clause (3) of Division IV of Part III for tax year 2027: 1.25 percent. 2. Tax deducted: Rs. 2,400,000 x 1.25 percent = Rs. 30,000. 3. Net paid to the dyeing unit: Rs. 2,400,000 - Rs. 30,000 = Rs. 2,370,000. If the dyeing unit is not on the active taxpayers' list, rule 1 of the Tenth Schedule increases the rate by one hundred percent of the specified rate: 4. Increased rate: 1.25 percent + 1.25 percent = 2.5 percent. 5. Tax deducted: Rs. 2,400,000 x 2.5 percent = Rs. 60,000. ### What if the unit also sells its own goods to the exporter? Section 153(2) covers only the listed services. If the same unit sells fabric it owns to the exporter, that is a sale of goods. Depending on the arrangement, a sale to an exporter may be taxed as an indirect export supply or as an ordinary sale of goods under section 153(1)(a). Those routes are explained on the related pages. ### What if the payer is not an exporter? A payment for the same stitching work by a prescribed person who is not an exporter or export house falls under section 153(1)(b) and the service rates in Division III of Part III of the First Schedule. Those rates are not covered on this page. ### Common mistakes - **Treating the deduction as final tax.** An older version of section 153 treated these deductions as final tax. The current section 153(3) makes them minimum tax. - **Using the old 1 percent rate.** The Finance Act, 2026 raised the Division IV rate for section 153(2) to 1.25 percent for tax year 2027. - **Stretching the list.** Section 153(2) names seven services. Services outside that list, such as packing or transport, are not covered by the sub-section. - **Forgetting the active taxpayers' list.** Rule 1 of the Tenth Schedule doubles the rate for a unit not appearing on the list. ### What to check in the official text - Section 153(2), 153(3) and its Explanation, and section 153(7)(i)(g) of the Income Tax Ordinance, 2001, as amended to 30 June 2026. - Clause (3) of Division IV of Part III of the First Schedule, and its footnotes showing the Finance Act, 2026 change. - Rule 1 of the Tenth Schedule for persons not appearing in the active taxpayers' list. - Provincial sales tax on services such as stitching or dyeing is a matter for provincial law and is outside this corpus. ### Frequently asked #### Is the 1.25 percent deduction under section 153(2) final tax? No. Section 153(3) says tax deductible under sub-section (2) on the income of a resident person is minimum tax. The Explanation to that sub-section says the income referred to is the amount on which tax is deductible. #### Does a local garment maker who is not an exporter deduct at 1.25 percent? Section 153(2) applies only to payments by an exporter or an export house. Payments by other prescribed persons for services fall under section 153(1)(b) and the rates in Division III of Part III, which this page does not cover. #### What if my unit is not on the active taxpayers' list? Rule 1 of the Tenth Schedule increases the rate of tax deducted or collected from a person not appearing in the active taxpayers' list by one hundred percent of the rate specified in the Ordinance. On the 1.25 percent rate that gives 2.5 percent. ### Citations - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "for rendering of or providing services of stitching, dying, printing, embroidery, washing, sizing and weaving, shall at the time of making the payment, deduct tax from the gross amount payable at the rate specified in Division IV of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "the income of resident person referred to in sub-section (3) means the amount on which tax is deductible under sub-section (1) or" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IV (Exports), clause (3): rate for section 153(2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1: rate for persons not appearing in the active taxpayers' list](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How long does FBR have to pay a textile exporter's sales tax refund, and is compensation due if it is late? Source: https://qanoondigest.com/faq/textile-manufacturers/exporter-sales-tax-refund-time-limit Law current to: 30 June 2026 (Sales Tax Act) and 30 June 2025 (Sales Tax Rules). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 10 of the Sales Tax Act requires excess input tax on exports to be refunded within forty-five days of filing the refund claim. Under rule 39F, claims routed to FASTER get a refund payment order sent to the State Bank within seventy-two hours. If the refund is late, section 67 adds compensation at KIBOR per annum. **Applies to:** Sales tax registered textile exporters, and other exporters, whose input tax exceeds output tax because of exports or zero-rated local supplies. An exporter's refund has a statutory deadline, and a late refund carries compensation. Both depend on when the refund claim counts as filed, and on whether the claim is paid automatically or sent for scrutiny. ### What does the law say? **The deadline.** Section 10(1) of the Sales Tax Act, 1990 applies where input tax paid on taxable purchases in a tax period exceeds output tax because of zero-rated local supplies or exports. The excess is to be refunded "not later than forty-five days of filing of refund claim", in the manner and subject to the conditions the Board notifies. **Deductions and scrutiny.** Section 10(2) says any unpaid tax, default surcharge or penalty under a law administered by the Board is adjusted from the refund first. Section 10(3) applies where there is reason to believe input tax or refund was claimed inadmissibly. Proceedings must then be completed within sixty days. An officer not below Additional Commissioner may extend this to one hundred and twenty days, and the Board may extend it further, to no more than nine months in total. **Compensation.** Section 67 applies where a refund due under section 10 is not made within the time in section 10. The claimant is then paid, in addition to the refund, a sum equal to KIBOR per annum on the amount due. It runs from the day after the time expires to the day before the refund is paid. ### How does the FASTER chapter work? Chapter V-A of the Sales Tax Rules, 2006, headed "Refund to Exporters", was inserted by S.R.O. 918(I)/2019. - **Rule 39B:** it applies to refund claims from July 2019 onwards filed by exporters in five export-oriented sectors: textile, carpets, leather, sports goods and surgical instruments. By S.R.O. 1507(I)/2024, it also covers refund claims filed from 1 October 2024 by all exporters of goods. - **Extent of payment:** the chapter caps the refund at the lower of the input tax actually consumed in exported or zero-rated goods, or any ceiling the Board sets. - **Rule 39D:** the monthly return is the refund claim, with no separate electronic data. The claimant may file the return without Annex-H and submit Annex-H later, within one hundred and twenty days, or one hundred and eighty days for commercial exporters. The Commissioner may extend the one hundred and twenty days by up to sixty days on application. The date Annex-H is submitted is the date the refund claim is filed. - **Rule 39E:** the Risk Management System routes each claim either to FASTER (Fully Automated Sales Tax e-Refund) or, if it does not meet the RMS parameters, to processing under Chapter V. - **Rule 39F:** in FASTER, the system verifies the claim and generates a refund payment order for the admissible amount. The order goes to the State Bank of Pakistan within seventy-two hours of submission of the claim. The unverified part is re-checked weekly. After eight validation checks, including the first, any amount still uncleared moves to the STARR module under Chapter V. For a commercial exporter, rule 39F pays only after the export proceeds are realised. The chapter's miscellaneous provisions require an export proceeds realisation certificate or bank credit advice for those refunds, and let the Board direct any claim to STARR. ### Worked example (illustrative figures) A home textile exporter in Karachi files its return for July 2027 without Annex-H, then submits Annex-H on 10 September 2027. The refund due is Rs. 8,000,000. KIBOR is assumed at 11% a year purely for illustration. The actual rate is not in this corpus. **Step 1: the filing date.** Under rule 39D, the claim is filed on 10 September 2027. **Step 2: the deadline.** Forty-five days from 10 September: - 11 to 30 September: 20 days - 1 to 25 October: 25 days - Total: 45 days, so the deadline is 25 October 2027. **Step 3: late payment.** Suppose the refund is paid on 24 December 2027. Section 67 runs from 26 October to 23 December: - 26 to 31 October: 6 days - November: 30 days - 1 to 23 December: 23 days - Total: 59 days **Step 4: compensation.** Rs. 8,000,000 × 11% = Rs. 880,000 a year. Rs. 880,000 × 59 ÷ 365 = Rs. 142,247 (rounded). Section 67 does not say whether a 365-day year is used. That is an assumption in this illustration. If the claim cleared FASTER, rule 39F would have sent the payment order within seventy-two hours of 10 September, and no delay would arise. ### What if the refund is under investigation? The first proviso to section 67 suspends the compensation. Where there is reason to believe the refund is not admissible, no additional amount is payable until the investigation is completed and the claim is accepted or rejected. Section 10(3) caps that inquiry at sixty days, extendable in stages up to nine months. ### Common mistakes - **Counting from the return date.** When Annex-H is filed later, rule 39D makes the Annex-H date the filing date. - **Treating seventy-two hours as a legal deadline for every claim.** It applies to claims routed to FASTER. Claims routed by RMS to Chapter V follow that chapter. - **Expecting compensation during an investigation.** Section 67 withholds it until the claim is accepted or rejected. ### What to check in the official text - Sections 10 and 67 of the Sales Tax Act, 1990, as amended to 30 June 2026. - Rules 39B to 39G of the Sales Tax Rules, 2006, as amended to 30 June 2025, and Chapter V for claims routed out of FASTER. - Any Board notification fixing a refund ceiling under Chapter V-A, or fixed refund rates under the second proviso to section 10(1). These are not in this corpus. - The KIBOR rate that applied in the period of delay. It is not published in this corpus. ### Frequently asked #### When does the forty-five day period start for an exporter? Section 10 counts it from the filing of the refund claim. Under rule 39D, if the return is submitted without Annex-H, the date Annex-H is submitted is treated as the date of filing of the refund claim. #### Is KIBOR compensation paid if FBR is investigating my refund? Not while the investigation is running. The first proviso to section 67 says that where there is reason to believe the refund is not admissible, the additional amount does not apply until the investigation is completed and the claim is accepted or rejected. #### Does FASTER pay the full claim at once? Not necessarily. Rule 39F generates a payment order for the amount found admissible. The rest goes through weekly system validation checks, and anything still uncleared after eight checks, including the first, is processed under the STARR module in Chapter V. ### Citations - [Sales Tax Act, 1990, section 10 (Refund of input tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#10-refund-of-input-tax), as amended to 2026-06-30: "the excess amount of input tax shall be refunded to the registered person not later than forty-five days of filing of refund claim" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 67 (Delayed Refund)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#67-delayed-refund), as amended to 2026-06-30: "there shall be paid to the claimant in addition to the amount of refund due to him, a further sum equal to" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 39B (Application)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#39b-application), as amended to 2025-06-30: "five exports - oriented sectors, namely textile, carpets, leather, sports goods and surgical instruments" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 39D (Filing and Processing of refund claims)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#39d-filing-and-processing-of-refund-claims), as amended to 2025-06-30: "The date of submission of Annex-H shall be considered as the date of filing of refund claim." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 39E (Risk management in refund processing)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#39e-risk-management-in-refund-processing), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 39F (Processing in FASTER module)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#39f-processing-in-faster-module), as amended to 2025-06-30: "within seventy-two hours of submission of claim" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf --- ## Why can a manufacturer adjust input tax only up to 90% of output tax, and how is the remaining input tax recovered? Source: https://qanoondigest.com/faq/textile-manufacturers/ninety-percent-input-tax-limit-section-8b Law current to: 30 June 2026 (Act), 30 June 2025 (Rules). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 8B(1) of the Sales Tax Act stops a registered person adjusting input tax above 90 percent of output tax in a tax period, except input tax on fixed assets or capital goods. The unadjusted amount is carried forward under section 10, and section 8B(2) and (3) with rule 34 allow a yearly adjustment or refund after the financial year. **Applies to:** Registered manufacturers, including textile mills, whose input tax in a month is close to or above their output tax. Section 8B of the Sales Tax Act means a registered mill always pays at least 10 percent of its output tax in cash each month, even if its input tax is higher. Input tax on fixed assets and capital goods is outside the cap. The part blocked by the cap is not lost: it carries forward, and the Act and rules allow a yearly adjustment or refund once the financial year is over. ### What does the law say? **The cap.** Section 8B(1) says that in relation to a tax period a registered person "shall not be allowed to adjust input tax in excess of ninety per cent of the output tax for that tax period". **The provisos.** Three provisos follow: 1. The restriction "shall not apply in case of fixed assets or Capital goods". 2. The Board may, by notification, exclude any person or class of persons from section 8B(1). 3. The Board may, by notification, reduce or enhance the limit for a registered person based on compliance or non-compliance with production monitoring, digital invoicing, e-bility, POS or other electronic systems. This proviso was added by the Finance Act, 2026. **Yearly adjustment or refund.** Section 8B(2) allows adjustment or refund of input tax not allowed under section 8B(1): - (i) for persons whose accounts are audited under the Companies Ordinance, 1984, on furnishing a statement with the annual audited accounts, certified by the auditors, showing value additions less than the section 8B(1) limit; - (ii) for other registered persons, subject to conditions the Board specifies by notification. Section 8B(3) says this adjustment or refund "shall be made on yearly basis in the second month following the end of the financial year of the registered person". Section 8B(5) says an auditor found guilty of misconduct in giving the certificate shall be referred to the Council for disciplinary action under section 20D of the Chartered Accountants Ordinance, 1961. **Other limits.** Section 8B(4) lets the Board prescribe any other limit for a person or class, and, since the Finance Act, 2025, use a data-based automated risk management system to defer input tax or fix higher or lower limits. The registered person may contest that action before the Commissioner, who "shall decide the case within thirty days". **Carry forward.** The first proviso to section 10(1) says excess input tax on supplies other than zero-rated supplies or exports "may be carried forward to the next tax period, along with the input tax as is not adjustable in terms of sub-section (1) of section 8B, and shall be treated as input tax for that period". ### How is the refund claimed under the rules? Rule 34(1)(c) of the Sales Tax Rules covers registered persons unable to adjust input tax above 90 percent of output tax because of section 8B. They may file a refund claim: - if their accounts are audited under company law, after the end of their accounting year; - otherwise, after the end of the financial year. Rule 34(2) requires the claim to be filed electronically in Form STR-7A after the return claiming it, with the section 8B(2)(i) statement uploaded where applicable. Rule 34(4) says claims under clause (c), other than those of persons whose accounts are audited under the Companies Act, 2017, are sanctioned after a departmental audit and a certificate that actual value addition was not enough to require a net payment of tax. Rule 34(5) requires the claimed amount not to be shown again as carried-forward credit in later returns. Rule 34(1)(a) separately lets some sectors, including cotton ginners, claim refund of excess input tax in any tax period. ### Worked example (illustrative figures) A registered weaving mill in Faisalabad sells grey cloth locally in November: 1. Taxable supplies: Rs. 25,000,000. Output tax at 18% = Rs. 4,500,000. 2. Input tax on yarn, sizing chemicals, electricity and gas (no capital goods) = Rs. 4,300,000. 3. Cap under section 8B(1): 90% x Rs. 4,500,000 = Rs. 4,050,000. 4. Input tax adjusted = Rs. 4,050,000 (the lower of Rs. 4,300,000 and the cap). 5. Tax payable = Rs. 4,500,000 minus Rs. 4,050,000 = Rs. 450,000. 6. Input tax not adjusted = Rs. 4,300,000 minus Rs. 4,050,000 = Rs. 250,000. Under section 10 this carries forward to December and is treated as input tax for that period. Without the cap, the mill would have paid Rs. 4,500,000 minus Rs. 4,300,000 = Rs. 200,000. The cap means it pays Rs. 250,000 more that month. If the mill's financial year ends on 30 June, the second month following is August, which is when section 8B(3) says the yearly adjustment or refund is made. ### What if ...? **What if the mill buys a new loom that month?** Input tax on fixed assets or capital goods is outside the 90 percent restriction under the first proviso. The Act does not set out the arithmetic order for combining capital goods input tax with other input tax under the cap. **What if the mill mainly exports?** Section 10(1) deals separately with excess input tax arising from zero-rated local supplies or exports, which is refundable within forty-five days of the refund claim, subject to Board conditions. That route is covered on the exporter refund pages. **What if FBR's risk system defers my input tax?** Section 8B(4) allows the person to contest by application to the Commissioner, to be decided within thirty days. ### Common mistakes - **Treating the blocked 10 percent as a cost.** Section 10 carries it forward and section 8B(2) and (3) allow yearly adjustment or refund. - **Applying the cap to machinery.** The first proviso to section 8B(1) excludes fixed assets and capital goods. - **Claiming the same amount twice.** Rule 34(5) requires a refunded amount not to be carried forward again. ### What to check in the official text Read section 8B and section 10 of the Sales Tax Act and rule 34 of the Sales Tax Rules. Board notifications excluding persons from the cap, changing it, or setting conditions under section 8B(2)(ii) are not held in this corpus. ### Frequently asked #### Does the 90 percent cap apply to sales tax paid on new machinery? No. The first proviso to section 8B(1) says the restriction on adjusting input tax above ninety percent of output tax shall not apply in case of fixed assets or capital goods. #### When can the blocked 10 percent be adjusted or refunded? Section 8B(3) says the adjustment or refund under section 8B(2) is made on a yearly basis in the second month following the end of the registered person's financial year. Rule 34(1)(c) allows the refund claim after the end of the accounting year for companies audited under company law, and after the financial year for others. #### Can FBR change the 90 percent limit for my business? Yes, within the Act. Provisos to section 8B(1) let the Board exclude persons from the cap, and reduce or enhance it based on compliance with digital invoicing and other electronic systems. Section 8B(4) lets the Board prescribe other limits and use an automated risk system to defer input tax or set limits, which the person may contest before the Commissioner. #### What must a company file to get the yearly adjustment? Section 8B(2)(i) requires a statement with the annual audited accounts, certified by the auditors, showing value additions less than the limit in section 8B(1). Other registered persons follow conditions the Board specifies by notification under section 8B(2)(ii). ### Citations - [Sales Tax Act, 1990, section 8B (Adjustable input tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8b-adjustable-input-tax), as amended to 2026-06-30: "shall not be allowed to adjust input tax in excess of ninety per cent of the output tax for that tax period:" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 10 (Refund of input tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#10-refund-of-input-tax), as amended to 2026-06-30: "such excess input tax may be carried forward to the next tax period, along with the input tax as is not adjustable in terms of sub-section (1) of section 8B" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 34 (Refund of excess input tax not relating to zero-rated supplies)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#34-refund-of-excess-input-tax-not-relating-to-zero-rated-supplies), as amended to 2025-06-30: "registered persons who are not able to adjust input tax in excess of 90% of output tax in view of restriction in section 8B of the Act, may file refund claim as under, -" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf --- ## How does FBR fix allowable wastage for a manufacturer, and how does it limit input tax on wasted material? Source: https://qanoondigest.com/faq/textile-manufacturers/input-output-wastage-limit-input-tax Law current to: 30 June 2025 (Sales Tax Rules) and 30 June 2026 (Sales Tax Act). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under Chapter IV-A of the Sales Tax Rules, 2006, the Board studies a process, refers it to the Input Output Co-efficient Organization to work out input-output ratios, and then notifies a wastage limit. Rule 25G bars input tax on wasted inputs above that notified extent, and rule 25I bars refunds on that excess for zero-rated goods. **Applies to:** Sales tax registered spinning, weaving, dyeing and processing units, and other manufacturers whose inputs produce yarn, fabric or other wastage. A mill that loses more of its raw material than the Board allows for its process cannot claim input tax on that extra loss. The limit is not a figure in the Act. It comes from a notified wastage extent, worked out through a procedure in Chapter IV-A of the Sales Tax Rules, 2006. ### What does the law say? Chapter IV-A, titled the Sales Tax (Imposition of Restrictions) on Wastages of Inputs Rules, 2020, was inserted into the Sales Tax Rules by S.R.O. 938(I)/2020 dated 1 October 2020. It runs from rule 25A to rule 25K. - **Rule 25A (application):** the Chapter applies to determining the restriction on wastage of material on which input tax has been claimed, for goods or classes of goods. - **Rule 25B (definitions):** "inputs" include electricity, raw materials and processed, semi-finished or finished products used in manufacturing. "Wastage" means the part of an input that is unfit or unable for use in making the corresponding output. "IOCO" is the Input Output Co-Efficient Organization. Section 30DDD of the Sales Tax Act, 1990 establishes the Directorate General of IOCO (Inland Revenue). - **Rule 25C (purpose):** wastage is determined to restrict inputs, to resolve disputes where input tax is suspected of being above actual entitlement because consumption was overstated, or to fix the extent of wastage beyond which input tax adjustment is not admissible. - **Rule 25G (the restriction):** once the Board has fixed and notified a wastage extent, no registered person may take input tax adjustment on wasted inputs above it. ### How does FBR decide the allowable wastage? **Who starts it.** Under rule 25D, the Board may start the exercise itself, or on a reference from a Chief Commissioner of Inland Revenue, the Director General of Intelligence and Investigation (Inland Revenue), or on the recommendation of a Government agency or an industrial or business association. **Preliminary study.** Rule 25E(1) requires a preliminary study through a field formation. It covers the full range of inputs and outputs, the manufacturing process, the plant and machinery used, general or special wastage standards and known input-output ratios. Where a Chief Commissioner or the Director General makes the reference, rule 25E(2) makes them arrange the study and send its results with the reference. **IOCO analysis.** The Board may then refer the case to IOCO to determine the extent of wastage of each input by working out input-output ratios. Rule 25F requires IOCO to plan the work within the Board's timeframe. The plan covers input and output specifications, process and machinery details, literature, subject specialists, industrial units to visit, office bearers of the relevant association to consult, resources and timelines. **Outside opinion.** Rule 25H lets the Board or IOCO seek scientific or technical opinion from an outside expert. No such opinion is conclusive or binding. **Notification.** Rule 25E(1) ends with the Board notifying the extent of wastage beyond which input tax adjustment on those inputs is not allowed. ### What happens to wastage above the notified limit? Three rules work together: | Rule | Effect | |---|---| | 25G | No input tax adjustment on wasted inputs above the notified extent | | 25I | The limit applies whether the output is taxable, zero-rated, domestic or exported. No refund on the excess where goods are zero-rated | | 25J | Wastage above the limit is treated as restricted and not relevant for assessment, declaration and payment of sales tax | For a textile exporter, rule 25I matters most. Zero-rating an export does not lift the restriction. The input tax on excess wastage is neither adjustable nor refundable. ### Worked example (illustrative figures) The figures below are invented, including the wastage limit. No notified textile wastage figure is in this corpus. A spinning unit in Faisalabad buys 50,000 kg of polyester staple fibre in a month. The input tax on its purchase invoices is Rs. 1,800,000, which works out to Rs. 36 per kg. It produces 42,000 kg of yarn. Assume the Board has notified 10% wastage for this input and process. | Step | Working | Result | |---|---|---| | Actual wastage | 50,000 kg minus 42,000 kg | 8,000 kg (16%) | | Allowed wastage at the assumed 10% | 50,000 kg × 10% | 5,000 kg | | Excess wastage | 8,000 kg minus 5,000 kg | 3,000 kg | | Input tax on excess | 3,000 kg × Rs. 36 | Rs. 108,000 | | Input tax still claimable, subject to other limits | Rs. 1,800,000 minus Rs. 108,000 | Rs. 1,692,000 | Under rule 25G, the Rs. 108,000 cannot be adjusted. If the yarn were exported, rule 25I would stop it being refunded as well. The Rs. 1,692,000 is not automatically allowed either. Other input tax restrictions in the Act still apply to it. How a notification expresses its ratio (per kilogram, per unit, or as a percentage) depends on that notification. ### What if no wastage limit has been notified for my product? Rule 25G applies only "where the extent of wastages has been fixed and notified by the Board". The rules do not set a default limit for goods without a notification. Rule 25C does describe the exercise as a way to resolve disputes where consumption of inputs is suspected of being overstated, so an unnotified product can still become the subject of a determination started under rule 25D. ### What if the process or machinery has changed since the limit was fixed? Rule 25K lets the Board review and revise a fixed limit, either on its own or on a representation from an aggrieved person. The rule names technological developments and changes or improvements in industrial processes as grounds. The rules do not set a timeline for deciding a representation. ### Common mistakes - **Treating the limit as a cap on actual wastage.** A mill may lose more material than the limit. The rules only deny input tax on the excess. - **Assuming exports escape the limit.** Rule 25I applies the fixed wastage "regardless of the status of supplies" and bars refunds on the excess for zero-rated goods. - **Assuming an expert report settles the figure.** Rule 25H says outside opinion is not conclusive or binding on the fixation. ### What to check in the official text - Rules 25A to 25K of the Sales Tax Rules, 2006, as amended to 30 June 2025. - The Board notification fixing wastage for your specific input, output and process. Those notifications are not held in this corpus, so no rate is given here. - Section 30DDD of the Sales Tax Act, 1990 on the IOCO directorate, and any Board notification setting out its functions. ### Frequently asked #### Does the law itself set a wastage percentage for spinning or weaving? No. Chapter IV-A of the Sales Tax Rules sets out how wastage is determined, but the actual limits are fixed and notified by the Board separately. Those notifications are not part of this corpus, so no textile wastage figure is given here. #### Can an exporter claim a refund on wastage above the notified limit? No. Rule 25I says the notified wastage applies whether the goods are taxable, zero-rated, domestic supplies or exports, and that no refund shall be claimed or paid on wastage above the fixed limit where goods have been zero-rated. #### Can a mill ask the Board to change a notified wastage limit? Yes. Rule 25K lets the Board review and revise a fixed wastage limit on its own or on a representation by any aggrieved person, and the Board may also re-fix limits periodically in light of new information or changes in industrial processes. ### Citations - [Sales Tax Rules, 2006, Chapter IV-A, Sales Tax (Imposition of Restrictions) on Wastages of Inputs Rules, 2020 (rules 25A to 25K)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 25C (Determination of wastages)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#25c-determination-of-wastages), as amended to 2025-06-30: "to fix the extent of wastages of inputs beyond which input tax adjustment shall not be admissible" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 25E (Process for determination of wastages)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#25e-process-for-determination-of-wastages), as amended to 2025-06-30: "The Board shall after wards notify the extent of wastages beyond which no registered person or class of registered person shall be entitled to claim any input tax adjustment on such inputs." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 25G (Restriction on extent of wastages and resultant input tax adjustment)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#25g-restriction-on-extent-of-wastages-and-resultant-input-tax-adjustment), as amended to 2025-06-30: "no registered person shall be entitled to take input tax adjustment in respect of wasted inputs over and above the extent so fixed and notified by the Board" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 25I (Non-relevance of the status of supplies)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#25i-non-relevance-of-the-status-of-supplies), as amended to 2025-06-30: "where goods have been zero-rated, no refund shall be claimed or paid on wastages over and above the limit, scale, extent or level determined and fixed under these rules" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, section 30DDD (Directorate General of Input Output Co-efficient Organization)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#30ddd-directorate-general-of-input-output-co-efficient-organization), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## As a textile company or exporter, when must I withhold sales tax from payments to my own suppliers? Source: https://qanoondigest.com/faq/textile-manufacturers/mill-withholding-sales-tax-on-purchases Law current to: 30 June 2026 (Sales Tax Act) and 30 June 2025 (Sales Tax Rules). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 3(7) of the Sales Tax Act and the Eleventh Schedule, a company withholds 1/5th of the invoiced sales tax from active taxpayers and 5% of gross value from persons not on the active list. Supplies by an active taxpayer to a registered buyer are excluded, and rule 150ZZI bars claiming withheld tax as input tax. **Applies to:** Textile mills, garment makers and exporters set up as companies, associations of persons or individuals, when they buy taxable goods or services from suppliers. A textile company is not only a seller that suffers sales tax withholding. As a buyer it is also a withholding agent, and the Sales Tax Act, 1990 can require it to deduct part of the sales tax from what it pays its own suppliers. Whether it must do so depends on who the supplier is and what is being bought. ### What does the law say? Section 3(7) of the Act says tax "shall be withheld" at the rate in the Eleventh Schedule by persons purchasing goods or services, acting as withholding agents. The Eleventh Schedule Table names the agents, the suppliers and the deduction. The entries a textile company is most likely to meet are: | S. No. | Withholding agent | Supplier | Deduction | |---|---|---|---| | 1 | Government bodies, and companies as defined in the Income Tax Ordinance, 2001 | Active taxpayers | 1/5th of sales tax as shown on invoice | | 2 | The same agents | Active taxpayer registered as a wholesaler, dealer or distributor | 1/10th of sales tax as shown on invoice | | 4 | Companies, associations of persons and individuals as defined in the Income Tax Ordinance, 2001, excluding companies exporting surgical instruments | Persons other than active taxpayers | 5% of gross value of supplies | | 5 | Registered persons receiving advertisement services | Person providing advertisement services | Whole of sales tax applicable | | 14 | Registered persons engaged in toll manufacturing | Person other than registered person | Four times of the tax charged on conversion charges | The words "association of persons and individuals" in serial number 4 were added by the Finance Act, 2026, and serial number 14 was also added by that Act. ### Which purchases are excluded? Withholding under the Schedule does not apply to the supplies listed after the Table. They include electrical energy, natural gas, certain petroleum products, vegetable ghee and cooking oil, telecommunication services, goods in the Third Schedule, and supplies by importers who paid value addition tax at import. The exclusion that matters most for a mill is clause (viii): supplies made by an active taxpayer "to another registered person", except the supplies at serial numbers 5, 7, 9, 10, 11, 12 and 13. So where a registered mill buys yarn, dyes or packing material from an active registered supplier, serial numbers 1 and 2 do not bite. Serial number 5 (advertisement services) remains, because it is in the exception. ### How does it work in practice? In practice, a registered mill's everyday withholding duty mostly arises when it buys from a supplier who is not on the active taxpayers list. Serial number 4 then requires a deduction of 5% of the gross value of supplies. The Schedule does not define "gross value of supplies". Rule 150ZZI of the Sales Tax Rules, 2006 sets out the agent's duties: - say in any advertisement or notice for the purchase that sales tax will be deducted; - deduct the Schedule amount and pay the supplier the balance; - if registered for sales tax or federal excise, deposit the withheld amount with the monthly return for the month of purchase, alongside other liability; - issue the supplier a certificate showing its name and registration number, the goods and the tax deducted. The proviso to rule 150ZZI(2) says the agent cannot reclaim or deduct the withheld amount as input tax. Rule 150ZZH(1) says the chapter applies to supplies to withholding agents in the Eleventh Schedule "for the purpose of deduction and deposit of sales tax by persons registered as exporters". The Rules do not explain whether this wording limits the chapter to exporters or simply names them. The Act and the Schedule themselves make companies withholding agents without regard to export status. ### Worked example (illustrative figures) A Karachi garment export company, registered for sales tax, makes three purchases in one month: 1. Fabric worth Rs. 3,000,000 plus Rs. 540,000 sales tax from an active registered weaver. Clause (viii) excludes this supply, so nothing is withheld. 2. Cartons for Rs. 400,000 gross from a supplier not on the active taxpayers list. Serial number 4 applies: Rs. 400,000 x 5% = Rs. 20,000 withheld. The supplier is paid Rs. 380,000. 3. Advertising services with sales tax of Rs. 90,000 on the invoice. Serial number 5 requires the whole of the sales tax to be withheld, so Rs. 90,000 is deducted. The company deposits Rs. 110,000 (Rs. 20,000 + Rs. 90,000) with its monthly return and issues certificates to both suppliers. It cannot claim either amount as its own input tax under rule 150ZZI. ### What if my mill does toll manufacturing? Serial number 14 names registered persons engaged in toll manufacturing as agents, the supplier as a "person other than registered person", and the deduction as "four times of the tax charged on conversion charges". The Schedule does not say which side of a toll arrangement the unregistered person is on, and the Rules in this corpus, amended to 30 June 2025, predate the entry. The text alone does not settle how it is applied. ### Common mistakes - **Withholding from every supplier.** Clause (viii) removes an active taxpayer's supplies to a registered buyer from serial numbers 1 and 2. - **Claiming withheld tax as input tax.** The proviso to rule 150ZZI(2) forbids it. - **Overlooking advertisement services.** Serial number 5 is carved back into withholding even for active suppliers. ### What to check in the official text - Section 3(7) of the Sales Tax Act, 1990 and the full Eleventh Schedule, including clauses (i) to (ix) after the Table. - Rules 150ZZH and 150ZZI of the Sales Tax Rules, 2006. - The supplier's status on the active taxpayers list on the date of purchase. - Any later amendment of the Rules to reflect serial number 14, which is not in this corpus. ### Frequently asked #### Does my mill withhold sales tax when buying yarn from a registered, active spinner? Not under the Eleventh Schedule as printed, if the mill is itself registered. Clause (viii) after the Table excludes supplies made by an active taxpayer to another registered person, except the supplies at serial numbers 5, 7, 9, 10, 11, 12 and 13. #### How much is withheld from a supplier who is not on the active taxpayers list? Serial number 4 of the Eleventh Schedule sets 5% of the gross value of supplies where the withholding agent is a company, an association of persons or an individual as defined in the Income Tax Ordinance, 2001. Companies exporting surgical instruments are excluded from that entry. #### Can I claim the sales tax I withheld as input tax? No. The proviso to rule 150ZZI(2) says the withholding agent is not entitled to reclaim or deduct the tax withheld as input tax. ### Citations - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "at the rate as specified in the Eleventh Schedule, by any person or class of persons" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Eleventh Schedule, Table (S. Nos. 1, 2, 4, 5 and 14) and exclusions (i) to (ix) after the Table](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 150ZZH (Application)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zzh-application), as amended to 2025-06-30: "This chapter shall apply to taxable goods and services as are supplied to the withholding agents as specified in the Eleventh Schedule to the Act, for the purpose of deduction and deposit of sales tax by persons registered as exporters." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 150ZZI (Responsibility of a withholding agent)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#150zzi-responsibility-of-a-withholding-agent), as amended to 2025-06-30: "Provided that the withholding agent shall not be entitled to reclaim or deduct the amount of tax withheld from such persons as input tax." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf --- ## Why is part of my export sales tax refund deferred or held back, and what does the law say happens next? Source: https://qanoondigest.com/faq/textile-manufacturers/why-export-sales-tax-refund-deferred Law current to: 30 June 2026 (Sales Tax Act) and 30 June 2025 (Sales Tax Rules). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under rules 39C to 39G of the Sales Tax Rules, 2006, an export refund is capped at input tax actually consumed in exports, unverified amounts are re-checked weekly in FASTER and then sent to STARR, and commercial exporters are paid after export proceeds are realised. Section 10 adjusts outstanding dues first, and section 21(4) allows refunds to be blocked. **Applies to:** Sales tax registered exporters of textiles and other goods whose refund claims are processed under Chapter V-A of the Sales Tax Rules, 2006, including commercial exporters without their own manufacturing facility. An export refund claim is rarely paid in one amount. The Sales Tax Rules, 2006 split a claim into the part the system can verify straight away and the part it cannot, and the Sales Tax Act, 1990 adds further reasons a refund can be reduced, delayed or stopped. This page walks through each one. ### Which rules govern an exporter's refund? Chapter V-A of the Rules, headed "Refund to Exporters", covers these claims. It has applied to the textile, carpets, leather, sports goods and surgical instruments sectors for tax periods from July 2019, and to refund claims filed by all exporters on account of export of goods from 1 October 2024. Rules 39C to 39G are the ones that explain why part of a claim is held back. ### What does the law say? There are five separate mechanisms, and a single claim can be affected by more than one. | Mechanism | Where it is | Effect | |---|---|---| | Ceiling on the amount | Rule 39C | Refund cannot exceed the lower of input tax actually consumed in exported or zero-rated goods, or any ceiling the Board sets | | Risk routing | Rule 39E | RMS decides whether the claim goes through FASTER; claims failing its parameters go to Chapter V processing | | Weekly revalidation | Rule 39F | Unverified or inadmissible parts are re-checked weekly; after eight checks the balance moves to STARR | | Export proceeds | Rules 39F and 39G | A commercial exporter's refund is paid after export proceeds are realised | | Dues and fraud | Sections 10 and 21(4) of the Act | Outstanding dues are adjusted first; refunds can be blocked where fraud is suspected | ### How does FASTER processing work in practice? Under rule 39E, once the claim is submitted the Risk Management System routes it. Claims that meet the RMS parameters go to FASTER, the Fully Automated Sales Tax e-Refund module. Those that do not are processed under Chapter V. Rule 39F says a FASTER claim is processed electronically, the system determines the payable amount "on the basis of input consumed in exports or supplies", and a refund payment order (RPO) for the admissible amount is sent to the State Bank of Pakistan within seventy-two hours of submission. The part not verified is then checked again every week. Each check can generate a further RPO for whatever has become valid. After each check, the RPO details and the system's objections are sent to the claimant and to the RTO or LTO. After eight validation checks, including the first one, any amount still not cleared is processed under STARR. Rule 39G applies the Chapter V provisions on post-refund scrutiny, supporting documents, claimant responsibility and action on inadmissible claims to these claims. It also lets the Board direct that any claim be processed through STARR. ### Why does the refund depend on input actually consumed? Rule 39C caps the total refund at the lower of two amounts: the input tax actually consumed in the goods exported or supplied at zero rate, or a ceiling set by the Board as a percentage of value or an amount per unit. Input tax on purchases that did not go into exported goods is not refundable under this chapter just because it was paid. Any Board ceiling is not reproduced in the Rules in this corpus. ### Worked example (illustrative figures) A Faisalabad home textile exporter with its own weaving and stitching units files a refund claim of Rs. 10,000,000. 1. RMS routes the claim to FASTER under rule 39E. 2. On the first check, the system verifies Rs. 7,200,000 as input consumed in exports. An RPO for that amount is generated within seventy-two hours. 3. The remaining Rs. 2,800,000 is re-checked weekly. Suppose later checks clear Rs. 1,900,000 as suppliers' data is matched. 4. After the eighth check, Rs. 900,000 (Rs. 2,800,000 minus Rs. 1,900,000) is still not cleared and moves to STARR. 5. If the exporter owes Rs. 300,000 of unpaid sales tax, section 10(2) requires the refund to be made after that amount is adjusted. The Rules in this corpus do not say at which RPO the adjustment is made. ### What if I am a commercial exporter? The Rules describe a commercial exporter as a registered exporter without its own manufacturing facility, exporting goods as purchased or after getting them processed elsewhere. Rule 39F says such an exporter's refund is paid after realisation of export proceeds, and rule 39G says it is processed on receipt of the export proceeds realisation certificate or bank credit advice. Until proceeds arrive, the refund is held even if the input tax is verified. ### What if the department suspects the claim? Section 10(3) of the Act says that where there is reason to believe inadmissible input tax or refund was claimed, the proceedings must be completed within sixty days. An officer not below Additional Commissioner may extend this up to one hundred and twenty days for enquiry, audit or investigation, and the Board may extend it further for recorded reasons, but not beyond nine months. Section 21(4) goes further. Where the Board, the Commissioner or an authorised officer has reasons to believe a registered person is issuing fake or flying invoices, claiming fraudulent input tax or refunds, does not physically exist, or is committing other fraud, refunds and input tax adjustments can be blocked after recording reasons in writing, with the case sent for investigation. ### Common mistakes - **Treating the claimed amount as the refund.** Rule 39C limits payment to input tax actually consumed in exports, or a lower Board ceiling. - **Assuming the held-back part is rejected.** Under rule 39F it is re-checked weekly, and after eight checks it moves to STARR rather than lapsing. - **Ignoring other dues.** Section 10(2) covers tax, default surcharge or penalty under any law the Board administers, not only sales tax. ### What to check in the official text - Chapter V-A of the Sales Tax Rules, 2006, especially rules 39C to 39G, and Chapter V, which rules 39E, 39F and 39G send claims to. - Section 10 and section 21(4) of the Sales Tax Act, 1990. - Whether the Board has notified a refund ceiling under rule 39C, or fixed refund rates under the second proviso to section 10(1). Neither notification is in this corpus. - The objections the system sends after each validation check, which rule 39F says are communicated to the claimant. ### Frequently asked #### How long can the unverified part of my refund stay in FASTER? Rule 39F subjects the unverified or inadmissible part to system validation checks every week. After eight validation checks, including the initial one, any amount still not cleared is processed under STARR, the channel described in Chapter V of the Rules. #### Why was my refund paid only after my export proceeds came in? For a commercial exporter, rule 39F says the refund is paid after the realisation of export proceeds, and rule 39G says such refunds are processed on receipt of the export proceeds realisation certificate or bank credit advice. The Rules describe a commercial exporter as a registered exporter without its own manufacturing facility. #### Can my refund be reduced because I owe other taxes? Yes. Section 10(2) of the Sales Tax Act says that where a registered person owes tax, default surcharge or penalty under any law administered by the Board, the refund is made after adjusting that unpaid amount. ### Citations - [Sales Tax Rules, 2006, section 39C (Extent of payment of refund claim)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#39c-extent-of-payment-of-refund-claim), as amended to 2025-06-30: "the amount of input tax actually consumed in goods as exported or supplied at zero-rated rate, or the amount as per ceiling, if any," Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 39E (Risk management in refund processing)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#39e-risk-management-in-refund-processing), as amended to 2025-06-30: "After submission of refund claim, in the aforesaid manner, the same shall be processed by Risk Management System (RMS)." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 39F (Processing in FASTER module)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#39f-processing-in-faster-module), as amended to 2025-06-30: "the part of the refund claim that is not verified or not found admissible shall be subjected to system validation checks every week and RPO shall be generated for the amount found valid during each validation check." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, section 39G (Miscellaneous)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#39g-miscellaneous), as amended to 2025-06-30: "Provided further that refunds of commercial exporters shall be processed on receipt of export proceeds realization certificate or bank credit advice" Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Act, 1990, section 10 (Refund of input tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#10-refund-of-input-tax), as amended to 2026-06-30: "the refund of input tax shall be made after adjustment of unpaid outstanding amount of tax or, as the case may, default surcharge and penalty." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 21 (De-registration, blacklisting and suspension of registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#21-de-registration-blacklisting-and-suspension-of-registration), as amended to 2026-06-30: "block the refunds or input tax adjustments of such person and direct the concerned Commissioner having jurisdiction for further investigation and appropriate legal action." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What withholding tax applies to toll manufacturing, such as processing or converting someone else's yarn or fabric? Source: https://qanoondigest.com/faq/textile-manufacturers/toll-manufacturing-withholding-tax-rate Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 153(1)(a) of the Income Tax Ordinance covers payments for the sale of goods including toll manufacturing. For tax year 2027, Division III of Part III of the First Schedule sets 9% of the gross amount for a company and 11% for others, against 5% and 5.5% for ordinary goods. Under section 153(3), this is minimum tax for most recipients. **Applies to:** Conversion, processing and job-work units, such as sizing, weaving, dyeing and finishing units, that are paid by a company or other prescribed person to process goods owned by someone else. Many textile units never own the yarn or fabric they work on. A sizing unit sizes a weaver's yarn, a weaving shed converts a mill's yarn into greige cloth, or a processing house dyes an exporter's fabric, and each is paid a conversion charge. The Income Tax Ordinance, 2001 calls this toll manufacturing and deducts tax on it at a higher rate than on an ordinary sale of goods. ### What does the law say? Section 153(1)(a) requires every prescribed person making a payment to a resident person "for the sale of goods including toll manufacturing" to deduct tax at the rate in Division III of Part III of the First Schedule. The words "including toll manufacturing" were inserted by the Finance Act, 2020. The deduction is taken from the gross amount payable, including sales tax, and covers advances as well as full or part payments. It does not apply where payments are less than Rs. 75,000 in aggregate during a financial year. The Ordinance does not define "toll manufacturing". Section 153 defines "manufacturer" and "sale of goods", but not the toll term itself. ### What are the rates for tax year 2027? Paragraph (1)(b) of Division III, amended to 30 June 2026 and so applying to tax year 2027, sets: | Recipient | Toll manufacturing | Other sale of goods | |---|---|---| | Company | 9% of gross amount payable | 5% of gross amount payable | | Other than a company | 11% of gross amount payable | 5.5% of gross amount payable | Rule 1 of the Tenth Schedule increases the rate by one hundred percent where the recipient does not appear in the active taxpayers' list. Section 153 is not among the exceptions in rule 10. On that reading, 9% becomes 18% for a company and 11% becomes 22% for others. ### Is it minimum tax? Section 153(3) says the tax deductible under sub-section (1) is minimum tax on the income of a resident person. The Explanation to that sub-section says the income it relates to is the amount on which tax is deductible. For a toll unit run by an individual or an association of persons, the deduction is therefore minimum tax. The proviso to section 153(3) makes the deduction not minimum tax where payments for sale or supply of goods are received by a company being a manufacturer of such goods, or by a listed public company. A listed public company doing toll work falls within the second limb on its words. For an unlisted company doing toll work, the Ordinance does not say whether processing goods owned by someone else makes it "a manufacturer of such goods". The text leaves that point open. Section 153(4) allows the Commissioner to issue a reduced-rate certificate, capped at eighty percent of the rate, only where the tax deductible is not minimum. ### Worked example (illustrative figures) A weaving unit in Faisalabad, run as an association of persons and on the active taxpayers' list, converts a mill company's yarn into greige fabric. Its conversion bill for the month is Rs. 1,500,000 plus Rs. 270,000 sales tax. 1. Gross amount payable, including sales tax: Rs. 1,500,000 + Rs. 270,000 = Rs. 1,770,000. 2. Rate for toll manufacturing, other than a company: 11%. 3. Tax deducted by the mill: Rs. 1,770,000 x 11% = Rs. 194,700. 4. Amount paid to the weaving unit: Rs. 1,770,000 - Rs. 194,700 = Rs. 1,575,300. 5. Because the unit is not a company, the Rs. 194,700 is minimum tax under section 153(3). Had the same work been an ordinary sale of goods, the rate would have been 5.5%: Rs. 1,770,000 x 5.5% = Rs. 97,350. ### What if the payer is an exporter? Section 153(2) separately requires an exporter or export house to deduct tax on payments for stitching, dyeing, printing, embroidery, washing, sizing and weaving services, at the rate in Division IV of Part III. Several of those activities could also be described as toll manufacturing. The Ordinance does not say which provision prevails where an exporter pays for such work, so the text alone does not settle it. ### Is there a sales tax rule on toll manufacturing too? Yes, separately. The Finance Act, 2026 added serial number 14 to the Eleventh Schedule of the Sales Tax Act, 1990. It names "Registered persons engaged in toll manufacturing" as withholding agents, the supplier as a "Person other than registered person", and the deduction as "four times of the tax charged on conversion charges". This is sales tax, not income tax, and it does not change the section 153 rates. ### Common mistakes - **Using the 5% or 5.5% goods rate for conversion work.** Toll manufacturing has its own 9% and 11% rates. - **Deducting on the conversion charge before sales tax.** Section 153(1) uses the gross amount including sales tax. - **Assuming the deduction is adjustable.** For individuals and associations of persons, section 153(3) makes it minimum tax. ### What to check in the official text - Section 153(1)(a), (2), (3) and (4) of the Income Tax Ordinance, 2001. - First Schedule, Part III, Division III, paragraph (1)(b). - Tenth Schedule, rules 1 and 10. - Eleventh Schedule to the Sales Tax Act, 1990, serial number 14, for the separate sales tax treatment. ### Frequently asked #### Why is the toll manufacturing rate higher than the rate for selling goods? Division III of Part III of the First Schedule simply sets different rates: 9% for a company and 11% for others on toll manufacturing, against 5% and 5.5% on other sales of goods. The Ordinance does not give a reason for the difference. #### Is the toll manufacturing deduction adjustable against my final tax? Section 153(3) makes tax deductible under sub-section (1) minimum tax, with an exception for payments received on sale or supply of goods by a company that manufactures those goods or by a listed public company. The Ordinance does not say whether a company doing toll manufacturing on someone else's goods counts as a manufacturer of such goods for that exception. #### Does the deduction apply to small job-work bills? Section 153(1)(a) does not apply where payments are less than Rs. 75,000 in aggregate during a financial year. Above that, the deduction is made from the gross amount payable, including sales tax. ### Citations - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "For the removal of doubt, it is explained that the income of resident person referred to in sub-section (3) means the amount on which tax is deductible under sub-section (1) or" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), paragraph (1), clause (b)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (Rate of deduction or collection of tax) and rule 10](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Sales Tax Act, 1990, Eleventh Schedule, Table, S. No. 14 (Registered persons engaged in toll manufacturing)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- # Importers and exporters Customs duty, goods declarations, valuation, advance tax at import and export proceeds. ## What is the 3% value addition sales tax charged on commercial imports, and who is exempt from it? Source: https://qanoondigest.com/faq/importers-exporters/value-addition-sales-tax-on-imports Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 7A(2) and the Twelfth Schedule of the Sales Tax Act charge a 3% ad valorem value addition tax at import, on top of ordinary sales tax under section 3. It does not apply to listed goods such as manufacturers' raw materials for in-house use, mobile phones, gold, silver and Third Schedule goods taxed on retail price. **Applies to:** Importers of taxable goods into Pakistan, especially traders who import for resale, for the period after 30 June 2026. ### What does the law say? Section 7A(2) of the Sales Tax Act, 1990 says that for goods in the Twelfth Schedule, "the minimum value addition tax, against the value added by the registered person, shall be payable" at the rate and by the persons specified in that Schedule. The Federal Government can amend the Schedule by notification. The Twelfth Schedule has a single entry: | S. No. | Goods | PCT heading | Rate | |---|---|---|---| | 1 | All imported goods subject to exclusions as in conditions and procedure given after the Table | Respective heading | 3% ad valorem | Paragraph (1) of the procedure says this value addition tax is "levied and collected at import stage from the importers on all taxable goods" chargeable under section 3, "in addition to the tax chargeable under section 3". Section 3(1)(b) already charges 18% on goods imported into Pakistan. So for goods caught by the Schedule, sales tax at import is 18% plus 3%. The Schedule itself says "all imported goods", not only commercial imports. In practice the exclusions carve out most imports by manufacturers for their own use, which is why the tax falls mainly on goods imported for resale. ### Who is exempt from it? Paragraph (2) of the Schedule lists goods on which it is not charged: 1. raw materials and intermediary goods imported by a manufacturer for in-house consumption, excluding compressor scrap (7204.4940), motor scrap (7204.4990) and copper cable cutting scrap (7404.0090); 2. petroleum products in Chapter 27 imported by a licensed oil marketing company for sale in the country; 3. registered service providers importing goods for in-house business use, not intended for further supply; 4. cellular mobile phones or satellite phones (8517.1419, 8517.1430 and 8517.1390); 5. LNG / RLNG; 6. second hand and worn clothing or footwear (6309.000); 7. gold, in un-worked condition; 8. silver, in un-worked condition; 9. Third Schedule goods on which tax is paid on retail price basis; 10. plant, machinery and equipment in Chapters 84 and 85 of the Customs tariff imported by a manufacturer for in-house installation or use; 11. electric vehicle CKD kits for small cars or SUVs (50 kwh battery or below) and LCVs (150 kwh or below), "till 30th June, 2026"; 12. the same electric small cars, SUVs and LCVs in CBU condition, also "till 30th June, 2026"; 13. electric 2 and 3 wheelers and heavy commercial vehicles in CBU condition, "till 30th June, 2025"; 14. motor cars of cylinder capacity up to 850cc. Items 11 to 13 carry their own end dates, which have passed on the text as amended to 30 June 2026. ### What changed in 2026? The Finance Act, 2026 made two changes to the Schedule: - **Same-state resale by manufacturers.** A proviso to exclusion (i) says the manufacturer is liable to pay 3% value addition tax on the imports, "along with default surcharge, in case the imported goods are supplied in the same state whether in the same packing, repacked, or in bulk". This applies apart from any other liability under the Act. - **Coal for power producers.** New paragraph (6) sets the rate at 1% for imported coal, on condition that it is "exclusively and directly supplied to Independent Power Producers". ### How is it adjusted? Paragraph (3) says the value addition tax paid at import forms part of input tax, and the importer deducts it from output tax for the tax period, subject to the Act's limits. Excess input tax is carried forward. Section 7(2)(ii) requires the importer to hold the goods declaration in its name showing its sales tax registration number before claiming input tax on imports. Paragraph (4) limits refunds: excess input tax attributable to this tax "shall not be refunded to a registered person in any case, except that as used for making of zero-rated supplies". Paragraph (5) lets a registered person that also deals in goods other than imported goods claim a refund of carried-forward input tax only after deducting the amount attributable to tax paid at import. ### Worked example (illustrative figures) Rukhsana Enterprises, a registered trader in Lahore, imports kitchen appliances for resale. Assume they are not in the Third Schedule and not excluded. Value of the import for sales tax (customs value plus customs duties): **Rs. 3,000,000**. 1. Sales tax under section 3 at 18%: Rs. 3,000,000 x 18% = **Rs. 540,000**. 2. Value addition tax at 3%: Rs. 3,000,000 x 3% = **Rs. 90,000**. 3. Total sales tax paid at import: **Rs. 630,000**. 4. She sells the whole consignment in the same month for Rs. 3,600,000 plus sales tax. Output tax: Rs. 3,600,000 x 18% = **Rs. 648,000**. 5. Input tax on the import: Rs. 630,000. Net payable with the return: Rs. 648,000 - Rs. 630,000 = **Rs. 18,000**. If she had sold for Rs. 3,400,000 instead, output tax would be Rs. 612,000, and the Rs. 18,000 of excess input tax would be carried forward, not refunded, under paragraphs (3) and (4). ### Common mistakes - **Treating it as a separate tax outside the return.** It is sales tax, and it becomes input tax. - **Assuming "manufacturer" is enough for exemption.** The exclusion covers raw materials and intermediary goods for in-house consumption, and machinery for in-house use. Goods resold in the same state now attract the 3% plus default surcharge. - **Relying on expired exclusions.** Check the dates written into items (xi) to (xiii). ### What to check in the official text Read section 7A and the full Twelfth Schedule in the official PDF of the Sales Tax Act as amended to 30 June 2026, where the table and its footnotes keep their layout. Check for notifications amending the Schedule under the proviso to section 7A(2), which are outside this corpus. ### Frequently asked #### Is the 3% value addition tax a cost, or can I claim it back? Paragraph (3) of the Twelfth Schedule says it forms part of input tax and is deducted from output tax for the tax period. Paragraph (4) says excess input tax attributable to it is not refunded, except where used for zero-rated supplies. #### My factory imported raw material but sold some of it unprocessed. What happens? A proviso added by the Finance Act, 2026 says the manufacturer is liable to pay the 3% value addition tax, with default surcharge, where the imported goods are supplied in the same state, whether in the same packing, repacked or in bulk. #### Are electric vehicles still excluded? The exclusions for electric vehicle CKD kits and CBU cars, SUVs and LCVs were stated to run till 30 June 2026, and the one for 2 and 3 wheelers and heavy commercial vehicles till 30 June 2025. On their own wording those dates have passed. ### Citations - [Sales Tax Act, 1990, section 7A (Levy and collection of tax on specified goods on value addition)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#7a-levy-and-collection-of-tax-on-specified-goods-on-value-addition), as amended to 2026-06-30: "the minimum value addition tax, against the value added by the registered person, shall be payable, at the rate and by the registered persons or class of registered persons, specified therein" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Twelfth Schedule (see sub-section (2) of section 7A), Table and procedure and conditions](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "in the case of goods imported into Pakistan, of the person importing the goods" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 7 (Determination of tax liability)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#7-determination-of-tax-liability), as amended to 2026-06-30: "in case of goods imported into Pakistan, he holds bill of entry or goods declaration in his name and showing his sales tax registration number" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What must I declare in my baggage at a Pakistani airport, and what happens if customs detains it? Source: https://qanoondigest.com/faq/importers-exporters/airport-baggage-declaration-detained-goods Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 139 requires every passenger and crew member to declare the contents of their baggage, answer the officer's questions and produce it for examination. A false or missing declaration is an offence, and concealing currency, gold, precious metals or stones is treated as smuggling. Section 142 lets a truthful passenger leave a dutiable or restricted item for return on departure. **Applies to:** Passengers and crew arriving in or leaving Pakistan through an airport, seaport or land border customs station with accompanied or unaccompanied baggage. Every traveller clearing customs in Pakistan makes a baggage declaration, whether they fill in a form or answer an officer's question at the counter. The Customs Act, 1969 attaches real consequences to that declaration. A truthful one opens the door to duty-free passage or temporary storage. A false or missing one is an offence, and for cash and gold it is treated as smuggling. ### What does the law say? **The duty to declare, section 139(1).** The owner of any baggage, whether passenger or crew, or a representative for a group of passengers, must make a verbal or written declaration of its contents in the manner prescribed by rules. The owner must answer the officer's questions about the baggage and anything carried with them, and produce the baggage for examination. Where the Customs Computerized System is operational, declarations and communications are electronic. **False or missing declaration, section 139(2).** A passenger or crew member who makes a false declaration, or fails to declare, is guilty of an offence under the Act. **Currency and gold, section 139(3).** A person who tries to bring into or take out of Pakistan currency, gold, precious metals or stones, in any form, through concealment in baggage or by circumventing customs controls at airports, seaports and land border stations, is guilty of smuggling within section 2(s). **What counts as baggage, section 2(bbb).** Baggage includes unaccompanied baggage but does not include motor vehicles. **Rate of duty, section 140.** Duty on baggage is charged at the rate in force on the date of the section 139 declaration. For mishandled or unaccompanied baggage, it is the rate in force on the date the clearance declaration is presented after the goods land. **Duty-free items, section 141.** The officer may pass free of duty any article that is bona fide meant for the passenger's own use or for making a gift, subject to the limits and conditions in the rules. **Detention for return, section 142.** Where baggage contains a dutiable, prohibited or restricted article, the passenger has made a true declaration, and the officer is satisfied it was not brought in for consumption in Pakistan, the officer may, at the passenger's request, detain the article so it can be returned when the passenger leaves Pakistan. ### What are the penalties for a false or missing declaration? Clause 70 of the table under section 156(1) sets them, read here from the source text of the Act: - **Goods other than currency, gold, silver, platinum and precious stones:** a penalty not exceeding three times the value of the goods, and the goods are liable to confiscation. - **Currency:** confiscation and a penalty in bands by the amount over the permissible limit. The bands run from a penalty not exceeding the value of the excess (up to US$10,000 over) to a penalty not exceeding ten times the value of the currency and imprisonment of up to fourteen years, with a five-year minimum, above US$200,000. - **Gold, silver, platinum and precious stones:** confiscation and a penalty in bands by weight, from a penalty not exceeding the value (up to 15 tola of gold or equivalent) to ten times the value and up to fourteen years' imprisonment above 500 tola. The "permissible limit" for currency is not defined in the Act's text in this corpus. ### Worked example (illustrative figures) Bilal flies from Dubai into Lahore. He has a new camera meant for his own use and a professional drone he is carrying on to a shoot abroad next week. 1. He declares both items under section 139(1). 2. The officer may pass the camera free of duty under section 141 if satisfied it is bona fide for Bilal's own use, within whatever limits the rules set. 3. Suppose the drone is restricted. Because Bilal declared it truthfully and it is not meant for use in Pakistan, he can ask the officer to detain it under section 142 and collect it when he leaves. 4. Now suppose instead Bilal had not declared goods worth Rs. 200,000. Under clause 70(i) the goods are liable to confiscation and the penalty ceiling is 3 × Rs. 200,000 = Rs. 600,000. ### What if ...? **What if my bag arrives on a later flight?** Section 140 applies the duty rate in force on the date the clearance declaration for the mishandled or unaccompanied baggage is presented after landing. **What if I disagree with a confiscation or penalty order?** The order can be appealed. The forum depends on the rank of the officer who passed it, as explained on the related page on customs appeals. ### Common mistakes - **Thinking a verbal "nothing to declare" is not a declaration.** Section 139(1) treats a verbal declaration as a declaration, and section 139(2) makes a false one an offence. - **Carrying cash hidden in luggage.** Section 139(3) turns concealment of currency or gold into smuggling, which carries heavier consequences than a simple failure to declare. - **Asking for detention after lying.** Section 142 applies only where a true declaration was made. - **Shipping a car as baggage.** Section 2(bbb) excludes motor vehicles from baggage. ### What to check in the official text Read sections 139 to 142 and clause 70 of the section 156 table in the Customs Act as amended to 30 June 2025. The allowances for personal effects and gifts, the permissible currency limit and the declaration form come from the Baggage Rules and other instruments that are not part of this corpus, so any allowance has to be confirmed in the current Baggage Rules. ### Frequently asked #### Do I have to declare my baggage if I have nothing dutiable? Section 139(1) requires the owner of any baggage to make a verbal or written declaration of its contents in the manner prescribed by rules, and to answer the officer's questions. Where the Customs Computerized System is operational, declarations are electronic. The duty-free allowances themselves are set in the Baggage Rules, which are not part of this corpus. #### What happens if I carry undeclared cash in my luggage? Section 139(3) treats bringing currency into or out of Pakistan through concealment in baggage, or by circumventing customs controls, as smuggling within section 2(s). Clause 70 of the section 156 table makes the currency liable to confiscation and sets penalties in bands by the amount over the permissible limit, with imprisonment for larger amounts. #### Can customs keep an item for me until I fly out again? Yes, on conditions. Section 142 lets the officer, at the passenger's request, detain a dutiable, prohibited or restricted article for return on leaving Pakistan, but only where a true declaration was made and the officer is satisfied it was not brought in for consumption in Pakistan. ### Citations - [Customs Act, 1969, section 139 (Declaration by passenger or crew of baggage)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#139-declaration-by-passenger-or-crew-of-baggage), as amended to 2025-06-30: "where any person attempts to bring into or takes out of Pakistan, currency, gold, precious metals or stones, in any form, through concealment in baggage or circumventing customs controls" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 140 (Determination of rate of duty in respect of baggage)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#140-determination-of-rate-of-duty-in-respect-of-baggage), as amended to 2025-06-30: "The rate of duty if any, applicable to baggage shall be the rate in force on the date on which a declaration is made in respect of such baggage under section 139" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 141 (Bona fide baggage exempt from duty)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#141-bona-fide-baggage-exempt-from-duty), as amended to 2025-06-30: "pass free of duty any article in the baggage of a passenger or a member of the crew in respect of which the said officer is satisfied that it is bona fide meant for the use of such passenger or for making gift." Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 142 (Temporary detention of baggage)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#142-temporary-detention-of-baggage), as amended to 2025-06-30: "detain such article for the purpose of being returned to him on his leaving Pakistan." Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 2 (Definitions)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#2-definitions), as amended to 2025-06-30: "(bbb) “baggage” includes unaccompanied baggage but does not include motor vehicles;" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 156 (Punishment for offences), Table under sub-section (1), clause 70 (baggage)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#156-punishment-for-offences), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf --- ## How do I appeal a customs order, and is it the Collector (Appeals) or the Appellate Tribunal? Source: https://qanoondigest.com/faq/importers-exporters/appeal-customs-order-time-limit Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It depends on who passed the order. Section 193 sends orders by an officer below Additional Collector to the Collector (Appeals) within thirty days of communication. Section 194A sends orders of an Additional Collector or above, and orders of the Collector (Appeals), to the Appellate Tribunal within forty-five days. Section 195C also offers alternative dispute resolution. **Applies to:** Importers, exporters, travellers and vehicle owners who have received a customs decision or order they disagree with, such as an assessment, confiscation or penalty order. The Customs Act, 1969 has two first-level appeal forums, and the rank of the officer who signed the order decides which one you use. Getting the forum wrong, or missing the short deadline, is the most common way an appeal fails before it is heard. ### What does the law say? **Collector (Appeals), section 193.** Any person, including a customs officer, aggrieved by a decision or order under the provisions listed in section 193(1), which cover matters such as refunds, assessment and adjudication, passed by an officer **below the rank of Additional Collector** may appeal to the Collector (Appeals). The appeal is due within thirty days of the date the order is communicated. A late appeal may be admitted if the Collector (Appeals) is satisfied there was sufficient cause. The fee is one thousand rupees under section 193(3). **Appellate Tribunal, section 194A.** The following orders go to the Customs Appellate Tribunal: - an adjudication order passed by an officer **not below the rank of Additional Collector**; - an order passed by the Collector (Appeals) under section 193; - an order passed when the Board or a Collector calls for and examines the record of a subordinate officer's proceedings; - a revision order of the Director General Customs Valuation on a valuation ruling; - an appellate or quasi-judicial order of the Chief Collector of Customs. The Tribunal appeal is due within forty-five days of communication of the order, under section 194A(2). The fee under section 194A(3) is twenty thousand rupees for a company and five thousand rupees for anyone else. Late filing may be admitted for sufficient cause under section 194A(4). ### How does it work in practice? **Hearing and decision times.** Section 193A gives the appellant a hearing and requires the Collector (Appeals) to decide within ninety days of filing, extendable by up to sixty days, with further extension possible by the Board. Section 194B requires the Tribunal to decide within ninety days, extendable by sixty days with the consent of both parties. **Recovery while the appeal runs.** Filing does not by itself stop recovery. Section 193A(2A) lets the Collector (Appeals) stay recovery for up to thirty days after hearing the department. Section 194A(5) says the adjudged amount remains payable unless the Tribunal stays it. A Tribunal stay starts at thirty days, may be confirmed or varied, cannot exceed ninety days in total, and requires a pay order or bank guarantee of not less than twenty-five per cent of the principal amount. **Small cases.** The proviso to section 194A(1) lets the Tribunal refuse to admit an appeal where the fine or penalty determined does not exceed fifty thousand rupees. Two related limbs of that proviso, for confiscated goods and duty differences, are printed without their amounts in the consolidated text, so their threshold cannot be confirmed from this corpus. **Alternative dispute resolution, section 195C.** A person with a dispute under litigation about duty liability, refunds, penalties or fines, confiscation, or relaxation of time limits may apply to the Board for a committee. It is not available where criminal proceedings have started or where the Board considers a question of law with larger revenue impact is involved. The application must include an initial proposal, including an offer of payment. The Board appoints the committee within fifteen days, and the committee decides within forty-five days, extendable by fifteen. Recovery is deemed stayed while the committee works. If the applicant accepts the decision, the appeal must be withdrawn within thirty days of service of the decision. **After the Tribunal.** Section 196 allows a reference to the High Court on a question of law, or a mixed question of law and fact, within thirty days of receipt of the Tribunal's order. ### Worked example (illustrative figures) Sana imports textile machinery parts through Karachi. A Deputy Collector passes an adjudication order against her company, communicated on 3 March. 1. A Deputy Collector is below the rank of Additional Collector, so section 193 applies. The appeal goes to the Collector (Appeals). 2. Thirty days from 3 March falls on 2 April. The fee is Rs. 1,000. 3. The Collector (Appeals) rejects the appeal and the order is communicated on 10 June. 4. That order is appealable to the Tribunal under section 194A(1)(b). Forty-five days from 10 June falls on 25 July. 5. Her company pays the Tribunal fee of Rs. 20,000. The Act does not set out a day-counting rule in these sections, so the dates above are illustrative. ### What if ...? **What if the order was signed by an Additional Collector or Collector?** It skips the Collector (Appeals) and goes straight to the Tribunal under section 194A(1)(a). **What if I miss the deadline?** Both sections 193 and 194A allow a late appeal if the forum is satisfied there was sufficient cause. Admission is at the forum's discretion. ### Common mistakes - **Filing with the wrong forum.** The dividing line is the rank of the officer who passed the order, not the amount. - **Assuming an appeal freezes recovery.** Section 194A(5) says the amount stays payable unless a stay is granted. - **Treating ADR as a separate appeal.** Section 195C resolves a dispute already under litigation, and the pending appeal is withdrawn if the decision is accepted. ### What to check in the official text Read sections 193, 193A, 194A, 194B, 195C and 196 in the Customs Act as amended to 30 June 2025. The form and verification of appeals are prescribed by rules under section 193(2), and ADR procedure by rules under section 195C(15). Those rules and any Board notification changing officers' powers are not part of this corpus. ### Frequently asked #### What is the time limit to appeal to the Collector (Appeals)? Section 193(1) allows thirty days from the date the decision or order is communicated. A later appeal may be admitted if the Collector (Appeals) is satisfied there was sufficient cause for the delay. Section 193(3) requires a fee of one thousand rupees. #### What is the fee and deadline for the Customs Appellate Tribunal? Section 194A(2) sets forty-five days from the date the order is communicated. Under section 194A(3), a person other than a customs officer pays twenty thousand rupees if a company and five thousand rupees otherwise. #### Does filing an appeal stop customs recovering the duty? Not automatically. Section 194A(5) says the adjudged amount remains payable unless the Tribunal stays recovery, and a stay is capped at ninety days and conditioned on a pay order or bank guarantee of at least twenty-five per cent of the principal. Section 193A(2A) lets the Collector (Appeals) stay recovery for up to thirty days. ### Citations - [Customs Act, 1969, section 193 (Appeals to Collector (Appeals))](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#193-appeals-to-collector-appeals), as amended to 2025-06-30: "by an officer of Customs below the rank of Additional Collector may prefer appeal to the Collector (Appeals) within thirty days of the date of communication to him of such decision or order" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 193A (Procedure in appeal)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#193a-procedure-in-appeal), as amended to 2025-06-30: "The Collector (Appeals) may, for a period not exceeding thirty days, stay recovery of duty and taxes on filing of appeal" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 194A (Appeals to the Appellate Tribunal)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#194a-appeals-to-the-appellate-tribunal), as amended to 2025-06-30: "(a) a decision or order passed by an officer of Customs not below the rank of Additional Collector under section 179;" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 194B (Decision of appeals by the Appellate Tribunal)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#194b-decision-of-appeals-by-the-appellate-tribunal), as amended to 2025-06-30: "Provided that the appeal shall be decided within ninety days of filing the appeal" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 195C (Alternative dispute resolution (ADR))](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#195c-alternative-dispute-resolution-adr), as amended to 2025-06-30: "may apply to the Board for the appointment of a committee for the resolution of dispute in appeal." Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 196 (Reference to High Court)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#196-reference-to-high-court), as amended to 2025-06-30: "may file a reference, in the prescribed form, along with a statement of the case, before the High Court, stating any question of law or a mixed question of law and fact" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf --- ## How do I claim a lower customs duty rate on goods from a free trade agreement country such as China? Source: https://qanoondigest.com/faq/importers-exporters/free-trade-agreement-lower-customs-duty Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 18C of the Customs Act, 1969, duty is charged at the standard rate unless the owner claims the preferential rate at the time of importation and the goods are found, under the origin rules, to be produce or manufacture of a notified free trade area. Origin can also be settled in advance through a section 212B ruling. **Applies to:** Importers bringing in goods made in a country that has a trade agreement with Pakistan and wanting the lower agreed duty rate. ### What does the law say? Section 18C of the Customs Act, 1969, amended to 30 June 2025, is the provision that connects trade agreements to the duty you pay. - **Section 18C(1)** covers the case where a trade agreement between Pakistan and another country says duty lower than the First Schedule rate is to be charged on goods that are the produce or manufacture of that country. The Federal Government may make rules for deciding whether goods qualify, and for "requiring the owner to make a claim at the time of importation, supported by such evidence as may be prescribed in the said rules". - **Section 18C(2)** sets the default. Where a preferential rate exists, duty is collected "at the standard rate unless the owner of the article claims at the time of importation" that the preferential rate applies, and the goods are determined under the rules to be produce or manufacture of the preferential or free trade area. - **Section 18C(3)** says a "preferential area or free trade area" is any country or territory the Federal Government declares to be one by notification. - **Section 18C(4)** lets the Federal Government discontinue, raise (up to the standard rate) or lower a preferential rate by notification when it considers immediate action necessary in the interests of trade. ### How does it work in practice? Three things have to line up for the lower rate: 1. **The country must be notified.** Section 18C(3) makes the notification, not the agreement alone, the trigger. The Act does not name any country. Whether China or any other country is currently a notified area is a matter of notifications this site does not hold. 2. **You must claim at importation.** The claim is made when the goods are imported, in practice on the goods declaration. Section 18C(2) is written so that the standard rate is the fallback whenever no claim is made. 3. **The goods must meet the origin rules.** Qualification is decided "in accordance with the rules made under sub-section (1)". Those rules set what counts as produce or manufacture of the partner country and what evidence supports the claim. ### Can I get origin decided before I import? Yes. Section 212B(2)(ii) allows an advance ruling on the "determination of origin of the goods under the rules of origin notified for bilateral and multilateral agreements". Section 2 defines an advance ruling as a written decision made on an applicant's request "prior to their importation or exportation". Section 212B(3) says proceedings are to be completed within ninety days, and section 212B(5) makes the ruling binding on Customs for three years unless the law, facts or circumstances change. The Customs (Advance Ruling) Rules, 2020, which form part of the Customs Rules, 2001, list origin as one of the matters for an advance ruling in rule 791(b), and the application form annexed to those rules (Annex-B) asks for the legal framework (preferential or non-preferential), the materials used, the rule of origin considered satisfied and the country of origin envisaged. ### Worked example (illustrative figures) Sana, who runs a trading business in Lahore, imports a consignment with a customs value of Rs. 1,500,000. The rates below are **hypothetical**: actual standard and preferential rates are in the First Schedule and the notifications, which are not reproduced in the Act text held here. 1. **Standard rate, hypothetical 20%.** 20% of Rs. 1,500,000 = Rs. 300,000. 2. **Preferential rate, hypothetical 5%.** 5% of Rs. 1,500,000 = Rs. 75,000. 3. **Difference at stake.** Rs. 300,000 - Rs. 75,000 = Rs. 225,000. If Sana files the goods declaration without claiming the preferential rate, section 18C(2) means Rs. 300,000 is charged. If she claims it and the goods are found to meet the origin rules, the lower rate applies. ### What if my goods were only shipped through the FTA country? Section 18C refers to articles that are "the produce or manufacture" of the preferential or free trade area. Where goods come from is decided by the origin rules, not by the port of shipment. The detailed tests are in rules that are not in this corpus. ### What if the preferential rate is cut or withdrawn? Section 18C(4) allows immediate change by notification. The rate that applies to a consignment follows section 30: the rate in force when the goods declaration is manifested. ### Common mistakes - **Assuming the lower rate applies automatically.** Section 18C(2) makes the standard rate the default. - **Relying on the invoice or bill of lading country.** Qualification depends on the origin rules, not on where the seller or the ship is based. - **Reading an advance ruling as permanent.** Section 212B(5) binds Customs for three years and only while law, facts and circumstances are unchanged. Rule 795 in our copy of the Customs Rules (updated to 30 June 2023) still says one year; the Act, as amended by the Finance Act, 2021, says three years. ### What to check in the official text Read section 18C and section 212B of the Customs Act, 1969, and rules 789 to 798 of the Customs Rules, 2001. The agreement texts, the notifications declaring free trade areas, the preferential rates and the rules of origin under section 18C(1) are not part of this corpus. Check them in the official notifications before relying on a particular rate or origin test. ### Frequently asked #### Can I claim the FTA rate after my goods are cleared? Section 18C(2) requires the owner to claim the preferential rate at the time of importation. The Act text does not provide a route for a claim made later, so without a claim at importation the standard rate is charged. #### What proof of origin is needed? Section 18C(1) says the evidence is whatever the rules made under that sub-section prescribe. Those origin rules, and the agreement texts behind them, are not part of the material held on this site, so the exact documents cannot be stated here. #### Can the government change the preferential rate? Yes. Section 18C(4) lets the Federal Government, by notification, discontinue, increase (up to the standard rate) or decrease the preferential rate for an article when it considers immediate action necessary in the interests of trade. ### Citations - [Customs Act, 1969, section 18C (Rates of duty and taxes and determination of origin under trade agreements)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#18c-rates-of-duty-and-taxes-and-determination-of-origin-under-trade-agreements), as amended to 2025-06-30: "the duty to be levied and collected shall be at the standard rate unless the owner of the article claims at the time of importation that it is chargeable with a preferential rate of duty" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 212B (Advance Ruling)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#212b-advance-ruling), as amended to 2025-06-30: "determination of origin of the goods under the rules of origin notified for bilateral and multilateral agreements" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 2 (Definitions)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#2-definitions), as amended to 2025-06-30: "a written decision by the Board or any officer or a committee authorized by the Board, on the request of an applicant for determination of classification, origin or applicability of a particular relief or exemption on goods prior to their importation or exportation" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Rules, 2001, section 791 (Issuance of advance ruling)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#791-issuance-of-advance-ruling), as amended to 2023-06-30: "determination of origin of the goods under the rules of origin notified for bilateral and multilateral agreements; and" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, section 795 (Validity of the order passed by the Committee)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#795-validity-of-the-order-passed-by-the-committee), as amended to 2023-06-30: "a ruling issued by the Committee shall be binding on the customs for a period of one year unless there is a change in fact or circumstances on the basis of which the advance ruling was pronounced." Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Act, 1969, section 30 (Date of determination of rate of import duty)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#30-date-of-determination-of-rate-of-import-duty), as amended to 2025-06-30: "The rate of duty applicable to any imported goods shall be the rate of duty in force;" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf --- ## Can customs seize my goods, and do I get a show cause notice before they are confiscated? Source: https://qanoondigest.com/faq/importers-exporters/customs-seizure-show-cause-notice-rights Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 168 lets customs seize goods liable to confiscation, and section 171 requires written grounds. No confiscation order can be passed without a notice and a hearing under section 180. If no show cause notice is issued within two months of seizure, extendable by two more, section 168(2) requires the goods to be returned. **Applies to:** Importers, exporters, transporters and anyone else from whose possession customs has seized goods or documents. Seizure and confiscation are two different steps under the Customs Act, 1969. Seizure is customs taking control of goods it believes are liable to confiscation. Confiscation is the order, made after adjudication, that takes the goods away permanently. The Act puts written notice, a hearing and time limits between the two. ### What does the law say about seizure? Section 168(1) allows the appropriate officer to seize "any goods liable to confiscation under this Act". Where seizing them is not practicable, the officer may instead order the owner or the person holding them not to remove, part with or deal with the goods without the officer's permission. Section 168(3) also allows seizure of documents or things useful as evidence, and section 168(4) entitles the person to make copies or take extracts from seized documents in the presence of a customs officer. Section 171 says that when anything is seized, the officer "shall, as soon as may be, inform in writing" the person from whose possession it was taken "of the grounds of such seizure". Section 169(1) requires seized goods to be delivered, without unnecessary delay, to the customs officer authorised to receive them, or deposited at the nearest custom-house or a place the Collector appoints. ### Do I get a show cause notice before confiscation? Yes. Section 180 says no order confiscating goods or imposing a penalty shall be passed unless the owner or person concerned: - (a) is informed in writing of the grounds on which confiscation or penalty is proposed (or orally, if the person consents in writing); - (b) is given an opportunity to make a written representation within a reasonable time the officer specifies (or orally, if the person prefers that in writing); and - (c) is given a reasonable opportunity of being heard personally or through a counsel or duly authorised agent. In the site file for the 30 June 2025 edition, section 180 is printed at the end of section 179 rather than under its own heading, which is why it is cited through section 179 on this page. ### What are the time limits? | Step | Section | Time limit | |---|---|---| | Show cause notice after seizure | 168(2) | Two months from seizure, extendable by the Collector by up to two months for recorded reasons | | Decision after the notice, ordinary cases | 179(3) | Ninety days from the notice, extendable by the Collector by up to sixty days | | Decision where clause (s) of section 2 (smuggling) is invoked | 179(3), first proviso | Forty-five days, extendable by fifteen days | | Decision where goods are lying at a sea-port, airport or dry port | 179(3), third proviso | Forty-five days, extendable by fifteen days | The second proviso to section 179(3) excludes time lost to a stay order, alternative dispute resolution, or adjournments sought by the petitioner of up to thirty days. **The consequence of a missed notice deadline.** Section 168(2) says that if no notice is given in time, the goods "shall be returned to the person from whose possession they were seized". Its second proviso says this limit does not apply to goods specified under the first proviso to section 181, which are the goods or classes of goods for which the Board has ordered that the option to pay a fine in lieu of confiscation shall not be given. ### Worked example (illustrative dates) Customs in Peshawar seizes a truckload of tyres from Kamran on 5 February 2026. 1. **Notice deadline.** Two months from 5 February is 5 April 2026. With the maximum two-month extension, 5 June 2026. 2. **Notice issued on 20 March 2026.** Ninety days from 20 March is 18 June 2026 (11 days to 31 March, 30 in April, 31 in May, 18 in June). 3. **Maximum extension.** Sixty more days runs to 17 August 2026 (12 days to 30 June, 31 in July, 17 in August). 4. **If smuggling under section 2(s) is alleged instead.** Forty-five days from 20 March is 4 May 2026, extendable by fifteen days to 19 May 2026. ### Who decides the case? Section 179(1) sets the officer's jurisdiction by the amount of duty and taxes involved, excluding the conveyance: a Collector without limit, an Additional Collector up to five million rupees, a Deputy Collector up to two million rupees, and a Superintendent or Principal Appraiser up to one hundred thousand rupees. For export goods, the proviso measures this by FOB value at twice each limit. Section 179(2) lets the Board vary these limits or transfer cases. ### What if the goods are perishable? Section 169(4) allows the Collector, or an officer he authorises, to have seized goods sold even while adjudication or an appeal is pending, with the proceeds kept in deposit. Section 169(5) says that if the goods are later found not liable to confiscation, the entire sale proceeds, after deduction of duties, taxes or dues, are handed to the owner. ### Common mistakes - **Treating seizure as confiscation.** Seizure is provisional. Confiscation needs an adjudicated order after the section 180 process. - **Not asking for written grounds.** Section 171 requires them as soon as may be. - **Assuming the two-month rule always applies.** It does not apply to goods the Board has excluded from the fine option under section 181. ### What to check in the official text Read sections 168, 169, 171, 179 and 180, and clause (s) of section 2 for the meaning of "smuggle". Any Board order under the first proviso to section 181 or notification under section 179(2) is issued separately and is not held in this corpus. ### Frequently asked #### How long does customs have to issue a show cause notice after seizing goods? Section 168(2) gives two months from seizure. The Collector of Customs may extend this, for reasons recorded in writing, by up to two more months. If no notice is given in time, the goods must be returned to the person they were seized from, except for goods the Board has excluded from the fine option under section 181. #### Can customs confiscate goods without hearing me? No. Section 180 says no order confiscating goods or imposing a penalty is passed unless the owner is told the grounds in writing, given a chance to make a written representation, and given a reasonable opportunity to be heard personally or through a counsel or authorised agent. #### How quickly must the case be decided after the notice? Section 179(3) requires a decision within ninety days of the show cause notice, extendable by the Collector by up to sixty days. Smuggling cases and cases where goods are lying at a sea-port, airport or dry port must be decided within forty-five days, extendable by fifteen. ### Citations - [Customs Act, 1969, section 168 (Seizure of things liable to confiscation)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#168-seizure-of-things-liable-to-confiscation), as amended to 2025-06-30: "Where any goods are seized under sub-section (1) and no show cause notice in respect thereof is given under section 180 within two months of the seizure of the goods, the goods shall be returned to the person from whose possession they were seized" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 171 (When seizure or arrest is made, reason in writing to be given)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#171-when-seizure-or-arrest-is-made-reason-in-writing-to-be-given), as amended to 2025-06-30: "inform in writing the person so arrested or the person from whose possession the things are seized of the grounds of such seizure or arrest." Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 179 (Power of adjudication), including section 180, which the site file prints at the end of section 179](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#179-power-of-adjudication), as amended to 2025-06-30: "(c) is given a reasonable opportunity of being heard personally or through a counsel or duly authorized agent." Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 169 (Things seized how dealt with)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#169-things-seized-how-dealt-with), as amended to 2025-06-30: "(1) All things seized on the ground that they are liable to confiscation under this Act shall, without unnecessary delay, be delivered into the care of the officer of customs authorized to receive the same." Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 181 (Option to pay fine in lieu of confiscated goods)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#181-option-to-pay-fine-in-lieu-of-confiscated-goods), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 2 (Definitions), clause (s), meaning of "smuggle"](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#2-definitions), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf --- ## Which duties and taxes are charged when I import goods into Pakistan, for example from China? Source: https://qanoondigest.com/faq/importers-exporters/taxes-charged-on-imported-goods-pakistan Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer A goods declaration can carry up to five charges: customs duty under section 18 of the Customs Act, regulatory and additional customs duty where notified, sales tax at 18% under section 3 of the Sales Tax Act, a 3% value addition tax on many imports, and advance income tax under section 148 of the Income Tax Ordinance. **Applies to:** Traders, small businesses and individuals importing goods into Pakistan through customs, from China or any other country, for the period after 30 June 2026. ### What does the law say? Three federal laws each add their own charge at the moment goods are cleared through customs. Customs collects all of them on the same goods declaration, but each one is a separate levy with its own base. 1. **Customs duty.** Section 18(1) of the Customs Act, 1969 charges customs duty on goods imported into Pakistan "at such rates as are prescribed in the First Schedule". That First Schedule is the customs tariff. It is **not in this corpus**, so this page cannot tell you the duty rate for any product. 2. **Regulatory duty and additional customs duty.** Section 18(3) lets the Federal Government levy a regulatory duty by notification, at a rate not exceeding 100% of the value of the goods. Section 18(5) lets it levy an additional customs duty on goods specified in the First Schedule, at a rate not exceeding 35% of their value. Both are "in addition to" ordinary customs duty. The notifications that set the actual rates are outside this corpus. 3. **Sales tax.** Section 3(1)(b) of the Sales Tax Act, 1990 charges sales tax at 18% of the value of goods imported into Pakistan, and section 3(3)(b) puts the liability on the person importing them. 4. **Value addition tax.** Section 7A(2) and the Twelfth Schedule of the Sales Tax Act add a further 3% ad valorem on imported goods, with a list of exclusions such as raw materials a manufacturer imports for its own consumption. 5. **Advance income tax.** Section 148 of the Income Tax Ordinance, 2001 requires the Collector of Customs to collect advance tax from every importer at the rate in Part II of the First Schedule to the Ordinance. ### What value is each charge worked out on? Each tax builds on the one before it, which is why the total is higher than the rates suggest on their own. | Charge | Base in the law | |---|---| | Customs duty, regulatory duty, additional customs duty | Customs value under section 25 of the Customs Act | | Sales tax (18%) and value addition tax (3%) | Section 2(46)(d) of the Sales Tax Act: the value under section 25 of the Customs Act, including the customs duties and federal excise duty levied on the goods | | Section 148 income tax | Section 148(9)(b): the customs value "increased by the custom-duty, federal excise duty and sales tax" payable on the import | Section 25(1) of the Customs Act sets the customs value as the transaction value, the price actually paid or payable for the goods when sold for export to Pakistan. Section 25(2)(a) adds, where not already in the price, the cost of transport to the port or airport, loading, unloading and handling charges, and insurance. So a CIF-type value, not the bare factory price in China, is the starting point. ### Worked example (illustrative figures) Bilal runs a small trading business in Faisalabad and imports a consignment of household goods from China for resale. Assume the goods are **not** listed in Part I or Part II of the Twelfth Schedule to the Income Tax Ordinance (so they fall in Part III), are **not** in the Third Schedule of the Sales Tax Act, and carry no exemption. The customs duty figure below is an invented amount, because the tariff is not in this corpus. 1. Price paid to the supplier: Rs. 1,800,000. Freight to Karachi: Rs. 150,000. Insurance: Rs. 50,000. Customs value under section 25: **Rs. 2,000,000**. 2. Customs duty, regulatory duty and additional customs duty assessed on the declaration, together: **Rs. 400,000** (illustrative amount). 3. Value for sales tax: Rs. 2,000,000 + Rs. 400,000 = **Rs. 2,400,000**. 4. Sales tax at 18%: Rs. 2,400,000 x 18% = **Rs. 432,000**. 5. Value addition tax at 3%: Rs. 2,400,000 x 3% = **Rs. 72,000**. This example applies the 3% to the same value as ordinary sales tax; the Twelfth Schedule states the rate only as "3% ad valorem". 6. Value for section 148: Rs. 2,400,000 + Rs. 432,000 = **Rs. 2,832,000**. 7. Section 148 at the commercial importer rate for Part III goods, 6%: Rs. 2,832,000 x 6% = **Rs. 169,920**. Total collected at import: Rs. 400,000 + Rs. 432,000 + Rs. 72,000 + Rs. 169,920 = **Rs. 1,073,920**, on goods that cost Rs. 2,000,000 landed. Section 148(9)(b) speaks of "sales tax, if any, payable in respect of the import" without saying whether the 3% value addition tax is part of that figure. If it is, step 6 becomes Rs. 2,904,000 and step 7 becomes Rs. 174,240, a difference of Rs. 4,320. The Ordinance does not settle this point in section 148. ### What if I am not on the Active Taxpayers List? Rule 1 of the Tenth Schedule to the Ordinance raises the rate of any tax collected from a person not on the active taxpayers' list by 100%. Section 148 is not among the exclusions in rule 10, so Bilal's 6% would become 12%, or Rs. 339,840 in the example above. The detail is on the page about section 148 rates. ### What if I am a manufacturer importing raw material? The picture changes in two places. The value addition tax does not apply to raw materials and intermediary goods a manufacturer imports for in-house consumption, under clause (2)(i) of the Twelfth Schedule to the Sales Tax Act. And the section 148 rate for a non-commercial importer is lower than the commercial importer rate in Part II of the First Schedule. ### Common mistakes - **Working out sales tax on the invoice price.** Section 2(46)(d) adds customs duties to the customs value first. - **Assuming the only cost is "duty".** Sales tax, the value addition tax and section 148 income tax are collected at the same time and can together exceed the customs duty. - **Treating the section 148 figure as the final income tax bill.** It is income tax on the importer's income, not a customs charge. For most importers section 148(7) makes it a minimum tax on the income from the imports; for an industrial undertaking importing for its own use it is generally advance tax. - **Forgetting Third Schedule goods.** Branded consumer goods in that Schedule are taxed on printed retail price, not customs value. ### What to check in the official text Read the First Schedule to the Customs Act for the duty rate on your PCT heading, and any current regulatory duty or additional customs duty notifications, none of which are in this corpus. Read section 3 and the Twelfth Schedule of the Sales Tax Act for sales tax and the value addition tax exclusions, and section 148 with Part II of the First Schedule and the Twelfth Schedule of the Income Tax Ordinance for the advance tax rate. The Customs Act text on this site is amended to 30 June 2025; the other two laws are amended to 30 June 2026. ### Frequently asked #### Where do I find the customs duty rate for my goods? Section 18 of the Customs Act says customs duty is charged at the rates in the First Schedule to that Act, which is the tariff organised by PCT heading. That tariff is not part of this site's corpus, so the rate for a particular product has to be read in the official tariff. #### Is sales tax at import charged on the invoice price? Usually not. For most imported goods the Sales Tax Act uses the customs value under section 25 of the Customs Act plus customs duties and federal excise duty. Goods in the Third Schedule are taxed on their printed retail price instead. #### Is the section 148 income tax the same for every importer? No. The rate depends on which Part of the Twelfth Schedule the goods fall in and whether the importer is a commercial importer. The Tenth Schedule also raises the rate by 100% for a person not on the active taxpayers' list. ### Citations - [Customs Act, 1969, section 18 (Goods dutiable)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#18-goods-dutiable), as amended to 2025-06-30: "customs duties shall be levied at such rates as are prescribed in the First Schedule or under any other law for the time being in force" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 25 (Value of imported and exported goods)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#25-value-of-imported-and-exported-goods), as amended to 2025-06-30: "the transaction value, that is the price actually paid or payable for the goods when sold for export to Pakistan" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "in the case of goods imported into Pakistan, of the person importing the goods" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "the value determined under section 25" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 7A (Levy and collection of tax on specified goods on value addition)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#7a-levy-and-collection-of-tax-on-specified-goods-on-value-addition), as amended to 2026-06-30: "the minimum value addition tax, against the value added by the registered person, shall be payable" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Income Tax Ordinance, 2001, section 148 (Imports)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#148-imports), as amended to 2026-06-30: "The Collector of Customs shall collect advance tax from every importer of goods on the value of the goods at the rate specified in Part II of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is there a duty-free limit for small parcels ordered online from abroad through post or courier? Source: https://qanoondigest.com/faq/importers-exporters/duty-free-limit-courier-parcels Law current to: 30 June 2025 (Customs Act); 30 June 2023 (Customs Rules). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, but the two texts disagree. Section 19C of the Customs Act, as amended to 30 June 2025, says no duties and taxes are demanded where goods imported through post or courier are worth up to one thousand rupees. The de minimis chapter of the Customs Rules, current only to 30 June 2023, still says five thousand rupees. **Applies to:** Individuals and small buyers in Pakistan who receive goods from abroad by post or air courier, including online orders from foreign websites. ### What does the law say? Section 19C of the Customs Act, 1969 sets a small-value exemption. In the edition amended to 30 June 2025 it reads that where the value of imported goods "through post or courier does not exceed one thousand" rupees, "no duties and taxes shall be demanded, subject to conditions and restrictions as may be prescribed by the Board under the rules." Two things changed in that wording. The editions of the Act in this corpus from 30 June 2020 to 30 June 2024 read "Where the value of imported goods does not exceed five thousand rupees", with no reference to post or courier. The 2025 edition narrows the section to post and courier imports and cuts the figure to one thousand rupees. The rules that carry out section 19C sit in Chapter XXXIV of the Customs Rules, 2001, headed "De minimis rules for imported goods". Rule 782(a) defines the "de minimis value" as "the value of goods upto five thousand rupees in terms of the provisions of section 19C". The Customs Rules edition in this corpus is current only to 30 June 2023, so it was written against the older five thousand rupee text of the Act. ### Which figure applies, Rs. 1,000 or Rs. 5,000? The texts conflict, and this page does not resolve that. What can be said from the documents: | Text | Edition | Limit | Scope | |---|---|---|---| | Customs Act, section 19C | Amended to 30 June 2025 | Rs. 1,000 | Goods imported through post or courier | | Customs Rules, rule 782(a) and rule 787 | Updated to 30 June 2023 | Rs. 5,000 | Postal goods and courier goods | Section 19C itself makes the waiver subject to conditions and restrictions prescribed by the Board under the rules. The rules can set conditions, but the amount in the Act is the amount Parliament enacted. If the Board has amended rule 782 after June 2023, that amendment is not in this corpus. Anyone relying on the Rs. 5,000 figure should check the current Customs Rules first. ### How does clearance work for a small parcel? Rule 781 limits the de minimis chapter to "goods imported through postal service and air couriers only". Within that chapter: - Rule 783 treats the value written on the postal label or courier receipt as the declared value. - Rule 784 converts an invoice in foreign currency at the official exchange rate of the previous day. - Rule 785 requires the postal or courier authorities to give customs a separate list of the qualifying goods, with invoices. - Rule 786 lets customs scrutinise that list and examine or detain any goods to verify the value or compliance with other requirements. - Rule 787 says the postal or courier authorities do not file a goods declaration or demand duty and taxes for goods within the limit. - Rule 788 requires a consolidated monthly e-statement of these clearances for reconciliation. For parcels above the limit, section 144 of the Act matters. It says that for goods imported by post or courier, "any label or declaration which contains the description, quantity and value thereof shall be deemed to be an entry". The label on the parcel is treated as the customs entry. Section 145(1) then fixes the rate of duty as the rate in force on the date the postal authorities present that label or declaration to the customs officer for assessment. ### What about orders from online shops? Chapter XXXVIII of the Customs Rules, the Import and Export of E-Commerce Rules, is a separate clearance route. Rule 825 applies it to business-to-consumer (B2C) transactions "through authorized dealer via designated customs stations". Rule 826(c) defines an e-commerce importer as an importer or end consumer receiving goods for personal use, not for commercial activity, who is registered with the WeBOC e-commerce portal. Under this route the registered courier files the goods declaration on the importer's behalf (rule 829), and rule 831 lets the duty and taxes be paid either by the importer through a unique payment ID or through the registered courier. Rule 825(2) excludes several kinds of goods from the route altogether, including food and beverages, medicines of any sort, perishable goods, animals, goods that need sample testing, and restricted or prohibited goods. If the goods are returned, rule 834(c) provides for refund of duty and taxes to the e-commerce importer on completion of the export and receipt of the foreign exchange remitted at the time of import. ### Worked example (illustrative figures) Sana in Faisalabad orders three items from foreign websites, each shipped separately by air courier. The amounts are invented. 1. A phone case with a courier receipt showing Rs. 850. This is within the one thousand rupee limit in section 19C and also within the older five thousand rupee figure in the rules. No duties and taxes are demanded under either text, though customs may still examine it under rule 786. 2. A pair of headphones with a receipt showing Rs. 3,500. This is above the Rs. 1,000 limit in the 2025 Act but within the Rs. 5,000 figure in rule 782. This is exactly the case where the two texts point different ways. 3. A jacket with a receipt showing Rs. 9,000. This is above both figures. The courier label is treated as the entry under section 144, and duty is assessed at the rate in force on the date the label is presented to customs under section 145(1). The duty rate depends on the tariff heading of the goods, which is outside this page. ### Common mistakes - **Assuming the Rs. 5,000 figure is still current.** It is the figure in the Act up to the 2024 edition and in the Customs Rules to June 2023. The 2025 Act says Rs. 1,000. - **Applying the limit to baggage.** Section 19C now refers only to post or courier, and rule 781 limits the chapter to postal and air courier goods. - **Treating the limit as a right to import anything.** The e-commerce route excludes restricted and prohibited goods, and customs can detain any parcel to verify value or other requirements. - **Assuming the label is informal.** Under section 144 the label or declaration is the entry, so an incorrect description or value on it is a declaration to customs. ### What to check in the official text Read section 19C in the Customs Act as amended to 30 June 2025, and compare the earlier editions to see the wording change. Then check whether rule 782 of the Customs Rules has been amended after 30 June 2023, since the edition held here still reads five thousand rupees. For online orders, read rules 825 to 835 of the Customs Rules for the list of excluded goods and the payment methods. Sections 144 and 145 explain how a parcel label becomes the customs entry. ### Frequently asked #### Is the duty-free limit for parcels Rs. 1,000 or Rs. 5,000? Section 19C of the Customs Act as amended to 30 June 2025 says one thousand rupees, and only for goods imported through post or courier. The Customs Rules edition in this corpus, current to 30 June 2023, still defines the de minimis value as up to five thousand rupees. The Act is the later and higher text, so the figure in the rules may simply not have been updated in the edition held here. #### What value does customs use to test the limit? Rule 783 of the Customs Rules says the value on the label of the postal goods or the courier receipt is treated as the declared value. Rule 784 converts a foreign currency invoice at the official exchange rate of the previous day. Customs can still examine or detain a parcel to verify that value under rule 786. #### Does the limit apply to goods in my luggage? No. Section 19C is limited to goods imported through post or courier, and rule 781 applies the de minimis chapter to goods imported through postal service and air couriers only. Baggage is dealt with under a separate part of the Act. ### Citations - [Customs Act, 1969, section 19C (Minimal duties not to be demanded)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#19c-minimal-duties-not-to-be-demanded), as amended to 2025-06-30: "no duties and taxes shall be demanded, subject to conditions and restrictions as may be prescribed by the Board under the rules." Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 144 (Label or declaration in respect of goods imported or exported by post or by courier to be treated as entry)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#144-label-or-declaration-in-respect-of-goods-imported-or-exported-by-post-or-by-courier-to-be-treated-as-entry), as amended to 2025-06-30: "any label or declaration which contains the description, quantity and value thereof shall be deemed to be an entry for import or export" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 145 (Rate of duty in respect of goods imported or exported by post or by courier)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#145-rate-of-duty-in-respect-of-goods-imported-or-exported-by-post-or-by-courier), as amended to 2025-06-30: "shall be the rate in force on the date on which the postal authorities present to the appropriate officer the declaration or label referred to in section 144" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Rules, 2001, Chapter XXXIV, De minimis rules for imported goods (rules 781 to 788)](https://qanoondigest.com/rules/rules-general/customs-rules-2001), as amended to 2023-06-30: "means the value of goods upto five thousand rupees in terms of the provisions of section 19C of the Customs Act, 1969" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, section 825 (Application)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#825-application), as amended to 2023-06-30: "These rules shall apply for assessment and clearance of imported or exported goods of business-to-consumer (B2C) transactions through authorized dealer via designated customs stations." Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, section 831 (Payment of duty and taxes)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#831-payment-of-duty-and-taxes), as amended to 2023-06-30: "Duty and taxes shall be paid by the e-commerce importer and exporter through following methods" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf --- ## How can an exporter import or buy inputs without duty and sales tax under the Export Facilitation Scheme? Source: https://qanoondigest.com/faq/importers-exporters/export-facilitation-scheme-duty-free-inputs Law current to: 30 June 2023 (Customs Rules). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under the Export Facilitation Scheme, 2021 in Chapter XL of the Customs Rules, an authorized user can import or buy input goods without customs duty, federal excise duty, sales tax or withholding tax. The inputs must go into exported goods within a utilization period of 24 to 60 months, set by the exporter's category under rule 883. **Applies to:** Manufacturer-cum-exporters, indirect exporters, commercial exporters, toll manufacturers and suppliers against international tenders who want to acquire inputs free of duty and taxes. ### What does the law say? The Export Facilitation Scheme, 2021 is Chapter XL of the Customs Rules, 2001, rules 871 to 899. Its core promise is in rule 880(1): a user "shall be entitled to acquire input goods without payment of customs duty, Federal excise duty, sales tax, or withholding tax as per his authorization under these rules". The inputs must be kept at the user's declared premises and used to make goods that are exported. Rule 880(1) sets out how the relief works in practice: - imported inputs are cleared free of duty and taxes on a goods declaration quoting the authorization number; - local inputs liable to sales tax are supplied against a zero-rated invoice; - inputs from excisable premises are supplied without federal excise duty against the prescribed document. Rule 880(2) requires the user to upload details of domestic purchases to WeBOC or PSW within thirty days. ### Who can use the scheme? Rule 872(1) opens the scheme to six groups, each subject to authorization and registration in WeBOC or PSW: 1. Manufacturer-cum-exporters registered for sales tax whose value-addition is "not less than ten per cent". 2. Manufacturers acting as toll manufacturers for a foreign principal. 3. Commercial exporters. 4. Registered manufacturers operating as indirect exporters. 5. Manufacturers, including engineering goods makers, supplying against international tenders. 6. Common Export Houses. The proviso to rule 872 limits the scheme to goods allowed under the export policy order. Restricted or prohibited exports need specific permission from the Ministry of Commerce. Under rule 873, authorization is based on export performance for the last two financial years, a firm export contract, or both at once. ### How are exporters categorised? Rule 874 sorts users into categories, and the category decides the security, authorization period and utilization period. | Category | Who (rule 874) | Authorization period (rule 878) | Utilization period (rule 883) | |---|---|---|---| | A | Manufacturer-cum-exporters exporting 60% or more of annual production, or exports of at least USD 20 million | Five years | 60 months | | B1 | Other manufacturer-cum-exporters with more than 3 years of export history | Four years | 48 months | | B2 | Other manufacturer-cum-exporters with less than 3 years of export history | Two years | 24 months | | C1 | Indirect exporters, commercial exporters and toll manufacturers with more than 3 years of history | Four years | 48 months | | C2 | The same groups with less than 3 years of history | Two years | 24 months | Rule 874(5) downgrades an applicant with a poor compliance profile by one category for a year. Contravention cases that are procedural or involve less than five million rupees do not count. ### How does authorization work? The application is filed online to the Regulatory Collector through WeBOC or PSW under rule 875, with documents such as bank statements for two years, export performance, a list of machinery for manufacturers, the approximate value of inputs and the input-output ratio. Small and medium exporters also need a recommendation from their chamber, trade association or SMEDA. Rule 876 requires security equal to the duty and taxes deferred. Category A gives an indemnity bond and post-dated cheque. Commercial exporters in Category C1 give a revolving insurance guarantee, and in Category C2 a revolving bank guarantee. Under rule 877, new inputs or outputs go to the Input Output Co-efficient Organization (IOCO), which determines the input-output ratios and issues an analysis certificate within thirty days. If the Regulatory Collector or IOCO does not process the application within thirty days, rule 877(6) says the system automatically allows acquisition against 100% of the declared value provisionally. ### What reporting is required? Rule 892 requires a reconciliation statement of inputs acquired and outputs exported, sold locally or wasted. Category A files annually within thirty days of the year end. Categories B and C file every six months within thirty days. If the statement is not filed, the system blocks further imports or acquisitions under rule 892(2). Rule 893 sets post-clearance audit once in five years for Category A, four years for Category B and three years for Category C and contract-based users. ### Worked example (illustrative figures) A towel maker in Faisalabad is authorized in Category B1. Figures are invented. 1. Under rule 883 the inputs must be used within 48 months of import or local purchase. 2. The unit makes 100,000 towels from inputs acquired under the scheme. 3. Under rule 886(1) it may sell up to 20% locally: 100,000 x 20% = 20,000 towels, on payment of duty and taxes assessed as if the towels were imported in that condition, subject to the Regulatory Collector being satisfied with the reasons. 4. If it sells 25,000 towels locally, the extra 5,000 fall under rule 886(2). They pay duty and taxes, plus a surcharge of KIBOR plus 3% per annum on the value of the inputs used in them. 5. Factory rejects and B grade goods can be sold locally on payment of duty and taxes under rule 886(3). ### What if inputs are left over? Rule 887 lets a user, with the Regulatory Collector's approval, carry unused inputs into the next year on filing the reconciliation statement, transfer them duty-free to another authorized user before the utilization period ends, sell them locally after it ends on payment of duty, taxes and the KIBOR plus 3% surcharge, re-export them, or destroy them if unfit. Plant and machinery can also be acquired under rule 881, but must be kept for five years, with reduced duty on earlier disposal. ### Common mistakes - **Treating the relief as an exemption.** It is conditional. Inputs sold locally or not accounted for become liable to duty and taxes. - **Missing the reconciliation deadline.** Rule 892(2) stops further duty-free acquisitions until it is filed. - **Assuming wastage is unlimited.** Rule 886(4) allows only the wastage set in the analysis certificate. - **Running two schemes at once.** Rule 898(2) bars operating under EFS and the older DTRE or SRO 327 schemes together. ### What to check in the official text Read rules 871 to 899 of the Customs Rules. The edition in this corpus is updated only to 30 June 2023, so check for later SROs. One drafting point: rule 871(x) says the utilization period is "as specified in rule 783", but the table is in rule 883. Rules 889 and 890 cover duty drawback and sales tax refund on duty-paid inputs. ### Frequently asked #### Can a commercial exporter who does not manufacture use EFS? Yes. Rule 872(1)(c) lists commercial exporters, defined in rule 871(f) as persons who buy goods from the domestic market or from an indirect exporter and export them in the same state. Rule 874 places them in Category C, and rule 876 requires them to give a revolving insurance or bank guarantee as security. #### How long do I have to use the inputs? Rule 883 sets 60 months for Category A, 48 months for Categories B1 and C1, and 24 months for Categories B2 and C2. The Chief Collector can extend the period by six months in exceptional circumstances, for export of output goods only, against fresh security. #### What happens if I cannot export everything? Rule 886 allows up to 20% of output to be sold locally on payment of duty and taxes. Sales above that also carry a surcharge of KIBOR plus 3% per annum on the value of the inputs used. Unused inputs can be transferred, sold after the utilization period with the surcharge, re-exported or destroyed under rule 887. ### Citations - [Customs Rules, 2001, section 872 (Scope of the scheme)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#872-scope-of-the-scheme), as amended to 2023-06-30: "persons registered under the Sales Tax Act, 1990, as manufacturer-cum-exporter,who make value-addition in the manufacture and export of goods, which shall not be less than ten per cent" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, section 873 (Authorization for acquisition of input goods)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#873-authorization-for-acquisition-of-input-goods), as amended to 2023-06-30: "Acquisition of input goods without payment of duty and taxes under these rules shall be granted based on" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, section 880 (Acquisition of input goods)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#880-acquisition-of-input-goods), as amended to 2023-06-30: "A user shall be entitled to acquire input goods without payment of customs duty, Federal excise duty, sales tax, or withholding tax as per his authorization under these rules" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, section 883 (Utilization period)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#883-utilization-period), as amended to 2023-06-30 Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, section 886 (Domestic sales)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#886-domestic-sales), as amended to 2023-06-30: "A user shall be allowed to sell up to 20% of the output goods manufactured from input goods in the domestic market on payment of leviableduty and taxes" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, Chapter XL, Export Facilitation Scheme 2021 (rules 871 to 899)](https://qanoondigest.com/rules/rules-general/customs-rules-2001), as amended to 2023-06-30 Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf --- ## Can I get confiscated goods back by paying a fine under section 181? Source: https://qanoondigest.com/faq/importers-exporters/redemption-fine-confiscated-goods-181 Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Often, but not as of right. Section 181 lets the officer who orders confiscation give the owner an option to pay a fine instead, set at an amount the officer thinks fit. The Board can exclude goods from this option or fix the fine. The fine is in addition to the duty, charges and any penalty on the goods. **Applies to:** Owners of goods that customs has ordered to be confiscated, including importers whose goods were seized for misdeclaration or other contraventions. A confiscation order does not always end the matter. Under the Customs Act, 1969, the officer who orders confiscation can let the owner take the goods back by paying a fine in lieu of confiscation, often called a redemption fine. Whether that option is offered, and at what amount, depends on the officer and on any order the Board has made. ### What does the law say? Section 181 says that whenever an order for the confiscation of goods is passed, "the officer passing the order may give the owner of the goods an option to pay in lieu of the confiscation of the goods such fine as the officer thinks fit". Two provisos limit that discretion: - **First proviso.** The Board may, by order, specify goods or classes of goods where the option "shall not be given". - **Second proviso.** The Board may, by order, fix the amount of the fine for goods imported in breach of the Act's import prohibitions and restrictions, of any other provision of the Act, or of any other law in force. The Explanation then says the fine "shall be in addition to any duty and charges payable in respect of such goods", and in addition to any penalty imposed alongside the confiscation. ### What happens if I do not pay, or no option is given? Section 182 says that when goods are confiscated, "they shall forthwith vest in the Federal Government", and the officer or person authorised by the Collector or Director takes possession. The proviso lets the Board authorise confiscated vehicles, conveyances and equipment to be used for operational purposes. Section 186(1) says goods on which a fine or penalty has been imposed, or is under consideration, or which are the subject of a pending inquiry or investigation, cannot be removed by the owner until the fine or penalty is paid or the inquiry is completed. Section 186(2) goes further: the officer "may detain any other goods belonging to the same owner" until the fine or penalty is paid. ### Which duty rate applies on redemption? For goods seized in anti-smuggling operations, a proviso to section 30 fixes the rate of duty at the rate in force on the date of seizure or the date of payment of duty and taxes, "whichever is higher". For other goods, the ordinary rules in section 30 on the date of determination of the rate apply. ### Worked example (illustrative figures) Nadia, a Karachi importer, has a consignment of cosmetics confiscated for a contravention. The adjudication order gives her the option under section 181. The figures below are invented to show how the amounts stack, not calculated from any tariff rate. 1. Duty and taxes assessed on the goods: Rs. 600,000. 2. Fine in lieu of confiscation fixed by the officer: Rs. 300,000. 3. Penalty imposed in the same order: Rs. 150,000. 4. Total to take the goods back: Rs. 600,000 + Rs. 300,000 + Rs. 150,000 = Rs. 1,050,000. Until this is paid, section 186(1) keeps the goods in customs control, and section 186(2) allows the officer to hold her other goods too. ### What if I want to challenge the confiscation or the fine? The appeal route depends on the rank of the officer who passed the confiscation order. Orders by an officer below Additional Collector go to the Collector (Appeals), and orders by an Additional Collector or above go to the Appellate Tribunal under section 194A(1)(a). The proviso to section 194A(1) lets the Tribunal, in its discretion, refuse to admit an appeal in three listed situations: (i) the value of goods confiscated without the fine option being given, (ii) the duty involved in certain disputes, or (iii) where the fine or penalty determined does not exceed fifty thousand rupees. As printed, the fifty thousand rupee figure appears only in item (iii), and items (i) and (ii) name no amount. Check the official PDF before relying on this proviso. ### What if the goods are on the Board's excluded list? The first proviso to section 181 means no fine option is given. The second proviso to section 168(2) adds that the two-month deadline for a show cause notice after seizure does not apply to these goods. ### Common mistakes - **Treating the fine as a right.** Section 181 uses "may". The officer decides, subject to any Board order. - **Budgeting only for the fine.** The Explanation to section 181 adds duty, charges and penalty on top. - **Assuming only the seized goods are held.** Section 186(2) allows other goods of the same owner to be detained until payment. - **Using today's duty rate for smuggling seizures.** The proviso to section 30 uses the higher of the rate on seizure or on payment. ### What to check in the official text Read section 181 with its provisos and Explanation, then sections 182 and 186, the anti-smuggling proviso to section 30, and section 194A(1). Board orders under either proviso to section 181, which decide whether the option exists and its amount for particular goods, are issued separately and are not held in this corpus. Section 181 does not state a time within which the fine must be paid. ### Frequently asked #### Is the redemption fine the only amount I pay to get the goods back? No. The Explanation to section 181 says the fine is in addition to any duty and charges payable on the goods and to any penalty imposed in addition to confiscation. #### Can the officer refuse to offer the fine option? Section 181 says the officer 'may' give the option, so it is not automatic. The first proviso also lets the Board, by order, specify goods or classes of goods for which the option shall not be given. #### Which duty rate applies when I redeem goods seized in an anti-smuggling operation? A proviso to section 30 says the rate is the one in force on the date of seizure or on the date of payment of duty and taxes, whichever is higher. ### Citations - [Customs Act, 1969, section 181 (Option to pay fine in lieu of confiscated goods)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#181-option-to-pay-fine-in-lieu-of-confiscated-goods), as amended to 2025-06-30: "Any fine in lieu of confiscation of goods imposed under this section shall be in addition to any duty and charges payable in respect of such goods" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 182 (Vesting of confiscated property in the Federal Government)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#182-vesting-of-confiscated-property-in-the-federal-government), as amended to 2025-06-30: "When any goods are confiscated under this Act, they shall forthwith vest in the" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 186 (Detention of goods pending payment of fine or penalty)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#186-detention-of-goods-pending-payment-of-fine-or-penalty), as amended to 2025-06-30: "(2) When any fine or penalty has been imposed in respect of any goods, the appropriate officer may detain any other goods belonging to the same owner pending payment of such fine or penalty." Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 30 (Date of determination of rate of import duty)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#30-date-of-determination-of-rate-of-import-duty), as amended to 2025-06-30: "Provided further that in case of exercising option for redemption of fine in lieu of confiscation of the goods seized during anti-smuggling operations, the rate of duty shall be the rate prevalent either on the date of seizure or date of payment of duty and taxes, whichever is higher" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 194A (Appeals to the Appellate Tribunal)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#194a-appeals-to-the-appellate-tribunal), as amended to 2025-06-30: "(i) the value of the goods confiscated without option having been given to the owner of the goods to pay a fine in lieu of confiscation under section 181; or" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 168 (Seizure of things liable to confiscation)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#168-seizure-of-things-liable-to-confiscation), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf --- ## When must I file a goods declaration for imported goods, and can I amend it after clearance? Source: https://qanoondigest.com/faq/importers-exporters/filing-goods-declaration-and-amendments Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 79 of the Customs Act, 1969 requires the owner to file a goods declaration within ten days of the goods arriving, or three days at a land border station. Once goods are removed from the customs area, or assigned a Customs Reference Number electronically, section 29 bars amending the declared value, quantity or description, except as section 88 provides. **Applies to:** Importers and their clearing agents entering goods for home consumption, warehousing or transshipment in Pakistan. ### What does the law say? **Filing (section 79).** Section 79(1) of the Customs Act, 1969, amended to 30 June 2025, requires the owner of imported goods to make entry of them for home consumption, warehousing, transshipment or another approved purpose "within ten days of the arrival of the goods". Entry is made by: - filing a true goods declaration with complete and correct particulars, supported by the commercial invoice, bill of lading or airway bill, packing list and any other document the Board prescribes; - uploading the documents mandatory for assessment with the declaration; and - for a registered user of the Customs Computerized System, assessing and paying the duty, taxes and other charges. Three provisos adjust the timing. A declaration cannot be filed more than ten days before the vessel's expected arrival. At a land customs station at the border, the declaration is due within three days of the goods arriving. For used goods, an Additional Collector may let the owner examine the goods first if full information is not available. **Checking (section 80).** Customs checks the declaration and may examine the goods at any time after import, during or after release. If a statement is found incorrect, the goods are reassessed, with notice through the computerized system and a hearing on request. **Clearance (section 83).** Once the owner has paid the duty and charges on assessed goods, the officer, if satisfied the import is not prohibited or restricted, may order clearance. Where the computerized system operates, the system can issue the clearance documents after payment. If duty is not paid within ten days of assessment, section 83(2) adds a surcharge of KIBOR plus three per cent. **Amendment (section 29).** Except as provided in section 88, no amendment of a goods declaration "relating to goods assessed for duty on the declared value, quantity or description thereof" is allowed after the goods have been removed from the customs area, or assigned a Customs Reference Number electronically. ### Can I amend the declaration after clearance? For value, quantity or description, section 29 says no, once the goods have left the customs area or received a Customs Reference Number. Two points narrow or qualify that rule: 1. **The section 88 exception.** Section 88(5) lets the Collector of Customs, for reasons recorded in writing, direct correction where quantity or value was incorrectly stated "due to inadvertence or bona fide error". Section 88 sits in the part of the Act dealing with receipt of goods at a warehouse, and the text does not say whether sub-section (5) reaches declarations for home consumption. This page does not settle that. 2. **The earlier cut-off in the rules.** Rule 434 of the Customs Rules, 2001, in the sub-chapter for the computerized clearance procedure, says a declaration shall not be amended after Customs has started checking it. It allows cancellation instead where the goods have not arrived at the declared terminal, where the goods are excluded from the computerized system, or where an Additional Collector is satisfied the circumstances warrant it. Duty paid on a cancelled declaration may be adjusted against the replacement declaration for the same goods. Section 29 does not stop Customs from revisiting the declaration. Section 80(2) allows examination and requisition of documents after release, and section 80(3) allows reassessment. ### Worked example (illustrative figures) Rabia imports textile machinery parts through Karachi. The goods arrive on 1 March. | Day after arrival | What the Act says | |---|---| | Up to 10 days before expected arrival | Earliest date a declaration can be filed (section 79, second proviso) | | Within 10 days of arrival | Goods declaration due (section 79(1)) | | Not filed within 20 days | Notified penalty can apply (section 82(1)(a)) | | Not filed within 30 days | Goods liable to confiscation (section 82(2), first proviso) | Rabia files on day 6. The duty assessed is Rs. 400,000 (illustrative). She pays two days after assessment, inside the ten-day window in section 83(2), so no surcharge arises. After release she notices her declaration listed 480 units against 500 actually received. Under section 29 she cannot amend the quantity now that the goods have left the customs area; whether section 88(5) could apply to her is not clear from the text. ### What if goods need urgent release before a declaration is filed? Section 79(3) lets an officer not below Assistant Collector allow release of goods requiring immediate release before the declaration is presented, subject to conditions the Board prescribes. ### Common mistakes - **Counting from the invoice or shipment date.** The ten days in section 79(1) run from arrival of the goods. - **Assuming errors can be fixed after release.** Section 29 blocks changes to value, quantity or description after removal from the customs area. - **Treating the declaration as final once cleared.** Section 80(2) lets Customs examine and requisition documents after release. - **Filing an incomplete declaration.** Section 79(1)(a) calls for a "true declaration" with complete and correct particulars. False statements are dealt with separately; see the misdeclaration page linked below. ### What to check in the official text Read sections 29, 79, 80, 82, 83 and 88 of the Customs Act, 1969 and rule 434 of the Customs Rules, 2001. In the parsed text, section 80 appears under the heading for section 79A and section 82 is printed inside section 81, so check the official PDF for those two. The penalties notified under section 82(1) and the Board's prescribed form of declaration are not in this corpus. ### Frequently asked #### What happens if I file the goods declaration late? Section 82 lets the Federal Government notify penalties where a goods declaration is not filed within twenty days of arrival, and makes the goods liable to confiscation if it is not filed within thirty days. The Collector may waive the penalty in unavoidable circumstances. #### Can I file the goods declaration before the ship arrives? Yes, but not too early. The second proviso to section 79(1) says no goods declaration shall be filed prior to ten days of the expected time of arrival of the vessel. #### What if I do not pay the assessed duty straight away? Section 83(2) charges a surcharge at KIBOR plus three per cent on the duty and other charges if they are not paid within ten days of assessment. ### Citations - [Customs Act, 1969, section 79 (Declaration and assessment for home consumption or warehousing [or transshipment)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#79-declaration-and-assessment-for-home-consumption-or-warehousing-or-transshipment), as amended to 2025-06-30: "filing a true declaration of goods, giving therein complete and correct particulars of such goods, duly supported by commercial invoice, bill of lading or airway bill, packing list or any other document required for clearance of such goods" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 29 (Restriction on amendment of goods declaration)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#29-restriction-on-amendment-of-goods-declaration), as amended to 2025-06-30: "relating to goods assessed for duty on the declared value, quantity or description thereof shall be allowed after such goods have been removed from the customs-area" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 83 (Clearance for home consumption)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#83-clearance-for-home-consumption), as amended to 2025-06-30: "if he is satisfied that the import of the goods is not prohibited or in breach of any restrictions or conditions applying to the import of such goods, may make an order for the clearance of the same" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 88 (Receipt of goods at warehouse)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#88-receipt-of-goods-at-warehouse), as amended to 2025-06-30: "if the quantity or value of any goods has been incorrectly stated in the goods declaration, due to inadvertence or bona fide error, the Collector of Customs may, for reasons to be recorded in writing, direct the correction of the said error." Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, Sections 80 and 82 (printed under the 79A and 81 headings in the parsed text)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Rules, 2001, section 434 (Amendments to imports declaration)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#434-amendments-to-imports-declaration), as amended to 2023-06-30: "No declaration made under rule 433 shall be amended after the customs has started checking the declaration:" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf --- ## How does customs decide the value of my imported goods if it does not accept my invoice price? Source: https://qanoondigest.com/faq/importers-exporters/how-customs-value-imported-goods Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 25 of the Customs Act, 1969 values imports at transaction value: the price paid or payable, plus freight, insurance and certain other costs. If that cannot be accepted, the Act moves to identical goods, then similar goods, then deductive value, computed value and a fall-back method. A valuation ruling under section 25A overrides a lower declared price. **Applies to:** Importers whose declared invoice value is questioned by Customs at assessment or after clearance. ### What does the law say? Section 25 of the Customs Act, 1969, amended to 30 June 2025, sets out the methods in turn. | Method | Sub-section | Basis | |---|---|---| | Transaction value | 25(1) and (2) | Price actually paid or payable for the goods when sold for export to Pakistan, with set additions | | Identical goods | 25(5) | Transaction value of identical goods sold for export to Pakistan at or about the same time | | Similar goods | 25(6) | Transaction value of similar goods, same timing | | Deductive value | 25(7) | Unit price at which the goods, or identical or similar goods, are sold in Pakistan, less commission or profit, inland transport and insurance, and duties and taxes | | Computed value | 25(8) | Cost of materials and processing, plus usual profit and general expenses, plus the section 25(2)(a) costs | | Fall-back | 25(9) | Reasonable means, applying the above methods flexibly | **What is added to the invoice price.** Section 25(2) adds, where not already included: transport to the port or airport of importation, loading, unloading and handling charges to that point, and insurance; commissions and brokerage (but not buying commissions), containers and packing; materials, tools, moulds or design work the importer supplies free or cheaply to the producer; royalties and licence fees payable as a condition of sale; and any share of resale proceeds going back to the seller. **When the invoice price is not accepted.** Section 25(1) accepts transaction value only if there are no restrictions on the buyer's use of the goods (other than ones the Act allows), the price is not subject to a condition that cannot be valued, no resale proceeds go to the seller unless added, and the parties are unrelated or the relationship did not influence the price. Section 25(2)(f) adds that if information for the required additions is not available, transaction value is treated as one that cannot be determined. **Order of methods.** Each method from 25(5) onward begins "if the customs value ... cannot be determined" under the previous one, which reads as a sequence. Section 25(10), however, says the methods "may or may not be applied in a sequential order", except that the importer may ask, with the Collector's agreement, to reverse deductive and computed value. The words "may or may not" replaced "are required to" by the Finance Act, 2007. The text does not reconcile these two readings, and this page does not either. **Valuation rulings (section 25A).** The Director of Customs Valuation may determine the customs value of any goods or category of goods, following the section 25 methods, and may consult internationally published prices. That value becomes the applicable value for assessment, but if the declared or invoice value is higher, the higher value is used. The value stays in force until revised or rescinded. ### How does customs question my price in practice? - **Asking for explanation.** Under rule 109 of the Customs Rules, 2001, an officer who doubts the particulars or documents may ask for further explanation, documents or other evidence. If reasonable doubt remains, the value may be treated as not determinable under section 25(1). The final decision and grounds must be given in writing. - **Demanding documents and information.** Section 26(1) lets an officer not below Assistant Collector require, in writing, information about import, purchase, sale, transport or storage of the goods, production of records, copies or extracts, and personal appearance to answer questions. Section 26(4) says the information must be supplied within the time in the notice. - **Using exchanged data.** Section 25AA allows information received under data-sharing arrangements with foreign customs (section 219A(1)(b)) to be used for assessment, including valuation. - **Limits on customs.** Rule 110 bars values based on the local selling price of goods produced in Pakistan, arbitrary or fictitious values, and the origin country's domestic price without deducting local taxes and profits. ### Worked example (illustrative figures) Adeel imports 500 kitchen blenders into Karachi. The figures are invented. 1. **Invoice price:** Rs. 3,000,000, ex-factory. 2. **Section 25(2)(a) additions:** sea freight Rs. 150,000, loading and handling to Karachi Rs. 20,000, insurance Rs. 30,000. Total Rs. 200,000. 3. **Section 25(2)(b) addition:** export cartons paid by Adeel separately, Rs. 50,000. 4. **Transaction value:** Rs. 3,000,000 + Rs. 200,000 + Rs. 50,000 = **Rs. 3,250,000**, or Rs. 6,500 per unit. Suppose the officer doubts this price, asks for the sales contract and bank payment record under rule 109, and after reviewing them still has reasonable doubt. Transaction value is set aside. The officer finds identical blenders from the same manufacturer, cleared within the same period at the same commercial level and similar quantity, at Rs. 7,000 per unit including freight and insurance. Under section 25(5): 500 x Rs. 7,000 = **Rs. 3,500,000**, which is Rs. 250,000 more than Adeel's figure. If a valuation ruling under section 25A covered these blenders at, say, Rs. 6,800 per unit, the value would be 500 x Rs. 6,800 = Rs. 3,400,000, since that is higher than the declared Rs. 3,250,000. ### What if the buyer and seller are related? Section 25(3) accepts transaction value if the circumstances show the relationship did not influence the price, or if the price closely approximates a test value (sales to unrelated buyers, or deductive or computed values of identical or similar goods). Under section 25(4), if the officer is not satisfied, he must put the reservations to the importer in writing and give an opportunity to justify the difference. ### Common mistakes - **Declaring the ex-factory price only.** Section 25(2)(a) requires freight, handling and insurance to the port to be added. - **Ignoring moulds or designs supplied to the factory.** Section 25(2)(c) adds their value. - **Assuming the lowest ruling value always applies.** Section 25A(2) uses the higher of the ruling and the declared or invoice value. - **Ignoring a section 26 notice.** Section 26(4) requires the information within the time specified. ### What to check in the official text Read sections 25, 25A, 25AA and 26 of the Customs Act, 1969, and rules 107 to 125 of the Customs Rules, 2001. In the parsed site text of section 25A, an older version of sub-sections (1) to (3), the wording replaced by the Finance Act, 2007, is printed after the current text. The first version is the operative one; the official PDF shows the older wording as a footnote. Specific valuation rulings are not in this corpus. Reviews of a ruling are covered on the valuation ruling page linked below. ### Frequently asked #### Can customs just use the price of the same product sold in Pakistan? No. Rule 110 of the Customs Rules, 2001 says value shall not be determined on the selling price of identical goods produced in Pakistan, on arbitrary or fictitious values, or on the domestic price in the country of origin without deducting local taxes and profits. #### What if a valuation ruling exists for my goods? Section 25A(2) makes the value determined by the Director of Customs Valuation the applicable value for assessment. Its proviso says that if your declared or invoice value is higher than the ruling, the higher value is used. #### Do I get a chance to explain before my price is rejected? Rule 109 lets the officer ask for further explanation and evidence, and requires the final decision and grounds to be given to you in writing. For related buyers and sellers, section 25(4) requires the officer to put reservations in writing and give you an opportunity to justify the price. ### Citations - [Customs Act, 1969, section 25 (Value of imported and exported goods)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#25-value-of-imported-and-exported-goods), as amended to 2025-06-30: "the price actually paid or payable for the goods when sold for export to Pakistan" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 25A (Power to determine the customs value)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#25a-power-to-determine-the-customs-value), as amended to 2025-06-30: "may determine the customs value of any goods or category of goods imported into or exported out of Pakistan, after following the methods laid down in section 25, whichever is applicable" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 25AA (Power to use data exchange information for determination of customs value)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#25aa-power-to-use-data-exchange-information-for-determination-of-customs-value), as amended to 2025-06-30: "Any information or data, available under clause (b) of sub-section (1) of section 219A, may be utilized for the purpose of assessment including valuation." Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 26 (Obligation to produce documents and provide information)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#26-obligation-to-produce-documents-and-provide-information), as amended to 2025-06-30: "produce for examination, documents or records that the appropriate officer considers necessary or relevant to the audit, inquiry or investigation under the Act;" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Rules, 2001, section 109 (Burden of proof)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#109-burden-of-proof), as amended to 2023-06-30: "Where the appropriate officer has reason to doubt the truth or accuracy of the particulars or of documents produced in support of the declaration, such officer may ask the importer to provide further explanation, including documents or other evidence." Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, section 110 (Prohibited methods)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#110-prohibited-methods), as amended to 2023-06-30: "However no value shall be determined under this chapter on the basis of --" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf --- ## How do I claim duty drawback on exported goods, and when is drawback refused? Source: https://qanoondigest.com/faq/importers-exporters/customs-duty-drawback-on-exports Law current to: 30 June 2025 (Customs Act); 30 June 2023 (Customs Rules). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 35 of the Customs Act repays seven-eighths of the duty paid on identifiable imported goods that are re-exported within two years. Section 37 lets the Board allow drawback on imported inputs used in exported goods. Under rule 455 of the Customs Rules, the export goods declaration itself is the drawback claim, and section 39 refuses drawback in three cases. **Applies to:** Exporters who paid customs duty on imported goods or inputs and then export the goods or products made from them. ### What does the law say? Drawback is a repayment of customs duty already paid, made because the goods, or goods made from them, have left Pakistan. The Customs Act, 1969 provides two main routes. **Re-export of the same goods (section 35).** When goods that are "capable of being easily identified" were imported, duty was paid, and they are then exported, "seven-eight of such duties shall be repaid as drawback". Two conditions apply: 1. an officer of customs not below the rank of Assistant Collector must be satisfied the goods are the same as those imported; and 2. the goods must be entered for export within two years of import. The Board or the Collector can extend this for sufficient cause, but the Collector cannot extend it beyond three years of importation. Goods count as entered for export on the date the goods declaration is delivered to the appropriate officer. **Imported inputs used in exported goods (section 37).** Where goods manufactured in Pakistan are exported, the Board may, by notification in the official Gazette, direct that drawback be allowed on imported goods used in making them, "to such extent and subject to such condition as may be provided in the rules". Section 21(c) separately lets the Board authorise repayment of duties paid on imported goods used in producing, manufacturing, processing, repairing or refitting goods meant for export. ### When is drawback refused? Section 39 says no drawback shall be allowed: - **(a)** on goods that should be in the export manifest but are not; - **(b)** where the claim for a single shipment amounts to "less than or equal to hundred rupees"; or - **(c)** "unless the claim for drawback has been made and established at the time of export." Other limits sit in nearby sections. Section 38(1) lets the Board declare goods not capable of being easily identified, which takes them outside section 35. Section 38(2) lets the Federal Government prohibit drawback on exports to a specified port or territory. Section 40 says no drawback is paid until the vessel has put out to sea or the conveyance has left Pakistan. Section 41 requires the claimant to declare that the goods were actually exported, have not been relanded and are not intended to be relanded in Pakistan. For goods taken into use between import and export, section 36 leaves the repayment to the rules. Rule 218 of the Customs Rules sets a sliding table for motor vehicles, from 75% of the duty if re-exported within 4 months down to nil after 36 months. Rule 219 refuses drawback, where the goods were taken into use, on chests imported as containers for tea or rubber, exposed cinematography films and articles of wearing apparel. ### How is a claim made in practice? Under the computerised system, there is no separate claim form. Rule 455 says "Every goods declaration for export filed under rule 444 shall also be considered as an application for duty drawback." The process in rules 456 and 457 runs like this: 1. When the exporter enters a PCT code on the export goods declaration, the system shows the relevant SROs and drawback rates. The exporter selects the most relevant description and rate. 2. When the export proceeds are repatriated and the Form-E is settled, the commercial bank updates the system. 3. The system calculates the drawback on the proceeds actually repatriated and generates a duty drawback order, subject to risk management. 4. Claims picked by the risk system for a compliance check are decided by the Collector or a designated officer within seven working days, on a first in, first out basis. 5. The State Bank credits the exporter's account through the commercial bank on a first in, first out basis. Rule 458 gives authorized economic operators priority processing. Rule 222, in the older drawback sub-chapter, likewise requires complete claims to be paid in order of filing. ### Worked example (illustrative figures) A Lahore firm imports a testing machine and pays Rs. 800,000 in customs duty. The figures are invented. Eighteen months later it sells the machine to a buyer abroad and exports it. 1. The machine is identifiable and is entered for export within two years, so section 35 applies. 2. Drawback = Rs. 800,000 x 7/8. 3. Rs. 800,000 / 8 = Rs. 100,000; Rs. 100,000 x 7 = Rs. 700,000. 4. The firm gets Rs. 700,000 back, and Rs. 100,000 of the duty is not repaid. If the same machine had been exported 40 months after import, the Collector could not extend time beyond three years, so section 35 would not apply. Drawback on inputs under section 37 depends on the rates in the Board's notifications, which are not in this corpus. ### Common mistakes - **Expecting the full duty back under section 35.** The section repays seven-eighths, not all of it. - **Claiming after the goods have left.** Section 39(c) requires the claim to be made and established at the time of export, which is why the export declaration itself is the claim. - **Assuming drawback is final once paid.** Rule 459 allows re-assessment for five years, and rule 457(7) sends 10% of paid cases for post-release verification. - **Selecting the wrong rate.** Under rule 457(1) the exporter chooses the SRO and rate, and any excess found later is recovered. ### What to check in the official text Read sections 35 to 41 of the Customs Act for the conditions. The actual drawback rates under section 37 are set by Board notifications (SROs) that this corpus does not hold. The Customs Rules edition here is current to 30 June 2023. If you use the Export Facilitation Scheme, its own rules limit drawback on duty-paid inputs until your obligations under that scheme are discharged. ### Frequently asked #### How much duty do I get back when I re-export imported goods? Section 35 repays seven-eighths of the customs duty paid on importation, if the goods can be identified as the same goods and are entered for export within two years of import. The Board or the Collector can extend that time for sufficient cause, but the Collector cannot extend it beyond three years. #### Do I need to file a separate drawback claim? Not under the computerised system. Rule 455 treats every export goods declaration as an application for duty drawback. The exporter selects the relevant SRO and drawback rate against the PCT code on the declaration under rule 457(1), and the amount is worked out on the export proceeds actually repatriated. #### Can customs take back drawback already paid? Yes. Rule 459 lets customs re-assess the export declaration at any time within five years of clearance. Any excess drawback is recovered from the exporter along with fine, and any shortfall found in audit is paid to the exporter. ### Citations - [Customs Act, 1969, section 35 (Drawback of the export on imported goods)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#35-drawback-of-the-export-on-imported-goods), as amended to 2025-06-30: "seven-eight of such duties shall be repaid as drawback, subject to the following conditions" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 37 (Drawback on goods used in the manufacture of goods which are exported)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#37-drawback-on-goods-used-in-the-manufacture-of-goods-which-are-exported), as amended to 2025-06-30: "the Board may, by notification in the official Gazette, direct that drawback shall be allowed in respect of such imported goods to such extent and subject to such condition as may be provided in the rules." Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 39 (When no drawback allowed)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#39-when-no-drawback-allowed), as amended to 2025-06-30: "unless the claim for drawback has been made and established at the time of export." Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, Sections 21(c), 36, 38, 40 and 41 (repayment and drawback)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Rules, 2001, section 455 (Application for duty drawback)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#455-application-for-duty-drawback), as amended to 2023-06-30: "Every goods declaration for export filed under rule 444 shall also be considered as an application for duty drawback." Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, Rules 218 to 224 and 456 to 460 (duty drawback)](https://qanoondigest.com/rules/rules-general/customs-rules-2001), as amended to 2023-06-30: "The duty drawback payment of such claims that are complete in all respects shall be made on FIFO basis taking into account the date of filing of claim" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf --- ## How is the correct HS code (PCT heading) decided for my product, and can I get an advance ruling? Source: https://qanoondigest.com/faq/importers-exporters/find-hs-code-advance-ruling-customs Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Customs duty is charged at the rate the First Schedule gives for your product's tariff heading, so classification decides the duty. Section 212B of the Customs Act, 1969 lets you apply for an advance ruling on classification before importing. It must be issued within ninety days and binds Customs for three years unless the law or facts change. **Applies to:** Importers and exporters unsure which Pakistan Customs Tariff heading their goods fall under, or in a classification dispute with Customs. ### What does the law say? **Duty follows the tariff heading.** Section 18(1) of the Customs Act, 1969 levies customs duty at the rates prescribed in the First Schedule, the Pakistan Customs Tariff, or under any other law. Every product sits under a Pakistan Customs Tariff (PCT) code in that schedule, and the code carries the rate. Regulatory duty and additional customs duty under section 18(3) and 18(5) are also levied on goods "as specified in the First Schedule", so a wrong heading can change more than one duty. **Changes to the tariff and disputes (section 18E).** The Board may, by notification, change the Pakistan Customs Tariff only for the purpose of the statistical suffix of the PCT code. A proviso adds that the Board "may constitute a committee or a centre for the purpose of settlement of disputes regarding classification of goods" and may prescribe the procedure. The Act does not itself set up that committee or its procedure. **Advance rulings (section 212B).** An applicant may ask for an advance ruling on: 1. classification of goods under the First Schedule; 2. origin of goods under the rules of origin notified for bilateral and multilateral agreements; or 3. any other matter the Board specifies by notification. A further item, clause (iii), now reads only "Omitted". Section 212B then sets the timetable and effect: | Sub-section | Rule | |---|---| | 212B(3) | Proceedings to be completed within ninety days | | 212B(4) | Ruling binding on the applicant | | 212B(5) | Ruling binding on Customs for three years, unless law, facts or circumstances change | | 212B(6) | Appeal to the Member Customs (Policy) within thirty days; ruling suspended in that period unless accepted | ### How does the advance ruling process work? The procedure is in the Customs (Advance Ruling) Rules, 2020, which form rules 789 to 798 of the Customs Rules, 2001. - **Application (rule 792).** You apply on the prescribed format (Annex-A for classification) to the secretary of the Advance Ruling Committee, stating the question and attaching the documents. You also give an undertaking that no issue about the goods is pending before any customs office, adjudicating authority, tribunal or court. Annex-A asks for a description of the goods, samples, photographs, catalogues or plans, the tariff code you think applies, and the General Interpretation Rule you rely on. - **Scrutiny.** The Committee tells you within fifteen days if more details or documents are needed. - **Hearing and order.** The Committee may call you or your representative to appear, and passes its order within ninety days of receiving the complete application. - **Refusal (rule 796).** The Committee refuses to process an application if the information is incomplete, incorrect, false or misleading, if the law, facts or circumstances change, or if the issue is already pending before or decided by an adjudicating authority, tribunal or court. You must be heard before a rejection. - **Revocation.** A ruling obtained on incomplete, incorrect, false or misleading information can be revoked with retrospective effect. ### Worked example (illustrative scenario) Hamza plans to import a new type of solar inverter with a built-in battery for resale from his shop in Faisalabad. Two PCT headings seem possible, and they carry different duty rates. 1. **Before shipping**, he files an Annex-A application with a product catalogue and photographs, proposing one heading and explaining which interpretation rule he relies on. 2. **Within fifteen days** the Committee asks for a technical data sheet, which he supplies. 3. **Within ninety days** of the complete application, the Committee rules on the heading (section 212B(3)). 4. **If he disagrees**, he has thirty days to appeal to the Member Customs (Policy); the ruling is suspended meanwhile unless he accepts it (section 212B(6)). 5. **Once final**, the ruling binds both Hamza and Customs for his future imports of that product for three years, unless the law, facts or circumstances change (section 212B(4) and (5)). ### What if my goods are already at the port with a classification dispute? Rule 796(c) says the Committee will not process an application if the issue is pending before an adjudicating authority, tribunal or court, and rule 792 requires an undertaking that nothing is pending before a customs office. An advance ruling is therefore built for goods before import. A dispute on goods already declared follows the ordinary assessment, adjudication and appeal route, covered on the appeals page linked below. ### Common mistakes - **Treating a supplier's HS code as final.** Duty is charged at the First Schedule rate for the correct heading, whatever code the foreign invoice shows. - **Expecting a ruling on value.** Section 212B(2) does not list valuation; value is governed by the Act's separate valuation provisions. - **Missing the thirty-day appeal window.** Section 212B(6) and the advance ruling rules both fix thirty days from the ruling. - **Relying on the one-year period in the rules.** The advance ruling rules in our copy still say one year; the Act, as amended, gives three years. This page follows the Act. ### What to check in the official text Read sections 18, 18E and 212B of the Customs Act, 1969 and rules 789 to 798 of the Customs Rules, 2001. The First Schedule tariff itself, with its headings, chapter notes and rates, is not reproduced in the consolidated Act held on this site, and no committee constituted under the section 18E proviso appears in the corpus. Check the current tariff and any Board notifications under section 212B(2)(iv) in the official sources. ### Frequently asked #### Can I get an advance ruling on the value of my goods? Not under the current text. Section 212B(2) lists classification, origin under notified rules of origin, and any other matter the Board notifies; clause (iii) of that list now reads 'Omitted'. Valuation is handled under the Act's separate valuation provisions. #### How long is an advance ruling valid? Section 212B(5) makes it binding on Customs for three years unless there is a change in law, facts or circumstances. The advance ruling rules in our copy of the Customs Rules, updated to 30 June 2023, still say one year, but the Act was amended to three years by the Finance Act, 2021. #### Can I appeal an advance ruling I disagree with? Yes. Section 212B(6) says the appeal lies with the Member Customs (Policy) within thirty days of the ruling, and the ruling stays suspended during those thirty days unless the applicant accepts it. ### Citations - [Customs Act, 1969, section 18 (Goods dutiable)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#18-goods-dutiable), as amended to 2025-06-30: "customs duties shall be levied at such rates as are prescribed in the First Schedule or under any other law for the time being in force on,-" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 18E (Pakistan Customs Tariff)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#18e-pakistan-customs-tariff), as amended to 2025-06-30: "the Board may constitute a committee or a centre for the purpose of settlement of disputes regarding classification of goods and may prescribe rules or procedure for carrying out the purpose of this section." Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 212B (Advance Ruling)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#212b-advance-ruling), as amended to 2025-06-30: "The proceedings for issuance of advance ruling shall be completed within ninety days." Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Rules, 2001, section 789 (Short, title and commencement)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#789-short-title-and-commencement), as amended to 2023-06-30: "These rules shall be called the Customs (Advance Ruling) Rules, 2020." Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, section 792 (Procedure for submission of application)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#792-procedure-for-submission-of-application), as amended to 2023-06-30: "An undertaking to the effect that, to the best of the applicant’s knowledge, no issues concerning the goods for which a ruling is sought, is pending before any customs office or port of entry or before any adjudicating authority, tribunal or court." Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf - [Customs Rules, 2001, section 796 (Conditions where Committee will decline to process the application)](https://qanoondigest.com/rules/rules-general/customs-rules-2001#796-conditions-where-committee-will-decline-to-process-the-application), as amended to 2023-06-30: "if the issue is pending before any adjudicating authority, appellate tribunal or court of law; or" Official source: https://download1.fbr.gov.pk/Docs/2023102014103110714Customs-Rules-SRO-450(I)-2001.pdf --- ## How much income tax is collected at import on a mobile phone brought into Pakistan? Source: https://qanoondigest.com/faq/importers-exporters/income-tax-on-imported-mobile-phones Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer A fixed rupee amount per phone. The mobile phone table in Part II of the First Schedule, applied through section 148, sets tax by the phone's C&F value in US dollars: from Rs. 70 up to Rs. 11,500 for a phone imported in CBU condition, and nil up to Rs. 5,200 in CKD/SKD condition, for tax year 2027. **Applies to:** Importers of mobile phones into Pakistan, including traders importing finished handsets or kits, and individuals asking how the income tax part of the charge on an imported phone is worked out. Most goods attract advance income tax at import as a percentage of their value. Mobile phones are different. The Income Tax Ordinance, 2001 sets a fixed rupee amount per handset, graded by the phone's C&F value in US dollars. The figures below are those in the Ordinance as amended to 30 June 2026, which apply for tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? Section 148(1) requires the Collector of Customs to collect advance tax from every importer of goods at the rate in Part II of the First Schedule. Part II sets percentage rates for most goods, but a proviso then says the rate of tax on the value of import of a mobile phone by any person is as set out in a separate table. Section 148(5) says the tax is collected in the same manner and at the same time as customs duty. The table, read from the source text of the Ordinance, is: | C&F value of mobile phone (US$) | CBU condition, PCT 8517.1219 | CKD/SKD condition, PCT 8517.1211 | |---|---|---| | Up to 30, except smart phones | Rs. 70 | Rs. 0 | | Exceeding 30 and up to 100, and smart phones up to 100 | Rs. 100 | Rs. 0 | | Exceeding 100 and up to 200 | Rs. 100 | Rs. 0 | | Exceeding 200 and up to 350 | Rs. 970 | Rs. 0 | | Exceeding 350 and up to 500 | Rs. 5,000 | Rs. 3,000 | | Exceeding 500 | Rs. 11,500 | Rs. 5,200 | The Rs. 100 figure for phones between US$100 and US$200 in CBU condition was substituted for Rs. 930 by the Finance Act, 2026, according to the footnote to the table. **Personal baggage.** Clause (60E) of Part IV of the Second Schedule says section 148 does not apply to mobile phones brought in personal baggage under the Baggage Rules, 2006. ### What about sales tax on a phone? Sales tax on imported phones is also in this corpus. Section 3(3B) of the Sales Tax Act, 1990 says sales tax on goods in the Ninth Schedule is charged at the rates and in the manner set out there. Table-II of the Ninth Schedule sets sales tax on cellular mobile phones on the import value per set: | Category | CBU at import or registration (IMEI by CMOs) | Import in CKD/SKD condition | Supply of locally manufactured phones in CBU condition | |---|---|---|---| | Not exceeding US$500 | 18% ad valorem | 18% ad valorem | 18% ad valorem | | Exceeding US$500 | 25% ad valorem | 18% ad valorem | 18% ad valorem | A clause added by the Finance Act, 2026 lets an individual paying tax on an imported phone through the PTA's Device Identification, Registration and Blocking System pay in instalments as prescribed, provided all are paid before the end of the financial year of import. The customs duty and any regulatory duty on phones come from the customs tariff and notifications that are not part of this corpus, so the full "PTA tax" total cannot be worked out here. ### Worked example (illustrative figures) Faisal, a trader in Rawalpindi, imports two finished smartphones in CBU condition. One has a C&F value of US$250, the other US$600. 1. The US$250 phone falls in the band "Exceeding 200 and up to 350". Income tax under section 148: Rs. 970. 2. The US$600 phone falls in the band "Exceeding 500". Income tax: Rs. 11,500. 3. Total income tax collected at import: Rs. 970 + Rs. 11,500 = Rs. 12,470. 4. Sales tax: suppose the import value per set works out to Rs. 75,000 for the first phone. At 18%, that is Rs. 13,500. The second phone, above US$500, is taxed at 25% of its own import value. The import values in step 4 are invented. Working out import value itself involves customs figures outside this corpus. ### What if ...? **What if I import kits for assembly?** The CKD/SKD column applies. Phones up to US$350 carry nil income tax in that column, and higher bands carry Rs. 3,000 or Rs. 5,200. **What if the importer is a business?** Section 148(7) makes tax collected under section 148 a minimum tax on the importer's income from the imports, except for goods imported by an industrial undertaking for its own use. How that applies to a particular importer depends on the rest of the Ordinance. ### Common mistakes - **Applying the percentage rates.** The general 1%, 2% or 5.5% rates in Part II do not apply to phones. The proviso substitutes the fixed-amount table. - **Using the pre-2026 figure.** The Rs. 930 amount for the US$100 to 200 CBU band was replaced by Rs. 100 for tax year 2027. - **Assuming income tax is the whole charge.** Sales tax under the Ninth Schedule and customs duty are separate. ### What to check in the official text Read section 148 and the mobile phone table in Part II of the First Schedule of the Income Tax Ordinance as amended to 30 June 2026, and clause (60E) of Part IV of the Second Schedule. For sales tax, read Table-II of the Ninth Schedule to the Sales Tax Act, 1990. Check the Baggage Rules, 2006, any Board notification under section 148(6A) on minimum values, and the customs tariff for duty. None of these three are in this corpus. ### Frequently asked #### Is income tax on an imported phone a percentage of its price? No. A proviso in Part II of the First Schedule replaces the percentage rates for mobile phones with a table of fixed rupee amounts per phone, set by the C&F value in US dollars and by whether the phone is in CBU or CKD/SKD condition. #### How much income tax is collected on a phone worth more than US$500? For tax year 2027 the table sets Rs. 11,500 for a phone in CBU condition under PCT heading 8517.1219 and Rs. 5,200 for one in CKD/SKD condition under PCT heading 8517.1211. #### Does section 148 apply to a phone I bring in my own luggage? Clause (60E) of Part IV of the Second Schedule says section 148 does not apply to mobile phones brought in personal baggage under the Baggage Rules, 2006. Whether a particular phone qualifies depends on those Rules, which are not part of this corpus. ### Citations - [Income Tax Ordinance, 2001, section 148 (Imports)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#148-imports), as amended to 2026-06-30: "The Collector of Customs shall collect advance tax from every importer of goods on the value of the goods at the rate specified in Part II of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part II, proviso to the rate table: Table of tax on value of import of mobile phone](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clause (60E)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "sales tax on the import and supply of the goods specified in the Ninth Schedule to this Act shall be charged, collected and paid at the rates, in the manner, at the time" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Ninth Schedule, Table-II (cellular mobile phones in CKD/CBU form)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Is section 148 import tax a minimum tax, and why does a commercial importer pay more than a manufacturer importing for its own use? Source: https://qanoondigest.com/faq/importers-exporters/commercial-importer-vs-industrial-import-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Mostly yes. Section 148(7) makes the tax a minimum tax on import income, except where an industrial undertaking imports goods for its own use; section 148(7A) makes it minimum for everyone on edible oil, packaging, paper and plastics. Part II of the First Schedule sets separate, higher rates for commercial importers but gives no reason. **Applies to:** Traders who import goods for resale and manufacturers or other industrial undertakings that import raw material, machinery or parts for their own use, in tax year 2027. ### What does the law say? Section 148(7) of the Income Tax Ordinance, 2001 says the tax required to be collected under section 148 "shall be minimum tax on the income of the importer arising from the imports". The same sub-section then switches this off for one case: it "shall not apply in the case of import of goods on which tax is required to be collected under this section by an industrial undertaking for its own use". Section 148(7A) overrides that carve-out for four kinds of goods. "Notwithstanding anything contained in sub-section (7)", the tax is minimum tax on the income of every person arising from imports of: 1. edible oil; 2. packaging material; 3. paper and paper board; or 4. plastics. The Board, with approval of the Minister in charge, can add to, omit from or amend that list by notification. ### So who pays a minimum tax and who pays an adjustable one? | Importer and goods | Status of section 148 tax | |---|---| | Commercial importer, any goods | Minimum tax on import income, section 148(7) | | Any other importer that is not an industrial undertaking importing for own use | Minimum tax on import income, section 148(7) | | Industrial undertaking importing for its own use, goods outside the section 148(7A) list | Not minimum. It is advance tax, credited under section 168 | | Anyone importing edible oil, packaging material, paper and paper board, or plastics | Minimum tax, section 148(7A) | Section 168(1)(b) treats tax collected under Division II of Part V of Chapter X, which is where section 148 sits, as "tax paid by the person from whom the tax was collected". Section 168(2) then allows a tax credit for it against the tax due on taxable income for that year. For the industrial undertaking in row 3, that is how the tax is adjusted. Section 168(3) lists final taxes that get no credit; section 148 is not among them. ### Why does a commercial importer pay a higher rate? Part II of the First Schedule sets two rates for goods in Parts II and III of the Twelfth Schedule, one general and one "in case of commercial importer": | Goods | General rate | Commercial importer | |---|---|---| | Part I of the Twelfth Schedule | 1% | 1% | | Part II of the Twelfth Schedule | 2% | 3.5% | | Part III of the Twelfth Schedule | 5.5% | 6% | All rates are on the import value as increased by customs duty, sales tax and federal excise duty. The Ordinance states the higher rate but does not state a reason for it, and it does not define "commercial importer" in section 148 or in Part II. This page does not guess at the policy. The second proviso to section 148(1) also gives manufacturers a possible route to the lower Part II rate. Where goods in Part III are used both as raw material and as finished goods, the Board may by notification treat goods imported by a person "as raw material for its own use" as classified under Part II, subject to conditions. Any such notification is outside this corpus. ### Worked example (illustrative figures) Two businesses each import Part III goods with a value, increased by customs duty and sales tax, of **Rs. 10,000,000**. Both are on the active taxpayers' list. **Khan Traders, Karachi, imports for resale.** 1. Commercial importer rate for Part III: 6%. 2. Tax collected: Rs. 10,000,000 x 6% = **Rs. 600,000**. 3. Under section 148(7) this is a minimum tax on the income from those imports. **Mehran Fabrication (Pvt) Ltd, Hyderabad, an industrial undertaking, imports components for its own production.** 1. General rate for Part III: 5.5%. 2. Tax collected: Rs. 10,000,000 x 5.5% = **Rs. 550,000**. 3. Section 148(7) does not apply to it, so the Rs. 550,000 is advance tax. Under section 168(2) it is a credit against the company's tax on its taxable income for the year. **If Mehran instead imported plastic sheets for its own packaging line**, section 148(7A) would make the Rs. 550,000 a minimum tax on income arising from those imports, even though Mehran is an industrial undertaking importing for its own use. The difference in collection between the two businesses is Rs. 600,000 - Rs. 550,000 = Rs. 50,000, but the bigger difference is in status: minimum for one, adjustable for the other. ### What if an industrial undertaking resells part of what it imported? Section 148(7) excludes imports "by an industrial undertaking for its own use". It does not say how goods that were declared for own use and later resold are to be treated. The law is silent on this in section 148, and this page does not fill the gap. ### Common mistakes - **Treating the commercial rate and minimum status as the same rule.** The rate comes from Part II of the First Schedule; the minimum status comes from section 148(7) and (7A). - **Assuming every manufacturer escapes minimum tax.** Section 148(7A) catches edible oil, packaging, paper and paper board, and plastics for every importer. - **Assuming only traders pay minimum tax.** A non-industrial business importing equipment for its own use is not within the section 148(7) carve-out. ### What to check in the official text Read section 148(7) and (7A) in full, and section 168 for credits. Read Part II of the First Schedule and the Twelfth Schedule in the official PDF, since the site copy leaves out schedules. Check for Board notifications amending the section 148(7A) list or moving raw material from Part III to Part II; those are outside this corpus. ### Frequently asked #### Does 'minimum tax' mean I cannot get the section 148 tax back? Section 148(7) says the tax is a minimum tax on the income arising from the imports. On those words, the tax on that income does not fall below the amount collected. Section 148 itself does not set out how the comparison is made in the return. #### Where does the Ordinance define a commercial importer? Neither section 148 nor Part II of the First Schedule defines the term. Part II simply sets a separate rate 'in case of commercial importer' for goods in Parts II and III of the Twelfth Schedule. #### My factory imports plastic granules for its own production. Is the tax adjustable? No. Section 148(7A) makes the tax a minimum tax for every person on imports of plastics, packaging material, paper and paper board and edible oil, notwithstanding the industrial undertaking carve-out in section 148(7). ### Citations - [Income Tax Ordinance, 2001, section 148 (Imports)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#148-imports), as amended to 2026-06-30: "shall be minimum tax on the income every person arising from imports of following goods" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part II (Rates of Advance Tax, section 148)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Twelfth Schedule, Parts I, II and III (see section 148)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "shall be treated as tax paid by the person from whom the tax was collected or deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What happens if customs finds a misdeclaration in my goods declaration, and is an honest mistake treated like deliberate fraud? Source: https://qanoondigest.com/faq/importers-exporters/misdeclaration-penalty-section-32-customs Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No. Section 32(1) makes a false statement an offence only where you knew or had reason to believe it was false. Short levies from inadvertence or error fall under section 32(3), with a lower penalty ceiling in the section 156 table. Forged documents or untrue declarations of value, origin or quantity are fiscal fraud under section 32A. **Applies to:** Importers, exporters and their clearing agents who have filed a goods declaration that customs says contains a wrong description, quantity, value or other detail. The Customs Act, 1969 has three separate provisions for a wrong goods declaration, and which one applies depends on what you knew and what kind of error it was. The penalties for each sit in the table under section 156(1), and they differ a great deal. ### What does the law say? **Knowing false statement: section 32(1).** A person commits an offence under section 32(1) if, in connection with any matter of customs, he makes, signs or delivers a declaration, certificate or other document, answers an officer's question, or submits a false statement or document electronically through the automated clearance system, "knowing or having reason to believe that such document or statement is false in any material particular". Section 32(2) then allows a show cause notice within five years where duty or taxes were short-levied because of such a statement or because of collusion. **Inadvertence or error: section 32(3).** Where duty or taxes were not levied, short-levied or wrongly refunded "by reason of any inadvertence, error or misconstruction", the person liable gets a show cause notice within three years. Two provisos limit this: no action if the recoverable amount is under twenty thousand rupees, and no action if the full short-paid amount is paid voluntarily before an audit, inquiry or investigation starts. Section 32(3A) covers short levies found through an audit of the importer's or exporter's accounts, with a five-year limit. **Fiscal fraud: section 32A.** This is a separate offence. It covers submitting concocted, altered, false, forged or counterfeit documents; declaring an importer or exporter who does not physically exist at the given address; declaring untrue information about self-assessed payment, description, quantity, quality, origin or value; declaring a value significantly higher or lower than the price actually paid or payable (subject to Board rules); tampering with a customs officer's findings; and attempting, abetting or conniving in any of these. Section 32A(2) requires the show cause notice within 180 days of detection. ### What are the penalties? The table under section 156(1) sets these ceilings. The adjudicating officer decides the actual amount up to the ceiling. | Clause of the section 156 table | Offence | Maximum penalty | Other consequences stated | |---|---|---|---| | 14(i) | Section 32(1) or (2) | Rs. 100,000 or three times the value of the goods, whichever is greater | Goods liable to confiscation; on conviction by a Special Judge, imprisonment up to three years, or fine, or both | | 14(ii) | Section 32(3) or (3A) | Rs. 50,000 or two times the value of the goods, whichever is greater | None stated in the entry | | 14A | Section 32A | Three times the value of the goods | Goods liable to confiscation; on conviction by a Special Judge, imprisonment of not less than five and up to ten years, or fine, or both | ### Worked example (illustrative figures) Imran, a Lahore trader, imports fabric valued at Rs. 3,000,000. Customs finds the declared description was wrong. 1. **If treated under section 32(1):** three times the value is Rs. 9,000,000, which is greater than Rs. 100,000. The ceiling is Rs. 9,000,000. 2. **If treated under section 32(3):** two times the value is Rs. 6,000,000, which is greater than Rs. 50,000. The ceiling is Rs. 6,000,000. 3. **If treated as fiscal fraud under section 32A:** three times the value is Rs. 9,000,000, and the imprisonment range in clause 14A applies on conviction. Now take a small consignment valued at Rs. 20,000: 1. Section 32(1): three times the value is Rs. 60,000, less than Rs. 100,000, so the ceiling is Rs. 100,000. 2. Section 32(3): two times the value is Rs. 40,000, less than Rs. 50,000, so the ceiling is Rs. 50,000. These are maximums. The duty and taxes short-paid are recovered separately under section 32(4), which caps the amount at what the notice specified. ### What if I have committed fiscal fraud and want to settle? Section 32B allows the Collector or Director, with the Board's prior approval, to compound the offence where a person has committed a duty or tax fraud, if the person pays the duty or tax due along with the penalty determined under the Act. This can happen before or after recovery proceedings begin. ### What if the error was the clearing agent's? Section 32(1) applies to any person who "makes or signs or causes to be made or signed" the document. It does not by its words exclude the importer when an agent prepared the declaration. How responsibility is shared between an importer and a licensed agent in a given case is not settled by these sections alone. ### Common mistakes - **Treating every wrong entry as fraud.** Section 32(1) needs knowledge or reason to believe. Section 32(3) exists for honest errors. - **Assuming an honest error carries no penalty.** Clause 14(ii) of the section 156 table does attach a penalty to section 32(3) and (3A) cases. - **Reading the ceiling as the fixed penalty.** Each entry says "not exceeding". - **Ignoring the voluntary payment proviso.** Under section 32(3), paying the full short amount before an audit, inquiry or investigation begins means the action is not initiated. ### What to check in the official text Read section 32 in full, section 32A(1) and (2), section 32B, and clauses 14 and 14A of the table under section 156(1). The site file does not reproduce the section 156 table cleanly; the figures above were read from the official PDF of the 30 June 2025 edition. The Board's rules under section 32A(1)(ca) on value misdeclaration are not reviewed on this page. ### Frequently asked #### Is an honest mistake in a goods declaration an offence? Section 32(1) requires that the person knew or had reason to believe the document or statement was false in a material particular. A short levy caused by inadvertence, error or misconstruction is dealt with under section 32(3), and clause 14(ii) of the section 156 table sets a lower penalty ceiling for it than for a knowing false statement. #### What is the maximum penalty for fiscal fraud under section 32A? Clause 14A of the section 156 table sets a penalty not exceeding three times the value of the goods, makes the goods liable to confiscation, and on conviction by a Special Judge allows imprisonment of not less than five and up to ten years, or fine, or both. #### Does paying the short amount voluntarily help? The second proviso to section 32(3) says action under that sub-section is not initiated if the full short-paid amount is paid voluntarily before an audit, inquiry or investigation begins. The first proviso also bars action where the recoverable amount is less than twenty thousand rupees. ### Citations - [Customs Act, 1969, section 32 (False statement, error, etc)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#32-false-statement-error-etc), as amended to 2025-06-30: "Where, by reason of any inadvertence, error or misconstruction, any duty" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 32A (Fiscal fraud)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#32a-fiscal-fraud), as amended to 2025-06-30: "(a) causes to submit documents including those filed electronically, which are concocted, altered, mutilated, false, forged, tempered or counterfeit to a functionary of customs;" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 156 (Punishment for offences), Table under sub-section (1), clauses 14 and 14A](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#156-punishment-for-offences), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 32B (Compounding of offence)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#32b-compounding-of-offence), as amended to 2025-06-30: "Notwithstanding anything contained in section 32 and 32A or any other provision of this Act, where any person has committed a duty or tax fraud, the Collector" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf --- ## What is the punishment for smuggling under the Customs Act? Source: https://qanoondigest.com/faq/importers-exporters/smuggling-punishment-customs-act Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It depends on the value of the goods. Under clause 8 of the section 156 table, smuggled goods are confiscated and the person concerned faces a penalty tied to the value, from up to the value itself to five times it, plus imprisonment on conviction by a Special Judge ranging from up to two years to up to fourteen years. **Applies to:** Anyone accused of bringing goods into or out of Pakistan, or carrying, keeping or selling them, in breach of the Customs Act's definition of smuggling. Smuggling is punished on two tracks under the Customs Act, 1969. There is a departmental track, where an officer confiscates the goods and imposes a penalty, and a criminal track, where a Special Judge can send the person to prison. Both come from clause 8 of the table in section 156, and the size of the punishment rises with the value of the goods. ### What does the law say? Section 2(s) defines "smuggle" as bringing goods into or taking them out of Pakistan in breach of a prohibition or restriction, or being concerned in carrying, transporting, depositing, harbouring, keeping, concealing or retailing them anywhere in Pakistan, or evading customs duties or taxes on them. The definition then lists the goods it covers: - gold, silver, platinum, palladium, radium, precious stones, antiques, currency, narcotics and psychotropic substances; - manufactures of gold, silver, platinum, palladium, radium or precious stones, and other goods notified by the Federal Government, where each exceeds five hundred thousand rupees in value; - any goods moved by a route other than a declared route or from a place other than a customs-station; - essential commodities notified by the Board. Attempts, abetment and connivance are included. Section 156(1) then sets out the punishment for each offence in a table. Clause 8 is the smuggling entry. Section 156(2) adds that where goods specified in section 2(s) are seized in the reasonable belief that duty was defrauded or a prohibition evaded, the person from whose possession they were seized must prove otherwise. ### How much is the penalty and prison term? Clause 8(i) says smuggled goods, including notified essential commodities, are liable to confiscation, and the person concerned is liable to the following. The table below is read from the source text of the consolidated Act, because the site copy of the section 156 table did not extract cleanly. | Value of goods | Penalty | Imprisonment on conviction by a Special Judge | |---|---|---| | Rs. 500,001 to Rs. 3,000,000 | Not exceeding the value of the goods | Up to 2 years | | Rs. 3,000,001 to Rs. 5,000,000 | Two times the value of the goods (see note) | Up to 3 years, not less than 2 years | | Rs. 5,000,001 to Rs. 7,500,000 | Three times the value (see note) | Up to 5 years, not less than two and a half years | | Rs. 7,500,001 to Rs. 10,000,000 | Four times the value (see note) | Up to 10 years, not less than 3 years | | Above Rs. 10,000,000 | Five times the value (see note) | Up to 14 years, not less than 5 years, and moveable and immoveable property liable to forfeiture | Note: for the four higher bands the consolidated text reads "a penalty not exceeding [but not less than]" the multiple, with the words "but not less than" inserted by the Finance Act, 2023. The printed wording does not make clear whether the multiple is a ceiling or a floor, and this page does not resolve that. For the top band there is a further proviso: for goods notified by the Federal Government, the sentence is not less than five years and the whole or part of the person's property is liable to forfeiture. Clause 8(iii) sets parallel bands where the smuggled goods are currency, gold, silver, platinum or precious stones, measured in US dollars: up to US$10,000 (penalty up to the value, prison up to 2 years), US$10,001 to 20,000 (two times, up to 3 years), US$20,001 to 50,000 (three times, up to 5 years), US$50,001 to 100,000 (four times, up to 10 years) and above US$100,000 (five times, up to 14 years with a five-year minimum and forfeiture). Clause 8(ii) covers narcotics by weight and runs up to death or imprisonment for life. ### How does a smuggling case proceed? - **Adjudication.** Under section 179(3), where section 2(s) has been invoked, the case must be decided within forty-five days of the show cause notice, extendable by fifteen days by the Collector Adjudication. - **Trial.** Section 185B says no court other than the Special Judge may try offences under the Act, except narcotics offences, which go to Special Courts under the Control of Narcotics Substances Act, 1997. Under section 185A, a case started on a customs report is to be disposed of within six months, extendable for recorded reasons. - **The vehicle.** Section 157(2) makes any conveyance used to remove goods liable to confiscation also liable to confiscation. ### Worked example (illustrative figures) Customs in Peshawar seizes a truckload of tyres brought in by an unapproved route. The tyres are valued at Rs. 6,000,000. 1. Rs. 6,000,000 falls in the band Rs. 5,000,001 to Rs. 7,500,000. 2. Three times the value is 3 × Rs. 6,000,000 = Rs. 18,000,000. That is the penalty figure in clause 8(i)(c). 3. The tyres are liable to confiscation, and the truck is liable to confiscation under section 157(2). 4. On conviction by a Special Judge, imprisonment is up to five years, with a minimum of two and a half years. ### What if ...? **What if the goods are worth Rs. 500,000 or less?** Clause 8(i) as printed starts at Rs. 500,001. It does not say what applies below that figure, and other clauses of the section 156 table may be relevant. This page does not decide which. **What if I only carried or stored the goods?** Section 2(s) covers "being concerned in carrying, transporting, removing, depositing, harbouring, keeping, concealing" smuggled goods, so a carrier or storekeeper is within the definition. ### Common mistakes - **Treating smuggling as only a border offence.** Section 2(s) reaches possession and retailing anywhere within Pakistan. - **Assuming the penalty replaces prison.** The table provides a penalty and confiscation, and further imprisonment on conviction. - **Assuming customs must prove intent.** Section 156(2) shifts the burden to the person from whose possession section 2(s) goods were seized. ### What to check in the official text Read clause 8 of the table under section 156(1) in the official PDF of the Customs Act as amended to 30 June 2025, since the table is complex and the site text is garbled. Check any Federal Government notification of goods under section 2(s)(ii) and the fifth band's proviso, and any Board notification of essential commodities under section 2(s)(iv). Those notifications are not part of this corpus. ### Frequently asked #### What counts as smuggling under the Customs Act? Section 2(s) covers bringing goods into or out of Pakistan in breach of a prohibition or restriction, or by an undeclared route, and being concerned in carrying, keeping, concealing or retailing such goods or evading duty on them. It lists gold, currency, precious stones and narcotics, other listed or notified goods above five hundred thousand rupees, goods moved by undeclared routes, and essential commodities notified by the Board. #### What is the maximum prison term for smuggling goods worth more than Rs. 10 million? Clause 8(i)(e) of the section 156 table allows imprisonment of up to fourteen years on conviction by a Special Judge, with a minimum of five years. The whole or part of the person's moveable and immoveable property is also liable to forfeiture. #### Which court tries a smuggling case? Section 185B gives the Special Judge exclusive jurisdiction over offences under the Act, except narcotics offences, which go to the Special Courts under the Control of Narcotics Substances Act, 1997. Section 185A requires cases on a customs report to be disposed of within six months, extendable by the Special Judge for recorded reasons. ### Citations - [Customs Act, 1969, section 2 (Definitions)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#2-definitions), as amended to 2025-06-30: "(s) “smuggle” means to bring into or take out of Pakistan, in breach of any prohibition or restriction for the time being in force" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 156 (Punishment for offences), Table under sub-section (1), clause 8 (smuggling)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#156-punishment-for-offences), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 185A (Cognizance of offences by Special Judges)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#185a-cognizance-of-offences-by-special-judges), as amended to 2025-06-30: "Provided that such cases shall be disposed of within six months of the receipt of report" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 185B (Special Judge, etc. to have exclusive jurisdiction)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#185b-special-judge-etc-to-have-exclusive-jurisdiction), as amended to 2025-06-30: "no court other than the Special Judge having jurisdiction shall try an offence punishable under the Act, except the offences relating to narcotics and narcotic substances" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 179 (Power of adjudication)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#179-power-of-adjudication), as amended to 2025-06-30: "in cases, wherein the provisions of clause (s) of section 2 have been invoked, such cases shall be decided within a period of" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 157 (Extent of confiscation)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#157-extent-of-confiscation), as amended to 2025-06-30: "Every conveyance of whatever kind used in the removal of any goods liable to confiscation under this Act shall also be liable to confiscation." Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf --- ## What are regulatory duty and additional customs duty, and why are they charged on some imports but not others? Source: https://qanoondigest.com/faq/importers-exporters/regulatory-duty-additional-customs-duty Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Both are extra customs duties added on top of the First Schedule rate. Section 18(3) of the Customs Act, 1969 allows regulatory duty of up to 100% of value, and section 18(5) allows additional customs duty of up to 35% of value. Each applies only to goods named in a notification, so some imports carry them and others do not. **Applies to:** Importers clearing goods through Pakistan customs who see regulatory duty or additional customs duty on their assessment. ### What does the law say? Section 18 of the Customs Act, 1969, as amended to 30 June 2025, sets up layers of customs duty on imports. **Ordinary customs duty (section 18(1)).** Duty is levied "at such rates as are prescribed in the First Schedule or under any other law" on goods imported into Pakistan. Section 18(1A) adds that some goods are charged at rates prescribed in the Fifth Schedule instead, subject to the conditions set out there. **Regulatory duty (section 18(3)).** The Federal Government may, by notification in the official Gazette, levy a regulatory duty on "all or any of the goods imported or exported, as specified in the First Schedule". The rate cannot exceed one hundred per cent of the value of the goods as determined under section 25 or section 25A. Section 18(4) says this duty is in addition to the ordinary duty under section 18(1). **Additional customs duty (section 18(5)).** The Federal Government may, again by Gazette notification, levy an additional customs duty on imported goods specified in the First Schedule, at a rate not exceeding thirty-five per cent of value under section 25 or 25A. A proviso says the cumulative incidence of duty under sub-sections (1) and (5) shall not exceed the rates Pakistan has agreed to under multilateral trade agreements. Section 18(6) makes it payable in addition to the duties under sub-sections (1) and (3). **Special customs duty (section 18A).** A separate power lets the Federal Government levy a special customs duty on imports that are the same kind of goods as those produced or manufactured in Pakistan, at a rate not exceeding the federal excise duty on the local goods. The last proviso says this duty does not form part of the value of supply for the Sales Tax Act, 1990. ### Why do some imports carry these duties and others do not? Because none of them applies automatically. Regulatory duty, additional customs duty and special customs duty are each levied only on goods that a notification names. If your product's tariff heading is not covered by a current notification, the duty is not charged on it. If it is covered, the duty is charged at the notified rate, which may be anything up to the cap in the Act. That is also why rates can change in the middle of the year. Sections 18(4)(b) and 18(6)(b) say each duty is leviable "on and from the day specified in the notification", even if the Gazette carrying it is published after that day. ### How is the amount worked out? All three caps are expressed as a share of value "as determined under section 25", or section 25A where a valuation ruling applies. Section 25(1) starts from the transaction value, the price actually paid or payable for the goods when sold for export to Pakistan, with the additions listed in section 25(2) such as freight, insurance and loading charges to the port of importation. Which rate applies is fixed by section 30: the rate in force on the date the goods declaration is "manifested", which the Explanation to section 30 defines as the point when a machine number is allocated and registered in customs records. For goods cleared from a warehouse, a later proviso uses the payment date if duty is not paid within seven days. ### Worked example (illustrative figures) Bilal imports a consignment into Karachi with a customs value of Rs. 2,000,000 under section 25. The real rates for his goods would come from the First Schedule and the notifications, which this site does not hold, so the rates in steps 2 to 4 are **hypothetical** and chosen only to show the arithmetic. 1. **Legal ceilings from the Act.** Regulatory duty cannot exceed 100% of Rs. 2,000,000 = Rs. 2,000,000. Additional customs duty cannot exceed 35% of Rs. 2,000,000 = Rs. 700,000. 2. **Ordinary duty at a hypothetical 20%.** 20% of Rs. 2,000,000 = Rs. 400,000. 3. **Regulatory duty at a hypothetical 10%.** 10% of Rs. 2,000,000 = Rs. 200,000. 4. **Additional customs duty at a hypothetical 2%.** 2% of Rs. 2,000,000 = Rs. 40,000. 5. **Customs duties together.** Rs. 400,000 + Rs. 200,000 + Rs. 40,000 = Rs. 640,000. Sales tax and advance income tax at import stage are separate charges under other laws and are not included here. ### What if the notification changes after my goods are shipped? Section 30 ties the rate to the date the goods declaration is manifested, not the date of shipment or the invoice date. A proviso deals with declarations filed before the vessel arrives: if the rate changes between filing and berthing (or border cross-over for vehicles), the berthing or cross-over date is used instead. ### What if my goods are exported rather than imported? Section 18(2) says no export duty is levied on goods exported from Pakistan. Section 18(3), however, still refers to regulatory duty on goods "imported or exported", so the text allows regulatory duty on exports if a notification imposes it. Additional customs duty under section 18(5) refers only to imported goods. ### Common mistakes - **Treating the cap as the rate.** 100% and 35% are ceilings in section 18. The rate actually charged is the one in the notification. - **Assuming regulatory duty replaces ordinary duty.** Section 18(4)(a) says it is in addition to the section 18(1) duty. - **Assuming a duty-free tariff line means no regulatory duty.** The Act does not tie the two together. A notification can name goods regardless of their First Schedule rate. - **Using the invoice date for the rate.** Section 30 uses the manifest date of the goods declaration. ### What to check in the official text Read section 18(1) to (6), section 18A and section 30 of the Customs Act, 1969. The First Schedule tariff and the regulatory duty and additional customs duty notifications are not reproduced in the consolidated Act held here, so the current rate for a given tariff heading has to be confirmed in those notifications. Exemptions granted under section 19 are also made by notification and are likewise outside this corpus. ### Frequently asked #### What is the maximum regulatory duty on an import? Section 18(3) of the Customs Act, 1969 caps regulatory duty at one hundred per cent of the value of the goods as determined under section 25 or section 25A. The actual rate for any item is whatever the government notification sets, which can be lower than the cap. #### Is additional customs duty the same as regulatory duty? No. Additional customs duty comes from section 18(5), is capped at thirty-five per cent of value, and applies only to imported goods. Section 18(6) says it is charged in addition to the ordinary duty and any regulatory duty, so one consignment can carry all three. #### Where do I find which goods carry regulatory duty? Both duties are levied by notification in the official Gazette for goods specified in the First Schedule. Those notifications and the tariff itself are not reproduced in the Act text held on this site, so the current list has to be checked in the notifications. ### Citations - [Customs Act, 1969, section 18 (Goods dutiable)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#18-goods-dutiable), as amended to 2025-06-30: "a regulatory duty on all or any of the goods imported or exported, as specified in the First Schedule at a rate not exceeding one hundred per cent of the value of such goods as determined under section 25" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 18A (Special customs duty on imported goods)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#18a-special-customs-duty-on-imported-goods), as amended to 2025-06-30: "levy a special customs duty on the importation of such of the goods specified in the First Schedule as are of the same kind as goods produced or manufactured in Pakistan" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 25 (Value of imported and exported goods)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#25-value-of-imported-and-exported-goods), as amended to 2025-06-30: "the price actually paid or payable for the goods when sold for export to Pakistan" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 30 (Date of determination of rate of import duty)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#30-date-of-determination-of-rate-of-import-duty), as amended to 2025-06-30: "The rate of duty applicable to any imported goods shall be the rate of duty in force;" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 25A (Power to determine the customs value)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#25a-power-to-determine-the-customs-value), as amended to 2025-06-30: "may determine the customs value of any goods or category of goods imported into or exported out of Pakistan, after following the methods laid down in section 25, whichever is applicable" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 19 (General power to exempt from customs-duties)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#19-general-power-to-exempt-from-customs-duties), as amended to 2025-06-30: "exempt any goods imported into, or exported from, Pakistan or into or from any specified port or station or area therein," Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf --- ## Why is sales tax on some imported goods charged on the retail price instead of the customs value? Source: https://qanoondigest.com/faq/importers-exporters/sales-tax-retail-price-imported-goods Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Because section 3(2)(a) of the Sales Tax Act taxes imports of goods listed in the Third Schedule at 18% of the retail price, not the customs value. Section 2(27) makes the importer fix that retail price, and for imports it cannot be less than 130% of the customs value plus customs duties and federal excise duty. **Applies to:** Importers of branded consumer goods listed in the Third Schedule of the Sales Tax Act, such as chocolates, coffee, cosmetics, household appliances and packaged foods, after 30 June 2026. ### What does the law say? The ordinary rule in section 3(1)(b) of the Sales Tax Act, 1990 is 18% of the value of goods imported into Pakistan, and section 2(46)(d) sets that value as the customs value plus customs duties and federal excise duty. That definition expressly excludes goods specified in the Third Schedule. For those goods, section 3(2)(a) applies instead. Taxable supplies "and import of goods specified in the Third Schedule" are charged at 18% of the retail price. The retail price, together with the amount of sales tax, must be "legibly, prominently and indelibly printed or embossed by the manufacturer, or the importer, in case of imported goods" on each article, packet, container, package, cover or label. So the tax is fixed at import on the price the consumer will pay, rather than on the landed cost. ### What counts as the retail price? Section 2(27) defines "retail price", with reference to the Third Schedule, as the price fixed by the manufacturer "or importer, in case of imported goods", inclusive of all duties, charges and taxes other than sales tax, at which the brand or variety is sold to the general body of consumers. Where more than one price is fixed for the same brand or variety, the highest one counts. Four provisos follow: 1. the Board may by general order specify zones or areas for determining the highest retail price; 2. for aerated water, beverages, mineral water or fruit juices, any reduction for chilling or similar charges cannot exceed 5% of the price; 3. the Board may, where it deems necessary, fix the retail price of Third Schedule goods by notification; 4. for imported Third Schedule goods, the retail price "shall not be less than one hundred thirty percent" of the customs value under section 25 of the Customs Act, including customs duties and federal excise duty. The fourth proviso is the one that matters most to importers. It sets a floor, so declaring a low retail price does not reduce the tax below 18% of 130% of the duty-paid value. ### Which imported goods are in the Third Schedule? The Third Schedule, as amended to 30 June 2026, lists goods by description and PCT heading. Examples relevant to importers include fruit juices, ice cream, aerated waters, cigarettes, toilet soap, detergents, shampoo, toothpaste, perfumery and cosmetics, tea, powder drinks, spices in branded retail packing, household electrical goods such as air conditioners, refrigerators and televisions, household gas appliances, paints in retail packing, lubricating oils in retail packing, tyres and batteries not sold to vehicle makers, motorcycles, tiles, auto-parts in retail packing, and specifically "import of" pet food, coffee, chocolates and cereal bars sold in retail packing. The Finance Act, 2026 added serial numbers 56 to 75, including fats and oils, confectionery, pasta, sauces, plastic household articles, bags and cases, footwear (with an exception for certain retail-integrated manufacturers), sanitaryware, crockery, car accessories, milk products, hair and toilet preparations, tissue paper, jams, utensils and ceramic sanitary products, each "sold in retail packing" or "put up for retail sale". A note at the end of the Schedule says that where the Federal Government has notified a rate higher than 18% for any of these goods, that rate continues after inclusion. Section 3(2)(a) also points to the Eighth Schedule where a Third Schedule item appears there too. ### Worked example (illustrative figures) Hassan Imports, Karachi, brings in 5,000 bars of branded chocolate in retail packing, which is serial 54 of the Third Schedule. The customs duty amount is invented, since the tariff is not in this corpus. 1. Customs value under section 25: Rs. 1,000,000. Customs duties assessed: Rs. 300,000 (illustrative). Duty-paid value: **Rs. 1,300,000**. 2. Floor under the proviso to section 2(27): Rs. 1,300,000 x 130% = **Rs. 1,690,000**. 3. Hassan fixes a retail price of Rs. 400 per bar, excluding sales tax. Total retail price: 5,000 x Rs. 400 = **Rs. 2,000,000**, which is above the floor. 4. Sales tax at import: Rs. 2,000,000 x 18% = **Rs. 360,000**. The printed price is Rs. 400 + Rs. 72 sales tax = Rs. 472 per bar. 5. For comparison, 18% on the duty-paid value would have been Rs. 1,300,000 x 18% = Rs. 234,000. 6. No 3% value addition tax, because paragraph (2)(ix) of the Twelfth Schedule excludes these goods. 7. Section 148 income tax: value under section 148(9)(a) is Rs. 2,000,000 + Rs. 360,000 = Rs. 2,360,000. Chocolate is not listed in Parts I or II of the Twelfth Schedule to the Ordinance, so as a commercial importer the rate is 6%: **Rs. 141,600**. ### What if the importer fixes a price below the floor? If Hassan fixed Rs. 300 per bar, the total would be Rs. 1,500,000, which is less than the floor of Rs. 1,690,000. The proviso says the retail price "shall not be less than" the floor, so tax would be Rs. 1,690,000 x 18% = Rs. 304,200. ### Common mistakes - **Assuming customs value always applies.** Section 2(46)(d) carves out Third Schedule goods. - **Printing a price without the sales tax amount.** Section 3(2)(a) requires both on each article or pack. - **Forgetting the 130% floor.** It applies only to imported goods, and it is measured on the duty-paid value. ### What to check in the official text Read section 2(27), section 3(2)(a) and the full Third Schedule in the official PDF of the Sales Tax Act, as the Schedule's PCT headings do not survive well in the site copy. Check for Board notifications fixing retail prices or zones and Federal Government notifications setting higher rates; those are outside this corpus. ### Frequently asked #### Who fixes the retail price of an imported Third Schedule product? Section 2(27) says the importer fixes it, in case of imported goods. It must include all duties, charges and taxes other than sales tax, and where more than one price is fixed for the same brand or variety, the highest is used. The Board may also fix retail prices by notification. #### Do I also pay the 3% value addition tax on these goods? No. Paragraph (2)(ix) of the Twelfth Schedule excludes goods specified in the Third Schedule on which tax is paid on retail price basis. #### Is the section 148 income tax also charged on the retail price? Yes, in a modified form. Section 148(9)(a) of the Income Tax Ordinance defines the value for these goods as the retail price increased by the sales tax payable on the import and taxable supply. ### Citations - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "legibly, prominently and indelibly printed or embossed by the manufacturer" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "in case of imported goods specified in the Third Schedule, the retail price shall not be less than one hundred thirty percent of the value determined under section 25 of the Customs Act, 1969 (IV of 1969), including the amount of customs duties and federal excise duty levied thereon." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Third Schedule (see clause (a) of sub-section (2) of section 3)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Twelfth Schedule, procedure and conditions, paragraph (2)(ix)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Income Tax Ordinance, 2001, section 148 (Imports)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#148-imports), as amended to 2026-06-30: "The Collector of Customs shall collect advance tax from every importer of goods on the value of the goods at the rate specified in Part II of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much advance income tax is collected at import under section 148 in tax year 2027, and is it higher if I am not on the Active Taxpayers List? Source: https://qanoondigest.com/faq/importers-exporters/section-148-advance-tax-import-rates Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 148 and Part II of the First Schedule, customs collects 1% for Part I goods, 2% for Part II goods (3.5% for commercial importers) and 5.5% for Part III goods (6% for commercial importers), on the duty and tax-paid value. Rule 1 of the Tenth Schedule raises the rate by 100% if you are not on the ATL. **Applies to:** Anyone importing goods into Pakistan through customs in tax year 2027 (1 July 2026 to 30 June 2027), whether a trader, a manufacturer or an individual. ### What does the law say? Section 148(1) of the Income Tax Ordinance, 2001 requires the Collector of Customs to collect advance tax from every importer "on the value of the goods at the rate specified in Part II of the First Schedule", for goods classified in Parts I to III of the Twelfth Schedule. Section 148(5) says it is collected in the same manner and at the same time as customs duty, or, for duty-free goods, at the time duty would have been payable. The rate therefore depends on two things: where your goods sit in the Twelfth Schedule, and what kind of importer you are. ### What are the rates for tax year 2027? Part II of the First Schedule, as amended to 30 June 2026, sets these rates. Each is a percentage "of the import value as increased by customs-duty, sales tax and federal excise duty". | Goods | Rate | Rate for a commercial importer | |---|---|---| | Part I of the Twelfth Schedule | 1% | 1% (no separate rate) | | Part II of the Twelfth Schedule | 2% | 3.5% | | Part III of the Twelfth Schedule | 5.5% | 6% | Part III is a catch-all: "Goods not specifically mentioned in Part I or II". Part I includes items such as potatoes, tomatoes, onions, coal, natural gas, urea, potassic fertilisers, cotton, gold and a long list of machinery headings in Chapter 84. Part II lists many industrial inputs and parts by PCT code. A proviso to the table then sets special rates: | Case | Rate | |---|---| | Manufacturers covered by the rescinded S.R.O. 1125(I)/2011, as it stood on 28 June 2019, importing items covered by it | 1% | | Finished pharmaceutical products not otherwise manufactured in Pakistan, as certified by the Drug Regulatory Authority of Pakistan | 4% | | CKD kits of electric vehicles: small cars or SUVs with 50 kwh battery or below, and LCVs with 150 kwh battery or below | 1% | Mobile phones are taxed differently: a further proviso sets fixed rupee amounts per phone according to C&F value in US dollars, with separate columns for CBU and CKD/SKD phones. That table is covered on its own page. ### What value is the rate applied to? Section 148(9) defines "value of goods" three ways: - **(a)** for goods taxed at retail price under the Third Schedule of the Sales Tax Act, the retail price increased by sales tax payable on the import and taxable supply; - **(b)** for other goods, the customs value "as if the goods were subject to ad valorem duty increased by the custom-duty, federal excise duty and sales tax, if any, payable in respect of the import of the goods"; - **(c)** where the Board has notified a minimum value under section 148(6A), that minimum value, increased in the same way. ### Is it higher if I am not on the Active Taxpayers List? Yes. Section 100BA(1) says that for a person not on the active taxpayers' list, or a person on it who has not filed the return by the due date, the collection of advance tax "shall be determined in accordance with the rules in the Tenth Schedule". Rule 1 of the Tenth Schedule then says the rate of tax to be collected from such a person "shall be increased by hundred percent of the rate specified in this Ordinance". Rule 10 lists the specific taxes the Schedule does not apply to, such as tax deducted from salary and tax on export proceeds. Tax collected under section 148 is not on that list, so the increase applies at import. | Goods and importer | ATL rate | Rate if not on the ATL | |---|---|---| | Part I | 1% | 2% | | Part II, other importer | 2% | 4% | | Part II, commercial importer | 3.5% | 7% | | Part III, other importer | 5.5% | 11% | | Part III, commercial importer | 6% | 12% | ### Worked example (illustrative figures) Sana imports a consignment of Part III goods into Lahore dry port for resale. The customs value increased by customs duty and sales tax is **Rs. 5,000,000**. 1. She is a commercial importer, so Part II of the First Schedule gives 6%. 2. On the ATL: Rs. 5,000,000 x 6% = **Rs. 300,000**. 3. Not on the ATL: rule 1 adds 100% of 6%, so 12%. Rs. 5,000,000 x 12% = **Rs. 600,000**. 4. The cost of not being on the list, on this one consignment: Rs. 600,000 - Rs. 300,000 = **Rs. 300,000**. If the same goods fell in Part II and she imported them as a commercial importer, the ATL figure would be Rs. 5,000,000 x 3.5% = Rs. 175,000, and the non-ATL figure Rs. 350,000. ### What if the extra tax was collected and I file later? The Tenth Schedule has its own procedure. Rule 3 lets the Commissioner make a provisional assessment where tax was collected under rule 1 and the person does not file by the due date. Rule 4(3) says that where returns are filed, the tax collected under rule 1 "shall be adjustable against the tax payable in the return filed for the relevant tax year". How that interacts with the minimum tax rule in section 148(7) for a commercial importer is not spelled out in the Schedule. ### Common mistakes - **Applying the rate to the invoice value.** The base is the value after customs duty and sales tax are added, under section 148(9). - **Assuming the non-ATL increase is 2% flat.** It is 100% of whatever rate applies, so 6% becomes 12%. - **Assuming Part III means rare goods.** Part III is everything not listed in Parts I and II, so many consumer and trade goods land there. ### What to check in the official text Read Part II of the First Schedule and the Twelfth Schedule in the official PDF, since the site copy of the Ordinance leaves out schedules. Check the PCT code of your goods against Parts I and II. Check for Board notifications under the provisos to section 148(1), and any minimum value notified under section 148(6A); those notifications are outside this corpus. ### Frequently asked #### What value is the section 148 rate applied to? Section 148(9)(b) uses the customs value under the Customs Act increased by customs duty, federal excise duty and sales tax payable on the import. For goods taxed on retail price under the Third Schedule of the Sales Tax Act, clause (a) uses the retail price increased by sales tax instead. #### Does the rate double if I am on the ATL but filed my return late? Section 100BA(1) applies the Tenth Schedule both to a person not on the list and to a person on the list who did not file the return by the due date or extended due date. The 100% increase in rule 1 therefore reaches both, because section 148 is not excluded by rule 10. #### How do I know which Part of the Twelfth Schedule my goods are in? Parts I and II of the Twelfth Schedule list goods by PCT code. Part III covers goods not specifically mentioned in Part I or II. The Board can add, omit or amend entries by notification under the first proviso to section 148(1). ### Citations - [Income Tax Ordinance, 2001, section 148 (Imports)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#148-imports), as amended to 2026-06-30: "The Collector of Customs shall collect advance tax from every importer of goods on the value of the goods at the rate specified in Part II of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part II (Rates of Advance Tax, section 148)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Twelfth Schedule, Parts I, II and III (see section 148)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "shall be determined in accordance with the rules in the Tenth Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rules 1, 3, 4 and 10](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much tax is deducted from export proceeds under section 154, and is it final, minimum or adjustable? Source: https://qanoondigest.com/faq/importers-exporters/exporter-tax-section-154-minimum-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer For tax year 2027, Division IV of Part III of the First Schedule sets the section 154 rate at 1.25% of the proceeds of the export. Section 154(4) makes it a minimum tax on the income from those transactions, not a final tax. The extra 1% advance tax in section 147(6C) was omitted by the Finance Act, 2026. **Applies to:** Exporters of goods, indirect exporters supplying direct exporters, and units in export processing zones, for tax year 2027 (1 July 2026 to 30 June 2027). Exporters of services fall under section 154A instead. ### What does the law say? Section 154 of the Income Tax Ordinance, 2001 is the withholding section for exports of goods. It names the person who must deduct or collect the tax at each point in the export chain, and sends every one of them to the same rate table: Division IV of Part III of the First Schedule. Clause (1) of that Division, in the edition amended to 30 June 2026, reads that the rate of tax to be deducted under sub-sections (1), (3), (3A), (3B) or (3C) of section 154 "shall be 1.25% of the proceeds of the export." A footnote records that the Finance Act, 2026 substituted "1.25%" for "1%". Because the Ordinance is amended to 30 June 2026, this is the rate for tax year 2027, covering 1 July 2026 to 30 June 2027. ### Who deducts the tax, and when? | Sub-section | Who deducts or collects | When | |---|---|---| | 154(1) | Authorised dealer in foreign exchange (the bank) | On realisation of foreign exchange proceeds from an exporter's export of goods | | 154(3) | Banking company | On realisation of proceeds from a sale of goods to an exporter under an inland back-to-back letter of credit or other arrangement prescribed by the Board | | 154(3A) | Export Processing Zone Authority | At the time of export by an industrial undertaking located in a zone | | 154(3B) | Direct exporter or export house registered under the DTRE rules or the Export Facilitation Scheme, 2021 | When paying an indirect exporter for a firm contract | | 154(3C) | Collector of Customs | At clearance of goods exported, on the gross value of the goods | Sub-section (1) says the bank deducts tax "including advance tax" from the proceeds. Sub-section (2), which once covered indenting commission agents, was omitted by the Finance Act, 2022. Section 154 lists both the bank at realisation and customs at clearance as collection points. The section does not itself explain how the two interact for the same shipment, and this page does not fill that gap. ### Is it final, minimum or adjustable? Section 154(4) says the tax deductible under the section "shall be a minimum tax on the income arising from the transactions referred to in this section". The footnotes show the history: the word "final" was replaced by "minimum" by the Finance Act, 2024. The same Act removed "sub-section (4) of section 154" from clause (b) of section 169(1), the list of taxes treated as final. This matters because section 169(2) is what takes final-tax income out of the normal computation: under it, the income "shall not be chargeable to tax under any head of income". With section 154 no longer on that list, export income is no longer kept outside the normal computation by section 169. Section 154(4) calls the deduction a minimum tax on that income. Section 154 does not spell out the step-by-step mechanics of how the minimum is compared with the tax worked out on the return, so check that point against the current return and the Ordinance as a whole. ### What happened to the extra 1% under section 147(6C)? The Finance Act, 2024 inserted sub-section (6C) into section 147. It required the persons named in sub-sections (1), (3), (3A), (3B) and (3C) of section 154 to deduct or collect "advance income tax under this section at the rate of one percent of such foreign exchange proceeds, or export proceeds, or exports, or payment, in addition to tax collectable or deductible under section 154 of this Ordinance." A footnote in the edition amended to 30 June 2026 records that sub-section (6C) was omitted by the Finance Act, 2026. From tax year 2027 the only rate that applies under section 154 is the 1.25% in Division IV. ### Worked example (illustrative figures) Bilal runs a sports goods business in Sialkot. The amounts below are invented; the rate is the one in Division IV for tax year 2027. 1. A shipment brings export proceeds of Rs. 20,000,000 into his bank account. 2. Tax under section 154(1): Rs. 20,000,000 x 1.25% = Rs. 250,000. 3. Bilal also buys stitched balls from a small indirect exporter in Sialkot under a firm contract and pays Rs. 4,000,000. Under section 154(3B), as a direct exporter registered under the Export Facilitation Scheme, he deducts Rs. 4,000,000 x 1.25% = Rs. 50,000 from that payment. 4. For comparison only: under the text that included section 147(6C), the same Rs. 20,000,000 would have borne 1% under section 154 (Rs. 200,000) plus 1% under section 147(6C) (Rs. 200,000), a total of Rs. 400,000. In tax year 2027 the section 147(6C) amount no longer applies. ### What if you export services, not goods? Section 154 covers goods. Section 154A deals with exports of services, such as computer software and IT enabled services, with its own rates in Division IVA of Part III. Those rates are not covered on this page. ### Common mistakes - **Treating the deduction as final tax.** Section 154(4) now says minimum, and section 169 no longer lists section 154(4) as final. - **Using the old 1% rate.** The Finance Act, 2026 replaced it with 1.25% in Division IV. - **Still budgeting for the extra 1% advance tax.** Section 147(6C) was omitted by the Finance Act, 2026. - **Thinking only the exporter bears it.** Under section 154(3) and (3B), a supplier to an exporter also has tax deducted from payments it receives. ### What to check in the official text Read section 154 and its footnotes in the Ordinance as amended to 30 June 2026, and clause (1) of Division IV of Part III of the First Schedule for the rate. The footnotes to section 147 carry the full text of the omitted sub-section (6C). Section 169 shows which withholding taxes remain final. If your exports are services, read section 154A and Division IVA instead. ### Frequently asked #### What is the section 154 rate for tax year 2027? Clause (1) of Division IV of Part III of the First Schedule sets 1.25% of the proceeds of the export for deductions under sub-sections (1), (3), (3A), (3B) or (3C) of section 154. The Finance Act, 2026 substituted 1.25% for the earlier 1%. #### Is the tax on export proceeds still final tax? No. Section 154(4) now calls it a minimum tax, the word final having been replaced by the Finance Act, 2024. The same Act omitted the reference to section 154(4) from the list of final taxes in section 169. #### Is the extra 1% advance tax on exports still deducted? Not under the edition amended to 30 June 2026. Section 147(6C), inserted by the Finance Act, 2024, required an extra one percent advance tax on export proceeds in addition to section 154 tax. The Finance Act, 2026 omitted it. ### Citations - [Income Tax Ordinance, 2001, section 154 (Exports)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154-exports), as amended to 2026-06-30: "The Collector of Customs at the time of clearing of goods exported shall collect tax from the gross value of such goods at the rate specified in Division IV of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IV (Exports), clause (1)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 147 (Advance tax paid by the taxpayer)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#147-advance-tax-paid-by-the-taxpayer), as amended to 2026-06-30: "advance income tax under this section at the rate of one percent of such foreign exchange proceeds, or export proceeds, or exports, or payment, in addition to tax collectable or deductible under section 154 of this Ordinance." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "Clause (e) omitted by the Finance Act, 2024. The omitted clause read as follow: “(e) sub-section (4) of section 154;”" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 154A (Export of Services)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#154a-export-of-services), as amended to 2026-06-30: "Every authorized dealer in foreign exchange shall, at the time of realization of foreign exchange proceeds on account of the following, deduct tax from the proceeds at the rates specified in Division IVA of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What happens to a non-custom-paid car, or a vehicle used to carry smuggled goods, when customs seizes it? Source: https://qanoondigest.com/faq/importers-exporters/non-custom-paid-vehicle-confiscation Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Customs can confiscate it. Section 157(2) makes every conveyance used to move goods liable to confiscation liable to confiscation too. Under section 187A, a vehicle found with a tampered, cut and welded or re-stamped chassis is presumed smuggled, even if registered, and must be confiscated. Section 181 lets the officer offer a fine instead, but it is optional. **Applies to:** Owners and drivers of cars, trucks and other vehicles seized by Pakistan Customs, whether the vehicle itself is alleged to be smuggled or it was carrying goods alleged to be smuggled. The Customs Act, 1969 treats a vehicle in two ways when customs seizes it. It can be the smuggled item itself, or it can be the means of carrying goods that are liable to confiscation. In both cases the vehicle can end up confiscated, and the owner's route back to it is narrow. ### What does the law say? Section 2(g) defines a "conveyance" as any means of transport used for carrying goods or passengers, and names a vehicle expressly. That definition matters because section 157(2) then says every conveyance of whatever kind used in the removal of any goods liable to confiscation is also liable to confiscation. A car, pickup or truck carrying smuggled cloth, cigarettes or diesel is therefore exposed along with the load. The term "non-custom-paid" does not appear in the Act. The Act works instead through the definition of "smuggle" in section 2(s), which covers bringing goods into or out of Pakistan in breach of a prohibition or restriction, or by any route other than a declared route, and being concerned in carrying, transporting, keeping or concealing such goods, or evading customs duties or taxes on them. A vehicle that entered Pakistan without duty being paid falls to be tested against that definition. Section 187A adds a presumption aimed at vehicles specifically. If a detained or seized vehicle, on forensic examination, has a tampered chassis number, a cut and weld chassis, a chassis number filled with welding material, or a re-stamped number, it is presumed to be smuggled even if registered with the Motor Registration Authority, and it shall be confiscated. The same section lets the Board authorise use of such vehicles for operational purposes within ninety days of confiscation. ### How does it work in practice? The sequence the Act sets out is seizure, notice, adjudication and then, where ordered, confiscation. - **Seizure and return deadline.** Section 168(2) says that if no show cause notice is given within two months of seizure, the goods must be returned to the person from whose possession they were seized. The Collector may extend this by up to two months for reasons recorded in writing. The limit does not apply to goods covered by the first proviso to section 181, which are goods the Board has excluded from the fine option. - **Proof of lawful possession.** Section 187 puts the burden on the person accused to prove they had lawful authority, permit, licence, goods declaration or other required document. For an imported vehicle, that means the paperwork showing it was cleared through customs. - **Fine in lieu of confiscation.** Section 181 lets the officer who passes the confiscation order give the owner an option to pay a fine instead. The officer decides the amount, the Board may fix fines for some goods, and the Board may bar the option for specified goods. The fine is in addition to duty, charges and any penalty. ### Worked example (illustrative figures) Imran runs a pickup service between Quetta and Karachi. Customs stops his pickup on the highway and finds boxes of foreign cigarettes with no import documents. Separately, officers examine the pickup's chassis. 1. The cigarettes are alleged to be smuggled goods under section 2(s). If they are liable to confiscation, section 157(2) makes the pickup liable to confiscation too, because it was the conveyance used to remove them. 2. The forensic examination finds the chassis number re-stamped. Section 187A now presumes the pickup itself is smuggled, even though Imran holds a registration book, and says it shall be confiscated. 3. Under section 187, Imran carries the burden of showing a goods declaration or other lawful document for the cigarettes, and for the pickup. 4. Customs must issue a show cause notice within two months of seizure (extendable by two months) or return what was seized, under section 168(2). 5. If a confiscation order is passed, the officer may, but need not, offer a section 181 fine. For a vehicle caught by the section 187A presumption, the section's own words are that it "shall be confiscated". No amounts are used here because the Act does not set a fixed fine for vehicles. The fine under section 181 is what the officer thinks fit, unless a Board order fixes it. ### What if ...? **What if I did not know the goods were in my vehicle?** Section 157(2) attaches liability to the conveyance by its use, not by the owner's knowledge. The section itself does not say whether an owner's lack of knowledge changes the outcome, so that question is argued in the adjudication and any appeal. **What if the vehicle has been seized before?** The current text of section 157(2) has no proviso about repeat seizures. Footnote 91 to the source text records that a proviso denying the fine option for a conveyance seized for the third time was omitted by the Finance Act, 2022. **What if customs misses the two-month deadline?** Section 168(2) says the goods "shall be returned", subject to the Collector's recorded extension and the carve-out for goods under the first proviso to section 181. ### Common mistakes - **"Registration makes my car legal."** Section 187A expressly overrides registration where the chassis has been tampered with. - **"A fine is always available."** Section 181 uses "may". It is an option the officer can give, and the Board can exclude some goods from it. - **"The vehicle is safe if the goods were not mine."** Section 157(2) makes the conveyance liable because it was used to remove goods liable to confiscation. ### What to check in the official text Read section 157, section 187A and section 181 in the Customs Act as amended to 30 June 2025, together with the definitions of "conveyance" and "smuggle" in section 2. Check whether any Board order under the first proviso to section 181 covers the type of vehicle involved, and whether a Board order fixes the fine for it. Those orders are not part of this corpus. Appeal routes after a confiscation order are covered on the related page on appealing a customs order. ### Frequently asked #### Can customs confiscate my car if it was only carrying someone else's smuggled goods? Section 157(2) makes every conveyance of whatever kind used in the removal of goods liable to confiscation also liable to confiscation. The section does not carve out an exception for an owner who did not know about the goods, so any argument about lack of knowledge is made in the adjudication, not assumed by the law. #### My car is registered with the excise department. Does that protect it? Not if the chassis has been tampered with. Section 187A says a vehicle found on forensic examination to have a tampered, cut and welded, filled or re-stamped chassis number is presumed smuggled even if registered with the Motor Registration Authority, and shall be confiscated. #### Can I pay a fine to get the vehicle back? Section 181 lets the officer who orders confiscation give the owner the option to pay a fine instead, but it is a discretion, not a right. The Board may by order specify goods for which no such option is given, and any fine is in addition to duty, charges and penalty. ### Citations - [Customs Act, 1969, section 157 (Extent of confiscation)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#157-extent-of-confiscation), as amended to 2025-06-30: "Every conveyance of whatever kind used in the removal of any goods liable to confiscation under this Act shall also be liable to confiscation." Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 187A (Presumption of legal character of vehicle)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#187a-presumption-of-legal-character-of-vehicle), as amended to 2025-06-30: "such vehicle shall be presumed to be smuggled, even if registered with Motor Registration Authority, and shall be confiscated" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 181 (Option to pay fine in lieu of confiscated goods)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#181-option-to-pay-fine-in-lieu-of-confiscated-goods), as amended to 2025-06-30: "the officer passing the order may give the owner of the goods an option to pay in lieu of the confiscation of the goods such fine as the officer thinks fit" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 2 (Definitions)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#2-definitions), as amended to 2025-06-30: "(g) “conveyance” means any means of transport used for carrying goods or passengers such as a vessel, aircraft, vehicle or animal;" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 168 (Seizure of things liable to confiscation)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#168-seizure-of-things-liable-to-confiscation), as amended to 2025-06-30: "no show cause notice in respect thereof is given under section 180 within two months of the seizure of the goods, the goods shall be returned to the person from whose possession they were seized" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 187 (Burden of proof as to lawful authority etc)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#187-burden-of-proof-as-to-lawful-authority-etc), as amended to 2025-06-30: "the burden of proving that he had such authority, permit, license" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf --- ## Can customs demand more duty after my goods were cleared, and how long do I have to claim back duty I overpaid? Source: https://qanoondigest.com/faq/importers-exporters/short-levy-notice-after-customs-clearance Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 32 allows a show cause notice within three years where duty was short-levied through inadvertence or error, and within five years for false statements, collusion or short levies found by audit. Going the other way, section 33 bars a refund of duty overpaid through error unless the claim is made within one year of the date of payment. **Applies to:** Importers and exporters whose goods have already been cleared and who either receive a demand for more duty or find they paid too much. Clearance does not close the file. The Customs Act, 1969 gives customs a fixed window to come back for duty that was missed, and gives you a much shorter window to recover duty you paid by mistake. Both windows are counted from dates the Act defines. ### What does the law say about demands after clearance? Section 32 has three time limits, each for a different cause of the short levy. | Sub-section | Cause of the short levy | Notice must be served within | |---|---|---| | 32(2) | A false document or statement, or collusion | Five years of the relevant date | | 32(3) | Inadvertence, error or misconstruction | Three years of the relevant date | | 32(3A) | Found by audit or examination of the importer's or exporter's accounts, or by any means other than the documents provided at import or export | Five years of the relevant date | Each notice asks the person to show cause why the amount should not be paid. Under section 32(4), the officer considers any representation and determines the amount payable, which "shall in no case exceed the amount specified in the notice". **Small amounts.** The first proviso to section 32(3) says no action is initiated where the recoverable amount is under twenty thousand rupees. The second proviso says no action is initiated where the full short-paid amount is paid voluntarily before an audit, inquiry or investigation begins. The proviso to section 32(3A) says that where the recoverable amount is under one hundred thousand rupees, no action is initiated if the person deposits the recoverable amount. **Audits.** Section 26A(1) says a customs audit proceeds in the manner the Board prescribes by rules, and section 26A(2) allows the officer to examine records and summon the importer, exporter, their employees or agents to produce records and give testimony. A short levy found this way falls under the five-year limit in section 32(3A). ### When does the clock start? Section 32(5) defines "relevant date": - (a) where duty was not levied, the date the clearance order is made; - (b) where duty was provisionally assessed under section 81, the date of adjustment after final assessment; - (c) where duty was wrongly refunded, the date of refund; - (d) in any other case, the date of payment of duty or charge; - (e) for clearance through the Customs Computerized System on self-assessment or electronic assessment, "the date of detection". Clause (e) matters for most modern clearances. Where it applies, the three- or five-year period runs from when the short levy is detected, not from when the goods left customs. Section 32 does not set a separate outer limit on when detection can happen. ### How long do I have to claim a refund? Section 33(1) says no refund of duty paid or overpaid "through inadvertence, error or misconstruction" is allowed unless the claim is made within one year of the date of payment. The start date moves in two cases: - Section 33(2): for provisional payments under section 81, the year runs from the adjustment after final assessment. - Section 33(3): where the refund is due because of a decision of a customs officer, the Board, the Appellate Tribunal or a court, the year runs from that decision. Section 33(3A) requires the claim to be disposed of, subject to pre-audit, within 120 days of filing, which the Collector may extend by up to 90 days for recorded reasons. Section 33(4) bars any refund where the duty has been passed on to the buyer or consumer. ### Worked example (illustrative figures) Ayesha runs a Faisalabad textile unit. She paid duty on a consignment of dyes on 10 August 2025, and the goods were assessed on the documents she filed. 1. **An honest error that customs finds from her documents.** Relevant date under section 32(5)(d) is 10 August 2025. Three years later is 10 August 2028, the last date for a section 32(3) notice. 2. **Found in a later audit of her accounts.** Section 32(3A) applies: five years, to 10 August 2030. 3. **Cleared on self-assessment through the Customs Computerized System.** Under section 32(5)(e) the relevant date is the date of detection. If detected on 1 March 2027, the three-year limit runs to 1 March 2030. 4. **Short levy of Rs. 15,000 from an honest error.** This is under twenty thousand rupees, so the first proviso to section 32(3) bars action. Separately, she finds she overpaid Rs. 180,000 on a shipment paid for on 15 January 2026. Under section 33(1), her claim must be made by 15 January 2027. If filed on 1 December 2026, section 33(3A) requires disposal within 120 days, which is 31 March 2027 (30 days in December, 31 in January, 28 in February, 31 in March), unless the Collector extends it. ### What if I disagree with the demand or the refund decision? Section 193(1) allows an appeal to the Collector (Appeals) against refund orders under section 33 and adjudication orders on short-levy notices, among others, passed by an officer below the rank of Additional Collector, within thirty days of the order being communicated. Section 193(3) sets a fee of one thousand rupees. ### Common mistakes - **Assuming three years always applies.** It applies only to inadvertence, error or misconstruction. False statements, collusion and audit findings get five years. - **Counting from the clearance date on a self-assessed entry.** Section 32(5)(e) uses the date of detection. - **Leaving a refund claim late.** Section 33 gives one year, and a refund can still be refused under section 33(4) if the duty was passed on. ### What to check in the official text Read section 32(2), (3), (3A), (4) and (5), section 33 in full, and section 26A. The Board's audit rules under section 26A(1) and any notification under section 33(5) on refund powers are not reviewed on this page. ### Frequently asked #### How many years does customs have to demand short-levied duty? Section 32 sets three years from the relevant date for short levies caused by inadvertence, error or misconstruction, and five years where the cause was a false statement or collusion, or where the short levy was found through an audit of accounts or other means besides the documents given at import or export. #### Is there a minimum amount before customs issues a short-levy notice? Under the first proviso to section 32(3), no action is initiated where the recoverable amount is less than twenty thousand rupees. For audit findings under section 32(3A), the proviso says no action is initiated for an amount under one hundred thousand rupees if the person deposits the recoverable amount. #### Can a refund be refused even if I claim within one year? Yes. Section 33(4) says no refund is allowed if the sanctioning authority is satisfied that the incidence of the duty has been passed on to the buyer or consumer. ### Citations - [Customs Act, 1969, section 32 (False statement, error, etc)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#32-false-statement-error-etc), as amended to 2025-06-30: "(a) in any case where duty is not levied, the date on which an order for the clearance of goods is made;" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 33 (Refund to be claimed within one year)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#33-refund-to-be-claimed-within-one-year), as amended to 2025-06-30: "No refund shall be allowed under this section, if the sanctioning authority is satisfied that the incidence of customs duty and other levies has been passed on to the buyer or consumer." Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 26A (Conducting the audit)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#26a-conducting-the-audit), as amended to 2025-06-30: "(1) The appropriate officer of customs conducting any audit under this Act shall proceed in the manner as the Board may by rules prescribe." Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 193 (Appeals to Collector (Appeals))](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#193-appeals-to-collector-appeals), as amended to 2025-06-30: "may prefer appeal to the Collector (Appeals) within thirty days of the date of communication to him of such decision or order" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 81 (Provisional determination of liability)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#81-provisional-determination-of-liability), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf --- ## What is a valuation ruling under section 25A, and how do I challenge one under section 25D? Source: https://qanoondigest.com/faq/importers-exporters/valuation-ruling-25a-review-deadline Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer A valuation ruling is a customs value fixed by the Director of Customs Valuation under section 25A that replaces a lower invoice value. Under section 25D you can file a review petition with the Director General Valuation within thirty days of the determination, which must be decided within sixty days. Section 194A then allows an appeal to the Appellate Tribunal. **Applies to:** Importers and exporters whose goods are assessed at a value fixed by the Directorate of Customs Valuation rather than at their declared invoice value. Section 25 of the Customs Act, 1969 sets out how the customs value of goods is normally worked out. Section 25A lets the Directorate of Customs Valuation set that value directly for a type of goods, and once it does, customs assesses your consignment at that figure rather than at your invoice. Section 25D is the first route to contest it. ### What does the law say about a valuation ruling? The Act does not use the phrase "valuation ruling" in section 25A itself, but section 81 refers to "a Valuation Ruling (VR) or a Publication Valuation Ruling (PVR), issued under section 25A", so the term is the Act's own. Section 25A(1) allows the Director of Customs Valuation, on his own motion, on a reference by any person or on a reference by an officer of Customs, to determine the customs value of any goods or category of goods imported into or exported out of Pakistan. He must follow the methods in section 25, whichever is applicable. The proviso lets him consult prices in internationally acclaimed publications, periodicals, bulletins or official websites of manufacturers. Section 25A(2) makes that value "the applicable customs value for assessment". Its proviso protects one direction only: if the value in your goods declaration, or in the invoice retrieved from the consignment, is higher than the determined value, the higher value is used. Section 25A(2A) says that where determinations under sub-section (1) conflict, the Director General of Valuation decides the applicable value. Section 25A(4) says the value stays applicable "until and unless revised or rescinded by the competent authority". ### How do I challenge a valuation ruling? **Step 1: review under section 25D.** The Director General Valuation may, on his own motion or on a review petition, rescind the value or determine it afresh. The petition must be made "within thirty days from the date of determination", and it can be filed by "any person or an officer of Customs". The proviso requires the proceedings to be completed within sixty days of the petition being filed, or of the Director General starting them himself. **Step 2: appeal to the Appellate Tribunal.** Section 194A(1)(d) lists "an order passed in revision by the Director General Customs Valuation under section 25D" among the orders that can be appealed. The proviso to clause (d) says the appeal is heard by a special bench of at least two members, one Judicial Member and one Technical Member. Section 194A(2) requires the appeal within forty-five days of the date the order is communicated. Under section 194A(3) a person other than a customs officer pays a fee of Rs. 20,000 for a company and Rs. 5,000 otherwise. Section 194A(4) lets the Tribunal admit a late appeal if it is satisfied there was sufficient cause. ### What happens to my goods while I challenge it? The ruling still applies. Section 81 deals with provisional assessment, where duty is fixed provisionally pending a test or inquiry. Its third proviso says no provisional determination of value is allowed where a Valuation Ruling or Publication Valuation Ruling issued under section 25A is in field, "irrespective of the fact whether any review or revision against such Valuation Ruling ... is pending in terms of section 25D". A pending review does not by itself let you clear at your invoice value. At the Tribunal stage, section 194A(5) says the assessed amount remains payable unless the Tribunal stays recovery. A stay can first be granted for thirty days and cannot exceed ninety days in total, and the second proviso requires a pay order or bank guarantee of not less than twenty-five per cent of the principal amount. ### Worked example (illustrative figures) Sana imports kitchen appliances into Karachi. A ruling under section 25A covering her category of goods is dated 3 March. 1. **Review deadline.** Thirty days from 3 March is 2 April. She files a review petition with the Director General Valuation on 25 March. 2. **Decision deadline.** Sixty days from 25 March is 24 May (6 days to 31 March, 30 in April, 24 in May). 3. **Tribunal deadline.** The Director General's order is communicated to her on 30 May. Forty-five days from 30 May is 14 July (1 day to 31 May, 30 in June, 14 in July). On value: her invoice for one consignment shows Rs. 2,000,000, while the ruling's figure for the same goods works out to Rs. 2,600,000. Customs assesses at Rs. 2,600,000. If her invoice had shown Rs. 2,800,000, the proviso to section 25A(2) would make Rs. 2,800,000 the customs value. The duty on either figure depends on the tariff rate for her goods, which is not held in this corpus, so no duty amount is given here. ### What if the Director General does not decide within sixty days? The proviso to section 25D says the proceedings "shall be completed within sixty days". The section does not say what follows if that limit is missed. This page does not resolve that question. ### Common mistakes - **Waiting for a consignment to arrive before acting.** The thirty days in section 25D run from the date of determination, not from the date your goods are assessed. - **Assuming a pending review allows provisional clearance at invoice value.** The third proviso to section 81 rules this out where a ruling is in field. - **Going straight to the Collector (Appeals).** Section 193 lists the orders appealable to the Collector (Appeals), and section 25D is not among them. Section 194A(1)(d) sends a section 25D revision order to the Tribunal. ### What to check in the official text Read section 25A in full, including sub-sections (2A) and (4), then section 25D and section 194A(1)(d), (2), (3) and (5). In the site file for the 30 June 2025 edition, section 25A is followed by an earlier version of the same section, printed as sub-sections (1) to (3) again. Check the official PDF to confirm which wording is current. The text of any individual valuation ruling is issued separately and is not held in this corpus. ### Frequently asked #### Does a valuation ruling apply if my invoice value is higher? No. The proviso to section 25A(2) says that where the value in the goods declaration, or in the invoice retrieved from the consignment, is higher than the value determined under section 25A, the higher value is the customs value. #### How long do I have to ask for a review of a valuation ruling? Section 25D allows a review petition to the Director General Valuation within thirty days from the date of determination. The proceedings must be completed within sixty days of the petition being filed. #### Can I appeal after the Director General decides the review? Yes. Section 194A(1)(d) allows an appeal to the Customs Appellate Tribunal against an order passed in revision under section 25D. Section 194A(2) sets a forty-five day filing period from the date the order is communicated. ### Citations - [Customs Act, 1969, section 25A (Power to determine the customs value)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#25a-power-to-determine-the-customs-value), as amended to 2025-06-30: "The Customs value determined under sub-section (1) shall be the applicable customs value for assessment of the relevant imported or exported goods" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 25D (Review of the value determined)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#25d-review-of-the-value-determined), as amended to 2025-06-30: "in pursuance to a review petition made to him within thirty days from the date of determination by any person or an officer of Customs may rescind or determine the value afresh" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 81 (Provisional determination of liability)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#81-provisional-determination-of-liability), as amended to 2025-06-30: "no provisional determination of value shall be allowed in those cases where a Valuation Ruling (VR)" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 194A (Appeals to the Appellate Tribunal)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#194a-appeals-to-the-appellate-tribunal), as amended to 2025-06-30: "(d) an order passed in revision by the Director General Customs Valuation under section 25D" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 193 (Appeals to Collector (Appeals))](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#193-appeals-to-collector-appeals), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 25 (Value of imported and exported goods)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#25-value-of-imported-and-exported-goods), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf --- ## Are exports zero-rated for sales tax, and how does an exporter get a refund of input tax? Source: https://qanoondigest.com/faq/importers-exporters/zero-rated-exports-sales-tax-refund Law current to: 30 June 2026 (Sales Tax Act); 30 June 2025 (Sales Tax Rules). Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 4(a) of the Sales Tax Act, 1990 charges goods exported at zero per cent. Where input tax on purchases for a tax period exceeds output tax on zero-rated supplies or exports, section 10(1) says the excess is refunded not later than forty-five days of filing the refund claim, under conditions the Board notifies. **Applies to:** Sales tax registered persons who export goods from Pakistan, including manufacturer-exporters and commercial exporters. ### What does the law say? Section 4 of the Sales Tax Act, 1990 is headed "Zero rating". It says that "the following goods shall be charged to tax at the rate of zero per cent", and clause (a) is "goods exported, or the goods specified in the Fifth Schedule". An export is therefore a taxable supply, but the tax charged on it is nil. Zero rating is not the same as exemption. Because the export is still a taxable supply, the exporter can claim the input tax paid on purchases and imports used for it. Since there is little or no output tax to set that input tax against, the exporter usually ends up with excess input tax, and section 10 deals with getting it back. ### When does zero rating not apply? The proviso to section 4 switches zero rating off for a supply of goods that: 1. are exported but have been, or are intended to be, re-imported into Pakistan; 2. have been entered for export under the Customs Act but are not exported; or 3. have been exported to a country specified by the Federal Government by notification. A further proviso lets the Federal Government, by notification, restrict the amount of input tax credit a person making zero-rated supplies can claim. ### How is the refund worked out? Section 10(1) says that if the input tax paid on taxable purchases in a tax period "exceeds the output tax on account of zero rated local supplies or export made during that tax period, the excess amount of input tax shall be refunded". The refund is due "not later than forty-five days of filing of refund claim", in the manner and on the conditions the Board notifies. Three limits apply before any money is paid: - **Section 8 disallowances.** Section 8(1) bars input tax on, among other things, goods or services not used for taxable supplies, fake invoices, purchases flagged by CREST or not verifiable in the supply chain, goods where the supplier did not deposit the tax, personal consumption, building materials and fittings, and vehicles, furniture and office equipment not bought for resale. - **Consumption test.** Rule 33 of the Sales Tax Rules pays refund on zero-rated supplies only "to the extent of input tax paid on purchases or imports that are actually consumed in such goods as supplied". Rule 39C caps the refund at the lower of that amount and any ceiling the Board sets. - **Set-off of dues.** Section 10(2) says the refund is made after adjusting any unpaid tax, default surcharge or penalty under any law the Board administers. A second proviso to section 10(1) also lets the Board direct that refunds against exports be paid at fixed rates notified by it. ### How is the claim filed and paid? Chapter V-A of the Sales Tax Rules, "Refund to exporters", applies under rule 39B to refund claims filed from 1 October 2024 onwards by all exporters on account of export of goods. - **Filing (rule 39D).** The monthly return is the claim. The amount in column 29 of the return in form STR-7 is the amount claimed. The return may be filed without Annex-H, and Annex-H filed separately within 120 days, or 180 days for commercial exporters. The Commissioner can extend this by up to 60 days. The date Annex-H is submitted is the date of filing the refund claim. - **Processing (rules 39E and 39F).** The risk management system routes the claim. Claims in the FASTER module are processed electronically, and a refund payment order is sent to the State Bank within seventy-two hours of submission. For a commercial exporter, payment follows realisation of the export proceeds. - **Checks (section 10(3)).** Where input tax or refund appears inadmissible, proceedings must be completed within sixty days, extendable to one hundred and twenty days by an Additional Commissioner, and by the Board to no more than nine months. ### Worked example (illustrative figures) A garment exporter in Karachi files its return for one tax period. All amounts are invented. 1. Exports in the period: zero-rated under section 4(a), so output tax on them is nil. 2. Output tax on a small volume of local sales: Rs. 300,000. 3. Input tax on invoices for the period: Rs. 1,500,000, of which Rs. 100,000 was paid on a car for the office. 4. Section 8(1)(i) disallows input tax on vehicles in Chapter 87 not bought for resale: Rs. 1,500,000 - Rs. 100,000 = Rs. 1,400,000 admissible. 5. Excess input tax: Rs. 1,400,000 - Rs. 300,000 = Rs. 1,100,000, subject to the consumption test in rule 33 and any ceiling under rule 39C. 6. The exporter files Annex-H on 10 August. Forty-five days from that date: 21 days remain in August, and 24 more days take the deadline to 24 September. ### Common mistakes - **Calling exports exempt.** Section 4 charges them at zero per cent, which is what preserves the right to input tax. - **Counting 45 days from the return date.** Where Annex-H is filed later, rule 39D treats its date as the claim date. - **Claiming every input.** Section 8 and rule 33 remove inputs that are barred or not consumed in the exports. - **Assuming a commercial exporter is paid at once.** Rule 39F links payment to realisation of export proceeds. ### What to check in the official text Read sections 4, 8 and 10 of the Sales Tax Act as amended to 30 June 2026, and section 67 on compensation for late refunds. The Sales Tax Rules held here run to 30 June 2025, so check for later changes to Chapter V-A. Any Board notification setting fixed refund rates or a ceiling under rule 39C is not in this corpus. ### Frequently asked #### When does the 45-day refund period start? Section 10(1) counts forty-five days from the filing of the refund claim. Under rule 39D of the Sales Tax Rules, where the return is filed without Annex-H, the date Annex-H is submitted is treated as the date of filing the refund claim. #### Is the whole of my input tax refunded? Only input tax that is admissible and consumed in the exports. Rule 33 limits refund on zero-rated supplies to input tax actually consumed in the goods supplied, rule 39C caps it at the lower of that amount and any Board ceiling, and section 8 disallows input tax on items such as vehicles, building materials, personal consumption and fake invoices. #### What if the refund is paid late? Section 67 adds a further sum equal to KIBOR per annum on a refund under section 10 that is not paid within the time in section 10. That additional amount does not run while a claim reasonably believed to be inadmissible is under investigation. ### Citations - [Sales Tax Act, 1990, section 4 (Zero rating)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#4-zero-rating), as amended to 2026-06-30: "the following goods shall be charged to tax at the rate of zero per cent:-- [(a) goods exported, or the goods specified in the Fifth Schedule;]" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 10 (Refund of input tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#10-refund-of-input-tax), as amended to 2026-06-30: "the excess amount of input tax shall be refunded to the registered person not later than forty-five days of filing of refund claim in such manner and subject to such conditions as the Board may, by notification in the official Gazette specify" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8 (Tax credit not allowed)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8-tax-credit-not-allowed), as amended to 2026-06-30: "a registered person shall not be entitled to reclaim or deduct input tax paid on" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 67 (Delayed Refund)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#67-delayed-refund), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Rules, 2006, section 39D (Filing and Processing of refund claims)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30#39d-filing-and-processing-of-refund-claims), as amended to 2025-06-30: "The date of submission of Annex-H shall be considered as the date of filing of refund claim." Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf - [Sales Tax Rules, 2006, Rule 33 and Chapter V-A, Refund to exporters (rules 39B to 39G)](https://qanoondigest.com/rules/sales-tax-rules-2006/sales-tax-rules-2006-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025881385446623STR-2006-UpdatedUpto06-08-2025(ver-iv).pdf --- # Partnership firms and AOPs How firms and associations of persons are taxed and what partners pay. ## Does a partnership firm have to pay advance tax in quarterly instalments? Source: https://qanoondigest.com/faq/partnership-firms-aop/aop-quarterly-advance-tax-dates Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 147 requires an association of persons, including a partnership firm, to pay advance tax each quarter: by 25 September, 25 December, 25 March and 15 June. The amount follows a turnover formula in section 147(4), and a new firm with no assessed income must still estimate and pay under section 147(6A). **Applies to:** Partnership firms and other associations of persons in Pakistan that earn business income, for tax year 2027 (1 July 2026 to 30 June 2027). A partnership firm pays part of its income tax during the year, in four quarterly instalments, rather than all of it with the return. The amount is linked to the firm's turnover and the tax assessed for its latest year. The firm can pay more or less than the formula gives by filing its own estimate, within limits. ### What does the law say? **Who pays.** Section 147(1) makes a taxpayer whose income was charged to tax for the latest tax year liable to pay advance tax, leaving out certain income such as salary taxed at source and income on which tax was withheld or collected without a tax credit. Section 147(2) excuses individuals whose latest assessed taxable income is under Rs. 1 million. That exemption is for individuals only: the words "or association of persons" were omitted from it by the Finance Act, 2010. **The formula.** Section 147(4) says that where the taxpayer is an association of persons or a company, the advance tax for a quarter is: (A x B / C) minus D | Letter | Meaning in section 147(4) | |---|---| | A | The taxpayer's turnover for the quarter | | B | The tax assessed to the taxpayer for the latest tax year | | C | The taxpayer's turnover for the latest tax year | | D | The tax paid in the quarter for which a tax credit is allowed under the Ordinance | An Explanation says "tax assessed" includes tax under sections 4C (super tax), 113 (minimum tax) and 113C (alternative corporate tax, which by its terms applies to companies). Section 147(4AA) says liability under those sections is also taken into account when working out advance tax. If the firm does not provide its turnover, or the quarter's turnover is not known, a proviso to section 147(4) takes it as one-fourth of 120% of the turnover of the latest tax year for which a return has been filed. **The due dates.** Section 147(5A) says an association of persons or a company pays: | Quarter | Due on or before | |---|---| | September quarter | 25 September | | December quarter | 25 December | | March quarter | 25 March | | June quarter | 15 June | ### How does it work in practice? **New firms.** Section 147(6A) says an AOP must pay advance tax even when it has no last assessed income or declared turnover. It estimates the amount on the basis of its quarterly turnover, takes into account tax payable under sections 113 and 113C, and adjusts anything already paid. **Estimating higher.** Under section 147(4A), a taxpayer paying under sub-section (4) must estimate its tax for the year before the second instalment is due. If the tax is likely to be more than the formula gives, it files the estimate by the second quarter's due date, pays 50% of the estimate (after adjusting what it has paid) by that date, and pays the other 50% in two equal instalments by the third and fourth quarter due dates. **Estimating lower.** Section 147(6) lets a taxpayer that expects to owe less file an estimate before the last instalment is due and pay the reduced amount in equal instalments on the remaining dates. Section 147(6B) says the estimate must contain turnover for completed quarters, estimated turnover for the rest, supporting evidence of expenses, deductions, tax payments and credits, and a computation of estimated taxable income. The Commissioner may reject it after giving an opportunity of being heard, and the formula then applies. **Credit.** Section 147(8) allows the advance tax paid as a tax credit against the firm's tax for the year, and section 147(10) provides for a refund of any credit that cannot be used. ### Worked example (illustrative figures) Malik Traders, a partnership in Multan, had turnover of Rs. 80,000,000 in tax year 2026 and tax assessed of Rs. 1,600,000. In the September 2026 quarter its turnover is Rs. 22,000,000, and Rs. 150,000 of tax was withheld from it at source in that quarter with a tax credit allowed. 1. B / C = Rs. 1,600,000 / Rs. 80,000,000 = 0.02. 2. A x B / C = Rs. 22,000,000 x 0.02 = Rs. 440,000. 3. Minus D: Rs. 440,000 minus Rs. 150,000 = Rs. 290,000. 4. Due on or before 25 September 2026. If the firm did not provide its quarterly turnover, the proviso would take A as one-fourth of 120% of Rs. 80,000,000: 1. 120% of Rs. 80,000,000 = Rs. 96,000,000. 2. One-fourth = Rs. 24,000,000. 3. Rs. 24,000,000 x 0.02 = Rs. 480,000, minus Rs. 150,000 = Rs. 330,000. ### What if the firm pays late or too little? Section 205(1A) makes a person who fails to pay advance tax under section 147 liable for default surcharge at 12% per annum on the unpaid amount, from the due date until it is paid or until the return for the year is due, whichever is earlier. Section 205(1B) adds a separate charge where a taxpayer fails to pay tax under section 147(4A) or (6), or pays less than 90% of the tax chargeable for the year: default surcharge at 12% per annum on the shortfall, counted from 1 April of that year. ### Common mistakes - **Using the individual dates.** Section 147(5) sets the 15th of September, December, March and June for individuals. A firm follows section 147(5A), where three of the four dates are the 25th. - **Relying on the Rs. 1 million threshold.** It is in section 147(2) and covers only individuals. - **Leaving out minimum tax or super tax.** The Explanation and sub-section (4AA) bring tax under sections 4C and 113 into the calculation. - **Waiting for the first return.** Section 147(6A) requires a new AOP to estimate and pay from its first quarter. ### What to check in the official text Read section 147 in full, especially sub-sections (1), (2), (4), (4A), (4AA), (5A), (6), (6A) and (6B). Read section 205(1A) and (1B) on default surcharge. Section 147(7A) lets the Board prescribe how estimates are filed through Iris or another automated system; those procedures are outside this corpus. ### Frequently asked #### What are the advance tax due dates for a partnership firm? Section 147(5A) sets 25 September for the September quarter, 25 December for the December quarter, 25 March for the March quarter and 15 June for the June quarter. These dates apply to associations of persons and companies; individuals have different dates in section 147(5). #### Our firm started this year. Do we still pay advance tax? Yes. Section 147(6A) says an AOP pays advance tax even without last assessed income or declared turnover. It estimates the amount on the basis of its quarterly turnover, taking minimum tax into account and adjusting any amount already paid. #### Is there an income threshold below which a firm is exempt? The Rs. 1 million threshold in section 147(2) applies only to individuals. The words covering associations of persons were omitted from that sub-section by the Finance Act, 2010, so the threshold does not help a firm. ### Citations - [Income Tax Ordinance, 2001, section 147 (Advance tax paid by the taxpayer)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#147-advance-tax-paid-by-the-taxpayer), as amended to 2026-06-30: "Advance tax shall be payable by an association of persons or a company to the Commissioner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 205 (Default surcharge)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#205-default-surcharge), as amended to 2026-06-30: "A person who fails to pay advance tax under section 147 shall be liable for" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "where, for any reason whatsoever allowed under this Ordinance, including any other law for the time being in force" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 4C (Super tax on high earning persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4c-super-tax-on-high-earning-persons), as amended to 2026-06-30: "A super tax shall be imposed for tax year 2022 and onwards at the rates specified in Division IIB of Part I of the First Schedule, on income of every person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113C (Alternative Corporate Tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113c-alternative-corporate-tax), as amended to 2026-06-30: "shall be higher of the Corporate Tax or Alternative Corporate Tax" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Our firm's turnover is over Rs. 300 million. Do we need audited accounts to keep the partners' share exempt? Source: https://qanoondigest.com/faq/partnership-firms-aop/aop-turnover-300-million-audited-accounts Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. The second proviso to section 92(1) of the Income Tax Ordinance says a member's share is not exempt where the association of persons had turnover of three hundred million rupees or more in the tax year or any preceding tax year, unless accounts audited by a Chartered Accountants or Cost and Management Accountants firm are filed with its return. **Applies to:** Partnership firms and other associations of persons whose turnover has reached Rs. 300 million in the current or any earlier tax year, and their partners. A partnership firm with turnover of Rs. 300 million or more keeps its partners' shares exempt only if its return is filed with audited financial statements. The audit must be by a firm of Chartered Accountants or a firm of Cost and Management Accountants. The rule is a proviso to section 92(1) of the Income Tax Ordinance, 2001, and it applies from the first year turnover reaches that level. ### What does the law say? Section 92(1) sets the basic rule for every association of persons (AOP), which includes a firm. The AOP is liable to tax separately from its members. Where the AOP has paid tax, the amount a member receives in the capacity of member out of the AOP's income is exempt from tax. The second proviso to section 92(1), inserted by the Finance Act, 2024, attaches a condition to that exemption for larger AOPs. The share of a member of an AOP "having turnover of three hundred million rupees or above during the tax year or any of the preceding tax years" is not exempt if audited financial statements have not been filed along with the AOP's return of income. The audit has to be done by: - a firm of Chartered Accountants as defined under the Chartered Accountants Ordinance, 1961; or - a firm of Cost and Management Accountants as defined under the Cost and Management Accountants Act, 1966. ### What counts as turnover for the Rs. 300 million test? Section 2 defines "turnover" by pointing to section 113(3). Under section 113(3), turnover means: - gross sales or gross receipts from the sale of goods, excluding sales tax, federal excise duty and trade discounts shown on invoices or bills, and excluding amounts taxed as a final discharge of liability; - gross fees for rendering services, including commissions, except those covered by final tax; - gross receipts from executing contracts, except those covered by final tax. So the test is on gross turnover, not profit. A trading firm with thin margins can cross Rs. 300 million long before its profit looks large. ### How does it work in practice? The test has two parts. First, check whether the AOP's turnover was Rs. 300 million or more in the current tax year or in any earlier tax year. Second, if it was, check whether audited financial statements from a qualifying firm were filed along with the AOP's return for the year. The words "along with return of income" tie the audited statements to the return itself. Section 114(2)(a) already requires a return to carry the annexures, statements or documents that are prescribed, and section 118(3)(b) sets the due date for an AOP's return: 30 September following the end of the tax year. For tax year 2027 (1 July 2026 to 30 June 2027) that is 30 September 2027. Section 114(6)(a) also refers to "revised audited accounts" where a return is revised. ### Worked example (illustrative figures) Malik Traders is a partnership of three brothers in Faisalabad selling yarn. Its made-up turnover, as defined in section 113(3), is: | Tax year | Turnover | | --- | --- | | 2024 | Rs. 310,000,000 | | 2025 | Rs. 280,000,000 | | 2026 | Rs. 265,000,000 | | 2027 | Rs. 240,000,000 | Step by step for tax year 2027: 1. Turnover in tax year 2027 is Rs. 240,000,000, below Rs. 300,000,000. 2. The proviso also looks at "any of the preceding tax years". Tax year 2024 turnover was Rs. 310,000,000, which is Rs. 10,000,000 above the threshold. 3. The firm is therefore within the proviso for tax year 2027, even though turnover has fallen for three years in a row. 4. If the firm files its tax year 2027 return with accounts audited by a Chartered Accountants or Cost and Management Accountants firm, each brother's share keeps the exemption in section 92(1). 5. If it files unaudited accounts, the proviso says the brothers' shares "shall not be exempt". ### What if ...? **What if the firm has never reached Rs. 300 million?** The second proviso does not apply. The general exemption in section 92(1) governs the members' shares, subject to the AOP having paid tax. **What if the audited accounts are filed late, after the return?** The proviso speaks of statements filed "along with return of income". The Ordinance does not say in section 92 whether filing them later with a revised return under section 114(6) cures the position. That point is not settled by the text. **What if the share loses its exemption?** The proviso removes the exemption but section 92 does not say under which head the share is then taxed, or how tax already paid by the AOP is treated in the member's hands. The text is silent on both. ### Common mistakes - **Testing only the current year.** The proviso reaches back to any preceding tax year, with no stated limit. - **Using profit instead of turnover.** The threshold is on turnover as defined in section 113(3). - **Assuming any auditor will do.** Only the two kinds of firm named in the proviso qualify. - **Thinking the AOP pays the price.** The AOP's own tax under section 92(1) is unaffected. The exemption lost is the members'. ### What to check in the official text Read section 92(1) with both provisos and the footnotes, which show the second proviso was inserted by the Finance Act, 2024 and the first by the Finance Act, 2014. Read section 113(3) for the turnover definition and section 114(2) for what must accompany a return. The Chartered Accountants Ordinance, 1961 and the Cost and Management Accountants Act, 1966 define which firms qualify, and those laws are not part of this corpus. Any form or annexure prescribed for AOP returns on the IRIS system is also outside what this page covers. ### Frequently asked #### Our turnover crossed Rs. 300 million once, three years ago, and has fallen since. Does the audit condition still apply? On the wording of section 92(1), yes. The proviso looks at turnover during the tax year or any of the preceding tax years, and it sets no cut-off for how far back that goes. A single year at or above Rs. 300 million brings the firm within the proviso. #### Can any accountant audit the firm's accounts for this purpose? The proviso names two kinds of firm only: a firm of Chartered Accountants as defined under the Chartered Accountants Ordinance, 1961, or a firm of Cost and Management Accountants as defined under the Cost and Management Accountants Act, 1966. Accounts audited by anyone else do not meet its wording. #### Does the firm itself pay more tax if the accounts are not audited? The proviso does not change the tax of the association of persons, which section 92(1) taxes separately from its members. What it removes is the exemption for the members' shares, so the effect falls on the partners. ### Citations - [Income Tax Ordinance, 2001, section 92 (Principles of taxation of associations of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#92-principles-of-taxation-of-associations-of-persons), as amended to 2026-06-30: "the share of a member of an association of persons having turnover of three hundred million rupees or above during the tax year or any of the preceding tax years shall not be exempt" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "“turnover” means turnover as defined in sub-section (3) of section 113" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "the gross fees for the rendering of services for giving benefits including commissions" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "shall be in the prescribed form and shall be accompanied by such annexures, statements or documents as may be prescribed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 118 (Method of furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#118-method-of-furnishing-returns-and-other-documents), as amended to 2026-06-30: "in the case of a return of income for any person (other than a company), as described under clause (a), on or before the 30th day of September next following the end of the tax year to which the return relates" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Are partners personally liable if the firm does not pay its tax or commits a tax offence? Source: https://qanoondigest.com/faq/partnership-firms-aop/partners-liable-for-firm-tax-and-offences Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 139(5) makes every person who was a member of an association of persons at any time in the tax year jointly and severally liable for tax that cannot be recovered from the association. Section 200(2) treats every member as guilty of an offence the association commits, unless the member lacked consent or knowledge and used due diligence. **Applies to:** Partners in partnership firms and members of other associations of persons in Pakistan, including partners who joined or left during the tax year, under the law as amended to 30 June 2026. A partnership firm is taxed as its own taxpayer, but that does not shield the partners. If the firm's tax cannot be collected from the firm, the Income Tax Ordinance lets the Commissioner collect all of it from any person who was a partner during that year. If the firm commits an offence under the Ordinance, every partner at the time is treated as guilty of it, with a narrow defence. ### What does the law say? **Separate taxpayer.** Section 92(1) makes an association of persons liable to tax separately from its members. The firm files, is assessed and pays in its own name. **Members answer for the AOP's unpaid tax.** Section 139(5) says that, notwithstanding anything in any other law, where tax payable by an association of persons for a tax year cannot be recovered from it, every person who was a member at any time in that year is jointly and severally liable for the tax due by the association. **Recovery between members.** Section 139(6) says a member who pays tax under sub-section (5) is entitled to recover it from the association, or a share of the tax from any other member. **The AOP answers for a member's tax.** Section 139(4) runs the other way. Where tax payable by a member in respect of the member's share of the association's income cannot be recovered from the member, the association is liable for it. **Treated as tax due.** Section 139(7) applies the Ordinance to any amount due under section 139 as if it were tax due under an assessment order. The recovery powers for assessed tax therefore apply to it. **Offences.** Section 200(2) says that where an offence under Part XI of the Ordinance (offences and prosecutions) is committed by an association of persons, every person who was a member at the time is guilty of the offence, notwithstanding anything in any other law. Section 201 adds that a prosecution may be brought without prejudice to any other liability under the Ordinance, so penalties and recovery can run alongside it. ### What does "jointly and severally" mean here? It means the Commissioner is not limited to each partner's profit-sharing ratio. The full unpaid amount can be recovered from any one member, or from several. The partnership deed's split between partners does not limit what the Commissioner can recover under section 139(5); it matters only when the partners settle up among themselves. ### Is there any defence to an offence? Section 200(3) says sub-section (2) does not apply to a person where both of these hold: 1. the offence was committed without the person's consent or knowledge; and 2. the person exercised all the diligence to prevent it that ought to have been exercised, having regard to the nature of the person's functions and all the circumstances. Both conditions are joined by "and". Lack of knowledge alone is not enough under the text. ### Worked example (illustrative figures) Ahmed, Farah and Kamran were partners in a Karachi electronics firm, sharing profits equally. Ahmed retired on 31 March 2027. The firm's assessed tax for tax year 2027 is Rs. 900,000, and it closes without paying. 1. Tax year 2027 runs from 1 July 2026 to 30 June 2027. Ahmed was a member for part of it. 2. Section 139(5) covers every person who was a member "at any time in that year". Ahmed, Farah and Kamran are all jointly and severally liable for Rs. 900,000. 3. The Commissioner recovers the full Rs. 900,000 from Ahmed, the only one with assets available. 4. Under section 139(6), Ahmed may recover the tax from the firm, or a share from Farah and Kamran. If the partners agree to split it by their equal profit shares, that would be Rs. 300,000 each, but section 139(6) itself does not fix the basis. ### What if ...? **What if the firm can still pay?** Section 139(5) applies only where the tax "cannot be recovered from the association of persons". While the firm can pay, the liability is the firm's. **What if a partner joined late in the year?** The words "at any time in that year" cover a partner who joined partway through as well as one who left. **What if the member's own tax on the share is unpaid?** Section 92(1) normally exempts a member's share where the AOP has paid tax. Section 139(4) matters where a member does owe tax on the share, for example where the second proviso to section 92(1) removes the exemption for a large AOP without audited accounts. The AOP is then liable if that tax cannot be recovered from the member. ### Common mistakes - **Assuming liability ends on retirement.** Section 139(5) looks at membership at any time in the tax year, not on the day the tax falls due. - **Assuming each partner owes only a share.** Liability is joint and several. - **Relying on the partnership deed.** Section 139(5) applies notwithstanding anything in any other law. A clause limiting a partner's share of liabilities governs only the partners among themselves. - **Treating a sleeping partner as automatically safe.** Section 200(3) requires both lack of consent or knowledge and due diligence. ### What to check in the official text Read section 139(4) to (7), section 200 in full and section 201. The individual offences are set out in Part XI of the Ordinance, headed Offences and Prosecutions, and each carries its own punishment; read the one that applies. Rights between partners under general partnership law are outside this corpus. ### Frequently asked #### I left the firm in March. Can I still be asked to pay its tax for that year? Yes. Section 139(5) covers every person who was a member at any time in the tax year. If the tax for that year cannot be recovered from the association, a partner who left partway through the year is still jointly and severally liable. #### If I pay the firm's tax, can I get the money back? Section 139(6) entitles a member who pays under sub-section (5) to recover the tax from the association, or a share of it from any other member. The sub-section does not say how each member's share is worked out. #### Can a sleeping partner be prosecuted for the firm's tax offence? Section 200(2) applies to every member at the time of the offence. Section 200(3) excludes a member only where the offence was committed without that member's consent or knowledge and the member exercised all the diligence that ought to have been exercised given the member's functions and all the circumstances. ### Citations - [Income Tax Ordinance, 2001, section 139 (Collection of tax in the case of private companies and associations of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#139-collection-of-tax-in-the-case-of-private-companies-and-associations-of-persons), as amended to 2026-06-30: "every person who was, at any time in that year, a member of the association of persons, shall be jointly and severally liable for payment of the tax due by the association of persons" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 200 (Offences by companies and associations of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#200-offences-by-companies-and-associations-of-persons), as amended to 2026-06-30: "every person who, at the time the offence was committed, was a member of the association shall be, notwithstanding anything contained in any other law, guilty of the offence" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 201 (Institution of prosecution proceedings without prejudice to other action)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#201-institution-of-prosecution-proceedings-without-prejudice-to-other-action), as amended to 2026-06-30: "a prosecution for an offence against this Ordinance may be instituted without prejudice to any other liability incurred by any person under this Ordinance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 92 (Principles of taxation of associations of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#92-principles-of-taxation-of-associations-of-persons), as amended to 2026-06-30: "An association of persons shall be liable to tax separately from the members of the association and" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can the firm deduct the salary, interest or commission it pays to partners? Source: https://qanoondigest.com/faq/partnership-firms-aop/partner-salary-interest-not-deductible Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No. Section 21(j) of the Income Tax Ordinance says no deduction is allowed, in computing business income, for any profit on debt, brokerage, commission, salary or other remuneration paid by an association of persons to its member. The amount is added back, so it is taxed as part of the firm's income under section 92. **Applies to:** Partnership firms and other associations of persons in Pakistan that pay their partners a salary, interest on capital or loans, commission or other remuneration, for tax year 2027. A partnership firm can pay its partners a salary, interest on capital or a commission if the partnership deed says so, but it cannot treat those payments as expenses when it works out its taxable income. The Income Tax Ordinance adds them back, so the firm pays tax on its profit before any partner's drawings. ### What does the law say? Section 21 lists deductions that are not allowed in computing income under the head "Income from Business". Its opening words say that, except as otherwise provided in the Ordinance, no deduction is allowed for any of the items that follow. Clause (j) of that list is: > any profit on debt, brokerage, commission, salary or other remuneration paid by an association of persons to a member of the association Section 80(2)(a) says an association of persons includes a firm, and section 92(1) taxes an association of persons separately from its members. Read together, a firm computes its own business income, and clause (j) stops it from reducing that income by what it pays to partners. ### What does clause (j) cover? The clause lists five kinds of payment: | Payment to a partner | Caught by clause (j)? | |---|---| | Monthly salary to a working partner | Yes, "salary" | | Interest or mark-up on a partner's capital or loan | Yes, "profit on debt" | | Commission on sales a partner brings in | Yes, "commission" | | Brokerage paid to a partner | Yes, "brokerage" | | Bonus, fee or allowance to a partner | Yes, if it is "other remuneration" | The clause turns on who is paid. It applies only to payments to "a member of the association". Salary paid to staff who are not partners, or interest paid to a bank, is outside clause (j) and is tested under the ordinary rules for business expenses. ### How does it work in practice? The firm's accounts may show partners' salaries and interest as charges against profit, because the partnership deed provides for them. For tax, the firm adds those amounts back when it computes income under the head "Income from Business". Tax is then worked out on the higher figure at the rates for associations of persons. What each partner takes home is a matter between the partners. The tax computation does not change whether the firm calls the payment salary, interest or a share of profit. ### Worked example (illustrative figures) Hassan and Iqra run a printing firm in Rawalpindi. The deed gives each working partner a salary of Rs. 100,000 a month and 10% interest on capital. Hassan has Rs. 3,000,000 of capital in the firm and Iqra Rs. 2,000,000. For tax year 2027 the firm's accounts show: | Item | Rs. | |---|---| | Profit before partners' salary and interest | 7,000,000 | | Less: partners' salaries (2 x Rs. 100,000 x 12) | (2,400,000) | | Less: interest on capital (10% of Rs. 5,000,000) | (500,000) | | Profit shown in the accounts | 4,100,000 | For tax: 1. Start with the accounting profit: Rs. 4,100,000. 2. Add back partners' salaries under section 21(j): Rs. 2,400,000. 3. Add back interest on capital under section 21(j): Rs. 500,000. 4. Business income of the firm: Rs. 4,100,000 + Rs. 2,400,000 + Rs. 500,000 = Rs. 7,000,000. The firm is taxed on Rs. 7,000,000, the same figure it would have had with no salary or interest at all. ### What if ...? **What if a partner's family member works in the firm?** If that person is not a member of the association, clause (j) does not apply to their salary. Whether the salary is allowed then depends on the general deduction rules and the other clauses of section 21. **What if a company is one of the partners?** A company member is still "a member of the association", so payments to it under clause (j) are not deductible either. The first proviso to section 92(1) separately excludes the company's share of income from the AOP's total income. **What if the partner has lent money on paper as a loan, not capital?** Clause (j) says "any profit on debt", without distinguishing capital from loans. Interest on either kind of balance, paid to a member, is covered. ### Common mistakes - **Treating the partnership deed as deciding the tax.** The deed can fix salaries and interest between partners. Section 21(j) still disallows them for the firm's income tax. - **Assuming only "salary" is caught.** The clause also names profit on debt, brokerage, commission and "other remuneration". - **Reading clause (j) as a ban on paying partners.** It only removes the tax deduction. It does not stop the firm from paying. - **Assuming the partner's side is settled by clause (j).** The clause is about the firm's computation. How the payment is treated in the partner's own return is not stated in sections 21 or 92. ### What to check in the official text Read the opening words of section 21 and clause (j), and section 92(1) with its provisos. Check the rest of section 21 for other disallowances that may apply to payments to non-partners. The rates at which the firm's income is then taxed are in Division I of Part I of the First Schedule and are covered on a separate page. ### Frequently asked #### Our partnership deed fixes a monthly salary for each working partner. Is it a business expense for tax? Not for income tax. Section 21(j) disallows any salary or other remuneration paid by an association of persons to a member. The deed can still govern how the partners share money between themselves, but the firm's taxable income is computed as if the salary had not been deducted. #### Does the rule cover interest on a loan a partner gives the firm? Yes. Clause (j) covers any profit on debt paid by an AOP to a member, which includes interest or mark-up on a partner's capital or loan. Profit on debt paid to a bank or other lender who is not a member is not caught by clause (j). #### Is the salary I receive from my firm taxed again in my hands? Section 21(j) deals only with the firm's side. The Ordinance does not say in section 21 or section 92 how a partner's salary from the firm is treated in the partner's own return, so that point is not settled by the text covered on this page. ### Citations - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "any profit on debt, brokerage, commission, salary or other remuneration paid by an association of persons to a member of the association" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 92 (Principles of taxation of associations of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#92-principles-of-taxation-of-associations-of-persons), as amended to 2026-06-30: "An association of persons shall be liable to tax separately from the members of the association and" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 80 (Person)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#80-person), as amended to 2026-06-30: "“association of persons” includes a firm, a Hindu undivided family, any artificial juridical person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## If the firm files its return, do the partners still have to file their own returns and wealth statements? Source: https://qanoondigest.com/faq/partnership-firms-aop/partners-file-own-return-and-wealth-statement Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Often yes. The firm's return covers the firm, not its partners. Section 114 of the Income Tax Ordinance decides separately whether each partner must file a return. The proviso to section 116(2) requires every member of an association of persons to furnish a wealth statement and wealth reconciliation statement along with the association's return. **Applies to:** Partners in a partnership firm and members of other associations of persons in Pakistan, where the firm files an income tax return for tax year 2027. The firm's return covers the firm only. Each partner is a separate person under the Income Tax Ordinance, 2001, so each one looks at section 114 on their own facts to see whether a return is due. On top of that, the proviso to section 116(2) requires every member of an association of persons (AOP) to give a wealth statement and a wealth reconciliation statement along with the AOP's return. ### What does the law say? **The firm and the partners are separate taxpayers.** Section 92(1) makes an AOP liable to tax separately from its members. The firm's return reports the firm's income, not the partners' personal income or assets. **Who must file a return: section 114.** Section 114(1) lists the persons who must furnish a return for a tax year. The main ones for a partner are: - **Clause (ab):** every person other than a company whose taxable income for the year exceeds the maximum amount not chargeable to tax. - **Clause (ae):** every person whose income for the year is subject to final taxation under any provision of the Ordinance. - **Clause (b):** any other person who, among other things, has been charged to tax for either of the two preceding tax years, claims a loss carried forward, owns immovable property of 500 square yards or more or a flat of 2,000 square feet or more in a rating area, owns a motor vehicle above 1000 CC, has obtained a National Tax Number, holds a commercial or industrial electricity connection with an annual bill over Rs. 500,000, or is a resident person registered with a chamber of commerce, trade body, market committee or professional body. Section 114(2)(e) says a return shall be accompanied by a wealth statement as required under section 116. **Wealth statements: section 116(2).** Every resident taxpayer being an individual who files a return must furnish a wealth statement and a wealth reconciliation statement with it. The proviso then adds that every member of an association of persons shall also furnish a wealth statement and wealth reconciliation statement for the year along with the return of income of the association. ### How does it work in practice? There are two separate questions for each partner. **1. Must I file my own return?** Section 9 defines taxable income as total income under clause (a) of section 10, which is income under the heads of income. An exempt AOP share under section 92(1) is not income under a head, so on its own it does not push a partner over the threshold in clause (ab). But many partners meet another trigger: an NTN, a car above 1000 CC, property above the size limits, a chamber of commerce or bar council registration, or other taxable income such as rent. Any one trigger in section 114(1) is enough. **2. Must I give a wealth statement?** The section 116(2) proviso attaches the wealth statement to the AOP's return, and it applies to every member. A partner who files a personal return also attaches a wealth statement to it under the main rule in section 116(2) and section 114(2)(e). A partner with other taxable income also needs a personal return for a practical reason: section 88 uses the exempt AOP share to set the rate on that other income, and that computation belongs in the partner's own return. ### Worked example (illustrative figures) A Karachi auto parts firm has three partners and files its return for tax year 2027. | Partner | Facts (made up) | Own return under section 114? | Wealth statement? | | --- | --- | --- | --- | | Asif | Only income is his exempt firm share; holds an NTN | Yes, clause (b)(vii): he has obtained an NTN | Yes, with his return and under the section 116(2) proviso | | Nadia | Exempt firm share plus Rs. 1,800,000 taxable rent | Yes, clause (ab): taxable income above the 0% band | Yes, with her return and under the proviso | | Kamran | Exempt share only; none of the clause (b) triggers | Not on these facts, unless a Board notification under section 114(1)(c) covers him | Yes, the proviso to section 116(2) applies to every member | In Nadia's case section 88 also applies, because she has taxable income and an amount exempt under section 92(1). ### What if ...? **What if a partner is a company?** A company must file under section 114(1)(a) in any case. The main rule in section 116(2) is limited to individuals, while the proviso says "every member" without that limit. The text does not say expressly whether a company member must furnish a wealth statement under the proviso. **What if the Commissioner sends a notice?** Section 116(1) lets the Commissioner require any individual to furnish a wealth statement by notice, whatever the filing position. **What if a partner joined partway through the year?** Section 116(2) speaks of a wealth statement "for the year". The section does not set special rules for a member who joined or left during the year. ### Common mistakes - **Treating the firm's return as covering the partners.** Section 92(1) keeps the AOP and its members separate. - **Assuming an exempt share means no filing.** Section 114(1)(b) triggers such as an NTN or a car above 1000 CC apply regardless of income. - **Leaving the partners' wealth statements out of the AOP filing.** The section 116(2) proviso ties them to the AOP's return. - **Leaving the AOP share out of the personal computation.** Section 88 needs it to set the rate on other income. ### What to check in the official text Read section 114(1) and (2) and section 116(1) and (2) with its proviso in the official PDF, since the site text of section 114 interleaves footnotes with the clauses. Read section 88 if a partner has other taxable income. The IRIS filing steps and the prescribed wealth statement form are not covered here. ### Frequently asked #### Does the firm's return count as my return? No. Section 92(1) treats the association of persons as a taxpayer separate from its members, and section 114 applies to each person on their own facts. Whether you must file depends on your own taxable income and the other triggers in section 114(1)(b). #### Do I need a wealth statement even if my only income is the firm's share? The proviso to section 116(2) says every member of an association of persons shall furnish a wealth statement and wealth reconciliation statement for the year along with the association's return. It does not make this depend on the member's income. #### Does the firm itself file a wealth statement? The main rule in section 116(2) applies to a resident taxpayer being an individual, and section 116(1) notices are also limited to individuals. The wealth statement duty is placed on individuals and on the members of the AOP, not on the AOP as such. ### Citations - [Income Tax Ordinance, 2001, section 116 (Wealth statement)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#116-wealth-statement), as amended to 2026-06-30: "shall also furnish wealth statement and wealth reconciliation statement for the year along with return of income of the association." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "every person (other than a company) whose taxable income for the year exceeds the maximum amount that is not chargeable to tax under this Ordinance for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 9 (Taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#9-taxable-income), as amended to 2026-06-30: "The taxable income of a person for a tax year shall be the total income" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 10 (Total Income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#10-total-income), as amended to 2026-06-30: "person’s income under all heads of income for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 88 (An individual as a member of an association of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#88-an-individual-as-a-member-of-an-association-of-persons), as amended to 2026-06-30: "If, for a tax year, an individual has taxable income and derives an amount or amounts exempt from tax under sub-section (1) of section 92" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 92 (Principles of taxation of associations of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#92-principles-of-taxation-of-associations-of-persons), as amended to 2026-06-30: "An association of persons shall be liable to tax separately from the members of the association and" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Does a partnership firm have to declare its beneficial owners to FBR? Source: https://qanoondigest.com/faq/partnership-firms-aop/aop-beneficial-owners-declaration Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 181E requires every association of persons, including a partnership firm, to electronically furnish particulars of its beneficial owners and update them whenever they change. Section 2 defines a beneficial owner as a natural person holding at least twenty five percent or exercising ultimate effective control. Section 182 sets a penalty of Rs. 1,000,000 for each default. **Applies to:** Partnership firms and other associations of persons registered with FBR, and the partners and other natural persons who own or control them. A partnership firm is an association of persons (AOP) under the Income Tax Ordinance, 2001, and section 181E requires every AOP to give FBR the particulars of its beneficial owners and to keep them current. The detail of what to file sits in Chapter XIIIA of the Income Tax Rules, 2002. The Ordinance text here is amended to 30 June 2026; the Rules in this corpus are amended to 24 November 2023. ### What does the law say? Section 181E has two sub-sections: 1. Every company and AOP shall **electronically furnish particulars of its beneficial owners** in the prescribed form and manner. 2. Every company and AOP shall **update those particulars as and when there is a change** in them. Section 2 defines "beneficial owner" as a natural person who either: - **(a)** ultimately owns or controls a company or AOP, directly or indirectly, through at least twenty five percent shares or voting rights; or - **(b)** exercises ultimate effective control, through direct or indirect means, over the company or AOP, including control over its finances, decisions or other affairs. A beneficial owner is always a natural person. Where a partner is itself a company or another firm, the question is which individuals ultimately stand behind it. ### How does it work in practice? The Income Tax Rules, 2002 fill in the procedure: - **Form.** Particulars are filed on Form BOF-01 in Part IXA of the First Schedule to the Rules through the Board's online system. - **Updates.** Rule 83A(4) requires the record to be updated within 30 days from the date a change occurs. - **What each owner provides.** Rule 83C lists the particulars. For a person holding twenty-five percent or more directly, these are name, father's or spouse's name, date of birth, nationality, CNIC, NICOP, NTN, passport or foreign identity number, percentage held, date of acquisition, and residential and commercial address. Other sub-rules cover control through a chain of ownership, joint control arrangements, voting rights, contracts, family connections and senior management. - **Order of tests.** Rule 83D applies the ownership, joint control and voting rights tests first, then the contract and family connection tests, then the senior management test, each only if the earlier ones do not identify all beneficial owners. - **Records.** Rule 83E(1) requires the AOP to keep records of all beneficial owners for ten years after they cease to be beneficial owners. Rule 83B(6) defines a joint control arrangement as two or more persons, each holding less than twenty-five percent but together twenty-five percent or more, who exercise or may exercise control as associates of each other. In this corpus's copy of the Rules, parts of rule 83A are incomplete: the deadline for already registered AOPs and the opening words of the sub-rule on the "Certificate of Confirmation for Beneficial Owner" (Form BOF-02, filed with the income tax return) did not survive extraction. Check those in the official text. ### Worked example (illustrative figures) Gul Hardware is a Peshawar firm with four partners: Gul Khan 40%, Shah Wali 35%, Nadia 15% and her husband Sana Ullah 10%. 1. **Twenty five percent limb.** Gul Khan (40%) and Shah Wali (35%) each hold at least twenty five percent. Both are beneficial owners under section 2(7A)(a). 2. **Joint control.** Nadia and Sana Ullah each hold less than twenty-five percent, but together hold 25%. If they are associates who exercise or may exercise control together, rule 83B(6) treats that as a joint control arrangement, and rule 83C(3) sets out what they provide. 3. **A change.** On 1 March 2027, Shah Wali sells half his interest to a new partner. Under rule 83A(4), the firm updates Form BOF-01 within 30 days, that is by 31 March 2027. 4. **The cost of missing it.** Serial 30 of the section 182 Table sets Rs. 1,000,000 for each default. ### What if ...? **What if no partner holds twenty five percent?** Section 2(7A)(b) still catches any natural person who exercises ultimate effective control, and rule 83D moves to the later tests to find that person. **What if a partner is a company?** The rules on control through a chain of ownerships in rule 83C(2) ask for the particulars of each legal entity in the chain and the natural person at the end of it. **What if nothing changed during the year?** The partly legible text of rule 83A refers to a Certificate of Confirmation on Form BOF-02 filed with the return. The condition that triggers it is not fully readable in this corpus. ### Common mistakes - **Treating a firm as outside the rule because it is not a company.** Section 181E names every company and AOP. - **Listing only partners with twenty five percent.** Effective control by other means also counts under section 2(7A)(b). - **Forgetting to update after a change of partners.** Section 181E requires updates, and rule 83A(4) gives 30 days. - **Assuming the penalty is per year.** Serial 30 says for each default; what counts as one default is not defined in that entry. ### What to check in the official text Read section 181E, clause (7A) of section 2 and serial 30 of the Table in section 182 in the official PDF of the Ordinance. Read Chapter XIIIA (rules 83A to 83E) and Forms BOF-01 and BOF-02 in the Income Tax Rules, 2002, and check for any amendments after 24 November 2023, which this corpus does not hold. ### Frequently asked #### Is a partner with a 10% share a beneficial owner? Not under the twenty five percent limb of the section 2 definition on its own. He can still be one under the second limb if he exercises ultimate effective control over the firm, for example through control over its finances or decisions. #### How quickly must a change of partners be reported? Section 181E requires the particulars to be updated as and when they change. Rule 83A(4) of the Income Tax Rules, 2002 sets the time as within 30 days from the date the change occurs, using Form BOF-01. #### What is the penalty for not declaring beneficial owners? Serial 30 of the Table in section 182 provides that a company or AOP that contravenes section 181E pays a penalty of Rs. 1,000,000 for each default. ### Citations - [Income Tax Ordinance, 2001, section 181E (Record of beneficial owners)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181e-record-of-beneficial-owners), as amended to 2026-06-30: "Every company and association of persons shall update the particulars of its beneficial owners as and when there is a change in the particulars of the beneficial owners." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "ultimately owns or controls a Company or association of persons, whether directly or indirectly, through at least twenty five percent shares or voting rights" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 182 (Offences and penalties)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182-offences-and-penalties), as amended to 2026-06-30: "Any person who commits any offence specified in column (2) of the Table below shall, in addition to and not in derogation of any punishment to which he may be liable under this Ordinance or any other law, be liable to the penalty mentioned against that offence in column (3) thereof" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 83A (Application of Chapter)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#83a-application-of-chapter), as amended to 2023-11-24: "The record of the beneficial owners shall be updated whenever there is a change in any of the particulars of the beneficial owner as stipulated in Form (BOF-01) of Part IXA of the First Schedule of these rules, within 30 days from the date when the change occurs." Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Rules, 2002, section 83C (Record of beneficial owner)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#83c-record-of-beneficial-owner), as amended to 2023-11-24: "The beneficial owner who exercise ultimate effective control over a company or AOP through direct ownership rights (through shareholding) of twenty-five percent or more, shall provide the following particulars or information" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Rules, 2002, Rules 83B (definitions), 83D (cascading process) and 83E (retention of records of beneficial owner)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24), as amended to 2023-11-24: "Every company or AOP shall retain the records of all beneficial owners for a period of ten years from the date when the beneficial owners of that company or AOP, as the case may be, cease to be the beneficial owners" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf --- ## Does a partnership firm need its own NTN separate from the partners' NTNs? Source: https://qanoondigest.com/faq/partnership-firms-aop/partnership-firm-ntn-registration Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 80 of the Income Tax Ordinance makes a firm an association of persons, separate from its partners, and section 181 requires every taxpayer to register. The CNIC-as-NTN rule in section 181(4) covers individuals only. Under section 118(6), a return from a taxpayer not on the NTN register, filed without an application, is not treated as a return. **Applies to:** New and existing partnership firms and other associations of persons, and partners setting one up. A partnership firm needs its own registration with FBR, separate from its partners. The Income Tax Ordinance, 2001 treats a firm as an association of persons (AOP), which is a person in its own right under section 80. Section 181 requires every taxpayer to apply for registration, and a partner's CNIC cannot stand in for the firm. ### What does the law say? **The firm is its own person.** Section 80(1)(b) treats as a person a company or association of persons formed or established in Pakistan or elsewhere. Section 80(2)(a) says an association of persons includes a firm. **Every taxpayer registers.** Section 181(1) says every taxpayer "shall apply in the prescribed form and in the prescribed manner for registration". Section 2(66) defines a taxpayer as any person who derives an amount chargeable to tax, and it includes a person required to deduct or collect tax, or required to furnish a return or pay tax. A trading firm earning business income fits that definition. **The CNIC rule is for individuals.** Section 181(4) says that from tax year 2015, for individuals holding a CNIC issued by NADRA, the CNIC is used as the National Tax Number. The sub-section speaks of individuals only. It does not extend to an AOP. **The prescribed manner.** Rule 80A of the Income Tax Rules, 2002 says every individual, AOP, company or foreign government required to e-file a return shall submit the e-enrolment form in Part IX of the First Schedule to the Rules through the Board's online system. **Consequence of not registering.** Section 118(6) says that where a taxpayer is not on the National Tax Number Register and fails to file an application in the prescribed form and manner with its return, that return is not treated as a return furnished under the section. ### How does it work in practice? The firm and each partner hold separate registrations: | Who | Registration route in the text | | --- | --- | | The firm (AOP) | Applies under section 181(1), e-enrolling as an AOP under rule 80A | | An individual partner with a CNIC | CNIC is the NTN under section 181(4) | | A company partner | Its own registration as a company under section 181(1) | Registration has a follow-on effect. Section 114(1)(b)(vii) lists a person who "has obtained National Tax Number" among those required to file a return, where not already covered by the earlier clauses of section 114(1). Section 118(3)(b) makes an AOP's return due by 30 September following the end of the tax year. For tax year 2027, that is 30 September 2027. ### Worked example (illustrative figures) Rehman and Qureshi open a printing business in Rawalpindi on 1 August 2026, sharing profits 60:40. Both already file returns using their CNICs. 1. The business is a firm under section 80(2)(c): two persons who agreed to share the profits of a business. 2. The firm is therefore an AOP, a separate person, and a taxpayer once it derives income chargeable to tax. 3. The partners' CNICs are their own NTNs under section 181(4). They are not the firm's. 4. The firm applies for registration under section 181 and e-enrols as an AOP under rule 80A. 5. Say the firm earns a made-up profit of Rs. 2,500,000 in tax year 2027. Its return for that year, due by 30 September 2027, goes in under the firm's own registration. Rehman's share is Rs. 2,500,000 × 60% = Rs. 1,500,000 and Qureshi's is Rs. 2,500,000 × 40% = Rs. 1,000,000, adding back to Rs. 2,500,000. 6. Had the firm filed without being on the NTN register and without an application, section 118(6) says the filing would not count as a return. ### What if ...? **What if the firm never applies?** Section 181(2) allows the Commissioner, where the facts require it, to register a taxpayer in the prescribed manner. **What if the partnership changes, for example a new partner joins?** Section 181 does not deal with changes in membership. The Income Tax Rules, 2002 contain a procedure for modifying registration particulars, but the corpus copy of that part is incomplete, so check it in the official text. **What if the firm has no taxable income yet?** Section 2(66) also covers a person required to deduct or collect tax or to file a return. Whether a newly formed firm with no income yet must register depends on the facts. The text does not set a separate start date for AOPs. ### Common mistakes - **Filing the firm's income in a partner's return.** Section 80 makes the firm a person separate from its partners. - **Using a partner's CNIC as the firm's NTN.** Section 181(4) is limited to individuals. - **Assuming registration is a formality.** Section 118(6) can stop a filing from counting as a return. ### What to check in the official text Read sections 80, 181 and 118(6) of the Ordinance, and section 114(1)(b) for who must file. In the Income Tax Rules, 2002, read rule 80A on e-enrolment and the neighbouring rules on registration and modification. The corpus copy of the Rules is amended only to 24 November 2023, so later changes to the registration procedure are not reflected here. The IRIS portal steps for e-enrolment are outside this page. ### Frequently asked #### Can the firm use a partner's CNIC as its NTN? Section 181(4) says that from tax year 2015 the CNIC is used as the National Tax Number for individuals. A firm is an association of persons, not an individual, so that rule does not cover it. The firm registers in its own right. #### Do the partners still need their own registration? Each partner is a separate person under section 80. For an individual partner with a CNIC, section 181(4) makes the CNIC the NTN. Whether each partner must also file a return is a separate question under section 114. #### Once the firm has an NTN, must it file a return every year? Section 114(1)(b)(vii) lists a person who has obtained a National Tax Number among those required to file a return, where not already covered by the earlier clauses. The firm's return is due by 30 September following the tax year under section 118(3)(b). ### Citations - [Income Tax Ordinance, 2001, section 181 (Taxpayer’s registration)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181-taxpayer-s-registration), as amended to 2026-06-30: "shall apply in the prescribed form and in the prescribed manner for registration" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 80 (Person)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#80-person), as amended to 2026-06-30: "a company or association of persons incorporated, formed, organised or established in Pakistan or elsewhere" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "“taxpayer” means any person who derives an amount chargeable to tax under this Ordinance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 118 (Method of furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#118-method-of-furnishing-returns-and-other-documents), as amended to 2026-06-30: "Where a taxpayer is not borne on the National Tax Number Register and fails to file an application in the prescribed form and manner with the taxpayer’s return of income" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "has obtained National Tax Number" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 80A (E-enrollment)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#80a-e-enrollment), as amended to 2023-11-24: "Every individual, an AOP, a company or a foreign government required to e-file return of total income shall submit form of e-enrolment" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf --- ## How is a company's share taxed when the company is a partner in an AOP? Source: https://qanoondigest.com/faq/partnership-firms-aop/company-as-partner-in-aop Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer The first proviso to section 92(1) of the Income Tax Ordinance excludes a company member's share when computing the AOP's total income, and taxes the company separately at company rates on that share. Section 168(2A) then gives the company a credit for part of the tax withheld in the AOP's name, using the formula (A/B) x C. **Applies to:** Joint ventures and partnerships in which at least one member is a company, and the companies that are members of them. When a company is a partner in an association of persons (AOP), its share is carved out of the AOP's income and taxed in the company's own hands at the company rate. The Income Tax Ordinance, 2001 does this through the first proviso to section 92(1), added by the Finance Act, 2014. Section 168(2A) then divides tax withheld in the AOP's name between the AOP and the company. ### What does the law say? **Section 92(1), first proviso.** If at least one member of an AOP is a company, the share of that company is excluded when computing the total income of the AOP. The company "shall be taxed separately, at the rate applicable to the companies, according to their share". **Division II of Part I of the First Schedule.** The company rates are: | Type of company | Rate | | --- | --- | | Banking company | 44% (tax year 2025), 43% (tax year 2026), 42% (tax year 2027 and onwards) | | Small company | 20% | | Any other company | 29% | **Section 168(2A).** Where a company is a member of an AOP taxed under section 92, and tax has been collected from or deducted from payments to the AOP, the company gets a tax credit worked out as (A/B) x C, where: - A is the share of profits before tax received by the company as a member from the AOP; - B is the taxable income of the AOP; and - C is the tax withheld in the name of the AOP. **Section 168(2B).** The AOP gets no credit for any withheld tax for which the company member has been allowed credit under sub-section (2A). **Section 113(3)(d).** For minimum tax, a company's turnover includes its share of the turnover amounts of any AOP of which it is a member. ### How does it work in practice? The AOP's return covers the income left after the company's share is removed. The non-company members' shares of that income are handled under the main rule of section 92(1): the AOP pays tax, and their shares are exempt in their hands, subject to the audited accounts condition for turnover of Rs. 300 million or more. The company brings its share into its own return and pays at its Division II rate. Tax withheld from the AOP's receipts is issued in the AOP's name, so section 168(2A) is the route by which the company claims its portion. ### Worked example (illustrative figures) Indus Build JV in Islamabad has three members: Margalla Engineering (Pvt) Ltd (not a small or banking company) with 40%, and two individuals with 30% each. For tax year 2027, the made-up figures are: - Profit before tax, which for simplicity equals taxable income before any exclusion: Rs. 50,000,000. - Tax withheld in the JV's name by clients: Rs. 3,000,000. **Step 1: the company's share.** Rs. 50,000,000 × 40% = Rs. 20,000,000. **Step 2: tax on the company's share.** Rs. 20,000,000 × 29% = Rs. 5,800,000. **Step 3: income left in the AOP.** Rs. 50,000,000 minus Rs. 20,000,000 = Rs. 30,000,000, taxed at the AOP rates in Division I of Part I of the First Schedule. **Step 4: the company's credit under section 168(2A).** A is Rs. 20,000,000 and C is Rs. 3,000,000. The Ordinance does not say whether B, "the taxable income of the association of persons", means the figure before or after the company's share is excluded. The two readings give different results: | Reading of B | A/B | Credit (A/B) x C | | --- | --- | --- | | B = Rs. 50,000,000 (before exclusion) | 0.4 | Rs. 1,200,000 | | B = Rs. 30,000,000 (after exclusion) | 0.6667 | Rs. 2,000,000 | **Step 5: balance.** On the first reading the company's tax after credit is Rs. 5,800,000 minus Rs. 1,200,000 = Rs. 4,600,000, and the AOP keeps credit for Rs. 1,800,000. On the second, it is Rs. 5,800,000 minus Rs. 2,000,000 = Rs. 3,800,000, and the AOP keeps Rs. 1,000,000. Either way, section 168(2B) stops the AOP claiming what the company claims. ### What if ...? **What if there are two company members?** The proviso speaks of "the share of such company or companies". Each company's share is excluded and taxed in its own hands, and section 168(2A) applies to each. **What if the AOP's profit before tax differs from its taxable income?** The formula uses both: A is share of profits before tax and B is taxable income. The ratio can therefore differ from the company's profit-sharing percentage. The text does not adjust for this. **What if the company must pay minimum tax?** Section 113(3)(d) counts the company's share of the AOP's turnover in its own turnover. ### Common mistakes - **Taxing the whole profit in the AOP.** The company's share is excluded from the AOP's total income. - **Applying the AOP rates to the company's share.** It is taxed at the company rate. - **Double-claiming withheld tax.** Section 168(2B) prevents the AOP claiming the company's portion. - **Ignoring other company-level taxes.** Super tax and minimum tax can also apply and are dealt with on separate pages. ### What to check in the official text Read section 92(1) with its first proviso and section 168(2A) and (2B), where the formula appears as "(A/B) x C" in the source PDF. Check Division II of Part I of the First Schedule for the rate that fits the company, including the Ordinance's definition of small company. Read section 113(3)(d) if minimum tax may apply. ### Frequently asked #### Does the AOP pay tax on the company's share of profit? No. The first proviso to section 92(1) says the company's share is excluded for the purpose of computing the total income of the association of persons. The company is taxed on it separately, at the rate applicable to companies. #### Can both the AOP and the company claim the same withheld tax? No. Section 168(2A) gives the company a credit for its portion of tax withheld in the AOP's name, and section 168(2B) says no credit is allowed to the AOP for any amount for which credit has been allowed to a company member under sub-section (2A). #### What rate does the company pay on its share for tax year 2027? The rate in Division II of Part I of the First Schedule for that type of company: 29% for a company other than a banking or small company, 20% for a small company, and 42% for a banking company for tax year 2027 and onwards. ### Citations - [Income Tax Ordinance, 2001, section 92 (Principles of taxation of associations of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#92-principles-of-taxation-of-associations-of-persons), as amended to 2026-06-30: "the company or the companies shall be taxed separately, at the rate applicable to the companies, according to their share" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the company shall be allowed a tax credit, in respect of tax collected or deducted from the association of persons, according to the following formula" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division II (Rates of Tax for Companies)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "the company’s share of the amounts stated above of any association of persons of which the company is a member" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What are the income tax rates for a partnership firm or AOP for tax year 2027? Source: https://qanoondigest.com/faq/partnership-firms-aop/aop-income-tax-rates-tax-year-2027 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer For tax year 2027, section 4 and clause (1) of Division I of the First Schedule tax a partnership firm or AOP on the same slab table as a non-salaried individual. Income up to Rs. 600,000 is taxed at 0%. Above that the rate rises in steps of 15%, 20%, 30%, 40% and 45%, the last above Rs. 5,600,000. **Applies to:** Partnership firms and other associations of persons in Pakistan computing income tax on their taxable income for tax year 2027 (1 July 2026 to 30 June 2027). A partnership firm or other association of persons (AOP) pays tax on its taxable income using clause (1) of Division I of Part I of the First Schedule to the Income Tax Ordinance, 2001. That clause is shared with individuals who are not salaried, so a firm and a sole proprietor with the same profit pay the same slab tax. For tax year 2027 the rates are those in the Ordinance as amended to 30 June 2026. ### What does the law say? Section 4(1) imposes income tax for each tax year at the rates in Division I or II of Part I of the First Schedule on every person who has taxable income. Section 4(2) says the tax is computed by applying the applicable rates to taxable income and then subtracting any tax credits. Section 92(1) makes an AOP liable to tax separately from its members. Division I is headed "Rates of Tax for Individuals and Association of Persons". Clause (1) applies, subject to clause (2), to every individual and association of persons except a salaried individual. Clause (2) sets a separate table for an individual whose salary exceeds seventy-five per cent of taxable income; it has no application to an AOP. ### What is the rate table? The clause (1) table, as substituted by the Finance Act, 2024 and unchanged in the edition amended to 30 June 2026: | S. No. | Taxable income | Tax | | --- | --- | --- | | 1 | Does not exceed Rs. 600,000 | 0% | | 2 | Exceeds Rs. 600,000 but does not exceed Rs. 1,200,000 | 15% of the amount exceeding Rs. 600,000 | | 3 | Exceeds Rs. 1,200,000 but does not exceed Rs. 1,600,000 | Rs. 90,000 + 20% of the amount exceeding Rs. 1,200,000 | | 4 | Exceeds Rs. 1,600,000 but does not exceed Rs. 3,200,000 | Rs. 170,000 + 30% of the amount exceeding Rs. 1,600,000 | | 5 | Exceeds Rs. 3,200,000 but does not exceed Rs. 5,600,000 | Rs. 650,000 + 40% of the amount exceeding Rs. 3,200,000 | | 6 | Exceeds Rs. 5,600,000 | Rs. 1,610,000 + 45% of the amount exceeding Rs. 5,600,000 | A proviso to the table says that for an AOP that is a professional firm prohibited from incorporating by any law or the rules of the body regulating its profession, the 45% rate at serial 6 is 40%. **Surcharge.** Section 4AB, printed at the end of section 4, makes every individual and AOP pay a surcharge at ten percent of the Division I tax where taxable income exceeds Rs. 10 million. The proviso excusing salaried individuals does not apply to an AOP. ### Worked example (illustrative figures) **Example 1: a mid-sized firm.** Two brothers run a bakery in Multan as a partnership. Made-up taxable income for tax year 2027: Rs. 4,000,000. 1. Rs. 4,000,000 falls in serial 5 (Rs. 3,200,000 to Rs. 5,600,000). 2. Amount above Rs. 3,200,000: Rs. 800,000. 3. 40% of Rs. 800,000 = Rs. 320,000. 4. Tax: Rs. 650,000 + Rs. 320,000 = **Rs. 970,000**. 5. Taxable income does not exceed Rs. 10 million, so no surcharge. A sole proprietor in Multan with the same Rs. 4,000,000 of business taxable income and no salary works out the same Rs. 970,000 from the same table. **Example 2: a larger firm.** A Sialkot sports goods firm has made-up taxable income of Rs. 12,000,000. 1. Serial 6 applies. Amount above Rs. 5,600,000: Rs. 6,400,000. 2. 45% of Rs. 6,400,000 = Rs. 2,880,000. 3. Division I tax: Rs. 1,610,000 + Rs. 2,880,000 = Rs. 4,490,000. 4. Taxable income exceeds Rs. 10 million, so the section 4AB surcharge applies: 10% of Rs. 4,490,000 = Rs. 449,000. 5. Total: Rs. 4,490,000 + Rs. 449,000 = **Rs. 4,939,000**, before any tax credits and before any super tax. The fixed amounts in the table are simply the tax on the band below. For example, 15% of the Rs. 600,000 in serial 2 is Rs. 90,000, which is the fixed amount at the start of serial 3. ### What if ...? **What if one partner is a company?** The first proviso to section 92(1) excludes the company's share when the AOP's total income is computed; the company is taxed on its share at the company rate. The clause (1) table applies to the AOP's income without that share. **What if the firm is a professional firm?** Only serial 6 changes, from 45% to 40%, and only where the firm is prohibited from incorporating by law or by its regulator's rules. **What if the firm makes a loss or very little profit?** The slab table applies to taxable income. Minimum tax on turnover and advance tax are separate rules and are covered on other pages. ### Common mistakes - **Applying 45% to the whole income.** Each rate applies only to the amount above the start of its band, plus the fixed amount shown. - **Using the salaried table.** Clause (2) is limited to individuals whose salary exceeds 75% of taxable income. An AOP uses clause (1). - **Taxing the partners' shares as well.** Section 92(1) exempts a member's share out of income on which the AOP has paid tax, subject to its provisos. - **Forgetting the surcharge above Rs. 10 million.** Section 4AB applies to AOPs. ### What to check in the official text Check the clause (1) table and its proviso in Division I of Part I of the First Schedule in the official PDF, since the site text does not reproduce rate tables. Read section 4, including section 4AB at its end, and section 92(1). Super tax on high earning persons and minimum tax on turnover are separate provisions not covered on this page. ### Frequently asked #### Does a partnership firm pay a different rate from a sole proprietor? No. Clause (1) of Division I applies to every individual and association of persons except a salaried individual. A firm and a sole proprietor with the same taxable income work out the same tax from the same table. #### Is there a tax-free amount for an AOP? The first row of the clause (1) table charges 0% where taxable income does not exceed Rs. 600,000. Above that, only the part over Rs. 600,000 is taxed at 15% in the next band. #### Is there anything on top of the slab tax? Yes, for larger AOPs. Section 4AB adds a surcharge of ten percent of the Division I tax where taxable income exceeds Rs. 10 million. A separate super tax on high earning persons can also apply and is covered on its own page. ### Citations - [Income Tax Ordinance, 2001, section 4 (Tax on taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4-tax-on-taxable-income), as amended to 2026-06-30: "a surcharge shall be payable by every individual and association of persons at the rate of ten percent of the income tax imposed under Division I of Part I of the First Schedule where the taxable income exceeds rupees ten million" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1) (rate table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1), proviso (professional firms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 4AB (surcharge)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 92 (Principles of taxation of associations of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#92-principles-of-taxation-of-associations-of-persons), as amended to 2026-06-30: "An association of persons shall be liable to tax separately from the members of the association and" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is a partnership firm taxed separately from its partners in Pakistan, and is my share of profit taxed again? Source: https://qanoondigest.com/faq/partnership-firms-aop/is-partnership-firm-taxed-separately-from-partners Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 92(1) of the Income Tax Ordinance makes an association of persons, which section 80 says includes a firm, liable to tax separately from its members. Where the AOP has paid tax, the amount a partner receives as a member out of its income is exempt, so it is not taxed a second time, subject to two provisos. **Applies to:** Partners in a partnership firm and members of other associations of persons in Pakistan, including people joining a firm for the first time, for tax year 2027. 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. ### Frequently asked #### Do I pay income tax on the profit share I take from my firm? Normally not. Section 92(1) exempts the amount a member receives in that capacity out of the income of the association, where the association has paid tax. The exempt share can still raise the rate on your other taxable income under section 88. #### What if one of the partners is a company? The first proviso to section 92(1) excludes the company's share when the AOP's total income is computed. The company is then taxed separately on its share, at the rate that applies to companies. #### When does my share stop being exempt? The second proviso to section 92(1) removes the exemption where the AOP had turnover of Rs. 300 million or more in the tax year or any preceding tax year and did not file financial statements audited by a firm of chartered accountants or cost and management accountants with its return. ### Citations - [Income Tax Ordinance, 2001, section 92 (Principles of taxation of associations of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#92-principles-of-taxation-of-associations-of-persons), as amended to 2026-06-30: "An association of persons shall be liable to tax separately from the members of the association and" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 80 (Person)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#80-person), as amended to 2026-06-30: "“firm” means 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" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 88 (An individual as a member of an association of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#88-an-individual-as-a-member-of-an-association-of-persons), as amended to 2026-06-30: "If, for a tax year, an individual has taxable income and derives an amount or amounts exempt from tax under sub-section (1) of section 92" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1) (rate table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is a limited liability partnership (LLP) taxed as a company or as an AOP? Source: https://qanoondigest.com/faq/partnership-firms-aop/limited-liability-partnership-tax-treatment Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer As an association of persons. The Finance Act, 2026 added limited liability partnership to the definition of association of persons in section 80(2)(a) of the Income Tax Ordinance, which excludes companies. It also inserted section 92(4A), under which a member's share of an LLP's profits is included in the member's income where the LLP's income is exempt. **Applies to:** Limited liability partnerships in Pakistan and their partners, from tax year 2027 onwards. A limited liability partnership is taxed as an association of persons (AOP), not as a company. The Finance Act, 2026 wrote the words "limited liability partnership" into the definition of AOP in section 80(2)(a) of the Income Tax Ordinance, 2001, and that definition expressly excludes companies. The change applies from 1 July 2026. ### What does the law say? **Section 80(2)(a).** An association of persons "includes a firm, a Hindu undivided family, any artificial juridical person, limited liability partnership and anybody of persons formed under a foreign law, but does not include a company". The footnote to the consolidated text records that the words "limited liability partnership" were inserted by the Finance Act, 2026. Section 5 of that Act makes the insertion. **Section 92(1).** An AOP is liable to tax separately from its members. Where the AOP has paid tax, the amount a member receives as member out of the AOP's income is exempt. Section 2(32) says "member" includes a partner in a firm. An LLP, as an AOP, sits inside this rule. **Section 92(4A).** The same Finance Act inserted a new sub-section: where the income of a limited liability partnership is exempt from tax, any amount a member receives as a share of the LLP's profits "shall be included in the income of that member". **The omitted explanation.** The Finance Act, 2026 also omitted an explanation to section 92(1). It had said that where an AOP's income was exempt and no tax was payable, the member's share remained exempt. That explanation is no longer in the text. ### How does it work in practice? An LLP is treated like any other AOP for tax year 2027 onwards: - The LLP computes its own taxable income and pays tax at the rates for associations of persons in Division I of Part I of the First Schedule. - Where the LLP has paid tax, a partner's share is exempt in the partner's hands under section 92(1). - If a corporate partner is involved, the first proviso to section 92(1) excludes its share from the LLP's income and taxes it at company rates. - If the LLP's turnover reaches Rs. 300 million in the tax year or any earlier tax year, the second proviso to section 92(1) applies. The partners' shares lose the exemption unless accounts audited by a Chartered Accountants or Cost and Management Accountants firm are filed with the LLP's return. - If the LLP's income is exempt, section 92(4A) moves the charge to the partners: each partner's share is included in that partner's income. ### Worked example (illustrative figures) Two LLPs in Karachi, each with two partners sharing 50:50, for tax year 2027: **LLP A: taxable income.** Profit of Rs. 8,000,000, on which the LLP pays tax as an AOP. Each partner's share is Rs. 8,000,000 × 50% = Rs. 4,000,000. Because the LLP has paid tax, section 92(1) exempts each Rs. 4,000,000 in the partners' hands (assuming turnover has never reached Rs. 300 million). **LLP B: exempt income.** Suppose all of LLP B's income of Rs. 8,000,000 is exempt under some provision of the Ordinance. The LLP pays no tax on it. Under section 92(4A), each partner's share of Rs. 4,000,000 is included in that partner's income. Across both partners, Rs. 4,000,000 + Rs. 4,000,000 = Rs. 8,000,000 comes into charge, the same total as the LLP's exempt income. The difference is the point of section 92(4A): exempt income no longer passes to the partners tax free. ### What if ...? **What if the LLP has some taxable and some exempt income?** Section 92(4A) speaks of the case where "the income of a limited liability partnership is exempt". It does not say how a share is split where only part of the income is exempt. The text does not settle that. **What if the LLP was set up before 1 July 2026?** The amendments are part of the Finance Act, 2026, which comes into force on 1 July 2026 unless otherwise provided. How an LLP was treated for tax year 2026 and earlier, before these words were inserted, is not addressed on this page. **What if the partner is a company?** The first proviso to section 92(1) applies to any AOP with a company member, so it covers an LLP too. ### Common mistakes - **Assuming "limited liability" means company tax.** Section 80(2)(a) puts LLPs in the AOP definition, which excludes companies. - **Relying on the old explanation.** The explanation keeping members' shares exempt where the AOP's income was exempt was omitted by the Finance Act, 2026. - **Forgetting the Rs. 300 million audit condition.** It applies to LLPs as it does to any AOP. ### What to check in the official text Read section 80(2) and section 92 in the consolidated Ordinance amended to 30 June 2026, and the footnotes that record the Finance Act, 2026 changes. Section 5 of the Finance Act, 2026 has the amending words. Check the AOP rates in Division I of Part I of the First Schedule in the official PDF. The Limited Liability Partnership Act, 2017, which governs how LLPs are formed, is not part of this corpus, and nor are any SECP rules on LLPs. ### Frequently asked #### Does an LLP pay the company tax rate? Not under the current text. Section 80(2)(a) lists a limited liability partnership as an association of persons and says that term does not include a company. The rates for associations of persons are set in Division I of Part I of the First Schedule, not the company rates in Division II. #### Are LLP partners taxed again on their profit share? Where the LLP has paid tax, section 92(1) exempts the amount a member receives as member out of its income, subject to the audited accounts proviso for turnover of Rs. 300 million or more. Where the LLP's income is exempt, section 92(4A) includes the member's share in the member's income instead. #### When did this change take effect? Both changes were made by section 5 of the Finance Act, 2026. Section 1(2) of that Act says it comes into force on 1 July 2026 unless otherwise provided, which is the start of tax year 2027. ### Citations - [Income Tax Ordinance, 2001, section 80 (Person)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#80-person), as amended to 2026-06-30: "and anybody of persons formed under a foreign law, but does not include a company" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 92 (Principles of taxation of associations of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#92-principles-of-taxation-of-associations-of-persons), as amended to 2026-06-30: "Where the income of a limited liability partnership is exempt from tax, any amount received by a member as share from profits earned by such limited liability partnership shall be included in the income of that member." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2026, section 5 (Amendments of the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2026#5-amendments-of-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2026: "in section 80, in sub-section (2), in clause (a), after the word “person”, the expression “, limited liability partnership” shall be inserted" Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Finance Act, 2026, section 1 (Short title and commencement)](https://qanoondigest.com/acts/finance-act/finance-act-2026#1-short-title-and-commencement), as amended to 2026: "It shall, unless otherwise provided, come into force on the first day of July, 2026." Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "“member” in relation to an association of persons, includes a partner in a firm" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What happens if our firm files its return late? Source: https://qanoondigest.com/faq/partnership-firms-aop/aop-late-return-penalty-atl-surcharge Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Two things follow. Section 182A keeps an association of persons that misses the due date off the active taxpayers' list for that year, unless it files and pays a Rs. 50,000 surcharge, and it cannot carry forward that year's loss. Separately, section 182 charges a daily penalty with a Rs. 50,000 minimum for a non-salaried filer. **Applies to:** Partnership firms and other associations of persons in Pakistan that file an income tax return after the due date, for tax year 2026 and later years. Filing late costs a partnership firm in two separate ways. It loses its place on the active taxpayers' list (ATL) for that year until it pays a fixed surcharge, and it becomes liable to a penalty that grows with each day of delay. Both apply to the same late return. ### What does the law say? **The due date.** Section 118(3)(b) requires a person other than a company, which includes a firm, to file its return on or before 30 September following the end of the tax year. The filing duty itself comes from section 114. **The active taxpayers' list.** Section 181A gives the Board power to institute an active taxpayers' list, regulated as prescribed. Section 182A(1) then says that where a person fails to file a return by the due date in section 118, or by a date extended by the Board or by the Commissioner under section 119, that person shall: - (a) not be included in the ATL for the year for which the return was not filed within the due date; - (b) not be allowed, for that tax year, to carry forward any business loss; - (c) not be issued a refund while it is off the ATL; and - (d) not be entitled to additional payment for delayed refund, and the period off the list is not counted when that payment is computed. **The way back onto the list.** A proviso to clause (a) says that, without prejudice to any other liability, the person shall be included in the ATL on filing the return after the due date if it pays a surcharge of: | Person | Surcharge under section 182A(1)(a) | |---|---| | Company | Rs. 100,000 | | Association of persons | Rs. 50,000 | | Individual | Rs. 25,000 | The company and AOP figures were raised by the Finance Act, 2026. **The penalty.** Entry 1 of the Table in section 182(1) covers any person who fails to furnish a return of income as required under section 114 within the due date. The penalty is the higher of: - (a) 0.1% of the tax payable for that tax year for each day of default; or - (b) Rs. 1,000 for each day of default. The minimum penalty is Rs. 10,000 for an individual with 75% or more of income from salary, and Rs. 50,000 in all other cases, which includes a firm. The maximum is 200% of the tax payable for the tax year. The penalty is reduced by 75%, 50% and 25% if the return is filed within one, two and three months respectively after the due date or extended due date. An Explanation, substituted by the Finance Act, 2026, defines "tax payable" for this entry as the higher of the tax chargeable on the assessed taxable income, or the tax payable for the immediately preceding tax year for which a return was duly filed. ### Worked example (illustrative figures) Malik Brothers, a hardware trading firm in Multan, files its tax year 2026 return 45 days after the 30 September 2026 due date. Its assessed tax for the year is Rs. 3,000,000, higher than the previous year's. 1. Daily penalty under clause (a): 0.1% of Rs. 3,000,000 = Rs. 3,000 per day. 2. Daily penalty under clause (b): Rs. 1,000 per day. The higher figure is Rs. 3,000. 3. For 45 days: Rs. 3,000 x 45 = Rs. 135,000. 4. Check against the limits: above the Rs. 50,000 minimum and well below the maximum of 200% of Rs. 3,000,000, which is Rs. 6,000,000. 5. The return was filed more than one month but within two months after the due date, so the penalty is reduced by 50%: Rs. 135,000 x 50% = Rs. 67,500. 6. Separately, to be included in the ATL for tax year 2026, the firm pays the section 182A surcharge of Rs. 50,000. Total cash cost in this example: Rs. 67,500 + Rs. 50,000 = Rs. 117,500, before any other liability such as default surcharge on late tax. ### What if ...? **What if the firm made a loss that year?** Section 182A(1)(b) says the person is not allowed, for that tax year, to carry forward any loss under Part VIII of Chapter IV. The proviso on the surcharge speaks only of inclusion in the ATL; it does not say that paying the surcharge restores the right to carry the loss forward. **What if the firm had an extension?** Section 182A measures lateness against the due date "or by the date as extended" by the Board or by the Commissioner under section 119. A return filed within a granted extension is not late for section 182A. **What if the penalty works out below Rs. 50,000?** The proviso sets Rs. 50,000 as the minimum for a firm. The Table does not say in which order the minimum and the 75%, 50% or 25% reduction are applied when a short delay produces a small figure, so that point is not settled on the face of the text. ### Common mistakes - **Treating the surcharge as the whole cost.** The section 182A surcharge only restores ATL status. The section 182 penalty is separate. - **Using the individual surcharge.** A firm pays the AOP rate of Rs. 50,000, not the Rs. 25,000 individual rate. - **Relying on the undertaking.** Section 182A(3) applies to an individual, not a firm. - **Assuming a loss year means no penalty.** The minimum penalty of Rs. 50,000 applies in all non-salaried cases, and "tax payable" can be measured by the previous year's tax. ### What to check in the official text Read section 182A in full, including sub-section (3), and entry 1 of the Table in section 182(1) with its provisos and Explanation. The penalty Table does not reproduce well in the site text, so check the figures in the official PDF. Section 181A leaves the detail of the ATL to rules; the Income Tax Rules in this corpus are amended only to November 2023. Relief from penalty in particular cases is dealt with in other sections not covered here. ### Frequently asked #### How much is the late-filing surcharge for a partnership firm? Section 182A(1)(a) sets Rs. 50,000 for an association of persons, compared with Rs. 100,000 for a company and Rs. 25,000 for an individual. Paying it, together with filing the return, brings the firm back onto the active taxpayers' list. #### Is the surcharge instead of the penalty? No. The proviso to section 182A(1)(a) applies without prejudice to any other liability under the Ordinance. The section 182 penalty for not filing by the due date is a separate liability. #### Can a firm avoid the surcharge by giving an undertaking? The undertaking route in section 182A(3) is for an individual who declares that he will not acquire property for six months. The text does not extend it to an association of persons. ### Citations - [Income Tax Ordinance, 2001, section 182A (Return not filed within due date)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182a-return-not-filed-within-due-date), as amended to 2026-06-30: "not be included in the active taxpayers' list for the year for which return was not filed within the due date" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 182 (Offences and penalties)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182-offences-and-penalties), as amended to 2026-06-30: "Any person who commits any offence specified in column (2) of the Table below shall, in addition to and not in derogation of any punishment to which he may be liable under this Ordinance or any other law, be liable to the penalty mentioned against that offence in column (3) thereof" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 181A (Active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181a-active-taxpayers-list), as amended to 2026-06-30: "The Board shall have the power to institute active taxpayers’ list." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 118 (Method of furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#118-method-of-furnishing-returns-and-other-documents), as amended to 2026-06-30: "on or before the 30th day of September next following the end of the tax year to which the return relates" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 119 (Extension of time for furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#119-extension-of-time-for-furnishing-returns-and-other-documents), as amended to 2026-06-30: "An extension of time under sub-section (3) should not exceed fifteen days from the due date for furnishing the return of income" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "every person (other than a company) whose taxable income for the year exceeds the maximum amount that is not chargeable to tax under this Ordinance for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Does minimum tax on turnover apply to a partnership firm? Source: https://qanoondigest.com/faq/partnership-firms-aop/minimum-tax-on-turnover-for-aop Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, once turnover is large enough. Section 113 of the Income Tax Ordinance applies to an association of persons with turnover of Rs. 100 million or more in tax year 2017 or any later year. If its normal tax is nil or below the Division IX percentage of turnover, the firm pays that percentage instead, 1.25% in most cases. **Applies to:** Partnership firms and other associations of persons in Pakistan with turnover of Rs. 100 million or more, for tax year 2027 (1 July 2026 to 30 June 2027). Minimum tax is a floor on the income tax a large firm pays. Once a partnership firm's turnover reaches Rs. 100 million, a year of low profit or a loss does not bring its income tax to zero: section 113 makes it pay a fixed percentage of turnover instead. The rates for tax year 2027 are in Division IX of Part I of the First Schedule. ### What does the law say? **Who is covered.** Section 113(1) applies to a resident company, a permanent establishment of a non-resident company, an individual, and an association of persons "having turnover of hundred million rupees or above in the tax year 2017 or in any subsequent tax year". A partnership firm is an association of persons for tax purposes. **When it bites.** The section applies where, for any reason allowed under the Ordinance or any other law, including: - (a) a loss for the year; - (b) setting off a loss of an earlier year; - (c) exemption from tax; - (d) credits or rebates; or - (e) allowances or deductions, including depreciation and amortization, no tax is payable or paid, or the tax payable or paid is less than the percentage in column (3) of the Division IX Table applied to the firm's turnover from all sources. **What the firm pays.** Under section 113(2), the firm's turnover is treated as its income for the year, and the firm pays as income tax "instead of the actual tax payable under this Ordinance" the minimum tax computed at the Division IX rates. **What is not counted as tax paid.** An Explanation to section 113(1) says "tax payable or paid" does not include tax on deemed income assessed as a final discharge of liability, or tax payable or paid under certain other charging provisions, including the super tax under section 4C. So super tax does not help a firm clear the minimum tax floor. ### What counts as turnover? Section 113(3) defines turnover as: - (a) gross sales or gross receipts from the sale of goods, excluding sales tax, federal excise duty and trade discounts shown on invoices or bills, and excluding amounts taken as deemed income under a final tax regime; - (b) gross fees for rendering services, including commissions, except those covered by a separate final tax; - (c) gross receipts from executing contracts, except those covered by a separate final tax; and - (d) a company's share of such amounts of any AOP of which it is a member. An Explanation to section 113(2)(a) adds that turnover covers receipts from all business activities, including receipts from the sale of immoveable property where taxed as business income. ### What are the rates for tax year 2027? The Division IX Table, as it stands after the Finance Act, 2026: | S. No. | Persons | Minimum tax as % of turnover | |---|---|---| | 1 | (a) Sui Southern Gas Company Limited and Sui Northern Gas Pipelines Limited (turnover above Rs. 1 billion); (b) Pakistani International Airlines Corporation; (c) poultry industry, including breeding, broiler, egg and feed production | 0.75% | | 2 | (a) Oil refineries; (b) motorcycle dealers registered under the Sales Tax Act, 1990; (c) oil marketing companies | 0.5% | | 3 | (b) Petroleum agents and distributors registered under the Sales Tax Act, 1990; (c) rice mills and dealers; (d) Tier-1 retailers of fast moving consumer goods integrated with the Board's system; (e) turnover from supplies through e-commerce, including an online marketplace; (f) persons dealing in used vehicles; (g) flour mills | 0.25% | | 4 | In all other cases | 1.25% | Entry 3(a), which covered distributors of pharmaceutical products, fast moving consumer goods and cigarettes, was omitted by the Finance Act, 2026. Those distributors now fall under "In all other cases" unless another entry fits. ### Worked example (illustrative figures) Awan Traders, a partnership selling building materials in Rawalpindi, has turnover for tax year 2027 of Rs. 150,000,000, excluding sales tax. After depreciation and expenses it makes a loss, so its normal income tax is nil. 1. Turnover is above Rs. 100 million, so section 113 applies to the firm. 2. Building materials do not fall within entries 1 to 3, so the rate is 1.25% under entry 4. 3. Minimum tax: Rs. 150,000,000 x 1.25% = Rs. 1,875,000. 4. The firm pays Rs. 1,875,000 as its income tax for tax year 2027. 5. Because the tax was paid "due to the fact that no tax is payable or paid for the year", the proviso to section 113(2)(c) lets the entire Rs. 1,875,000 be carried forward. 6. It can be adjusted against tax liability under clause (1) of Division I or Division II of Part I of the First Schedule in tax years 2028 and 2029 only. If the same firm were a rice dealer, entry 3(c) would apply: Rs. 150,000,000 x 0.25% = Rs. 375,000. ### What if ...? **What if normal tax is positive but below the floor?** Say normal tax is Rs. 1,000,000 against a minimum of Rs. 1,875,000. The firm pays the minimum. Section 113(2)(c) carries forward the excess of the minimum over the actual tax payable, here Rs. 875,000, on the same two-year basis. **What if turnover drops below Rs. 100 million in a later year?** The test in section 113(1) is turnover of Rs. 100 million or more "in the tax year 2017 or in any subsequent tax year". The words do not expressly say whether a firm that crossed the threshold once stays covered in a later year when turnover falls, so this point is not settled on the face of the text. **What if a company is a partner?** Section 113(3)(d) includes in a company's turnover its share of the turnover of an AOP of which it is a member. That share is counted for the company's own minimum tax. ### Common mistakes - **Counting sales tax in turnover.** Section 113(3)(a) excludes sales tax and federal excise duty. - **Using 1.5%.** The rate in all other cases is now 1.25%. The 1.5% figure appears only in a superseded table printed in the footnotes. - **Treating super tax as meeting the floor.** The Explanation to section 113(1) excludes tax under section 4C. - **Carrying the excess forward indefinitely.** The period is two tax years since the Finance Act, 2025. ### What to check in the official text Read section 113(1), (2) and (3) with both Explanations. The Division IX Table is badly broken in the extracted text because superseded tables are printed alongside it, so confirm the current Table in the official PDF. Check which entry describes your trade before applying a rate. ### Frequently asked #### What turnover brings a partnership firm into minimum tax? Section 113(1) applies to an association of persons having turnover of one hundred million rupees or above in tax year 2017 or any subsequent tax year. Below that, the section does not apply to the firm. #### What rate of minimum tax does a firm pay? The rate depends on the business, as listed in the Division IX Table. For most firms the entry 'In all other cases' applies, which is 1.25% of turnover. Some trades have lower rates, such as 0.25% for rice mills and dealers and for flour mills. #### Is minimum tax lost if the firm's tax is higher next year? Not immediately. Section 113(2)(c) carries the excess forward for adjustment against tax liability under clause (1) of Division I or Division II of Part I of the First Schedule for the two tax years immediately after the year it was paid. ### Citations - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "the person shall pay as income tax for the tax year (instead of the actual tax payable under this Ordinance)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IX (Minimum tax under section 113), Table](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 4C (Super tax on high earning persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4c-super-tax-on-high-earning-persons), as amended to 2026-06-30: "A super tax shall be imposed for tax year 2022 and onwards at the rates specified in Division IIB of Part I of the First Schedule, on income of every person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Does our firm have to deduct tax from the rent it pays for its office or shop? Source: https://qanoondigest.com/faq/partnership-firms-aop/aop-deduct-tax-on-office-rent Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, if the firm pays gross rent of Rs. 1.5 million or more in a year. Section 155 makes an association of persons paying that much rent a prescribed person, so it must deduct tax from each rent payment at the rates in Division V of Part III of the First Schedule and pay it to the Commissioner. **Applies to:** Partnership firms and other associations of persons that rent an office, shop or other premises in Pakistan, and the landlords who rent to them, for tax year 2027. A partnership firm has to deduct income tax from the rent it pays once its gross rent for the year reaches Rs. 1.5 million. Below that, the firm is usually not a withholding agent for rent, unless it is one of the specific businesses the section lists. The rate depends on whether the landlord is an individual or AOP, or a company. ### What does the law say? **Who must deduct.** Section 155(1) says every "prescribed person" making a payment of rent of immovable property, in full or in part, including an advance, must deduct tax from the gross amount of rent paid at the rate in Division V of Part III of the First Schedule. Rent includes rent of furniture and fixtures and amounts for services relating to the property. **Where a firm fits in.** Section 155(3) lists the prescribed persons. Two clauses matter for a firm: - **Clause (vib):** individuals or associations of persons paying gross rent of Rs. 1.5 million or more in a year. - **Clause (via):** a private educational institution, a boutique, a beauty parlour, a hospital, a clinic or a maternity home. This clause sets no rent threshold. The list also covers companies, governments, non-profit organisations and anyone the Board notifies under clause (vii). **Head of income does not matter.** An Explanation to section 155(1) says it applies to rent of immovable property irrespective of head of income. ### What rate does the firm deduct? Division V of Part III of the First Schedule sets two scales, based on who the landlord is. **Clause (a): landlord is an individual or an association of persons** | Gross amount of rent | Rate of tax | |---|---| | Up to Rs. 300,000 | Nil | | Rs. 300,001 to Rs. 600,000 | 5% of the amount exceeding Rs. 300,000 | | Rs. 600,001 to Rs. 2,000,000 | Rs. 15,000 plus 10% of the amount exceeding Rs. 600,000 | | Above Rs. 2,000,000 | Rs. 155,000 plus 25% of the amount exceeding Rs. 2,000,000 | **Clause (b): landlord is a company.** The rate is 15% of the gross amount of rent. These are the rates in the Ordinance as amended to 30 June 2026, which apply for tax year 2027. ### How does it work in practice? The firm totals the rent it pays in the year. If the total is Rs. 1.5 million or more, section 155 applies. The firm deducts the tax when it pays the landlord, and section 160 requires it to pay the deducted tax to the Commissioner within the time and in the manner prescribed. The prescribed time and manner are in the Income Tax Rules, not in section 160 itself. Section 155 once had a sub-section (2) making the deduction a final tax on the landlord's property income. The Finance Act, 2010 omitted it, and the current section contains no such provision. ### Worked example (illustrative figures) Zafar & Sons, a partnership running a hardware shop in Gujranwala, rents its shop from an individual, Mr. Rashid, at Rs. 200,000 a month for tax year 2027. 1. Gross rent for the year: Rs. 200,000 x 12 = Rs. 2,400,000. 2. That is above Rs. 1.5 million, so the firm is a prescribed person under clause (vib). 3. The landlord is an individual, so clause (a) applies. Rent exceeds Rs. 2,000,000. 4. Amount above Rs. 2,000,000: Rs. 2,400,000 minus Rs. 2,000,000 = Rs. 400,000. 5. 25% of Rs. 400,000 = Rs. 100,000. 6. Tax on the year's rent: Rs. 155,000 + Rs. 100,000 = Rs. 255,000. Spread evenly over twelve payments, that would be Rs. 21,250 a month. Division V gives the scale by "gross amount of rent" and does not itself set out how to split the annual figure across monthly payments, so the even split here is only for illustration. If the same shop were owned by a private limited company, clause (b) would apply: 15% of Rs. 2,400,000 = Rs. 360,000. ### What if ...? **What if the firm pays less than Rs. 1.5 million a year?** Clause (vib) does not apply. The firm is still a prescribed person if it runs one of the businesses in clause (via), such as a clinic or a private school, or if the Board has notified it under clause (vii). Board notifications are outside this corpus. **What if the rent crosses Rs. 1.5 million partway through the year?** The clause speaks of rent "in a year" but does not say from which payment deduction starts when the threshold is crossed mid-year. The text is silent on this point. **What if the firm pays rent in advance?** Section 155(1) expressly covers payments "including a payment by way of advance", so an advance is subject to deduction as well. ### Common mistakes - **Using the company scale for every landlord.** The 15% flat rate is only for company landlords. Individuals and AOPs use the slab scale in clause (a). - **Forgetting furniture and service charges.** Section 155(1) includes rent of furniture and fixtures and amounts for services relating to the property. - **Assuming a missed deduction only affects the landlord.** Section 161 makes the firm personally liable for tax it failed to deduct or, having deducted, failed to pay over. Section 21(c) also bars a deduction for expenditure on which tax had to be deducted until the tax is deducted and paid. ### What to check in the official text Read section 155(1) and the full list in section 155(3), including clauses (via), (vib) and (vii). Check the rate scales in Division V of Part III of the First Schedule in the official PDF, since the site text drops tables. Read sections 160 and 161 for payment and default, and section 21(c) for the expense disallowance. Any notification issued under clause (vii) would need to be checked separately. ### Frequently asked #### Our firm pays Rs. 100,000 a month for its shop. Do we have to deduct tax? That is Rs. 1,200,000 a year, below the Rs. 1.5 million threshold in clause (vib) of section 155(3). The firm is not a prescribed person on that ground, unless it falls in another clause, for example if it runs a clinic, boutique or private school listed in clause (via). #### What rate applies if our landlord is an individual? Clause (a) of Division V applies to individual and AOP landlords: nil up to Rs. 300,000, 5% of the amount above Rs. 300,000 up to Rs. 600,000, then Rs. 15,000 plus 10% up to Rs. 2,000,000, and Rs. 155,000 plus 25% of the amount above Rs. 2,000,000. #### What happens if the firm does not deduct the tax? Section 161 makes the firm personally liable to pay the tax it failed to deduct, after a hearing. Section 21(c) can also disallow the rent as a business expense until the tax is deducted and paid. ### Citations - [Income Tax Ordinance, 2001, section 155 (Rent of immoveable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#155-rent-of-immoveable-property), as amended to 2026-06-30: "individuals or association of persons paying gross rent of rupees one and a half million and above in a year; or" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division V (Income from Property), clauses (a) and (b)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 160 (Payment of tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#160-payment-of-tax-collected-or-deducted), as amended to 2026-06-30: "shall be paid to the Commissioner by the person making the collection or deduction within the time and in the manner as may be prescribed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 161 (Failure to pay tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#161-failure-to-pay-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be personally liable to pay the amount of tax to the Commissioner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "any expenditure from which the person is required to deduct or collect tax under Part V of Chapter X or Chapter XII, unless the person has paid or deducted and paid the tax as required by Division IV of Part V of Chapter X" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How are a non-resident partner's share and a firm managed partly from abroad taxed? Source: https://qanoondigest.com/faq/partnership-firms-aop/non-resident-partner-aop-residence Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 84, a partnership firm is a resident AOP for a tax year if its control and management is wholly or partly in Pakistan at any time in that year, so its foreign-source income is taxed too. Section 142 lets tax due by a non-resident partner on his share be assessed on the firm or a resident partner. **Applies to:** Partnership firms and other AOPs in Pakistan with one or more partners living abroad, or run partly from outside Pakistan. A partnership firm with a partner abroad is taxed in two layers under the Income Tax Ordinance, 2001. First, the firm's own residence decides how much of its income Pakistan taxes. Second, section 142 gives FBR a way to collect any tax a non-resident partner owes on his share from inside Pakistan. Both rules are current in the Ordinance as amended to 30 June 2026. ### When is a partnership firm a resident AOP? Section 84 makes an association of persons a resident AOP for a tax year if the control and management of its affairs is situated wholly or partly in Pakistan at any time in the year. A firm is an AOP for this purpose. Two words in the test carry most of the weight: - **"Partly"**: the firm does not need to be run entirely from Pakistan. If some of the control and management is here, the test is met. - **"At any time in the year"**: section 84 sets no minimum number of days. On its wording, control and management situated partly in Pakistan at any point in the tax year meets the test. Section 81 then treats a resident AOP as a resident person, and any person that is not resident as non-resident. The Ordinance does not define "control and management" in section 84, so which decisions count is a question of fact that the text does not settle. ### Why does residence matter for the firm's tax? Section 11 sets the scope. For a resident person, income under each head is computed by taking into account both Pakistan-source and foreign-source income. For a non-resident person, only Pakistan-source income is counted. A resident firm therefore brings its foreign earnings into its Pakistani return, while a non-resident firm does not. Section 92(1) taxes the AOP separately from its members. Where the AOP has paid tax, an amount a member receives in the capacity of member out of the AOP's income is exempt. That exemption does not depend on whether the member is resident. ### How does section 142 work for a non-resident partner? Section 142 deals with tax due by a non-resident member in respect of his share of the AOP's profits: 1. The tax can be **assessed in the name of the AOP or of any resident member**. 2. It **may be recovered out of the AOP's assets or from the resident member personally**. 3. A person who pays under the section is treated as acting under the non-resident member's authority and is **indemnified** against proceedings, notwithstanding any contract to the contrary. 4. The amount is treated **as if it were tax due under an assessment order**, so the Ordinance's recovery rules apply to it. Section 142 does not itself list when a non-resident member will have tax due on his share. The Ordinance contains cases where a share is not covered by the section 92(1) exemption, such as the second proviso for an AOP with turnover of three hundred million rupees or above that has not filed audited accounts with its return, and the first proviso for a company member. Whether and how section 142 applies to a particular share is something the section does not work through case by case. ### Worked example (illustrative figures) Rehman Traders is a Faisalabad firm of textile agents. Imran runs day-to-day affairs from Faisalabad and holds 60%. His brother Kashif lives in Dubai, holds 40% and approves major contracts from there. The firm earns made-up income of Rs. 8,000,000 in commission from Pakistani mills and Rs. 2,000,000 in commission from a buyer abroad. **Step 1: residence.** Part of the control and management sits with Imran in Faisalabad. Under section 84 the firm is a resident AOP for the tax year. **Step 2: scope of income.** Under section 11, as a resident person the firm counts both amounts: Rs. 8,000,000 + Rs. 2,000,000 = Rs. 10,000,000 goes into its income computation. **Step 3: the partners.** The firm pays tax on that income under section 92(1). Kashif's 40% share received out of that taxed income is exempt under the same sub-section, subject to its provisos. **Contrast.** Suppose instead that every decision about the firm was taken outside Pakistan for the whole year. The section 84 test would not be met, the firm would be non-resident under section 81, and section 11 would count only the Rs. 8,000,000 of Pakistan-source income. ### What if ...? **What if the non-resident partner is himself unsure of his own residence?** The partner's residence is a separate test. Section 82 makes an individual resident on grounds including presence in Pakistan for one hundred and eighty-three days or more in the tax year, or being a citizen who is not present in any other country for more than one hundred and eighty-two days, or who is not a resident taxpayer of any other country. His residence affects his own return, not the firm's residence under section 84. **What if the non-resident member is a company?** The first proviso to section 92(1) excludes a company member's share from the AOP's total income and taxes the company separately at the company rate. That is covered on its own page. **What if tax on the non-resident partner's share cannot be collected from him?** Section 142 allows it to be assessed on the firm or a resident partner and recovered from the firm's assets or that partner personally. ### Common mistakes - **Looking at where the partners live instead of where the firm is run.** Section 84 is about control and management of the AOP's affairs. - **Treating "partly" as "mainly".** The section says wholly or partly. - **Leaving foreign commission out of a resident firm's return.** Section 11 includes foreign-source income for a resident person. - **Assuming the Pakistani partner cannot be pursued for the overseas partner's tax.** Section 142 expressly allows assessment on, and recovery from, a resident member. ### What to check in the official text Read section 84 with sections 81 and 11, then sections 92(1) and 142 in the official PDF. Double tax treaties, the tax laws of the country where the partner lives, and provincial taxes are outside this corpus and are not covered here. ### Frequently asked #### Does a firm become non-resident because most partners live abroad? Not by that fact alone. Section 84 looks at where the control and management of the firm's affairs is situated. If that is wholly or partly in Pakistan at any time in the tax year, the firm is a resident AOP for that year. #### Can FBR collect a non-resident partner's tax from the partner who lives in Pakistan? Section 142 allows tax due by a non-resident member on his share of the profits to be assessed in the name of the AOP or of any resident member. It can be recovered from the AOP's assets or from the resident member personally, and the person who pays is indemnified. #### Is a non-resident partner's share of profit taxed again in his hands? Section 92(1) exempts an amount a member receives out of income on which the AOP has paid tax, and it does not draw a line between resident and non-resident members. The exemption is subject to the provisos in section 92(1), which can make a share taxable. ### Citations - [Income Tax Ordinance, 2001, section 84 (Resident association of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#84-resident-association-of-persons), as amended to 2026-06-30: "the control and management of the affairs of the association is situated wholly or partly in Pakistan at any time in the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 81 (Resident and non-resident persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#81-resident-and-non-resident-persons), as amended to 2026-06-30: "a resident individual, resident company or resident association of persons for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 11 (Heads of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#11-heads-of-income), as amended to 2026-06-30: "The income of a non-resident person under a head of income shall be computed by taking into account only amounts that are Pakistan-source income." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 142 (Recovery of tax due by non-resident member of an association of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#142-recovery-of-tax-due-by-non-resident-member-of-an-association-of-persons), as amended to 2026-06-30: "The tax due by a non-resident member of an association of persons in respect of the member’s share of the profits of the association shall be assessable in the name of the association or of any resident member of the association" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 92 (Principles of taxation of associations of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#92-principles-of-taxation-of-associations-of-persons), as amended to 2026-06-30: "An association of persons shall be liable to tax separately from the members of the association and" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 82 (Resident individual)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#82-resident-individual), as amended to 2026-06-30: "being a citizen of Pakistan is not present in any other country for more than one hundred and eighty-two days during the tax year or who is not a resident taxpayer of any other country" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can partners set off the firm's loss against their own income, and how long can the firm carry it forward? Source: https://qanoondigest.com/faq/partnership-firms-aop/aop-business-loss-set-off-carry-forward Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No. Section 59A(3) and (4) say an association of persons' loss can be set off or carried forward only against the association's own income, and no member can use it against personal income. The firm itself can carry an unabsorbed business loss forward under section 57 for up to six tax years after the year of loss. **Applies to:** Partnership firms and other associations of persons in Pakistan that have a business loss for a tax year, and their partners, under the law as amended to 30 June 2026. A loss made by a partnership firm belongs to the firm. The partners cannot deduct their share from their own salary, rent or other business income. The firm can use the loss against its own other income in the same year, within limits, and carry what is left forward against its business income for up to six years. ### What does the law say? **The loss stays in the AOP.** Section 59A(3) says that in the case of an association of persons, any loss shall be set off, or carried forward and set off, only against the income of the association. Section 59A(4)(a) adds that nothing in sections 56 and 57, or the other set off and carry forward provisions, entitles a member of an association of persons to set off a loss of the association, or carry it forward and set it off, against the member's own income. This matches the general scheme in section 92(1), which taxes an association of persons separately from its members. **Set off in the same year.** Section 56(1) lets a person set off a loss under one head of income against income under any other head for the same year, except income under the head "Salary". A proviso, added by the Finance Act, 2025, says a business loss cannot be adjusted against income from property for the tax year. Section 56(3) says that where there is a business loss and a loss under another head, the business loss is set off last. **Carry forward.** Section 57(1) says a business loss that cannot be wholly set off under section 56 is carried forward to the following tax year and set off against income under the head "Income from Business". Section 57(2) continues this year by year, but no loss can be carried forward to more than six tax years immediately succeeding the year in which it was first computed. Section 57(3) uses the earliest year's loss first. Section 56(2) says a loss under any other head that cannot be set off in the year is not carried forward, except as that Part of the Ordinance provides. ### How does it work in practice? The firm computes its business income or loss for the year. If there is a loss, it first looks for other income of the firm under another head (not property income) for the same year. Any balance is carried forward and can only be used against the firm's future business income. Section 59A(7) adds a condition: a loss is carried forward and set off only if it has been assessed or determined under one of the orders the sub-section lists. A loss the firm has simply worked out for itself, without such an assessment or determination, does not qualify. **Depreciation and similar allowances.** Section 57(4) treats the part of a loss that comes from depreciation, amortisation and certain other allowances differently. That part is set off against 50% of the balance business income of the following year, or 100% of it if taxable income for the year is less than Rs. 10 million, and so on until fully used. ### Worked example (illustrative figures) Shah & Co., a partnership trading cloth in Faisalabad, has an assessed business loss of Rs. 3,000,000 in tax year 2027. It also earns Rs. 800,000 of rent from a godown it owns. None of the loss comes from depreciation or similar allowances. 1. Tax year 2027: the proviso to section 56(1) bars setting the business loss against the Rs. 800,000 of property income. The full Rs. 3,000,000 is carried forward. 2. Tax year 2028: business income is Rs. 1,800,000. Set off Rs. 1,800,000 of the loss. Taxable business income is nil. Balance carried forward: Rs. 3,000,000 minus Rs. 1,800,000 = Rs. 1,200,000. 3. Tax year 2029: business income is Rs. 2,000,000. Set off the remaining Rs. 1,200,000. Taxable business income: Rs. 2,000,000 minus Rs. 1,200,000 = Rs. 800,000. 4. Latest year the 2027 loss could have been used: tax year 2033, the sixth year after 2027. Neither partner can deduct any part of the Rs. 3,000,000 against personal income in any of these years. ### What if ...? **What if a partner has large personal income in the loss year?** It makes no difference. Section 59A(4)(a) bars the member from using the AOP's loss. The partner's own income is taxed on its own terms. **What if the business is taken over by a new firm?** Section 59A(4)(b) says a person who succeeds another person carrying on a business, otherwise than by inheritance, cannot carry forward and set off the predecessor's loss. The section does not say whether a change of partners in the same firm is a succession for this purpose, so the text leaves that question open. **What if the firm is subject to minimum tax?** A loss reduces the firm's income, but minimum tax on turnover can still apply. That is covered on a separate page. ### Common mistakes - **Passing the loss through to partners.** Section 59A(4)(a) prevents it. - **Setting a business loss against rent.** The proviso to section 56(1) bars it for the tax year. - **Counting seven years instead of six.** The limit in section 57(2) is six tax years immediately after the year the loss was first computed. - **Using a later loss before an earlier one.** Section 57(3) requires the earliest year's loss first. ### What to check in the official text Read section 59A(3), (4) and (7), section 56 with its proviso, and section 57(1) to (4). Sub-sections (2A) to (2C) of section 57 give longer periods to certain banks, hotel companies and one airline; none applies to an ordinary firm. Speculation business losses and capital losses have their own rules in sections the Ordinance places next to section 57, not covered here. ### Frequently asked #### Can I deduct my share of the firm's loss from my salary or rent income? No. Section 59A(4)(a) says nothing in the set off and carry forward provisions entitles a member of an association of persons to set off the association's loss against the member's own income, or to carry it forward for that purpose. The loss stays with the firm. #### How many years can the firm carry a business loss forward? Section 57(2) allows carry forward to the following tax years, but not to more than six tax years immediately succeeding the year in which the loss was first computed. A loss from tax year 2027 can be used up to tax year 2033. #### Can the firm set its business loss against rent it earns? Not in the same year. A proviso to section 56(1), added by the Finance Act, 2025, says a business loss cannot be adjusted against income from property for the tax year. ### Citations - [Income Tax Ordinance, 2001, section 59A (Limitations on set off and carry forward of losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#59a-limitations-on-set-off-and-carry-forward-of-losses), as amended to 2026-06-30: "shall be set off or carried forward and set off only against the income of the association" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 57 (Carry forward of business losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#57-carry-forward-of-business-losses), as amended to 2026-06-30: "no loss can be carried forward to more than six tax years immediately succeeding the tax year for which the loss was first computed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 56 (Set off of losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#56-set-off-of-losses), as amended to 2026-06-30: "Provided that the adjustment of business loss shall not be allowed against income from property for the tax year." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 92 (Principles of taxation of associations of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#92-principles-of-taxation-of-associations-of-persons), as amended to 2026-06-30: "An association of persons shall be liable to tax separately from the members of the association and" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is a partnership taxed less than a private limited company? Source: https://qanoondigest.com/faq/partnership-firms-aop/partnership-vs-private-limited-company-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Neither is always cheaper. For tax year 2027 a partnership pays the slab table in Division I of the First Schedule, from 0% up to 45%, and partners' shares are then exempt under section 92. A company generally pays a flat 29% under Division II, and dividends it pays are taxed again at 15% under section 5. **Applies to:** People in Pakistan choosing between running a business as a partnership firm (AOP) or as a private limited company, looking at income tax for tax year 2027. The Income Tax Ordinance, 2001 taxes a partnership firm and a private limited company in different ways, and neither is lower at every level of profit. A firm pays progressive slab rates once, and its partners' shares are then exempt. A company pays a flat rate, and any profit it pays out as dividend is taxed a second time in the shareholder's hands. This page compares the two for tax year 2027 (1 July 2026 to 30 June 2027) using the Ordinance as amended to 30 June 2026. It does not recommend either structure. ### What does the law say about each structure? **Partnership firm (AOP).** Section 92(1) makes an AOP liable to tax separately from its members. Where the AOP has paid tax, an amount a member receives as a member out of the AOP's income is exempt, subject to the provisos. The firm's rate comes from clause (1) of Division I of Part I of the First Schedule, the same table used by non-salaried individuals. Section 4AB, printed at the end of section 4, adds a surcharge of ten percent of that Division I tax where taxable income exceeds Rs. 10 million. **Private limited company.** Section 94(1) makes a company liable to tax separately from its shareholders. Section 94(2) says a dividend it pays is taxable under section 5. Section 5 taxes every person who receives a dividend from a company, on the gross amount of the dividend, at the rate in Division III of Part I of the First Schedule. The section 4AB surcharge applies to individuals and AOPs only, not to companies. ### What are the rates for tax year 2027? | Structure | Rule | Rate | | --- | --- | --- | | Partnership firm | Division I, clause (1) | 0% up to Rs. 600,000, then 15%, 20%, 30%, 40% and 45% on successive bands; the 45% band starts above Rs. 5,600,000 | | Partnership firm, surcharge | Section 4AB | 10% of the Division I tax where taxable income exceeds Rs. 10 million | | Company (any other company) | Division II | 29% | | Small company | Division II | 20% | | Dividend to shareholder, general case | Division III, clause (b) | 15% | | Dividend where the company pays no tax because of exemption, carried forward losses or tax credits | Division III, clause (d) | 25% | For a professional firm prohibited from incorporating by law or its regulator's rules, a proviso to the clause (1) table reduces the 45% band to 40%. Such a firm cannot choose a company, so the comparison does not arise for it. ### Worked example (illustrative figures) Three made-up businesses in Lahore, each with the same taxable profit under either structure. The company is an "any other company" at 29%, and in the dividend column it pays out all its after-tax profit to individual shareholders at 15%. **Profit Rs. 3,000,000** - Firm: serial 4 of the table. Rs. 170,000 + 30% of (Rs. 3,000,000 minus Rs. 1,600,000) = Rs. 170,000 + Rs. 420,000 = **Rs. 590,000**. - Company: 29% of Rs. 3,000,000 = Rs. 870,000. After-tax profit Rs. 2,130,000. Dividend tax 15% = Rs. 319,500. Total **Rs. 1,189,500**. **Profit Rs. 10,000,000** - Firm: serial 6. Rs. 1,610,000 + 45% of Rs. 4,400,000 = Rs. 1,610,000 + Rs. 1,980,000 = Rs. 3,590,000. Taxable income does not exceed Rs. 10 million, so no surcharge. Total **Rs. 3,590,000**. - Company: 29% = Rs. 2,900,000. After-tax profit Rs. 7,100,000. Dividend tax 15% = Rs. 1,065,000. Total **Rs. 3,965,000**. **Profit Rs. 20,000,000** - Firm: Rs. 1,610,000 + 45% of Rs. 14,400,000 = Rs. 1,610,000 + Rs. 6,480,000 = Rs. 8,090,000. Surcharge 10% = Rs. 809,000. Total **Rs. 8,899,000**. - Company: 29% = Rs. 5,800,000. After-tax profit Rs. 14,200,000. Dividend tax 15% = Rs. 2,130,000. Total **Rs. 7,930,000**. | Profit | Firm total | Company, no dividend | Company plus full dividend | | --- | --- | --- | --- | | Rs. 3,000,000 | Rs. 590,000 | Rs. 870,000 | Rs. 1,189,500 | | Rs. 10,000,000 | Rs. 3,590,000 | Rs. 2,900,000 | Rs. 3,965,000 | | Rs. 20,000,000 | Rs. 8,899,000 | Rs. 5,800,000 | Rs. 7,930,000 | In these figures the firm pays less at the two lower profits when the company distributes everything, and more at the highest. How much the company pays out changes the answer. ### What if ...? **What if the company qualifies as a small company?** Division II sets 20% instead of 29%. The definition has conditions that this page does not set out. **What if a partner is a company?** The first proviso to section 92(1) excludes the company's share from the AOP's income and taxes it at the company rate. **What if the firm's turnover is large?** The second proviso to section 92(1) removes the exemption for members' shares where turnover is three hundred million rupees or above and audited accounts are not filed with the return. ### Common mistakes - **Comparing 45% with 29% and stopping there.** The 45% applies only to the band above Rs. 5,600,000, and the company figure ignores dividend tax. - **Forgetting the surcharge.** Section 4AB applies to AOPs above Rs. 10 million, not to companies. - **Forgetting other charges.** Super tax on high earning persons and minimum tax on turnover can apply to both structures and are left out of the examples above. - **Treating tax as the only factor.** Liability, compliance and funding differences between a firm and a company are outside this corpus. ### What to check in the official text Check the Division I clause (1) table, the Division II company table and the Division III dividend rates in the First Schedule of the official PDF, since the site text does not reproduce rate tables. Read sections 4 (including section 4AB), 5, 92 and 94. ### Frequently asked #### What rate does a private limited company pay in tax year 2027? The Division II table sets 29% for any company other than a banking company or a small company. A small company, as defined in the Ordinance, pays 20%, and a banking company pays 42% for tax year 2027 and onwards. #### Are partners taxed again when they take their share of profit? Section 92(1) exempts an amount a member receives out of income on which the AOP has paid tax. The provisos can remove that exemption, for example for an AOP with turnover of three hundred million rupees or above that has not filed audited accounts with its return. #### Is dividend tax charged if the company keeps its profit? Section 5 imposes the tax on a person who receives a dividend. If no dividend is paid, there is nothing for section 5 to tax at that point, though the company has still paid its own tax under Division II. ### Citations - [Income Tax Ordinance, 2001, section 92 (Principles of taxation of associations of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#92-principles-of-taxation-of-associations-of-persons), as amended to 2026-06-30: "An association of persons shall be liable to tax separately from the members of the association and" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 94 (Principles of taxation of companies)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#94-principles-of-taxation-of-companies), as amended to 2026-06-30: "A company shall be liable to tax separately from its shareholders." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 5 (Tax on dividends)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#5-tax-on-dividends), as amended to 2026-06-30: "a tax shall be imposed, at the rate specified in Division III of Part I of the First Schedule, on every person who receives a dividend from a" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 4 (Tax on taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4-tax-on-taxable-income), as amended to 2026-06-30: "a surcharge shall be payable by every individual and association of persons at the rate of ten percent of the income tax imposed under Division I of Part I of the First Schedule where the taxable income exceeds rupees ten million" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1) (rate table for individuals and associations of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division II (rates of tax for companies) and Division III (rate of dividend tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What is the last date for a partnership firm to file its income tax return? Source: https://qanoondigest.com/faq/partnership-firms-aop/aop-return-filing-due-date Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer A partnership firm is an association of persons, not a company, so section 118(3)(b) of the Income Tax Ordinance sets its return due date: on or before 30 September following the end of the tax year. Under section 119 the Commissioner may extend this, normally by up to fifteen days, if the firm applies before the due date. **Applies to:** Partnership firms and other associations of persons in Pakistan that must file an income tax return, for tax year 2026 and later years. A partnership firm files its income tax return by 30 September after the end of its tax year. For the normal tax year 2026, which ran from 1 July 2025 to 30 June 2026, that means on or before 30 September 2026. The later company deadline does not apply to a firm. ### What does the law say? **Section 118 sets the dates.** It has separate rules for companies and for everyone else. - **Companies, section 118(2).** A company whose tax year ends between 1 January and 30 June files by 31 December following the end of the tax year. Any other company files by 30 September following the end of the tax year. - **Persons other than companies, section 118(3)(b).** A return of income for any person other than a company is due "on or before the 30th day of September next following the end of the tax year to which the return relates". Section 118(3)(a) gives salaried individuals filing through the e-portal the same 30 September date. A partnership firm is not a company. The Ordinance treats it as an association of persons (AOP), so its date comes from section 118(3)(b), not section 118(2). **Section 119 allows an extension.** A person required to file a return under section 114 may apply in writing to the Commissioner for more time. Under section 119(2) the application must be made by the due date for the return. Under section 119(3) the Commissioner may grant an extension, by order in writing, if the applicant cannot file on time because of absence from Pakistan, sickness or other misadventure, or any other reasonable cause. ### How long can the extension be? Section 119(4) says an extension "should not exceed fifteen days from the due date" unless exceptional circumstances justify a longer one. A proviso adds that where the Commissioner has not granted an extension, the Chief Commissioner may, on the taxpayer's application, grant an extension or further extension of up to fifteen days, again unless exceptional circumstances justify longer. The extension moves the filing date only. Section 119(6) says it does not change the due date for payment of tax under section 137 for the purpose of default surcharge. Section 137(1) makes the tax on a year's taxable income due on the due date for furnishing the return for that year. ### Does every firm have to file? Section 114(1) lists who must file. Clause (ab) covers every person other than a company whose taxable income for the year exceeds the amount that is not chargeable to tax. Clause (b) then catches persons not already covered who meet any of several tests, including a person who: - has been charged to tax in either of the two preceding tax years; - claims a loss carried forward for the tax year; - has obtained a National Tax Number. In practice, a firm that has registered and taken an NTN falls within section 114(1)(b)(vii) and has a filing duty even in a year when its taxable income is low. The return must follow section 114(2), which requires the prescribed form, full particulars, evidence of payment of the tax due, and the other attachments listed there. ### Worked example (illustrative figures) Rehman and Company, a two-partner furniture business in Gujranwala, uses the normal tax year of 1 July to 30 June. 1. Tax year 2026 ended on 30 June 2026. 2. Under section 118(3)(b) the return for tax year 2026 is due on or before 30 September 2026. 3. The managing partner falls ill in mid-September. On 25 September 2026 the firm applies in writing to the Commissioner under section 119(1), before the due date as section 119(2) requires. 4. If the Commissioner accepts sickness as the cause and grants the usual maximum under section 119(4), the new filing date is 15 October 2026, fifteen days after the due date. 5. The tax itself was still due on 30 September 2026 under section 137(1). Section 119(6) says the extension does not move that date for default surcharge purposes. ### What if ...? **What if the firm applies after 30 September?** Section 119(2) says the application "shall be made by the due date" for the return. An application after that date falls outside section 119. The Ordinance also refers elsewhere to dates extended by the Board, which is a different power and is not covered on this page. **What if the firm uses a special tax year?** Section 118(3)(b) is worded by reference to "the end of the tax year to which the return relates", so the 30 September date follows the end of whatever tax year the firm uses. Special tax years themselves are governed by other provisions not covered here. **What if the firm misses the date altogether?** Late filing brings a penalty and affects the firm's place on the active taxpayers' list. Those rules are explained on a separate page. ### Common mistakes - **Using the company date.** The 31 December date in section 118(2)(a) is for companies only. However a firm is organised, the Ordinance treats it as an association of persons, not a company. - **Applying for extension too late.** Section 119(2) requires the application by the due date. - **Assuming the extension covers payment.** Section 119(6) keeps the payment date fixed. - **Treating a partner's return as the firm's return.** The firm and each individual partner are separate persons and each files its own return under section 114. ### What to check in the official text Read section 118(2) and (3) together to see the split between companies and others, then section 119 in full, including the proviso to sub-section (4) and sub-section (6). Read section 114(1) for the list of persons required to file and section 137(1) for when the tax falls due. FBR may extend dates by general order in a given year; any such order is outside this corpus. ### Frequently asked #### Does a partnership firm get the December deadline that some companies get? No. The 31 December date in section 118(2)(a) applies only to a company whose tax year ends between 1 January and 30 June. A firm is a person other than a company, so section 118(3)(b) gives it 30 September. #### How long an extension can a firm get? Section 119(4) says an extension granted by the Commissioner should not exceed fifteen days from the due date unless there are exceptional circumstances. If the Commissioner does not grant one, the Chief Commissioner may, on application, grant up to fifteen days, again unless exceptional circumstances justify longer. #### Does an extension also give more time to pay the tax? No. Section 119(6) says an extension does not change the due date for payment of tax under section 137 for the purpose of default surcharge. Section 137(1) makes the tax due on the return due date. ### Citations - [Income Tax Ordinance, 2001, section 118 (Method of furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#118-method-of-furnishing-returns-and-other-documents), as amended to 2026-06-30: "on or before the 30th day of September next following the end of the tax year to which the return relates" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 119 (Extension of time for furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#119-extension-of-time-for-furnishing-returns-and-other-documents), as amended to 2026-06-30: "An extension of time under sub-section (3) should not exceed fifteen days from the due date for furnishing the return of income" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "every person (other than a company) whose taxable income for the year exceeds the maximum amount that is not chargeable to tax under this Ordinance for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 137 (Due date for payment of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#137-due-date-for-payment-of-tax), as amended to 2026-06-30: "shall be due on the due date for furnishing the taxpayer’s return of income for that year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Does super tax under section 4C apply to a partnership firm? Source: https://qanoondigest.com/faq/partnership-firms-aop/super-tax-section-4c-aop Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 4C of the Income Tax Ordinance imposes super tax on the income of every person, so a partnership firm is covered. Under the Division IIB Table substituted by the Finance Act, 2026, a firm outside the banking, petroleum and fertilizer entries pays 8% of its section 4C income where that income exceeds Rs. 500 million. **Applies to:** Partnership firms and other associations of persons in Pakistan with high income, for tax year 2027 (1 July 2026 to 30 June 2027). Super tax is not limited to companies. Section 4C charges it on the income of every person, which includes a partnership firm. After the Finance Act, 2026, the Table in Division IIB is short: most firms pay nothing under it unless their section 4C income passes Rs. 500 million, and then they pay 8% of that income. ### What does the law say? **The charge.** Section 4C(1) says a super tax "shall be imposed for tax year 2022 and onwards at the rates specified in Division IIB of Part I of the First Schedule, on income of every person". The only carve-out in the section itself is for a banking company in tax year 2022. **What "income" means.** Section 4C(2) defines income for super tax as the sum of: - (i) profit on debt, dividend, capital gains, brokerage and commission; - (ii) taxable income, other than brought forward depreciation and brought forward business losses, excluding amounts already in clause (i); - (iii) imputable income as defined in the Ordinance, excluding amounts in clause (i); and - (iv) income computed under the Fourth, Fifth, Seventh and Eighth Schedules, other than brought forward depreciation, amortization and business losses. So the base is wider than a firm's taxable income. Brought forward losses and depreciation do not reduce it, and income taxed under separate regimes, such as capital gains and profit on debt, is added in. **Payment.** Section 4C(3) says the super tax is paid on the date and in the manner specified in section 137(1), and all of Chapter X applies. Section 137(1) makes tax due on the due date for furnishing the return for that year. ### What are the rates for tax year 2027? The Finance Act, 2026 replaced the banded Table in Division IIB with this one: | S. No. | Income under section 4C and person | Rate of tax | |---|---|---| | 1 | Income of a banking company exceeding Rs. 150 million | 10% of the income | | 2 | Income of a person computed under Part I of the Fifth Schedule, exceeding Rs. 150 million, so far as it does not exceed the limit in rule 4 of that Part | 10% of the income | | 3 | Income of a person engaged in deriving income from sale of any kind of fertilizer, exceeding Rs. 150 million | 10% of the income | | 4 | Income of a person other than those in S. No. 1, 2 and 3, exceeding Rs. 500 million | 8% of the income | A typical trading, manufacturing or professional firm falls in S. No. 4. The old graduated bands, which started at 1% above Rs. 150 million, now appear only in the footnote as the superseded Table. **Exporters.** Clause (104B) of Part IV of the Second Schedule, inserted by the Finance Act, 2026, says section 4C does not apply to a person if the export proceeds realized for the tax year are more than eighty percent of its total turnover for the year. ### Worked example (illustrative figures) Qureshi and Sons, a large edible oil trading firm in Karachi, has the following for tax year 2027: - Taxable business income before brought forward losses: Rs. 490,000,000 - Profit on debt from bank deposits: Rs. 30,000,000 - Brought forward business loss from an earlier year: Rs. 40,000,000 1. Clause (i) income: profit on debt of Rs. 30,000,000. 2. Clause (ii) income: taxable income ignoring the brought forward loss, Rs. 490,000,000. 3. Section 4C income: Rs. 490,000,000 + Rs. 30,000,000 = Rs. 520,000,000. The Rs. 40,000,000 brought forward loss is not deducted. 4. The firm is not a bank, not a Fifth Schedule person and not a fertilizer seller, so S. No. 4 applies. 5. Income exceeds Rs. 500 million, so the rate is 8% of the income. 6. Super tax: Rs. 520,000,000 x 8% = Rs. 41,600,000. If the same firm's section 4C income had been Rs. 480,000,000, S. No. 4 would not reach it, and the Table sets no rate for it. ### What if ...? **What if income is only slightly above Rs. 500 million?** S. No. 4 is printed as "8% of the income" once the income exceeds Rs. 500 million. The Table does not contain a marginal relief rule, and the text does not say whether 8% is meant to apply only to the excess. Read literally, a firm just over the line pays 8% on all of its section 4C income. **What if the firm is also paying minimum tax?** An Explanation to section 113(1) excludes tax under section 4C from "tax payable or paid" when testing the minimum tax floor. Super tax and minimum tax are therefore worked out separately. **What if the firm's income is mostly export sales?** If realized export proceeds exceed eighty percent of total turnover for the year, clause (104B) takes the firm outside section 4C for that year. ### Common mistakes - **Assuming partnerships are exempt.** Section 4C(1) says "every person". - **Using the old bands.** The 1% to 10% bands for incomes from Rs. 150 million upwards were replaced for other persons by the single S. No. 4 entry. - **Deducting brought forward losses.** Section 4C(2) excludes them from the reduction. - **Leaving out separately taxed income.** Profit on debt, dividends and capital gains are part of section 4C income under clause (i). ### What to check in the official text Read section 4C in full, including sub-sections (3) to (5A) on payment and recovery. The Division IIB Table does not appear in the site text, so check it in the official PDF, where it is printed with the superseded Table in the footnotes. Read clause (104B) of Part IV of the Second Schedule if the firm exports. Tax on a partner's share of firm income is a separate question covered on other pages. ### Frequently asked #### Is super tax only for companies? No. Section 4C(1) imposes it on the income of every person, which includes an association of persons such as a partnership firm. The rate depends on the Division IIB Table. #### At what income does a partnership firm start paying super tax in tax year 2027? Unless the firm is in banking, earns income computed under Part I of the Fifth Schedule, or sells fertilizer, it falls in S. No. 4 of the Division IIB Table. That entry charges 8% of the income where the income exceeds Rs. 500 million. #### Can an exporting firm be outside super tax? Clause (104B) of Part IV of the Second Schedule, inserted by the Finance Act, 2026, says section 4C does not apply to a person whose realized export proceeds for the tax year are more than eighty percent of its total turnover for that year. ### Citations - [Income Tax Ordinance, 2001, section 4C (Super tax on high earning persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4c-super-tax-on-high-earning-persons), as amended to 2026-06-30: "A super tax shall be imposed for tax year 2022 and onwards at the rates specified in Division IIB of Part I of the First Schedule, on income of every person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IIB (Super Tax on high earning persons), Table](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clause (104B)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 137 (Due date for payment of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#137-due-date-for-payment-of-tax), as amended to 2026-06-30: "shall be due on the due date for furnishing the taxpayer’s return of income for that year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "the person shall pay as income tax for the tax year (instead of the actual tax payable under this Ordinance)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is there tax when a partnership firm is converted into a private limited company? Source: https://qanoondigest.com/faq/partnership-firms-aop/convert-partnership-to-private-limited-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 96 says no gain or loss arises when a resident AOP disposes of all the assets of a business to a resident company for non-redeemable shares, if the firm then owns all the shares, partners keep their proportions, liabilities do not exceed cost, values match and the company is not tax-exempt. The company takes over the firm's tax values. **Applies to:** Resident partnership firms and other resident AOPs planning to move their whole business into a new or existing resident company in exchange for shares. Converting a partnership firm into a private limited company is, for income tax, a disposal of the firm's business assets to the company. Section 96 of the Income Tax Ordinance, 2001 provides that no gain or loss arises on that disposal if every one of its conditions is met. In the parsed text, section 96 is printed inside the section 95 block, which gives the same relief to a sole proprietor. The rules are from the Ordinance as amended to 30 June 2026. ### What does section 96 require? Section 96(1) applies where a **resident association of persons disposes of all the assets of a business** of the association to a **resident company**. All of these conditions must be satisfied: | Clause | Condition | | --- | --- | | (a) | The consideration received by the association is a share or shares in the company, other than redeemable shares. | | (b) | The association must own all the issued shares in the company immediately after the disposal. | | (c) | Each member must have an interest in the shares in the same proportion as the member's interest in the business assets immediately before the disposal. | | (d) | The company must undertake to discharge any liability in respect of the assets transferred. | | (e) | Any such liability must not exceed the association's cost of the asset at the time of the disposal. | | (f) | The fair market value of the shares must be substantially the same as the fair market value of the assets, reduced by liabilities the company takes on. | | (g) | The company must not be exempt from tax for the tax year of the disposal. | ### What carries over to the company? Section 96(2) sets out the consequences when the conditions are met: - **Character.** Each asset keeps the character it had in the association's hands. - **Company's cost.** Depreciable assets and amortised intangibles come in at written down value immediately before the disposal. Stock-in-trade valued for tax purposes comes in at that value. Any other asset comes in at the association's cost. - **Unused deductions.** If the association was taxed separately from its members and had depreciation, initial allowance or amortisation deductions on the transferred assets that were not set off against its income, the unused amount is added to the company's deductions in the tax year of transfer. Section 96(3) says those deductions are taken into account last when deciding what was set off. - **The association's cost of its shares.** For one share, the cost of the assets transferred less liabilities taken over. For more than one share, that amount divided by the number of shares. ### How does it work in practice? Before conversion, section 92(1) taxes the firm separately from its partners. After conversion, section 94(1) taxes the company separately from its shareholders. Section 96 bridges the two by keeping the tax values unchanged, so there is no gain charged at the moment of transfer. Note the ownership structure the conditions produce: the firm itself holds the shares, and the partners hold their interests through the firm. Section 96 does not say what happens when the firm later passes those shares to the partners. If that happens on dissolution, section 79(1)(f) gives non-recognition where assets are distributed in accordance with the members' interests in capital, subject to section 79(2), which excludes a member who is non-resident when acquiring the asset. ### Worked example (illustrative figures) Malik Brothers is a Sialkot surgical instruments firm. Tariq holds 60% and Usman 40%. They form Malik Surgical (Private) Limited, a resident company that is not exempt, and transfer the whole business to it for ordinary shares. Made-up figures immediately before transfer: | Asset | Tax value | | --- | --- | | Machinery (written down value) | Rs. 12,000,000 | | Stock-in-trade (value for tax purposes) | Rs. 5,000,000 | | Land (firm's cost) | Rs. 8,000,000 | | **Total** | **Rs. 25,000,000** | The company takes over a bank loan of Rs. 3,000,000 on these assets. 1. **Liability test, clause (e).** Rs. 3,000,000 does not exceed the firm's cost of the assets. Met. 2. **Company's cost, section 96(2)(b).** Machinery Rs. 12,000,000, stock Rs. 5,000,000, land Rs. 8,000,000. 3. **Firm's cost of its shares, section 96(2)(d).** Rs. 25,000,000 minus Rs. 3,000,000 = Rs. 22,000,000. The company issues 2,200,000 shares, so each share costs the firm Rs. 22,000,000 divided by 2,200,000 = **Rs. 10**. 4. **Ownership, clauses (b) and (c).** Malik Brothers holds all 2,200,000 shares, and Tariq and Usman are interested in them 60:40, matching their interests in the assets before. 5. **Unused depreciation.** If the firm had Rs. 1,500,000 of depreciation on the machinery not yet set off, that amount is added to the company's depreciation deductions for the tax year of transfer. 6. **Value test, clause (f).** Assume the shares are worth about the same as the assets' market value less the loan. The section says "substantially the same" and gives no percentage. ### What if ...? **What if one condition fails?** Section 96 does not apply, and the transfer is treated under the ordinary rules on disposal of business assets. Those rules are not worked through on this page. **What if the firm has business losses brought forward?** Section 96(2)(c) carries over only unused depreciation, initial allowance and amortisation deductions. It says nothing about other business losses, and this page does not resolve whether they pass. **What if a sole proprietor, not a firm, is converting?** Section 95 gives the parallel rule for a resident individual, with the individual owning all the shares. ### Common mistakes - **Issuing shares directly to the partners.** Clause (b) requires the association to own all the issued shares immediately after the disposal. - **Using redeemable shares.** Clause (a) excludes them. - **Transferring only the valuable assets.** The section applies to all the assets of a business. - **Revaluing assets in the company's tax books.** Section 96(2)(b) fixes the company's cost at the firm's tax values. ### What to check in the official text Read section 96 (printed with section 95) and sections 79, 92 and 94 in the official PDF. Company registration with SECP, stamp duty, provincial property transfer taxes and sales tax registration are outside this corpus and are not covered here. ### Frequently asked #### Can the new company issue its shares straight to the partners? Section 96(1)(b) requires the association to own all the issued shares in the company immediately after the disposal. Condition (c) then requires each member's interest in those shares to match his interest in the business assets before the transfer. #### Does the company get a fresh cost for the assets it takes over? No. Under section 96(2)(b) the company takes depreciable assets and amortised intangibles at their written down value, stock-in-trade at its value for tax purposes, and other assets at the association's cost. #### What if the firm moves only some of its assets? Section 96(1) applies where the AOP disposes of all the assets of a business. A partial transfer does not fit that wording, and the ordinary disposal rules would apply instead. ### Citations - [Income Tax Ordinance, 2001, Section 96 (printed under the section 95 heading in the parsed text)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "the association must own all the issued shares in the company immediately after the disposal" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 95 (Disposal of business by individual to wholly-owned company)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#95-disposal-of-business-by-individual-to-wholly-owned-company), as amended to 2026-06-30: "Where a resident individual (hereinafter referred to as the “transferor”) disposes of all the assets of a business of the transferor to a resident company" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 79 (Non-recognition rules)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#79-non-recognition-rules), as amended to 2026-06-30: "by an association of persons to its members on dissolution of the association where the assets are distributed to members in accordance with their interests in the capital of the association." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 92 (Principles of taxation of associations of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#92-principles-of-taxation-of-associations-of-persons), as amended to 2026-06-30: "An association of persons shall be liable to tax separately from the members of the association and" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 94 (Principles of taxation of companies)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#94-principles-of-taxation-of-companies), as amended to 2026-06-30: "A company shall be liable to tax separately from its shareholders." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What happens for tax when a partner leaves or the partnership firm is dissolved? Source: https://qanoondigest.com/faq/partnership-firms-aop/partner-leaves-or-firm-dissolved-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 98A makes the firm as constituted when the return is filed responsible for filing it after a partner leaves, with income apportioned among those entitled. On dissolution, section 98B keeps the Ordinance applying and makes every former partner jointly and severally liable, while section 79 treats assets shared out by capital interest as passing without gain. **Applies to:** Partnership firms and other AOPs where a partner leaves or joins during a tax year, or where the firm stops business or is dissolved. The Income Tax Ordinance, 2001 treats a change of partners and a dissolution differently, but in both cases the firm's tax does not disappear. A partner leaving mid-year is handled by section 98A. A firm that stops business or is dissolved falls under sections 98B and 117, and the assets it hands to partners fall under section 79. The rules below are from the Ordinance as amended to 30 June 2026. ### What does the law say when a partner leaves mid-year? Section 98A covers a change in the constitution of an AOP during a tax year. Three things follow: 1. **Who files.** The liability to file the return for that tax year is on the AOP as constituted at the time the return is filed. 2. **Whose income.** The AOP's income is apportioned among the members who were entitled to receive it, so a partner who left still has the share he was entitled to for his part of the year. 3. **Recovery.** Where tax assessed on a member cannot be recovered from him, it is recovered from the AOP as constituted at the time of filing. A partner leaving can also affect the firm's carried forward losses. Section 98 applies to an AOP that is taxed separately from its members. If there is a change of fifty per cent or more in its underlying ownership, losses from before the change are not deductible after it, unless the AOP keeps conducting the same business until the loss is fully set off and does not take on a new business or investment mainly to use the loss. ### What does the law say when the firm is dissolved? Section 98B is printed inside the section 98A block in the parsed text. It covers a discontinued business and a dissolved AOP: - **Section 98B(1)**, subject to section 117, applies all the provisions of the Ordinance, so far as may be, as if no discontinuance or dissolution had taken place. Assessments, recovery and penalties can still run. - **Section 98B(2)** makes every person who was a member at the time of discontinuance or dissolution, and the legal representative of any deceased member, jointly and severally liable for the tax payable by the AOP. Section 117 adds the procedure. A person discontinuing a business gives the Commissioner written notice within fifteen days. A return is furnished for the period from the first day of the tax year of discontinuance to the date of discontinuance, and that period is treated as a separate tax year. If no notice is given, the Commissioner can serve a notice requiring a return. ### What happens to assets handed to partners? Section 79(1)(f) says no gain or loss arises on a disposal by an AOP to its members on dissolution where the assets are distributed in accordance with their interests in the capital of the AOP. Section 79(3) then treats the partner as acquiring: - an asset of the same character as it had in the firm's hands, and - at a cost equal to the firm's cost at the time of the disposal. Section 79(2) switches this off where the partner acquiring the asset is non-resident at the time of acquisition. The gain is therefore deferred, not removed. When the partner later disposes of a capital asset, section 37(2) computes the gain as A minus B, where A is the consideration received and B is the cost, which is the firm's cost carried over under section 79(3). Section 37 once contained a sub-section (4A) that gave assets received on dissolution a fair market value cost. The Finance Act, 2022 omitted it, and it is not part of the current text. ### Worked example (illustrative figures) Asma and Bilal run a Gujranwala firm with equal capital. They dissolve it on 31 December 2026. The firm owns a shop with a tax cost of Rs. 4,000,000 and a godown with a tax cost of Rs. 4,000,000. Assume both are worth the same, so giving the shop to Asma and the godown to Bilal matches their equal capital interests. **Step 1: the firm's final period.** Under section 117, the firm gives notice within fifteen days of discontinuance and furnishes a return for 1 July 2026 to 31 December 2026, treated as a separate tax year. **Step 2: the transfer.** Both partners are resident. Section 79(1)(f) applies, so the firm has no gain or loss on handing over the shop and godown. **Step 3: Asma's cost.** Under section 79(3), Asma's cost for the shop is Rs. 4,000,000, the firm's cost. **Step 4: a later sale.** Asma sells the shop in 2028 for a made-up Rs. 11,000,000. Under section 37(2): Rs. 11,000,000 minus Rs. 4,000,000 = **Rs. 7,000,000** gain. Because the shop is immovable property in Pakistan, section 37(1A) charges that gain under the head Capital Gains at the rates in Division VIII of Part I of the First Schedule, which this page does not reproduce. **Step 5: old tax.** If FBR later assesses the firm for tax year 2026, section 98B(2) lets it pursue Asma or Bilal for the full amount. ### What if ...? **What if a partner leaves and a new one joins in the same year?** Section 98A still applies. The AOP as constituted when the return is filed files it, and income is apportioned among the members entitled to it. **What if one partner is non-resident when the assets are shared out?** Section 79(2) disapplies the non-recognition rule for that partner's acquisition. How the consideration on that disposal is measured is not set out in section 79, and this page does not resolve it. **What if assets are not shared in line with capital interests?** Section 79(1)(f) is limited to distributions in accordance with the members' interests in the capital. The section does not say how an uneven split is treated. ### Common mistakes - **Assuming a departed partner is free of the firm's old tax.** Section 98B(2) makes members at the time of dissolution jointly and severally liable. - **Stepping up the partner's cost to market value.** The current section 79(3) uses the firm's cost; the old section 37(4A) rule was omitted in 2022. - **Skipping the discontinuance notice.** Section 117 sets a fifteen day notice and a return for the short period. - **Ignoring losses when a big share changes hands.** Section 98 can bar pre-change losses after a change of fifty per cent or more in underlying ownership. ### What to check in the official text Read sections 98A and 98B (printed together), 117, 79, 37 and 98 in the official PDF. The Partnership Act, deeds of dissolution, stamp duty and provincial property transfer taxes are outside this corpus and are not covered here. ### Frequently asked #### Who files the return for the year in which a partner left? Section 98A puts the filing liability on the AOP as constituted when the return is filed. The income is apportioned among the members who were entitled to receive it, and tax that cannot be recovered from a member can be recovered from the AOP as then constituted. #### Does dissolving the firm end the partners' tax exposure? No. Section 98B(1) applies the Ordinance as if no dissolution had taken place, and section 98B(2) makes everyone who was a member at the time, and the legal representative of a deceased member, jointly and severally liable for the AOP's tax. #### Is there capital gains tax when the firm hands its property to the partners on dissolution? Section 79(1)(f) says no gain or loss arises where assets are distributed to members in accordance with their interests in the capital. The partner takes the firm's cost under section 79(3), so the gain is counted when the partner later disposes of the asset. The rule does not apply to a partner who is non-resident when acquiring the asset. ### Citations - [Income Tax Ordinance, 2001, section 98A (Change in the constitution of an association of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#98a-change-in-the-constitution-of-an-association-of-persons), as amended to 2026-06-30: "liability of filing the return on behalf of the association of persons for the tax year shall be on the association of persons as constituted at the time of filing of such return" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 98B (printed under the section 98A heading in the parsed text)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "shall be jointly and severally liable for the amount of tax payable by the association of persons." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 79 (Non-recognition rules)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#79-non-recognition-rules), as amended to 2026-06-30: "by an association of persons to its members on dissolution of the association where the assets are distributed to members in accordance with their interests in the capital of the association." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 37 (Capital gains)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#37-capital-gains), as amended to 2026-06-30: "the gain arising on the disposal of a capital asset by a person shall be computed in accordance with the following formula" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 117 (Notice of discontinued business)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#117-notice-of-discontinued-business), as amended to 2026-06-30: "furnish a return of income for the period commencing on the first day of the tax year in which the discontinuance occurred and ending on the date of discontinuance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 98 (Change in control of an entity)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#98-change-in-control-of-an-entity), as amended to 2026-06-30: "Where there is a change of fifty per cent or more in the underlying ownership of an entity, any loss incurred for a tax year before the change shall not be allowed as a deduction in a tax year after the change" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What counts as an association of persons: a firm, a family business, an unregistered partnership? Source: https://qanoondigest.com/faq/partnership-firms-aop/what-counts-as-association-of-persons Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 80 of the Income Tax Ordinance, an association of persons includes a firm, a Hindu undivided family, any artificial juridical person, a limited liability partnership and a body of persons formed under foreign law, but not a company. A firm is persons who agreed to share the profits of a business run by all or any of them. **Applies to:** People running a business jointly with relatives, friends or associates, with or without a written partnership deed or registration. For income tax, an association of persons (AOP) is a group of persons treated as one taxpayer, separate from its members. Section 80 of the Income Tax Ordinance, 2001 lists what it 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. A company is excluded. ### What does the law say? Section 80(1)(b) treats as a "person" a company or association of persons "incorporated, formed, organised or established in Pakistan or elsewhere". Section 80(2)(a) then says an association of persons includes: - a firm; - a Hindu undivided family; - any artificial juridical person; - a limited liability partnership (added by the Finance Act, 2026); and - any body of persons formed under a foreign law. It "does not include a company". A company is defined separately in section 80(2)(b). 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". Section 2(32) says a "member", in relation to an AOP, includes a partner in a firm. Section 92(1) is what gives the definition its weight. It makes an AOP liable to tax separately from its members, and exempts the amount a member receives as member out of the AOP's income, where the AOP has paid tax. ### Does a partnership have to be registered to be an AOP? The Ordinance's definition of a firm has three elements: persons, an agreement to share profits, and a business carried on by all or any of them acting for all. Registration with the Registrar of Firms is not one of those elements. Nothing in section 80 makes AOP status depend on a registered deed. Registration of firms is dealt with under partnership law, which is not part of this corpus. This page does not cover what registration does or does not do under that law. ### What about a family business? A family business is not an AOP just because relatives work in it. The question under section 80(2)(c) is whether the family members have agreed to share the profits of a business carried on by all or any of them acting for all. If one person owns the business and pays relatives a wage, the elements of a firm are not described by that arrangement. If siblings have agreed to split the profits of a shop they run together, the words of the definition fit. A Hindu undivided family is named separately in section 80(2)(a). The Ordinance does not define it in section 80. ### Worked example (illustrative figures) Three situations in Multan: | Situation | Agreement to share business profits? | Result under the Ordinance | | --- | --- | --- | | Ayesha and Bilal run a catering business and split profits 50:50 under an oral understanding. No deed, no registration. | Yes | Matches the section 80(2)(c) definition of a firm, so an AOP | | Tariq owns a mobile repair shop. His nephew works there on a monthly wage of Rs. 45,000. | No | Not a firm on the definition's terms. Tariq's business is his own | | Sana and Hina jointly own a flat, 60:40, and let it out for Rs. 100,000 a month. | Property income, not a business | Section 66 applies. Each includes her share: Sana Rs. 60,000 a month, Hina Rs. 40,000 | Step by step for the flat: Rs. 100,000 × 60% = Rs. 60,000 for Sana, and Rs. 100,000 × 40% = Rs. 40,000 for Hina. Over twelve months, that is Rs. 720,000 and Rs. 480,000, totalling Rs. 1,200,000, which matches Rs. 100,000 × 12. ### What if ...? **What if co-owners run a business from the jointly owned property?** Section 66(2) says the joint-owner rule does not apply in computing income chargeable under the head Income from Business. Business income is outside section 66, so the section 80 definitions decide. **What if the co-owners' shares are not fixed?** Section 66(1) applies only where shares are "definite and ascertainable". The section does not say what happens otherwise. **What if one of the partners is a company?** The body is still an AOP, since the company is a member rather than the AOP itself. The first proviso to section 92(1) excludes the company's share from the AOP's income and taxes it at company rates. ### Common mistakes - **Treating the lack of a deed or registration as decisive.** The section 80 definition does not refer to either. - **Assuming all joint income is AOP income.** Section 66 keeps joint owners of property with definite shares out of AOP assessment for that property. - **Treating employees as partners.** A wage is not an agreement to share profits. - **Calling a company an AOP.** Section 80(2)(a) excludes companies from the definition. ### What to check in the official text Read section 80 in full, including the definition of company in section 80(2)(b), which covers bodies such as modarabas, co-operative societies and trusts established under law. Read section 2(32) for "member" and section 66 for joint owners. How a firm is registered under partnership law, and any Board guidance on documents needed for an AOP's registration, are outside this page. ### Frequently asked #### Is our partnership an AOP for tax if it is not registered with the Registrar of Firms? The definition of firm in section 80(2)(c) turns on an agreement to share the profits of a business, and the Ordinance's definition does not mention registration. Registration under partnership law is governed by a separate law that is not part of this corpus. #### My brother and I jointly own a rented shop. Are we an AOP? Section 66 says that where two or more persons own property with definite and ascertainable shares, they are not assessed as an association of persons in respect of that property. Each owner includes their own share of the income. Section 66 does not apply to income chargeable under the head Income from Business. #### Is a company that joins with others in a business an AOP? A company on its own is not an AOP, because section 80(2)(a) says an association of persons does not include a company. A company can, however, be a member of an AOP, and section 92(1) has a special rule for its share. ### Citations - [Income Tax Ordinance, 2001, section 80 (Person)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#80-person), as amended to 2026-06-30: "“firm” means 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" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "“member” in relation to an association of persons, includes a partner in a firm" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 66 (Income of joint owners)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#66-income-of-joint-owners), as amended to 2026-06-30: "the persons shall not be assessed as an association of persons in respect of the property" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 92 (Principles of taxation of associations of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#92-principles-of-taxation-of-associations-of-persons), as amended to 2026-06-30: "An association of persons shall be liable to tax separately from the members of the association" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## When does a partnership firm have to deduct tax on payments to suppliers and contractors? Source: https://qanoondigest.com/faq/partnership-firms-aop/when-aop-becomes-withholding-agent Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 153 of the Income Tax Ordinance, a partnership firm deducts tax from payments for goods, services and contracts once it is a prescribed person. That covers an AOP constituted by or under law, and any AOP with turnover of Rs. 100 million or more in any preceding tax year. It must then file quarterly statements under section 165. **Applies to:** Partnership firms and other associations of persons in Pakistan that pay suppliers, service providers or contractors, for tax year 2027 (1 July 2026 to 30 June 2027). A small partnership firm pays its suppliers in full. As it grows, the Ordinance turns it into a withholding agent: once it becomes a "prescribed person" under section 153, it must deduct income tax from payments for goods, services and contracts, deposit it, and report it every quarter. The trigger for most firms is turnover. ### What does the law say? **The duty to deduct.** Section 153(1) says every prescribed person making a payment, in full or in part and including an advance, to a resident person: - (a) for the sale of goods, including toll manufacturing, except where the payment is less than Rs. 75,000 in aggregate during a financial year; - (b) for rendering or providing services, except where the payment is less than Rs. 30,000 in aggregate during a financial year; or - (c) on the execution of a contract, other than a contract for goods or services, shall deduct tax at the time of payment from the gross amount payable, including sales tax, at the rate in Division III of Part III of the First Schedule. **Who is a prescribed person.** Section 153(7)(i) lists them. Two entries catch partnership firms: - **Clause (c):** an association of persons constituted by, or under law. - **Clause (h):** an association of persons having turnover of Rs. 100 million or above in any of the preceding tax years. Other entries can also apply to a firm, such as clause (j), a person registered under the Sales Tax Act, 1990 with turnover of Rs. 100 million or more in any of the preceding tax years, and clauses (k) and (l) for builders and plot developers. ### What else does a prescribed person have to do? **Quarterly statements.** Section 165(1) requires every person deducting tax from a payment, which includes deduction under section 153, to furnish a quarterly statement in the prescribed form. It shows each payee's name, CNIC, NTN and address, the total payments made, and the tax deducted. Under section 165(2) the statements are due: | Quarter ending | Statement due by | |---|---| | 30 September | 20 October | | 31 December | 20 January | | 31 March | 20 April | | 30 June | 20 July | A proviso says the statement must be filed "even where no withholding tax is collected or deducted during the period". **Annual statement and reconciliation.** Section 165(7) requires an annual statement within thirty days of the end of the tax year. Section 165(8) requires a statement reconciling the annual statement with the return, audited accounts or financial statements, by the due date for filing the return of income. ### Worked example (illustrative figures) Siddiqui Associates, a partnership distributing kitchen appliances in Lahore, had turnover of Rs. 115,000,000 in tax year 2026. It was not constituted under any special law. 1. Tax year 2026 is a preceding tax year for tax year 2027, and turnover in it was Rs. 100 million or more. 2. Under section 153(7)(i)(h), the firm is a prescribed person throughout tax year 2027. 3. In July 2026 it pays a local transporter Rs. 45,000 for deliveries. Services payments exceed Rs. 30,000 in aggregate for the financial year, so the firm deducts tax under section 153(1)(b) at the Division III rate. 4. It buys packing material from one supplier for Rs. 60,000 in total over the year. That is below Rs. 75,000 in aggregate, so section 153(1)(a) requires no deduction on those payments. 5. It files quarterly statements by 20 October 2026, 20 January 2027, 20 April 2027 and 20 July 2027, then the annual statement within thirty days of 30 June 2027. ### What if ...? **What if the firm fails to deduct?** Section 161(1) says a person who fails to deduct tax as required, or deducts it but does not pay it over, is personally liable to pay the amount to the Commissioner, after an opportunity of being heard under section 161(1A). Section 161(2) lets the firm recover that amount from the payee. If the payee has already paid the tax itself, section 161(1B) bars recovery from the firm but charges default surcharge at twelve percent per annum for the period of default. **What if the firm files a statement late?** Entry 1A of the Table in section 182(1) sets a penalty of Rs. 50,000 where the tax withheld was paid by its due date and the statement is filed within ninety days of its due date. In all other cases the penalty is Rs. 2,500 for each day of default, with a minimum of Rs. 10,000. **What if the payee has an exemption certificate?** Section 153(4) lets the Commissioner, on the payee's application, allow payment after deduction at a reduced rate, or, for a public limited company, without deduction. The firm would act on the certificate the payee holds. ### Common mistakes - **Waiting for the current year's turnover.** Clause (h) looks back at "any of the preceding tax years". - **Ignoring small aggregates.** The Rs. 75,000 and Rs. 30,000 limits are per financial year in aggregate, not per invoice. - **Skipping nil statements.** The proviso to section 165(1) requires a statement even when nothing was deducted. - **Deducting on the net amount.** Section 153(1) applies to the gross amount payable, including sales tax. ### What to check in the official text Read section 153(1), the definitions in section 153(7), and sub-section (5) for payments outside the section. Read section 165 in full for statement dates, and section 161 for the consequences of not deducting. The rates are in Division III of Part III of the First Schedule; check them in the official PDF, since the site text drops tables. Rent paid by a firm has its own withholding rule, covered on a separate page. ### Frequently asked #### Our firm crossed Rs. 100 million turnover last year. Do we deduct tax this year? Yes. Clause (h) of the prescribed person definition in section 153(7) covers an association of persons having turnover of one hundred million rupees or above in any of the preceding tax years. Turnover in the previous tax year is enough. #### Do we deduct tax on every small purchase? No. Section 153(1)(a) excludes goods payments of less than Rs. 75,000 in aggregate during a financial year, and section 153(1)(b) excludes services payments of less than Rs. 30,000 in aggregate during a financial year. #### What happens if the firm does not deduct? Section 161(1) makes the firm personally liable to pay the tax it should have deducted. If the payee has since paid the tax, section 161(1B) instead charges default surcharge at twelve percent per annum from the date of failure to the date the tax was paid. ### Citations - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "an association of persons constituted by, or under law" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 165 (Statements)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#165-statements), as amended to 2026-06-30: "Provided that every person as provided in sub-section (1) shall be required to file withholding statement even where no withholding tax is collected or deducted during the period" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 161 (Failure to pay tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#161-failure-to-pay-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be personally liable to pay the amount of tax to the Commissioner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 182 (Offences and penalties)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182-offences-and-penalties), as amended to 2026-06-30: "Any person who commits any offence specified in column (2) of the Table below shall, in addition to and not in derogation of any punishment to which he may be liable under this Ordinance or any other law, be liable to the penalty mentioned against that offence in column (3) thereof" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (rates of deduction under section 153)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Which professional firms pay a 40% top rate instead of 45%? Source: https://qanoondigest.com/faq/partnership-firms-aop/professional-firms-40-percent-top-rate Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer A proviso to clause (1) of Division I of the First Schedule cuts the 45% rate at serial 6 to 40% for an association of persons that is a professional firm prohibited from incorporating by law or by its regulator's rules. Only the rate on income above Rs. 5,600,000 changes. The Ordinance does not define professional firm. **Applies to:** Partnership firms of professionals, such as lawyers or accountants, whose law or regulator's rules bar them from forming a company, with taxable income above Rs. 5,600,000 in tax year 2027. A professional firm organised as an association of persons (AOP) pays 40% instead of 45% on the top band of the tax table, but only if a law or its professional regulator's rules stop it from becoming a company. The concession sits in a proviso to clause (1) of Division I of Part I of the First Schedule to the Income Tax Ordinance, 2001, and it touches only the rate on taxable income above Rs. 5,600,000. ### What does the law say? Clause (1) of Division I sets the slab table for every individual and association of persons except a salaried individual. Its last row, serial 6, charges Rs. 1,610,000 plus 45% of the amount exceeding Rs. 5,600,000. The proviso that follows the table reads, in the official text: "Provided that in the case of an association of persons that is a professional firm prohibited from incorporating by any law or the rules of the body regulating their profession, the 45% rate of tax mentioned against serial number 6 of the Table shall be 40%." Three conditions come out of those words: 1. The taxpayer is an **association of persons**. Section 80(2)(a) says this includes a firm, and 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. 2. The AOP is a **professional firm**. 3. It is **prohibited from incorporating** by a law or by the rules of the body that regulates the profession. Section 92(1) still applies to such a firm: it is taxed separately from its partners, and a partner's share out of income on which the firm has paid tax is exempt. ### What does the law leave undefined? - **"Professional firm"** is not defined in the proviso, and the Ordinance does not list the professions it has in mind. - **Which laws or rules count** is not stated. The proviso does not name any statute or regulator. Whether a particular profession's rules bar incorporation is a question of those rules, which are outside this corpus. - **Mixed firms.** The proviso does not say how it applies to a firm whose partners belong to different professions, or that carries on professional and non-professional work. The same wording, "a professional firm prohibited from incorporating by any law or the rules of the body regulating the profession", appeared in the old section 92(2), which the Finance Act, 2007 omitted. The old version made such firms pass-through entities. The current proviso does not do that; it only lowers one rate. ### Worked example (illustrative figures) **A mid-sized firm.** A Lahore firm of advocates, assumed to be barred from incorporating by its regulator's rules, has made-up taxable income of Rs. 8,000,000 for tax year 2027. 1. Amount above Rs. 5,600,000: Rs. 2,400,000. 2. At 45%: Rs. 1,610,000 + Rs. 1,080,000 = Rs. 2,690,000. 3. At 40% under the proviso: 40% of Rs. 2,400,000 = Rs. 960,000. Tax: Rs. 1,610,000 + Rs. 960,000 = **Rs. 2,570,000**. 4. Difference: Rs. 120,000, which is 5% of Rs. 2,400,000. 5. Taxable income does not exceed Rs. 10 million, so no surcharge. **A larger firm.** The same firm with made-up taxable income of Rs. 20,000,000. 1. Amount above Rs. 5,600,000: Rs. 14,400,000. 2. At 40%: Rs. 5,760,000. Division I tax: Rs. 1,610,000 + Rs. 5,760,000 = Rs. 7,370,000. 3. Surcharge under section 4AB, since taxable income exceeds Rs. 10 million: 10% of Rs. 7,370,000 = Rs. 737,000. 4. Total: **Rs. 8,107,000**, before credits and any super tax. 5. At 45% the Division I tax would be Rs. 1,610,000 + Rs. 6,480,000 = Rs. 8,090,000, surcharge Rs. 809,000, total Rs. 8,899,000. The proviso saves Rs. 792,000. ### What if ...? **What if the firm's income is Rs. 5,600,000 or less?** Serial 6 never applies, so the proviso makes no difference. The lower rows of the table are the same for every AOP. **What if the profession allows incorporation but the partners chose a partnership?** The proviso depends on being "prohibited from incorporating". A firm that could incorporate but has not does not meet that wording and stays at 45%. **What if a partner is a company?** The first proviso to section 92(1) excludes the company's share from the AOP's total income and taxes the company at the company rate. The 40% proviso then applies to the AOP's remaining income, if the AOP otherwise qualifies. ### Common mistakes - **Applying 40% across the board.** Only the 45% at serial 6 becomes 40%. - **Reducing the Rs. 1,610,000 fixed amount.** The proviso changes the rate, not the fixed amount. - **Claiming it as a sole practitioner.** The proviso is limited to an association of persons. - **Forgetting the surcharge.** Section 4AB applies to AOPs whose taxable income exceeds Rs. 10 million, including professional firms. ### What to check in the official text Read clause (1) of Division I of Part I of the First Schedule and the proviso after its table in the official PDF; the proviso runs across a page break there. Read section 92(1) and section 80(2). For whether a particular profession is barred from incorporating, check the law or rules of that profession's regulator, which this site does not hold. ### Frequently asked #### Does the 40% rate apply to all of a professional firm's income? No. The proviso changes only the 45% rate mentioned against serial number 6 of the table. The lower bands and the fixed amount of Rs. 1,610,000 at serial 6 are unchanged, so the saving is 5% of the income above Rs. 5,600,000. #### Does a lawyer or accountant practising alone get the 40% rate? The proviso speaks of an association of persons that is a professional firm. An individual practising in their own name is not an association of persons, so the proviso does not cover them and serial 6 stays at 45%. #### Which professions qualify? The Ordinance does not list them. The test is whether the firm is prohibited from incorporating by any law or by the rules of the body regulating the profession, and those laws and rules are outside the Income Tax Ordinance. ### Citations - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1), proviso (professional firms)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1) (rate table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 92 (Principles of taxation of associations of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#92-principles-of-taxation-of-associations-of-persons), as amended to 2026-06-30: "An association of persons shall be liable to tax separately from the members of the association and" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 80 (Person)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#80-person), as amended to 2026-06-30: "“firm” means 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" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 4 (Tax on taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4-tax-on-taxable-income), as amended to 2026-06-30: "a surcharge shall be payable by every individual and association of persons at the rate of ten percent of the income tax imposed under Division I of Part I of the First Schedule where the taxable income exceeds rupees ten million" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 4AB (surcharge)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Why does my exempt share of profit from the AOP increase the tax on my salary or rent? Source: https://qanoondigest.com/faq/partnership-firms-aop/aop-share-pushes-other-income-higher-rate Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 88 of the Income Tax Ordinance computes a partner's tax with the formula (A/B) x C. A and B treat the exempt AOP share under section 92(1) as if it were taxable, which fixes an average rate. That rate is then applied only to C, the partner's actual taxable income, so the share is untaxed but lifts the rate. **Applies to:** Individuals who receive an exempt share of profit from a partnership firm or other AOP and also have taxable income such as rent, business income or salary, for tax year 2027. Your share of profit from a firm is exempt, but the Ordinance does not let it vanish from the picture. Section 88 of the Income Tax Ordinance, 2001 uses the exempt share to find the average rate you would pay if all your income were taxed together, and then applies that rate to your other income alone. The result is that rent, business income or salary is taxed at a higher rate than it would be on its own. ### What does the law say? Section 92(1) makes an association of persons (AOP) liable to tax separately from its members. Where the AOP has paid tax, the amount a member receives in that capacity out of the AOP's income is exempt. Section 88 then applies when, for a tax year, an individual has taxable income and also derives an amount exempt under section 92(1). The tax payable on the individual's taxable income is computed with this formula, as printed in the official text: **(A/B) x C** | Letter | Meaning in section 88 | | --- | --- | | A | The tax that would be assessed to the individual for the year if the exempt amount under section 92(1) were chargeable to tax | | B | The individual's taxable income for the year if that exempt amount were chargeable to tax | | C | The individual's actual taxable income for the year | A divided by B is an average rate on the combined figure. Multiplying by C applies that average rate only to the income that is actually taxable. ### How does it work in practice? The partner works out tax twice in effect. First, on a notional income made up of the actual taxable income plus the exempt AOP share, using the slab table that applies to that individual. Second, that tax is scaled down to the actual taxable income. Because the slab tables are progressive, the average rate on the larger notional income is higher than the average rate on the actual income alone. For tax year 2027 a non-salaried individual uses clause (1) of Division I of Part I of the First Schedule, which rises from 0% up to Rs. 600,000 to 45% above Rs. 5,600,000. Rent counts here because section 15(1) makes rent chargeable under the head "Income from Property", so it forms part of taxable income. ### Worked example (illustrative figures) Farhan is a partner in a textile trading firm in Faisalabad. For tax year 2027 his made-up figures are: - Exempt share of profit from the firm, which has paid its tax: Rs. 3,600,000. - Taxable income from renting out a shop: Rs. 2,400,000. - No salary. Step by step, using clause (1): 1. **B** = Rs. 2,400,000 + Rs. 3,600,000 = Rs. 6,000,000. 2. **A** = tax on Rs. 6,000,000. The band above Rs. 5,600,000 is Rs. 1,610,000 plus 45% of the excess. Excess: Rs. 400,000. 45% of Rs. 400,000 = Rs. 180,000. A = Rs. 1,610,000 + Rs. 180,000 = Rs. 1,790,000. 3. **C** = Rs. 2,400,000. 4. Tax = (1,790,000 / 6,000,000) x 2,400,000. Since 2,400,000 / 6,000,000 = 0.4, tax = 1,790,000 x 0.4 = **Rs. 716,000**. For comparison, tax on Rs. 2,400,000 on its own under clause (1): the band from Rs. 1,600,000 to Rs. 3,200,000 is Rs. 170,000 plus 30% of the excess over Rs. 1,600,000. Excess: Rs. 800,000. 30% of that is Rs. 240,000. Tax: Rs. 410,000. So the exempt share lifts Farhan's tax on his rent from Rs. 410,000 to Rs. 716,000, an increase of Rs. 306,000. His Rs. 3,600,000 share itself is not taxed. ### What if ...? **What if my other income is a salary?** Clause (2) of Division I applies different, lower rates where salary exceeds 75% of an individual's taxable income. Section 88 does not say in so many words whether that 75% test, when working out A, is applied to taxable income with or without the exempt share. The text leaves this open, so the choice of table for A in a salaried case is not settled by the section itself. **What if I have no taxable income apart from the share?** Section 88 applies only where the individual "has taxable income". With C at nil, the formula gives nil tax. **What if the AOP's share is not exempt?** If the second proviso to section 92(1) removes the exemption (an AOP with turnover of Rs. 300 million or more that did not file audited financial statements), the share is not an amount exempt under section 92(1), and section 88 is not the route for it. ### Common mistakes - **Adding the share to taxable income.** The share is in A and B only. C is the actual taxable income. - **Ignoring the share because it is exempt.** Section 88 is written precisely so the share counts towards the rate. - **Using a flat rate.** A is computed on the full slab table, not by multiplying by the top rate. - **Assuming a company partner is covered.** Section 88 speaks of "an individual". A company member's share is dealt with by the first proviso to section 92(1). ### What to check in the official text Read section 88 in the official PDF, where the formula line "(A/B) x C" is printed; the site text of the section loses that line in extraction. Read section 92(1) with its provisos. Check the slab tables in clauses (1) and (2) of Division I of Part I of the First Schedule, which the site text also drops. ### Frequently asked #### Is my AOP share being taxed twice? No. Section 92(1) keeps the share itself exempt, and section 88 applies the tax only to your actual taxable income, the C in the formula. The share only affects the rate at which that other income is taxed. #### What if the AOP share is my only income? Section 88 applies where an individual has taxable income and also derives an amount exempt under section 92(1). If your actual taxable income is nil, C is zero and the formula produces no tax. #### Which rate table is used to work out A? A is the tax that would be assessed if the exempt share were chargeable, so it uses the rate table that applies to you. For an individual who is not salaried, that is clause (1) of Division I of Part I of the First Schedule. ### Citations - [Income Tax Ordinance, 2001, section 88 (An individual as a member of an association of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#88-an-individual-as-a-member-of-an-association-of-persons), as amended to 2026-06-30: "the amount of tax payable on the taxable income of the individual shall be computed in accordance with the following formula" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 92 (Principles of taxation of associations of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#92-principles-of-taxation-of-associations-of-persons), as amended to 2026-06-30: "amount received by a member of the association in the capacity as member out of the income of the association shall be exempt from tax" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 15 (Income from property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#15-income-from-property), as amended to 2026-06-30: "shall be chargeable to tax in that year under the head “Income from Property”" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1) (rate table)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- # Companies (mid-size and large) Corporate tax rate, super tax, minimum tax, dividends and withholding duties. ## What is Alternative Corporate Tax under section 113C, when does 17% of accounting profit apply, and which companies are outside it? Source: https://qanoondigest.com/faq/companies/alternative-corporate-tax-section-113c Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Alternative Corporate Tax is a floor based on book profit. Section 113C of the Income Tax Ordinance makes a company pay the higher of its corporate tax and 17% of accounting profit before tax, after removing amounts listed in sub-section (8) such as exempt income. It does not apply to taxpayers under the Fourth, Fifth and Seventh Schedules. **Applies to:** Companies in Pakistan taxed under Division II of Part I of the First Schedule or under minimum tax, whose accounting profit is high compared with their taxable income. Alternative Corporate Tax, often shortened to ACT, is a second floor on company tax. Minimum tax under section 113 looks at turnover. ACT under section 113C looks at the profit shown in the company's own financial statements. Where a company reports a healthy book profit but a small taxable income, ACT can decide what it pays. ### What does the law say? Section 113C(1) applies "for tax year 2014 and onwards". It says the tax payable by a company, in respect of income subject to tax under Division II of Part I of the First Schedule or minimum tax under any provision of the Ordinance, "shall be higher of the Corporate Tax or Alternative Corporate Tax." Three definitions in section 113C(2) do the work: | Term | What section 113C(2) says | |---|---| | Accounting income, clause (a) | Accounting profit before tax for the tax year, as disclosed in the financial statements or as adjusted under sub-section (7) or (11), excluding the share from an associate recognised under the equity method | | Alternative Corporate Tax, clause (b) | Tax at seventeen per cent of accounting income less the amounts in sub-section (8), determined under sub-section (7) | | Corporate tax, clause (c) | The higher of tax payable under Division II of Part I of the First Schedule and minimum tax payable under any provision of the Ordinance | Section 113C(3) treats accounting income, less the sub-section (8) exclusions, as taxable income for the purpose of the section. ### What is taken out of accounting income? Section 113C(8) lists amounts excluded from accounting income. Our copy of the Ordinance shows these items: - (i) exempt income; - (ii) income which is subject to tax other than under Division II of Part I of the First Schedule or minimum tax under any provision of the Ordinance; and - (xii) income subject to the tax credits under the sections named in that item. The numbering jumps from (ii) to (xii), and the footnotes record that items (iv) and (v) were omitted by the Finance Act, 2015. Our copy does not show items (iii) to (xi). Read the full list in the official PDF before relying on it. Section 113C(7) requires expenses to be apportioned between the excluded amounts and the amount treated as taxable income. So excluded income is removed net of the expenses that relate to it, not gross. Section 113C(10) allows certain tax credits against ACT, and section 113C(11) lets the Commissioner adjust accounting income on the basis of the historical accounting pattern after giving the company a hearing. ### Which companies are outside it? - **Fourth, Fifth and Seventh Schedule taxpayers.** Section 113C(9) says the section does not apply to "taxpayers chargeable to tax in accordance with the provisions contained in the Fourth, Fifth and Seventh Schedules". This page does not describe those Schedules. - **LNG terminals.** Clause (11D) of Part IV of the Second Schedule says section 113C does not apply to LNG Terminal Operators and LNG Terminal Owners. - **Taxpayers that are not companies.** Section 113C(1) speaks of "tax payable by a company". Individuals and associations of persons are not within it. ### Worked example (illustrative figures) Indus Foods Ltd in Faisalabad is a resident company that is not a small company or a banking company, so its Division II rate for tax year 2027 is 29%. Its business is not listed separately in Division IX, so minimum tax is 1.25% of turnover. All amounts are invented. 1. Accounting profit before tax: Rs. 100,000,000. 2. Exempt income included in that profit, net of expenses apportioned to it under sub-section (7): Rs. 10,000,000. 3. Base for ACT: Rs. 100,000,000 - Rs. 10,000,000 = Rs. 90,000,000. 4. ACT: Rs. 90,000,000 x 17% = Rs. 15,300,000. 5. Taxable income under the normal rules, after tax depreciation and other deductions: Rs. 40,000,000. Division II tax: Rs. 40,000,000 x 29% = Rs. 11,600,000. 6. Turnover: Rs. 600,000,000. Minimum tax: Rs. 600,000,000 x 1.25% = Rs. 7,500,000. 7. Corporate tax is the higher of step 5 and step 6: Rs. 11,600,000. 8. Tax payable is the higher of corporate tax and ACT: Rs. 15,300,000. 9. The excess, Rs. 15,300,000 - Rs. 11,600,000 = Rs. 3,700,000, is carried forward under section 113C(4) and (5). If the company's taxable income had been close to its accounting profit, Division II tax at 29% would normally exceed ACT at 17%, and ACT would change nothing. ### What if ...? **What if the company has an accounting loss?** Then accounting income is negative and ACT at 17% produces nothing to compare. The company still faces minimum tax under section 113 if its normal tax is nil or low. **What if taxes other than Division II tax apply?** An Explanation at the end of section 113C says taxes payable other than under Division II remain payable in the mode and manner of their own provisions. This page does not deal with super tax. ### Common mistakes - **Applying 17% to gross accounting profit.** The sub-section (8) exclusions come off first, with expenses apportioned under sub-section (7). - **Comparing ACT only with Division II tax.** Corporate tax already means the higher of Division II tax and minimum tax. - **Treating ACT paid over corporate tax as lost.** Sub-sections (4) and (5) carry the excess forward, for up to ten tax years. ### What to check in the official text Read section 113C in full in the official PDF, particularly the complete list in sub-section (8), which our copy does not show in full, and the credits named in sub-section (10). Check the Fourth, Fifth and Seventh Schedules if your business may fall under them, and clause (11D) of Part IV of the Second Schedule. ### Frequently asked #### What is the rate of Alternative Corporate Tax? Seventeen per cent. Section 113C(2)(b) defines Alternative Corporate Tax as tax at seventeen per cent of accounting income less the amounts excluded under sub-section (8). #### What is accounting income for section 113C? Section 113C(2)(a) defines it as the accounting profit before tax for the tax year as disclosed in the financial statements, or as adjusted under sub-section (7) or (11), excluding the share from an associate recognised under the equity method. #### Which companies are outside Alternative Corporate Tax? Section 113C(9) says the section does not apply to taxpayers chargeable under the Fourth, Fifth and Seventh Schedules. Clause (11D) of Part IV of the Second Schedule also takes LNG Terminal Operators and LNG Terminal Owners out of section 113C. ### Citations - [Income Tax Ordinance, 2001, section 113C (Alternative Corporate Tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113c-alternative-corporate-tax), as amended to 2026-06-30: "shall be higher of the Corporate Tax or Alternative Corporate Tax." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113C (Alternative Corporate Tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113c-alternative-corporate-tax), as amended to 2026-06-30: "the tax at a rate of seventeen per cent of a sum equal to accounting income less the amounts, as specified in sub-section (8)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113C (Alternative Corporate Tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113c-alternative-corporate-tax), as amended to 2026-06-30: "The provisions of this section shall not apply to taxpayers chargeable to tax in accordance with the provisions contained in the Fourth, Fifth and Seventh Schedules." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "no tax is payable or paid by the person for a tax year or the tax payable or paid by the person for a tax year is less than" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division II (Rates of Tax for Companies), Table](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clause (11D)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can Alternative Corporate Tax paid over normal tax be carried forward, and for how long? Source: https://qanoondigest.com/faq/companies/alternative-corporate-tax-carry-forward Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 113C(4) of the Income Tax Ordinance carries the excess of Alternative Corporate Tax over corporate tax forward for adjustment against Division II tax in the following year. Sub-section (5) rolls any unused balance on, but for no more than ten tax years after the year the excess was first computed. Amended assessments change the amount. **Applies to:** Companies that paid Alternative Corporate Tax under section 113C because it was higher than their Division II tax and minimum tax for the year. A company that pays Alternative Corporate Tax (ACT) because it is higher than its normal tax does not lose the difference. Section 113C of the Income Tax Ordinance, 2001 turns the excess into an amount that can be set against future corporate tax. The window is much longer than for minimum tax: up to ten tax years. ### What does the law say? Section 113C(1) makes a company's tax the higher of corporate tax and ACT. Corporate tax, under section 113C(2)(c), is itself the higher of Division II tax and minimum tax. When ACT wins, sub-sections (4) to (6) deal with the difference. - **Sub-section (4).** "The excess of Alternative Corporate Tax paid over the Corporate Tax payable for the tax year shall be carried forward and adjusted against the tax payable under Division II of Part I of the First Schedule, for following year." - **Sub-section (5).** If the excess is not wholly adjusted, the balance is carried forward to the following tax year and adjusted in the same way, "and so on", but it "cannot be carried forward to more than ten tax years immediately succeeding the tax year for which the excess was first computed". - **Explanation to sub-section (5).** The ACT mechanism "shall not prejudice or affect the entitlement of the taxpayer regarding carrying forward and adjustment of minimum tax referred to in section 113". - **Sub-section (6).** If corporate tax or ACT is enhanced or reduced by an amendment or by any order under the Ordinance, the excess to be carried forward is reduced or enhanced accordingly. ### How is it different from the minimum tax carry forward? | | ACT excess, section 113C | Minimum tax excess, section 113 | |---|---|---| | What is carried forward | ACT paid over corporate tax | Minimum tax paid over tax at normal rates (the whole amount in a nil-tax year) | | Adjusted against | Tax under Division II of Part I of the First Schedule | Tax under clause (1) of Division I or Division II of Part I of the First Schedule | | Period | Up to ten tax years after the year first computed | Two tax years immediately after the year of payment | | Effect of amendments | Sub-section (6) adjusts the amount | Not addressed in the same words | Because the Explanation keeps the two separate, a company can carry both kinds of amount at the same time, each with its own period. Section 113C does not set an order in which the two are used when both are available in the same year, and this page does not supply one. ### Worked example (illustrative figures) Indus Foods Ltd in Faisalabad is a resident company taxed at 29% under Division II for tax year 2027. All amounts are invented. **Tax year 2027** 1. ACT: Rs. 15,300,000. 2. Division II tax: Rs. 11,600,000. Minimum tax: Rs. 7,500,000. Corporate tax, the higher of these two: Rs. 11,600,000. 3. Tax payable, the higher of corporate tax and ACT: Rs. 15,300,000. 4. Excess carried forward under sub-section (4): Rs. 15,300,000 - Rs. 11,600,000 = Rs. 3,700,000. **Tax year 2028** 1. Division II tax: Rs. 14,000,000. Minimum tax: Rs. 8,000,000. ACT: Rs. 10,200,000. 2. Corporate tax is Rs. 14,000,000, which is higher than ACT, so the company's tax before adjustment is Rs. 14,000,000. 3. Adjust the carried forward excess against Division II tax: Rs. 14,000,000 - Rs. 3,700,000 = Rs. 10,300,000. 4. The Rs. 3,700,000 is fully used in the first year after it arose, well inside the ten-year limit. **If the tax year 2027 assessment is later amended** 1. Suppose an amended assessment raises tax year 2027 Division II tax to Rs. 12,600,000, while ACT stays at Rs. 15,300,000. 2. The excess becomes Rs. 15,300,000 - Rs. 12,600,000 = Rs. 2,700,000. 3. Sub-section (6) reduces the amount to be carried forward to Rs. 2,700,000. If Rs. 3,700,000 had already been adjusted in tax year 2028, the section does not itself say how the difference is recovered. ### What if ...? **What if the following year's Division II tax is small?** Only part of the excess can be adjusted that year. Sub-section (5) carries the balance to the next year, and so on up to the ten-year limit. **What if the company pays ACT again the next year?** Section 113C does not say whether an earlier excess can be adjusted in a year when ACT is again the higher figure, or whether an adjustment can take the year's tax below that year's ACT or minimum tax. The section is silent, and this page does not resolve it. **What if the company pays minimum tax in the later year?** The excess is adjusted against Division II tax only. Sub-section (4) does not mention minimum tax as a tax against which it can be set. ### Common mistakes - **Using the minimum tax period.** ACT excess runs for up to ten tax years under section 113C(5), not the two years in section 113. - **Merging the two balances.** The Explanation keeps ACT and minimum tax carry forwards separate. - **Ignoring amended assessments.** Sub-section (6) changes the carried forward amount when either tax is enhanced or reduced. - **Counting from the wrong year.** The ten years run from the year the excess was "first computed". ### What to check in the official text Read section 113C(1), (2)(c) and (4) to (6), including the Explanation to sub-section (5), and compare them with section 113(2)(c) and its provisos. Keep a schedule of each year's excess, the year it was first computed, and any change made by an amended assessment or order. ### Frequently asked #### How long can excess Alternative Corporate Tax be carried forward? Up to ten tax years. Section 113C(5) says the excess cannot be carried forward to more than ten tax years immediately succeeding the tax year for which it was first computed. #### Against which tax is excess Alternative Corporate Tax adjusted? Against tax payable under Division II of Part I of the First Schedule, the normal corporate rate table. Section 113C(4) names that Division and no other. #### Does it replace the minimum tax carry forward under section 113? No. The Explanation to section 113C(5) says the ACT mechanism shall not prejudice or affect the carry forward and adjustment of minimum tax under section 113. The two run separately, with two tax years for minimum tax and up to ten for ACT. ### Citations - [Income Tax Ordinance, 2001, section 113C (Alternative Corporate Tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113c-alternative-corporate-tax), as amended to 2026-06-30: "The excess of Alternative Corporate Tax paid over the Corporate Tax payable for the tax year shall be carried forward and adjusted against the tax payable under Division II of Part I of the First Schedule, for following year." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113C (Alternative Corporate Tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113c-alternative-corporate-tax), as amended to 2026-06-30: "the said excess cannot be carried forward to more than ten tax years immediately succeeding the tax year for which the excess was first computed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113C (Alternative Corporate Tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113c-alternative-corporate-tax), as amended to 2026-06-30: "shall not prejudice or affect the entitlement of the taxpayer regarding carrying forward and adjustment of minimum tax referred to in section 113" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "tax years immediately succeeding the tax year for which the amount was paid." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division II (Rates of Tax for Companies), Table](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Which company expenses are disallowed for cash payments, purchases from people without an NTN, or failing to integrate with FBR? Source: https://qanoondigest.com/faq/companies/company-expenses-disallowed-cash-non-ntn Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 21 of the Income Tax Ordinance disallows expenditure over Rs. 250,000 per account head not paid through banking or digital channels (clauses (l) and (la)), 10% of purchases from non-NTN holders (clause (q)), 3% of expenses where required integration is missing (clause (r)), and 50% of expenses on sales paid over Rs. 200,000 per invoice in cash (clause (s)). **Applies to:** Companies with business income, especially traders and manufacturers that buy from small suppliers or receive cash from customers. Section 21 of the Income Tax Ordinance, 2001 is a list of amounts a business may not deduct when it computes income under the head "Income from Business". Four of its clauses aim at the cash economy, and a company that pays or is paid in cash, or buys from unregistered suppliers, can lose part of its deductions even when the expense was genuine. ### What does the law say? As amended to 30 June 2026, the relevant clauses of section 21 read as follows in plain terms: | Clause | What is disallowed | Main exceptions in the clause | |---|---|---| | (l) | Expenditure under a single account head over Rs. 250,000 in aggregate, not paid by crossed cheque, draft, pay order or other crossed banking instrument from the business bank account | Expenses up to Rs. 25,000; utility bills, freight, travel fare, postage, taxes and statutory payments | | (la) | For a company, expenditure under a single account head over Rs. 250,000 in aggregate, not made "by digital means" from the business bank account notified under section 114A | Same exceptions as clause (l) | | (q) | Ten percent of claimed expenditure attributable to purchases from persons who are not NTN holders | Agricultural produce: applies only to purchases from a middleman; Board may exempt by notification | | (r) | Three percent of the expenditure claimed by a person who fails to install electronic resource or to act as an integrated enterprise as required by law | Subject to the method and procedure to be prescribed | | (s) | Fifty percent of the expenditure claimed in respect of a sale where more than Rs. 200,000 was received against a single invoice otherwise than through a banking channel or digital means | None stated | Clause (l) accepts online transfers between business accounts and credit card payments as banking channel transactions, if they can be verified from both bank statements. ### Does clause (la) apply to companies now? Clause (la) carries its own proviso: it "shall be effective from such date as the Board may notify". A further proviso to clause (l) says clause (l) stops applying to a company from the date clause (la) takes effect. So until the Board issues that notification, a company is tested under clause (l), which accepts crossed banking instruments. After it, only digital payment from the declared business account under section 114A satisfies the rule. This corpus does not include any such notification, so this page cannot say whether the date has been set. ### What counts as integration under clause (r)? Section 2 defines an "integrated enterprise" as a person integrated with the Board's computerized system through a licensed integrator who fulfils the integration obligations "as may be prescribed". Section 237A(3) says an integrated enterprise may not make a sale or render a service without generating fiscal invoices. Which companies are required to integrate is set by prescribed rules and Board notifications, not by section 21 itself. Clause (r) was substituted by the Finance Act, 2026 and now reads three percent. ### Worked example (illustrative figures) Ravi Trading Company (Pvt) Ltd, Lahore, claims the following for tax year 2027. All amounts are invented; the percentages are those in section 21. 1. **Purchases from non-NTN holders.** Of Rs. 40,000,000 of purchases, Rs. 6,000,000 came from suppliers with no NTN. Clause (q) disallows Rs. 6,000,000 x 10% = Rs. 600,000. 2. **Cash repairs.** Repairs and maintenance, one account head, total Rs. 400,000 for the year, all paid in cash. That exceeds Rs. 250,000 in aggregate and is not a listed exception, so the Rs. 400,000 is not deductible under clause (l), or clause (la) once in force. 3. **A cash sale.** A customer paid Rs. 750,000 in cash against one invoice. The company attributes Rs. 600,000 of its expenditure to that sale. Clause (s) disallows Rs. 600,000 x 50% = Rs. 300,000. Total added back: Rs. 600,000 + Rs. 400,000 + Rs. 300,000 = Rs. 1,300,000. Clause (s) does not say how expenditure is attributed to a particular sale. The Rs. 600,000 in step 3 is an assumption for the example, and the section leaves the method open. ### What if the supplier gets an NTN mid-year? Clause (q) looks at purchases "made from persons who are not National Tax Number holders". It does not say at what date NTN status is tested. Purchases made after the supplier obtained an NTN appear to fall outside the words of the clause, but the section does not state this. ### What if the cash expense is freight or a tax payment? Freight charges, travel fare, postage, utility bills and payment of taxes, duties, fees, fines or other statutory obligations are carved out of both clause (l) and clause (la). So are expenditures not exceeding Rs. 25,000. ### Common mistakes - **Testing each payment instead of the account head.** Clauses (l) and (la) look at expenditure under a single account head that "in aggregate" exceeds Rs. 250,000. - **Paying from a director's personal account.** Clause (la) requires payment from the business bank account declared under section 114A. - **Thinking clause (s) only hits the sale.** It disallows expenditure, not income. The sale is still fully taxable. - **Applying clause (q) to all purchases.** Only purchases from non-NTN holders are affected, and only ten percent of that expenditure. ### What to check in the official text Read section 21, clauses (l), (la), (q), (r) and (s) with their provisos, section 114A on the business bank account, and section 237A on integrated enterprises. Check whether the Board has notified the effective date for clause (la), any exemption notification under clause (q), and the rules that prescribe who must integrate under clause (r). Section 21(c), which disallows expenses where withholding tax was not deducted, is a separate test covered on its own page. ### Frequently asked #### Is a company's cash expense over Rs. 250,000 disallowed? Clause (la) of section 21 disallows a company's expenditure under a single account head that exceeds Rs. 250,000 in aggregate unless paid by digital means from the business bank account declared under section 114A. It takes effect from a date the Board notifies; until then clause (l) applies, which accepts crossed banking instruments from the business bank account. #### How much is disallowed for purchases from suppliers without an NTN? Clause (q) disallows ten percent of the claimed expenditure attributable to purchases from persons who are not National Tax Number holders. For agricultural produce it applies only to purchases from a middleman, and the Board may exempt persons by notification. #### What does clause (s) disallow? Fifty percent of the expenditure claimed in respect of a sale where the taxpayer received more than Rs. 200,000 against a single invoice otherwise than through a banking channel or digital means. ### Citations - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "made other than by digital means from business bank account of the taxpayer notified to the Commissioner under section 114A" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "ten percent of the claimed expenditure made attributable to purchases made from persons who are not National Tax Number holders" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "fifty percent of the expenditure claimed in respect of sale where the taxpayer received payment exceeding two hundred thousand rupees otherwise than through a banking channel or digital means against a single invoice" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114A (Business bank account)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114a-business-bank-account), as amended to 2026-06-30: "Every taxpayer shall declare to the Commissioner the bank account utilized by the taxpayer for business transactions." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "“integrated enterprise” means a person integrated with the" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 237A (Electronic record)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#237a-electronic-record), as amended to 2026-06-30: "In case of an integrated enterprise, no sale shall be made or service shall be rendered, as the case may be, without generating fiscal invoices as prescribed." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What happens if my company does not deduct withholding tax from a payment: do we pay it ourselves and lose the expense? Source: https://qanoondigest.com/faq/companies/company-failed-to-deduct-withholding-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 161 makes a company that fails to deduct or deposit withholding tax personally liable for that tax. Section 205(3) adds default surcharge at 12% a year. Section 21(c) disallows the expense unless the tax is paid, capped at 20% of purchases for raw materials and finished goods, and tax recovered under section 161 or 162 counts as paid. **Applies to:** Companies and other withholding agents that did not deduct tax, or deducted it but did not deposit it, and are facing an audit or a recovery order. A missed withholding deduction does not go away when the payment is made. Under the Income Tax Ordinance, 2001, as amended to 30 June 2026, it can lead to four separate consequences for the company that made the payment: the tax itself, default surcharge, a penalty, and loss of the tax deduction for the expense. ### What does the law say? **The duty to deposit.** Section 160 requires tax deducted under Division III of Part V of Chapter X, or under Chapter XII, to be paid to the Commissioner by the person who deducted it, within the time and in the manner prescribed. **Personal liability.** Section 161(1) applies where a person either fails to deduct tax as required, or deducts it and fails to pay it to the Commissioner under section 160. In both cases "the person shall be personally liable to pay the amount of tax to the Commissioner", who may pass an order and recover it. Section 161(1A) requires the person to be given an opportunity of being heard first. **Where the payee has already paid.** Section 161(1B) says that if, at the time of recovery, the tax that should have been deducted has been paid by the payee, no recovery is made from the payer. The payer instead pays default surcharge at twelve per cent a year from the date it failed to deduct to the date the tax was paid. **Default surcharge.** Section 205(3) charges default surcharge at 12 per cent a year on the amount unpaid by a person who fails to deduct tax, or fails to pay deducted tax under section 160 by the due date. It runs from the date the tax should have been deducted to the date it is paid to the Commissioner. **Penalty.** Serial No. 15 of the Table in section 182 applies to any person who fails to collect or deduct tax, or fails to pay it under section 160. The penalty is Rs. 40,000 or 10% of the amount of tax, whichever is higher. **The expense.** Section 21(c) says no deduction is allowed under "Income from Business" for any expenditure from which the person must deduct or collect tax, unless the person has paid, or deducted and paid, the tax. Two provisos follow: 1. for purchases of raw materials and finished goods, the disallowance cannot exceed twenty per cent of purchases of raw materials and finished goods; 2. recovery of tax under section 161 or 162 counts as tax paid. ### How does it work in practice? The consequences arise at different stages. Personal liability and default surcharge arise when the Commissioner passes an order after hearing the company. The penalty is a separate charge. The disallowance under section 21(c) affects the company's taxable income for the year of the expense. Because of the second proviso, once the company pays the tax under a section 161 recovery, that tax counts as paid for section 21(c). Section 161(2) lets the company recover the tax from the supplier. Section 162 gives the Commissioner a separate route to recover the tax from the supplier. Section 162(2) says this does not protect the payer from other legal action, default surcharge or disallowance of the expense. ### Worked example (illustrative figures) Sialkot Surgical Instruments Limited paid Rs. 3,000,000 to an engineering services company on 1 October 2026 without deducting tax. The service provider is on the active taxpayers' list, and the Division III rate for engineering services is 7%. An audit picks this up and the company pays the tax on 1 April 2027. 1. Tax not deducted: 3,000,000 x 7% = Rs. 210,000. Section 161(1) makes the company personally liable for this. 2. Default surcharge under section 205(3), for six months: 210,000 x 12% x 6 / 12 = Rs. 12,600. 3. Penalty under S. No. 15: the higher of Rs. 40,000 and 10% x 210,000 = Rs. 21,000. The penalty is Rs. 40,000. 4. The Rs. 3,000,000 expense: under the second proviso to section 21(c), the tax recovered under section 161 counts as paid, so the expense is not disallowed on this ground once the tax is paid. Total cash cost in this example: 210,000 + 12,600 + 40,000 = Rs. 262,600, before any amount the company recovers from the service provider under section 161(2). ### What if the missed deduction was on purchases of raw materials? Suppose the same company bought Rs. 15,000,000 of steel from suppliers without deduction and never paid the tax, and its total purchases of raw materials and finished goods for the year were Rs. 50,000,000. The first proviso says the disallowance "shall not exceed twenty per cent of purchases of raw materials and finished goods". The text does not say whether "purchases" means the company's total purchases or only the purchases affected by the failure. The two readings give different caps: - If total purchases: 50,000,000 x 20% = Rs. 10,000,000, so Rs. 10,000,000 of the Rs. 15,000,000 is disallowed. - If only the affected purchases: 15,000,000 x 20% = Rs. 3,000,000. The Ordinance does not settle which reading applies. ### Common mistakes - **Thinking the supplier's tax return cures everything.** Under section 161(1B), it removes recovery of the tax from the payer, but default surcharge still applies. - **Treating the penalty and default surcharge as alternatives.** They come from different provisions, section 182 and section 205(3). - **Assuming deducted but undeposited tax is safer.** Section 161(1)(b) covers failure to deposit in the same way as failure to deduct. - **Assuming the disallowed expense stays disallowed after the tax is paid.** The second proviso to section 21(c) treats recovery under section 161 or 162 as payment. ### What to check in the official text Read sections 21(c), 160, 161, 162 and 205(3) in full, and S. No. 15 of the section 182 Table, which the consolidated text prints as a broken table. Section 160 refers to a time and manner "as may be prescribed": the deposit deadlines are in the Income Tax Rules, not the Ordinance. Also check the proviso to section 205(3), which removes default surcharge for a period where tax due under an appeal order is paid on time and no further appeal is filed. ### Frequently asked #### If the supplier has already paid its own tax, does the company still owe the tax it failed to deduct? No. Section 161(1B) says that where the tax that should have been deducted has since been paid by the payee, no recovery is made from the payer. The payer is still liable for default surcharge at twelve percent a year from the date it failed to deduct to the date the tax was paid. #### Can the company recover the tax from the supplier? Section 161(2) gives a payer who has become personally liable the right to recover the tax from the person from whom it should have been deducted. Separately, section 162 lets the Commissioner recover it from the payee, but section 162(2) says that does not free the payer from other legal action, default surcharge or disallowance of the expense. #### Is the whole expense always disallowed? Section 21(c) disallows the expense unless the tax has been paid, or deducted and paid. For purchases of raw materials and finished goods, the first proviso caps the disallowance at twenty per cent of purchases, and the second proviso treats tax recovered under section 161 or 162 as paid. ### Citations - [Income Tax Ordinance, 2001, section 161 (Failure to pay tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#161-failure-to-pay-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be personally liable to pay the amount of tax to the Commissioner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "Provided that disallowance in respect of purchases of raw materials and finished goods under this clause shall not exceed twenty per cent of purchases of raw materials and finished goods" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 160 (Payment of tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#160-payment-of-tax-collected-or-deducted), as amended to 2026-06-30: "shall be paid to the Commissioner by the person making the collection or deduction within the time and in the manner as may be prescribed." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 205 (Default surcharge)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#205-default-surcharge), as amended to 2026-06-30: "per cent per annum on the amount unpaid computed for the period commencing on the date the amount was required to be collected or deducted and ending on the date on which it was paid to the Commissioner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 162 (Recovery of tax from the person from whom tax was not collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#162-recovery-of-tax-from-the-person-from-whom-tax-was-not-collected-or-deducted), as amended to 2026-06-30: "recover the amount not collected or deducted from the person from whom the tax should have been collected or to whom the payment was made." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 182, Table, S. No. 15 (failure to collect or deduct tax or to pay it under section 160)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What is the income tax rate for a private or public limited company in Pakistan for tax year 2027? Source: https://qanoondigest.com/faq/companies/company-income-tax-rate-pakistan Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 4 charges a company at the rates in Division II of Part I of the First Schedule. For tax year 2027 that Table sets 29% for any company other than a small or banking company, 20% for a small company, and 42% for a banking company, which paid 44% in tax year 2025 and 43% in tax year 2026. **Applies to:** Private and public limited companies, small companies and banking companies taxed on taxable income in Pakistan, and the accountants who prepare their returns. A company in Pakistan pays income tax on its taxable income at a flat rate, not on slabs. The rate depends on which of three types of company it is. The figures below come from the Income Tax Ordinance, 2001 as amended to 30 June 2026, which gives the rates for tax year 2027 (income of the year 1 July 2026 to 30 June 2027 for a company on the normal tax year). ### What does the law say? Section 4(1) imposes income tax for each tax year "at the rate or rates specified in Division I or II of Part I of the First Schedule". Division I holds the slab rates for individuals and associations of persons. Division II holds the rates for companies. Section 4(2) then computes the tax by applying that rate to the taxable income for the year and subtracting any tax credits. The Table in Division II, as substituted by the Income Tax (Amendment) Act, 2025, reads: | Type of company | Tax year 2025 | Tax year 2026 | Tax year 2027 and onwards | |---|---|---|---| | Banking company | 44% | 43% | 42% | | Small company | 20% | 20% | 20% | | Any other company | 29% | 29% | 29% | The small company and any other company rows carry a single rate in the Table, so the same figure applies in each year shown. ### Which companies fall into each row? **Any other company.** This is the ordinary row. Section 80(2)(b) defines "company" widely: a company as defined in the Companies Act, 2017, a body corporate formed under any law in Pakistan, a modaraba, a foreign incorporated body, and several others. A private limited company and a public limited company that are not banking companies and do not meet the small company test both pay 29%. The Table does not separate listed from unlisted companies. **Small company.** Clause (59AB) of section 2 defines a small company as a company registered on or after 1 July 2005 under the Companies Act, 2017 which: - has paid up capital plus undistributed reserves not exceeding fifty million rupees; - has employees not exceeding two hundred and fifty at any time during the year; - has annual turnover not exceeding two hundred and fifty million rupees; - is not formed by splitting up or reconstituting a company already in existence; and - is not a small and medium enterprise as defined in clause (59A). All five conditions have to hold. A company registered before 1 July 2005 cannot be a small company under this definition however small it is. **Banking company.** The banking row steps down from 44% to 43% to 42% over tax years 2025, 2026 and 2027. ### Worked example (illustrative figures) Three companies each report their taxable income for tax year 2027. 1. **Ravi Fabrics (Private) Limited, Faisalabad**, an ordinary private company with taxable income of Rs. 80,000,000. Rate 29%. Tax: Rs. 80,000,000 x 29% = **Rs. 23,200,000**. 2. **Margalla Soft (SMC-Private) Limited, Islamabad**, registered in 2019, capital and reserves of Rs. 30,000,000, 60 employees and turnover of Rs. 120,000,000, with taxable income of Rs. 10,000,000. It meets every condition in clause (59AB). Rate 20%. Tax: Rs. 10,000,000 x 20% = **Rs. 2,000,000**. 3. **A banking company** with taxable income of Rs. 80,000,000 (kept equal to the first example so the rates can be compared). Rate 42%. Tax: Rs. 80,000,000 x 42% = **Rs. 33,600,000**. The same income in tax year 2026 at 43% would give Rs. 34,400,000. In each case section 4(2) then subtracts tax credits, and section 4(3) sets the order: foreign tax credit first, then Part X of Chapter III credits, then credits for advance tax paid and tax deducted or collected at source. ### What if the rate in Division II is not the whole story? **What if the company has high income?** Section 4C imposes super tax at the Division IIB rates on a separately defined income. It is charged on top of the Division II tax, not instead of it. The thresholds are explained on the super tax pages linked below. **What if the company has a loss or very low profit?** The minimum tax on turnover can make a resident company pay a percentage of its turnover instead (see the linked page), and section 113C provides that tax payable by a company "shall be higher of the Corporate Tax or Alternative Corporate Tax". Section 113C(2)(b) sets Alternative Corporate Tax at seventeen per cent of adjusted accounting income. So the Division II rate is the starting point, not always the final figure. **What if the company outgrows the small company limits?** The definition is tested on the company's position, including turnover in the year. Once any condition fails, for example turnover goes above Rs. 250,000,000, the small company rate no longer fits the definition and the any other company row applies. ### Common mistakes - **Using the individual slabs for a company.** Division I slabs apply to individuals and associations of persons. A company is charged under Division II. - **Assuming a public limited company pays more than a private one.** The current Table does not distinguish them. An older version of Division II did, which is why the belief persists. - **Claiming the small company rate for an old company.** The definition requires registration on or after 1 July 2005. - **Quoting 44% for a bank in tax year 2027.** 44% is the tax year 2025 figure. The Table sets 42% for tax year 2027 and onwards. - **Forgetting super tax and minimum tax.** The 29% figure is the Division II rate only. ### What to check in the official text Read section 4, clause (59AB) of section 2 and section 80 in the official PDF of the Ordinance, then the Table in Division II of Part I of the First Schedule. The Table was substituted by the Income Tax (Amendment) Act, 2025, which is not held in this corpus as a separate instrument, so confirm the figures against the official consolidated PDF. Some companies may also have income that is taxed separately or as a final tax under section 4(4) and (5), for example dividends received, and those amounts are not taxed at the Division II rate. ### Frequently asked #### Is there a separate rate for a public limited company and a private limited company? No. The current Division II Table has three rows only: banking company, small company and any other company. A public or private limited company that is neither a banking company nor a small company falls in the any other company row at 29%. #### What rate does a banking company pay for tax year 2027? The Division II Table sets 42% for a banking company for tax year 2027 and onwards. The same Table shows 44% for tax year 2025 and 43% for tax year 2026. #### Is 29% the only tax a large company pays? Not always. Super tax under section 4C is charged separately on high incomes, and the minimum tax on turnover and section 113C can make a company pay minimum tax or Alternative Corporate Tax where these are higher than tax at the Division II rate. ### Citations - [Income Tax Ordinance, 2001, section 4 (Tax on taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4-tax-on-taxable-income), as amended to 2026-06-30: "The income tax payable by a taxpayer for a tax year shall be computed by applying the rate or rates of tax applicable to the taxpayer under this Ordinance to the taxable income of the taxpayer for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division II (Rates of Tax for Companies), Table as substituted by the Income Tax (Amendment) Act, 2025](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 80 (Person)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#80-person), as amended to 2026-06-30: "a company or association of persons incorporated, formed, organised or established in Pakistan or elsewhere" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "“Small Company” means a company registered on or after the first day of July, 2005, under the" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 4C (Super tax on high earning persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4c-super-tax-on-high-earning-persons), as amended to 2026-06-30: "A super tax shall be imposed for tax year 2022 and onwards at the rates specified in Division IIB of Part I of the First Schedule, on income of every person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113C (Alternative Corporate Tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113c-alternative-corporate-tax), as amended to 2026-06-30: "shall be higher of the Corporate Tax or Alternative Corporate Tax" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## When are a company's quarterly advance tax instalments due, how are they calculated, and does super tax go into them? Source: https://qanoondigest.com/faq/companies/company-quarterly-advance-tax-instalments Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 147(5A) makes a company pay advance tax by 25 September, 25 December, 25 March and 15 June. Each instalment is (A x B/C) - D: the quarter's turnover times last year's tax assessed over last year's turnover, less credits for the quarter. Tax assessed includes super tax under section 4C, minimum tax and Alternative Corporate Tax. **Applies to:** Companies (and associations of persons) that were charged to tax for their latest tax year and must pay quarterly advance tax under section 147. A company does not wait for its return to pay the year's tax. Section 147 of the Income Tax Ordinance, 2001 makes it pay four instalments during the year, sized by its turnover in each quarter. This page uses the Ordinance as amended to 30 June 2026, so it describes instalments for tax year 2027 (quarters from July 2026 to June 2027 for a company on the normal tax year). ### Who has to pay? Section 147(1) applies to every taxpayer whose income was charged to tax for the latest tax year, apart from income listed in clauses (b) to (d), such as dividends and other income charged separately, salary taxed at source, and income that has suffered a final tax without a tax credit. Section 147(6A) goes further for a company or association of persons: advance tax is payable even where there is no last assessed income or declared turnover, in which case the company estimates it from its quarterly turnover. ### What are the due dates? Section 147(5A) sets the dates for a company or association of persons: | Quarter | Due on or before | |---|---| | September quarter (July to September) | 25 September | | December quarter (October to December) | 25 December | | March quarter (January to March) | 25 March | | June quarter (April to June) | 15 June | Note that the June instalment is due on the 15th, before the quarter ends. ### How is each instalment calculated? Section 147(4) gives the formula for a company: **(A x B/C) - D**, where: - **A** is the company's turnover for the quarter; - **B** is the tax assessed to the company for the latest tax year; - **C** is the company's turnover for the latest tax year; and - **D** is the tax paid in the quarter for which a credit is allowed under section 168, that is tax deducted or collected at source from the company in that quarter. B/C is last year's effective tax as a share of turnover, applied to this quarter's sales. If the company does not provide its turnover, or the quarter's turnover is not known, the proviso to A takes it as one-fourth of one hundred and twenty percent of the turnover of the latest tax year for which a return was filed. ### Does super tax go into the instalments? Yes, in three places: 1. The Explanation to section 147(4) says "tax assessed" (B) includes tax under sections 4C, 113 and 113C. 2. Section 147(4AA) says tax liability under sections 4C, 113 and 113C shall also be taken into account in working out advance tax. 3. Section 4C(5A) says the provisions of section 147 apply to tax payable under section 4C. So B includes super tax, minimum tax and Alternative Corporate Tax (the higher of corporate tax or ACT under section 113C) for the latest year. ### Worked example (illustrative figures) Sialkot Surgical Exports (Pvt) Ltd has these figures for its latest tax year, tax year 2026: - Turnover (C): Rs. 2,000,000,000 - Tax assessed (B): Rs. 60,000,000, of which Rs. 18,000,000 was super tax For the September 2026 quarter, turnover (A) is Rs. 550,000,000 and tax withheld from the company in the quarter (D) is Rs. 4,000,000. 1. A x B/C = Rs. 550,000,000 x 60,000,000 / 2,000,000,000 = Rs. 16,500,000. 2. Less D: Rs. 16,500,000 - Rs. 4,000,000 = **Rs. 12,500,000**, due by 25 September 2026. 3. Without the super tax in B, the figure would have been Rs. 550,000,000 x 42,000,000 / 2,000,000,000 - Rs. 4,000,000 = Rs. 7,550,000. Leaving super tax out would under-pay by Rs. 4,950,000. 4. If the September turnover had not been provided: A = 1/4 x 120% x Rs. 2,000,000,000 = Rs. 600,000,000, and A x B/C = Rs. 18,000,000 before deducting D. 5. **Late payment.** If the Rs. 12,500,000 is paid 30 days late, default surcharge under section 205(1A) at 12 per cent per annum is Rs. 12,500,000 x 12% x 30/365 = about Rs. 123,288. (The section states an annual rate; the 365-day count here is for illustration.) ### What if ...? **What if this year's tax will be higher than the formula gives?** Section 147(4A) requires the company, before the second instalment is due, to estimate the year's tax. If it is likely to exceed what sub-section (4) produces, the company furnishes the estimate to the Commissioner by the second quarter's due date, pays fifty per cent of it (less amounts already paid) by that date, and pays the remaining fifty per cent in two equal instalments by the third and fourth quarter dates. **What if this year's tax will be lower?** Section 147(6) lets the company furnish a lower estimate before the last instalment is due and pay the reduced amount on the remaining dates. Section 147(6B) requires the estimate to show turnover for completed and remaining quarters, evidence of expenses, tax payments and credits, and a computation of estimated taxable income. The Commissioner may reject an unsupported estimate after a hearing, and the formula then applies. **What if the company under-estimates?** Section 205(1B) charges default surcharge at 12 per cent per annum where tax under sub-section (4A) or (6) is not paid, or the tax paid is less than ninety per cent of the tax chargeable for the year. It runs on the shortfall below ninety per cent, from 1 April of that year to the date of assessment or 30 June of the next financial year, whichever is earlier. ### Common mistakes - **Using the 15th for every quarter.** Those are the individual dates in section 147(5). A company's September, December and March dates are the 25th. - **Leaving super tax, minimum tax or ACT out of B.** The Explanation to section 147(4) includes them. - **Deducting every tax paid in the quarter as D.** D is tax for which a credit is allowed under section 168; tax that is a final tax without credit is not part of it. - **Treating advance tax as optional because last year was a loss.** Section 147(6A) still requires a company to estimate and pay on quarterly turnover. ### What to check in the official text Read section 147 in full, section 4C(5A), and sub-sections (1A) and (1B) of section 205 in the official PDF of the Ordinance. Section 147(7A) allows the Board to prescribe how the estimate is furnished through Iris or another automated system; those procedures and portal steps are not part of this corpus. Banking companies have their own instalment rules and are not covered on this page. ### Frequently asked #### What are the advance tax due dates for a company? Section 147(5A) sets 25 September for the September quarter, 25 December for the December quarter, 25 March for the March quarter and 15 June for the June quarter. Individuals have different dates, the 15th of each of those months, under section 147(5). #### Does super tax have to be paid in advance tax instalments? Yes. Section 4C(5A) applies section 147 to super tax, the Explanation to section 147(4) says tax assessed includes tax under section 4C, and section 147(4AA) requires section 4C liability to be taken into account. #### What is the surcharge for a late or short instalment? Section 205(1A) charges default surcharge at 12 per cent per annum on unpaid advance tax, from its due date until it is paid or until the return for the year was due, whichever is earlier. ### Citations - [Income Tax Ordinance, 2001, section 147 (Advance tax paid by the taxpayer)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#147-advance-tax-paid-by-the-taxpayer), as amended to 2026-06-30: "C is the taxpayer’s turnover for the latest tax year; and D is the tax paid in the quarter for which a tax credit is allowed under section 168" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 4C (Super tax on high earning persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4c-super-tax-on-high-earning-persons), as amended to 2026-06-30: "The provisions of section 147 shall apply on tax payable under this section." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 205 (Default surcharge)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#205-default-surcharge), as amended to 2026-06-30: "per cent per annum on the amount of tax unpaid computed for the period commencing on the date on which it was due and ending on the date on which it was paid or date on which the return of income for the relevant tax year was due, whichever is earlier" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113C (Alternative Corporate Tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113c-alternative-corporate-tax), as amended to 2026-06-30: "shall be higher of the Corporate Tax or Alternative Corporate Tax" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "the aggregate of the person’s turnover as defined in sub-section" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## When must a company file its income tax return, and in what format must its financial statements be attached? Source: https://qanoondigest.com/faq/companies/company-tax-return-deadline-financial-statements Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Every company files a return whatever its income, under section 114(1)(a). Section 118(2) sets the due date: 31 December for a tax year ending between January and June, otherwise 30 September. From tax year 2026, section 114(2A) requires the attached financial statements in an electronically readable format, not PDF or scans. **Applies to:** Companies of every size, including loss-making and dormant companies, and the secretaries and accountants who prepare their returns. A company never falls below a filing threshold. The Income Tax Ordinance, 2001 makes every company file a return each tax year, sets its deadline by the month its year ends, and, from tax year 2026, requires its financial statements in a format a computer can read, not a scanned or PDF copy. ### Who has to file? Section 114(1) opens with "(a) every company". Clause (ab), which ties the duty to taxable income above the exempt amount, applies only to persons "other than a company". So a company with a loss, a company with no business yet, and a company whose income is all under final taxation are all on the list. ### What must go with the return? Section 114(2) says a return must be in the prescribed form with the prescribed annexures, statements or documents, must fully state the particulars the form asks for, and must be accompanied by evidence of payment of the tax due as per the return. Section 114(2A), substituted by the Finance Act, 2026, requires filing electronically on IRIS and adds a proviso for companies: for tax year 2026 and onwards, the financial statements accompanying the return "shall only be filed in electronically readable file format". Section 2(19DA), also inserted by the Finance Act, 2026, defines that format as any digital format where data can be read, extracted, validated and processed by computer systems without human intervention. It names spreadsheet formats such as CSV or XLSX, XML, XBRL and JSON as examples, and excludes "formats primarily designed for human readability, such as PDF, scanned images or photographs". ### When is the return due? Section 118(2) sets two dates for companies: | Company's tax year ends | Return due on or before | |---|---| | Any time from 1 January to 30 June | 31 December following the end of the tax year | | Any other date (1 July to 31 December) | 30 September following the end of the tax year | A company on the normal tax year ending 30 June therefore files for tax year 2026 (1 July 2025 to 30 June 2026) by 31 December 2026. Section 119 lets a company apply to the Commissioner for an extension, by the due date, on grounds of absence from Pakistan, sickness or misadventure, or any other reasonable cause. The extension should not exceed fifteen days unless there are exceptional circumstances, and the Chief Commissioner may grant a further period of up to fifteen days. Section 119(6) says an extension does not move the due date for payment of tax for default surcharge purposes. ### What happens if the statements are scanned or locked? The section 182 Table, S. No. 35, covers a person, including a company, who furnishes the return with incomplete or irrelevant particulars or attaches blank or incomplete annexures, statements or documents. An Explanation added by the Finance Act, 2026 says audited financial statements furnished as image files, scanned documents or password-protected files that are illegible or inaccessible to the Inland Revenue authority are deemed blank or incomplete. The penalty column for that entry reads Rs. 500,000 or 10% of the tax chargeable on the taxable income, whichever is higher. Section 182(2) says no penalty is payable unless the Commissioner, Commissioner (Appeals) or Appellate Tribunal passes a written order after giving the company a hearing. ### Worked example (illustrative figures) Indus Textiles (Pvt) Ltd of Faisalabad closes its accounts on 30 June 2026. Its tax payable for tax year 2026 is Rs. 3,000,000. It files 20 days after 31 December 2026, with no extension. S. No. 1 of the section 182 Table charges the higher of: 1. 0.1% of tax payable for each day: Rs. 3,000,000 x 0.1% x 20 = Rs. 60,000. 2. Rs. 1,000 for each day: Rs. 1,000 x 20 = Rs. 20,000. The higher figure is Rs. 60,000, which is above the Rs. 50,000 minimum for cases other than salaried individuals and below the cap of 200% of tax payable. A further proviso reduces the penalty by 75% if the return is filed within one month of the due date. The entry does not say whether that reduction is applied before or after the minimum, so the final figure is not settled by the text alone. Separately, section 182A keeps the company off the active taxpayers' list for tax year 2026 unless it pays a surcharge of Rs. 100,000, and a company that misses the due date is not allowed to carry forward any loss for that tax year. ### What if the company's year ends on 31 December? Its tax year ends outside the January to June window, so section 118(2)(b) applies. Accounts closing on 31 December 2025 mean a return due by 30 September 2026. ### Common mistakes - **Assuming a dormant company is exempt.** Section 114(1)(a) has no income test for companies. - **Treating 30 September as the company date.** For a 30 June year end, section 118(2)(a) gives 31 December. 30 September in section 118(3) is for persons other than a company. - **Uploading signed PDFs of audited accounts.** The proviso to section 114(2A) and section 2(19DA) exclude PDF from tax year 2026. - **Losing a loss by filing late.** Section 182A(1)(b) denies carry forward of the loss for a year whose return was not filed by the due date. ### What to check in the official text Read section 114(1) and (2), the proviso to section 114(2A), section 2(19DA), section 118(2), section 119, S. Nos. 1 and 35 of the section 182 Table, and section 182A. The exact file types, schema and IRIS steps the Board accepts are set by the Board and are not part of this corpus. Check whether the Board has notified any general extension of the due date for the year in question. ### Frequently asked #### Does a company with no income or a loss still have to file a return? Yes. Section 114(1)(a) lists "every company" without any income threshold, unlike clause (ab), which applies only to persons other than a company whose taxable income exceeds the exempt amount. #### When is the return due for a company whose year ends on 30 June? On or before 31 December following the end of that tax year, under section 118(2)(a). A company whose tax year ends between 1 July and 31 December files by the following 30 September under section 118(2)(b). #### Can a company attach its audited accounts as a PDF? Not from tax year 2026. The proviso to section 114(2A) requires an electronically readable file format, and section 2(19DA) excludes PDF, scanned images and photographs from that term. S. No. 35 of the section 182 Table treats image, scanned or password-protected audited statements that cannot be read as blank or incomplete. ### Citations - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "Provided that in case of companies for tax year 2026 and onwards the financial statements accompanying the return shall only be filed in electronically readable file format." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 118 (Method of furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#118-method-of-furnishing-returns-and-other-documents), as amended to 2026-06-30: "in the case of a company with a tax year ending any time between the first day of January and the thirtieth day of June, on or before the thirty-first day of December next following the end of the tax year to which the return relates" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "excluding formats primarily designed for human readability, such as PDF, scanned images or photographs" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 182 (Offences and penalties)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182-offences-and-penalties), as amended to 2026-06-30: "audited financial statements furnished in the form of image files, scanned documents, or passwordprotected files that are illegible or otherwise inaccessible to the concerned Inland Revenue authority shall be deemed to have been furnished as blank or incomplete documents" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 182A (Return not filed within due date)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182a-return-not-filed-within-due-date), as amended to 2026-06-30: "not be allowed, for that tax year, to carry forward any loss under Part VIII of Chapter IV" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 119 (Extension of time for furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#119-extension-of-time-for-furnishing-returns-and-other-documents), as amended to 2026-06-30: "An extension of time under sub-section (3) should not exceed fifteen days from the due date for furnishing the return of income" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much tax must a company deduct when it pays a dividend, and why is it 25% when the company paid no tax? Source: https://qanoondigest.com/faq/companies/company-dividend-withholding-tax-rate Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 150 makes a company deduct tax from the gross dividend at the rates in Division I of Part III of the First Schedule: 15% in most cases, 7.5% for qualifying IPP dividends, and 25% where the payer had no tax payable because of exempt income, carried-forward business losses or tax credits. Section 8 makes this tax final. **Applies to:** Companies that declare and pay dividends, their finance teams, and the individual and corporate shareholders who receive them. A company that pays a dividend in Pakistan is a withholding agent for the tax on it. It deducts the tax from the gross dividend before paying the shareholder, and for most shareholders that deduction is the whole of their tax on the dividend. The rates below are from the Income Tax Ordinance, 2001 as amended to 30 June 2026, and apply to dividends paid in tax year 2027. ### What does the law say? Section 150 says every person paying a dividend "shall deduct tax from the gross amount of the dividend paid", or collect tax from the amount of a dividend in specie, at the rate in Division I of Part III of the First Schedule. That Division sets these rates: | Clause | Dividend | Rate | |---|---|---| | (a) | Paid by an Independent Power Producer, where the dividend is a pass through item under an Implementation, Power Purchase or Energy Purchase Agreement and is reimbursed by CPPA-G | 7.5% | | (b) | Real Estate Investment Trust, and all cases not covered by (a), (ba), (c) and (d) | 15% | | (ba) | Mutual funds, depending on income from debt securities and equities | 25% and 15% | | (c) | From a Special Purpose Vehicle under the REIT Regulations, 2015 | 0% to a REIT scheme, 35% to others | | (d) | From a company with no tax payable because of exempt income, carried-forward business losses or tax credits | 25% | Section 5 separately charges the shareholder at the rate in Division III of Part I of the First Schedule, computed "to the gross amount of the dividend". Division III uses the same clauses and rates, so what the company deducts under section 150 matches the shareholder's charge under section 5. ### Why is it 25% when the company paid no tax? Clause (d) reads: "25% in case of a person receiving dividend from a company where no tax is payable by such company, due to exemption of income or carry forward of business losses under Part VIII Chapter III or claim of tax credits under Part X of Chapter III." The trigger is the paying company's own tax position. A dividend normally comes out of profit that has already borne company tax, and the shareholder pays 15% on top. Where the company's profit was covered by an exemption, by set-off of losses brought forward, or by tax credits so that no tax was payable, the shareholder rate rises to 25%. The wording is "no tax payable". The clause does not say how to treat a company that paid some tax but less than the full rate because of partial loss set-off or credits, and this page does not settle that point. ### How does it work in practice? The company deducts at the time the dividend is paid, on the gross amount, not on the net amount after deduction. Section 8(1) then makes the section 5 tax "a final tax on the amount in respect of which the tax is imposed", which means: - the dividend is not added to the shareholder's other income; - no expense is deductible against it; - no loss can be set off against it and no tax credit reduces the tax; and - under section 8(1)(e)(ii), the shareholder's liability is discharged to the extent the tax was deducted at source. For a shareholder who does not appear in the active taxpayers' list, rule 1 of the Tenth Schedule says the rate to be deducted "shall be increased by hundred percent of the rate specified" in the Ordinance. ### Worked example (illustrative figures) A Karachi cement company declares a total cash dividend of Rs. 10,000,000 in tax year 2027. Two shareholders each receive Rs. 2,000,000. **Case 1: the company paid tax on its income.** Clause (b) applies. - Rs. 2,000,000 x 15% = **Rs. 300,000** deducted. Shareholder receives Rs. 1,700,000. **Case 2: the company had no tax payable because brought-forward business losses absorbed its income.** Clause (d) applies. - Rs. 2,000,000 x 25% = **Rs. 500,000** deducted. Shareholder receives Rs. 1,500,000. **Case 3: as Case 1, but the shareholder is not in the active taxpayers' list.** The 15% rate is increased by 100% of itself: 15% + 15% = 30%. - Rs. 2,000,000 x 30% = **Rs. 600,000** deducted. Shareholder receives Rs. 1,400,000. ### What if the dividend is paid in shares or kind? Section 150 covers a "dividend in specie" by requiring the payer to "collect tax from the amount of dividend in specie" at the same Division I rates. Bonus shares are no longer caught: the words "or collect tax from the shareholder in the case of bonus shares" were omitted by the Finance Act, 2002. ### What if the shareholder is another company? The same deduction applies. A footnote to section 8 records that a proviso reading "the provision of this section shall not apply to dividend received by a company" was omitted by the Finance Act, 2013, so the final tax rule now covers corporate shareholders too. Dividends within a group taxed as one fiscal unit can be exempt, which is covered on the intercorporate dividend page. ### Common mistakes - **Deducting on the net amount.** Section 150 and section 5(2) both work on the gross dividend. - **Using 15% when the company's income was covered by losses or exemption.** Clause (d) sets 25% where no tax is payable for those reasons. - **Forgetting the non-active taxpayer increase.** Rule 1 of the Tenth Schedule increases the deduction rate by 100% for persons not in the active taxpayers' list. - **Adding the dividend to the shareholder's taxable income.** Section 8 excludes it from every head of income. ### What to check in the official text Read section 150, sections 5 and 8, Division I of Part III and Division III of Part I of the First Schedule, and rule 1 of the Tenth Schedule in the official PDF. Check whether the paying company had tax payable for the relevant year before choosing between clause (b) and clause (d), and check a mutual fund's income mix before applying clause (ba). ### Frequently asked #### What is the normal rate of tax deducted from a dividend in Pakistan? For most dividends it is 15% of the gross amount, under clause (b) of Division I of Part III of the First Schedule. Section 150 requires the paying company to deduct it when the dividend is paid. #### Why would a company deduct 25% instead of 15%? Clause (d) sets 25% where no tax is payable by the paying company because of exemption of income, carry forward of business losses, or tax credits. The profit behind the dividend was not taxed at company level, and the higher rate on the shareholder applies instead. #### Does the shareholder pay more tax on the dividend in their return? Generally no. Section 8 makes the tax imposed under section 5 a final tax, and section 8(1)(e) treats the liability as discharged to the extent the tax was deducted at source. ### Citations - [Income Tax Ordinance, 2001, section 150 (Dividends)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#150-dividends), as amended to 2026-06-30: "shall deduct tax from the gross amount of the dividend paid" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division I (Advance Tax on Dividend), clauses (a) to (d)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 5 (Tax on dividends)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#5-tax-on-dividends), as amended to 2026-06-30: "Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division III of Part I of the First Schedule, on every person who receives a dividend from a" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 8 (General provisions relating to taxes imposed under sections 5, 5A, 5AA, 6, 6A, 7, 7A, 7B and 7G)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#8-general-provisions-relating-to-taxes-imposed-under-sections-5-5a-5aa-6-6a-7-7a-7b-and-7g), as amended to 2026-06-30: "shall be a final tax on the amount in respect of which the tax is imposed and-" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division III (Rate of Dividend Tax), clauses (a) to (d)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (Rate of deduction or collection of tax for persons not appearing in the active taxpayers' list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## My company made a loss this year. Do we still have to pay tax? Source: https://qanoondigest.com/faq/companies/loss-making-company-still-pays-minimum-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Usually yes. Section 113 of the Income Tax Ordinance applies to a resident company where a loss for the year, old losses, exemptions, credits or deductions leave no tax payable. The company then pays minimum tax on turnover at the Division IX rate, 1.25% in most cases for tax year 2027, and carries the whole amount forward. **Applies to:** Resident companies and permanent establishments of non-resident companies in Pakistan that have a business loss, or no tax payable, for a tax year. A loss does not take a Pakistani company out of income tax. The Income Tax Ordinance, 2001 has a floor for companies: minimum tax on turnover under section 113. A loss year is one of the situations the section was written for, so most loss-making companies pay tax on their sales even though they have no profit. ### What does the law say? Section 113(1) applies to a resident company and a permanent establishment of a non-resident company. It applies where, "for any reason whatsoever allowed under this Ordinance", one of the following leaves the company with no tax payable, or with tax payable below the Division IX percentage of turnover: - (a) a loss for the year; - (b) the setting off of a loss of an earlier year; - (c) exemption from tax; - (d) the application of credits or rebates; or - (e) the claiming of allowances or deductions, including depreciation and amortization. Where the section applies, section 113(2)(a) treats the company's turnover for the year as its income, and section 113(2)(b) says the company pays, "instead of the actual tax payable", minimum tax at the rates in Division IX of Part I of the First Schedule. Turnover is defined in section 113(3). For sales of goods it means gross sales or gross receipts, exclusive of sales tax, federal excise duty and trade discounts shown on invoices or bills, and excluding amounts already taxed as a final discharge of liability. It also covers gross fees for services and gross receipts from contracts, again excluding receipts under final tax. ### What rate applies to my company? The rate depends on the business. The Division IX Table, as amended to 30 June 2026 and so in force for tax year 2027, includes: | Business | Rate of turnover | |---|---| | Oil refineries, motorcycle dealers registered under the Sales Tax Act, 1990, oil marketing companies | 0.5% | | Petroleum agents and distributors registered under the Sales Tax Act, 1990, rice mills and dealers, flour mills, and some other listed persons | 0.25% | | In all other cases | 1.25% | Our copy of serial number 1 of the Table is partly illegible, so this page does not list who falls under it. A company whose business is not listed in the Table falls under "In all other cases" at 1.25%. ### What happens to the minimum tax paid in a loss year? Section 113(2)(c) normally carries forward only the excess of minimum tax over the tax payable at normal rates. The first proviso makes a special rule for a year with no tax payable: "the entire amount of tax paid under sub-section (1) shall be carried forward". In a loss year the normal tax is nil, so the whole minimum tax goes forward. The second proviso limits the period. The amount is adjusted against tax liability for the two tax years immediately succeeding the tax year for which it was paid. An Explanation says the adjustment is against tax under clause (1) of Division I or Division II of Part I of the First Schedule, which for a company is the Division II corporate rate. The business loss itself is dealt with separately. Under section 57(1) and (2), a business loss that cannot be set off in the year is carried forward and set off against business income of later years, for no more than six tax years after the year the loss was first computed. ### Worked example (illustrative figures) Rehman Furniture (Pvt) Ltd in Lahore makes and sells furniture. Its figures below are invented. The rate is the real Division IX rate for tax year 2027. 1. Turnover for tax year 2027, net of sales tax and trade discounts: Rs. 180,000,000. 2. Business result for the year: a loss of Rs. 12,000,000. Tax at the Division II rate on a loss: nil. 3. Section 113(1)(a) applies because a loss for the year leaves no tax payable. 4. Minimum tax: Rs. 180,000,000 x 1.25% = Rs. 2,250,000. 5. The company pays Rs. 2,250,000 for tax year 2027. 6. Because no tax was otherwise payable, the first proviso carries forward the whole Rs. 2,250,000 for adjustment in tax years 2028 and 2029. 7. Separately, the Rs. 12,000,000 loss is carried forward under section 57, for up to six tax years. If the company earns a profit in tax year 2028 and its Division II tax is higher than its minimum tax for that year, the carried forward Rs. 2,250,000 can be adjusted against that liability. How that works over two years is shown on the carry forward page linked below. ### What if ...? **What if the loss comes only from old losses brought forward?** Section 113(1)(b) covers "the setting off of a loss of an earlier year". A company that is profitable this year but wipes out its taxable income with brought forward losses is still subject to minimum tax. **What if the company has income taxed under final tax?** The Explanation to section 113(1) says "tax payable or paid" does not include tax on deemed income assessed as a final discharge of liability, or tax under sections 4B or 4C. Final tax receipts are also excluded from turnover by section 113(3). **What if the company is exempt from minimum tax?** Some persons are taken out of section 113 by the Second Schedule. This page does not list them; check the Second Schedule for your business. ### Common mistakes - **Assuming a loss means a nil return.** Section 113(1)(a) names a loss for the year as a trigger for minimum tax. - **Carrying forward only part of the minimum tax in a loss year.** Where no tax was payable, the first proviso to section 113(2)(c) carries forward the entire amount. - **Using a five or three year window.** The Finance Act, 2025 replaced "three" with "two" in the second proviso. - **Confusing the two carry forwards.** Minimum tax goes forward for two tax years under section 113. The business loss goes forward for up to six tax years under section 57. ### What to check in the official text Read section 113(1), (2) and (3) with the Explanations and both provisos to sub-section (2)(c). Check the Division IX Table against the official PDF for your business, especially serial number 1, which our copy does not show clearly. Read section 57 for the loss itself. Check the Second Schedule for any exclusion from section 113 that applies to your company. ### Frequently asked #### Why does my company owe tax when it made a loss? Section 113(1) lists a loss for the year as one of the reasons that can leave a company with no tax payable. Where that happens, section 113(2) treats turnover as income and the company pays minimum tax at the Division IX rate instead of the actual tax payable. #### What rate of minimum tax applies to a company in a loss year? The rate comes from the Table in Division IX of Part I of the First Schedule. For tax year 2027 the entry for all other cases is 1.25% of turnover, and some listed businesses have lower rates such as 0.25% or 0.5%. #### Is the minimum tax paid in a loss year lost for good? Not straight away. The first proviso to section 113(2)(c) carries the entire amount forward when no tax was otherwise payable, and the second proviso allows it to be adjusted against normal tax for the two tax years immediately after the year it was paid. ### Citations - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "no tax is payable or paid by the person for a tax year or the tax payable or paid by the person for a tax year is less than" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "if tax is paid under sub-section (1) due to the fact that no tax is 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" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IX (Minimum tax under section 113), Table, S. No. 4](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 57 (Carry forward of business losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#57-carry-forward-of-business-losses), as amended to 2026-06-30: "no loss can be carried forward to more than six tax years immediately succeeding the tax year for which the loss was first computed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Does tax on undistributed profits under section 5A still apply to companies that do not pay dividends? Source: https://qanoondigest.com/faq/companies/tax-on-undistributed-profits-section-5a Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Not for current years. Section 5A, as amended to 30 June 2026, imposes tax only for tax years 2017 to 2019: 5% of accounting profit before tax on a public company that did not distribute at least 20% of its after-tax profit in cash within six months of the year end. It charges nothing for later years. **Applies to:** Public companies, including listed companies, that retain profits instead of paying cash dividends, and anyone checking whether section 5A affects a current or past tax year. Section 5A of the Income Tax Ordinance, 2001 is still printed in the consolidated text, but its charge is tied to three past tax years. In the edition amended to 30 June 2026 it imposes no tax for tax year 2020 or any later year, including tax year 2027. ### What does the law say? Section 5A(1) reads, in its current form, that "For tax years 2017 to 2019" a tax is imposed at five percent "of its accounting profit before tax on every public company, other than a scheduled bank or a modaraba, that derives profit for a tax year but does not distribute at least" twenty percent of its after tax profits within six months of the end of the tax year through cash. The elements are: | Element | What the section says | |---|---| | Tax years | 2017 to 2019 only | | Who | A public company, other than a scheduled bank or a modaraba | | Trigger | Profit for the year, and less than 20% of after-tax profit distributed in cash within six months of the year end | | Base | Accounting profit before tax | | Rate | 5% | A proviso allowed, for tax year 2017, bonus shares or cash dividends to be distributed before the due date for filing the return. Section 5A(2) excludes two further groups: - a company qualifying for exemption under clause (132) of Part I of the Second Schedule; and - a company in which not less than fifty percent of the shares are held by the Government. Section 8 lists section 5A among the taxes that are "a final tax on the amount in respect of which the tax is imposed". ### Why does it not apply now? The limit is in the opening words. A footnote records that the expression "year 2017 and onwards" was replaced by "years 2017 to 2019" through the Finance Supplementary (Second Amendment) Act, 2019. Nothing in the consolidated text as amended to 30 June 2026 extends it to a later year, and no rate for it appears in the First Schedule, because the rate is written into the section itself. ### Which companies were "public companies"? Section 2(47) defines "public company" to include a company in which not less than fifty per cent of the shares are held by the Federal or a Provincial Government, a company majority held by a foreign Government, and "a company whose shares were traded on a registered stock exchange in Pakistan at any time in the tax year and which remained listed on that exchange" at the end of that year. Government-held companies meet the definition but are then taken out by section 5A(2)(b), which leaves listed companies as the main group that was exposed. Private companies were never within section 5A. ### How did the section change over time? The footnotes to section 5A record these amendments: - The Finance Act, 2017 substituted the whole section. The earlier version, headed "Tax on undistributed reserves", charged ten percent on reserves above one hundred percent of paid up capital where a public company did not distribute cash dividends within six months. - The Finance Act, 2018 substituted "five" for "seven and half" as the rate, substituted "twenty" for "forty" as the distribution threshold, and omitted the words "or bonus shares". - The Finance Supplementary (Second Amendment) Act, 2019 limited the section to tax years 2017 to 2019. The consolidated text does not say whether the 2018 changes to the rate and threshold reach back to tax year 2017. For that year, the Finance Acts of 2017 and 2018 would need to be read together. ### Worked example (illustrative figures) A listed textile company in Faisalabad, tax year 2019: 1. Accounting profit before tax: Rs. 100,000,000. After-tax profit: Rs. 70,000,000. 2. Minimum cash distribution to avoid the charge: Rs. 70,000,000 x 20% = Rs. 14,000,000, paid within six months of the year end. 3. The company paid a cash dividend of Rs. 10,000,000 only, which is below Rs. 14,000,000. 4. Section 5A tax: Rs. 100,000,000 x 5% = **Rs. 5,000,000**. The same company with the same figures in tax year 2027 would owe **nothing** under section 5A, because the section no longer charges that year. ### What if a company is asked about section 5A for an old year? The section still governs tax years 2017, 2018 and 2019, so a question about one of those years is answered by the section as printed, subject to the timing point above. How long an old assessment can be reopened is dealt with elsewhere in the Ordinance and is not covered on this page. ### Common mistakes - **Treating section 5A as a current charge.** Since the 2019 amendment it covers tax years 2017 to 2019 only. - **Applying it to a private company.** It only ever applied to public companies. - **Using after-tax profit as the base.** The 20% test uses after-tax profit, but the 5% tax is calculated on accounting profit before tax. - **Counting bonus shares as a distribution.** The main rule requires a cash distribution. Only the tax year 2017 proviso mentions bonus shares. ### What to check in the official text Read section 5A with its footnotes, section 8 and clause (47) of section 2 in the official PDF of the Ordinance. For tax year 2017, read the Finance Act, 2017 and the Finance Act, 2018 in this corpus to see which rate and threshold applied. Check clause (132) of Part I of the Second Schedule if a company claims the section 5A(2)(a) exclusion. ### Frequently asked #### Does a company that pays no dividend in tax year 2027 owe section 5A tax? No. Section 5A(1) opens with the words 'For tax years 2017 to 2019', so the charge is limited to those three tax years. The section as it now reads imposes nothing for tax year 2027. #### Did section 5A ever apply to private companies? No. Both the current section and the earlier version quoted in the footnotes applied to public companies only, other than scheduled banks and modarabas. #### Could bonus shares count as a distribution under section 5A? Only in a limited way. The main rule now requires distribution through cash, because the words 'or bonus shares' were omitted by the Finance Act, 2018. The proviso still mentions bonus shares or cash dividends distributed before the return due date for tax year 2017. ### Citations - [Income Tax Ordinance, 2001, section 5A (Tax on undistributed profits)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#5a-tax-on-undistributed-profits), as amended to 2026-06-30: "percent of its accounting profit before tax on every public company, other than a scheduled bank or a modaraba, that derives profit for a tax year but does not distribute at least" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 8 (General provisions relating to taxes imposed under sections 5, 5A, 5AA, 6, 6A, 7, 7A, 7B and 7G)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#8-general-provisions-relating-to-taxes-imposed-under-sections-5-5a-5aa-6-6a-7-7a-7b-and-7g), as amended to 2026-06-30: "shall be a final tax on the amount in respect of which the tax is imposed and-" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "a company whose shares were traded on a registered stock exchange in Pakistan at any time in the tax year and which remained listed on that exchange" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can a subsidiary's tax loss be surrendered to its holding company under group relief, and what shareholding is needed? Source: https://qanoondigest.com/faq/companies/group-relief-section-59b-subsidiary-losses Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 59B lets a subsidiary or holding company surrender its assessed loss for the tax year, excluding brought-forward and capital losses, to another group company, which can set it off in that tax year and the next two. The holding must be 55% where a group company is listed, or 75% otherwise, kept for five years. **Applies to:** Holding companies and subsidiaries incorporated in Pakistan that want to use one group company's current-year business loss against another group company's business income. Group relief lets one company in a Pakistani group use another group company's current-year business loss against its own business income. It is not automatic: section 59B of the Income Tax Ordinance, 2001, as amended to 30 June 2026, sets ownership, business and approval conditions, and reverses the benefit if the shareholding drops within five years. ### What does the law say? Section 59B(1) allows "any company, being a subsidiary or a holding company" to surrender its assessed loss for the tax year, excluding capital loss and brought forward losses, "in favour of its holding company or its subsidiary or between another subsidiary of the holding company". The shareholding needed depends on whether the group has a listed company: | Group | Direct holding by the holding company in the subsidiary | |---|---| | One of the group companies is a public company listed on a registered stock exchange in Pakistan | 55% or more | | None of the group companies is listed | 75% or more | Section 59B(1A) caps the loss that can be surrendered at **(A/100) x B**, where A is the percentage of share capital the holding company holds in the subsidiary and B is the subsidiary's assessed loss. ### What conditions have to be met? Section 59B(2) allows the claiming company to set the surrendered loss off against its income under the head "Income from Business" in the tax year and the following two tax years, subject to these conditions: - **(a)** continued ownership of the subsidiary's share capital for five years, at 55% for a listed company or 75% or more for other companies; - **(b)** a group company engaged in the business of trading cannot avail group relief; - **(ba)** a company whose business income is taxed under any provision other than Division II of Part I of the First Schedule cannot avail group relief. This clause was inserted by the Finance Act, 2025; - **(c)** a holding company that is a private limited company with 75% ownership "gets itself listed within three years from the year in which loss is claimed"; - **(d)** the group companies are locally incorporated under the Companies Act, 2017; - **(e)** the Board of Directors of each company approves the loss surrendered and the loss claimed; - **(f)** the subsidiary "continues the same business during the said period of three years"; - **(g)** every group company meets SECP corporate governance and group designation requirements and is designated as entitled to group relief; and - **(h)** any other condition as may be prescribed. Clause (a) speaks of five years and clause (f) of three years. The section does not reconcile the two periods, and this page does not either. ### What happens after the loss is surrendered? - **Time limit.** Section 59B(3) says the subsidiary cannot surrender its losses to the holding company for more than three tax years. - **Unused loss.** Under section 59B(4), surrendered losses not adjusted in those three tax years go back to the subsidiary, which carries them forward under section 57. Section 57 allows a business loss to be carried forward for no more than six tax years after the year it was first computed. - **Cash payment.** Section 59B(6) requires the claiming company, with board approval, to transfer cash to the surrendering company equal to the tax payable on the profits set off against the acquired loss, at the applicable tax rate. That transfer "would not be taken as a taxable event" for either company. - **Clawback.** Under section 59B(5), if the holding company disposes of shares within the five years so that its holding falls below 55% or 75%, it must, in the year of disposal, offer the profit on which tax was not paid because of the surrendered losses. - **Share transfers to form the group.** Section 59B(7) says share transfers made to acquire share capital for forming the group are not a taxable event where SECP or State Bank approval has been obtained. Sale and purchase from a third party is taxable. ### Worked example (illustrative figures) A Karachi holding company, unlisted, holds 80% of a manufacturing subsidiary. Neither company trades, both are taxed under Division II, and all approvals and designations are in place. Tax year 2027: 1. Subsidiary's assessed loss for the year: Rs. 40,000,000. 2. Maximum surrender under section 59B(1A): (80 / 100) x Rs. 40,000,000 = **Rs. 32,000,000**. 3. Holding company's business income for tax year 2027: Rs. 20,000,000. It sets off Rs. 20,000,000 of the surrendered loss, leaving Rs. 12,000,000 for tax years 2028 and 2029. 4. Cash the holding company transfers to the subsidiary under section 59B(6), at the 29% Division II rate for an ordinary company: Rs. 20,000,000 x 29% = **Rs. 5,800,000**. 5. If Rs. 12,000,000 is still unused after tax year 2029, section 59B(4) returns it to the subsidiary to carry forward under section 57. Section 59B does not say in terms what happens to the remaining Rs. 8,000,000 that falls outside the (A/100) x B formula. Section 57 is the general rule for carrying forward a company's own business loss. ### How is this different from group taxation? Section 59AA is a separate regime. It lets "Holding companies and subsidiary companies of 100% owned group" opt, irrevocably, to be taxed as one fiscal unit. Group relief under section 59B needs only 55% or 75% ownership but moves losses for a limited period and on conditions, rather than combining the group's income. ### Common mistakes - **Surrendering old losses.** Only the assessed loss for the tax year qualifies, not brought forward or capital losses. - **Surrendering the full loss of a partly owned subsidiary.** Section 59B(1A) limits it to the ownership percentage. - **Including a trading company.** Clause (b) of section 59B(2) excludes a group company engaged in trading. - **Including a company taxed outside Division II.** Clause (ba), inserted by the Finance Act, 2025, excludes it. - **Ignoring the five-year holding.** A sale that drops the holding below the threshold triggers the clawback in section 59B(5). ### What to check in the official text Read section 59B in full with its footnotes, section 57 and section 59AA in the official PDF. Clause (h) of section 59B(2) allows further conditions to be prescribed, and clause (g) depends on SECP group designation rules; neither is covered on this page. Confirm which group companies are listed before applying the 55% or 75% test. ### Frequently asked #### Can a subsidiary surrender its brought-forward losses to the holding company? No. Section 59B(1) allows surrender of the assessed loss for the tax year only, and expressly excludes brought forward losses and capital losses. #### How much of a subsidiary's loss can be surrendered if the holding company owns 80%? Section 59B(1A) limits the surrender to A/100 x B, where A is the percentage of share capital held and B is the subsidiary's assessed loss. At 80%, that is 80% of the assessed loss. #### What happens if the holding company sells shares within five years? If the holding falls below 55% or 75%, as the case may be, section 59B(5) requires the holding company, in the year of disposal, to offer the profit on which tax was not paid because of the surrendered losses. ### Citations - [Income Tax Ordinance, 2001, section 59B (Group relief)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#59b-group-relief), as amended to 2026-06-30: "where one of the company in the group is a public company listed on a registered stock exchange in Pakistan, the holding company shall directly hold fifty-five per cent or more of the share capital of the subsidiary company." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 57 (Carry forward of business losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#57-carry-forward-of-business-losses), as amended to 2026-06-30: "no loss can be carried forward to more than six tax years immediately succeeding the tax year for which the loss was first computed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 59AA (Group taxation)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#59aa-group-taxation), as amended to 2026-06-30: "Holding companies and subsidiary companies of 100% owned group may opt to be taxed as one fiscal unit." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division II (Rates of Tax for Companies)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can a holding company and its wholly owned subsidiaries be taxed as one group under section 59AA? Source: https://qanoondigest.com/faq/companies/group-taxation-section-59aa-one-fiscal-unit Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, if the group qualifies. Section 59AA lets a holding company and its 100% owned subsidiaries opt to be taxed as one fiscal unit. The option is irrevocable, only companies incorporated in Pakistan can join, losses from before the group was formed get no relief, and the Securities and Exchange Commission of Pakistan must designate the group as entitled. **Applies to:** Holding companies and their 100% owned subsidiaries incorporated in Pakistan that are considering consolidated taxation or moving assets within the group. Pakistan's Income Tax Ordinance, 2001 lets a group of companies be taxed as one fiscal unit, but only a narrow kind of group. This page reads section 59AA as amended to 30 June 2026, the procedure in rule 231D of the Income Tax Rules, 2002, and section 97, which covers asset transfers inside a wholly owned group. ### What does the law say? Section 59AA sets out six conditions and features: | Sub-section | What it says | |---|---| | (1) | Holding companies and subsidiaries of a 100% owned group may opt to be taxed as one fiscal unit. Income and tax payable are computed for tax purposes in addition to the consolidated group accounts required under the Companies Act, 2017. | | (2) | The companies in the group give an irrevocable option. | | (3) | Group taxation is restricted to companies locally incorporated under the Companies Act, 2017. | | (4) | Relief is not available for losses from before the group was formed. | | (5) | The group must meet the corporate governance requirements and group designation rules or regulations the Securities and Exchange Commission of Pakistan (SECP) specifies, and be designated as entitled to group taxation. | | (6) | The Board may regulate group taxation through rules. | Two more provisions matter to a group that qualifies. Clause (103A) of Part I of the Second Schedule exempts income from inter-corporate dividends within companies entitled to group taxation under section 59AA, on the condition that the group's return has been filed for the tax year. Clauses (11B) and (11C) of Part IV switch off withholding on those inter-corporate dividends and on inter-corporate profit on debt, on the condition that the group's return has been filed for the latest completed tax year. ### How does it work in practice? Rule 231D of the Income Tax Rules sets out the procedure: - **Who counts as 100% owned.** Under rule 231D(1), a subsidiary qualifies where the holding company owns all its equity shares, except shares held by nominees to meet company law requirements. - **Application.** Under rule 231D(2), the holding company and each subsidiary each make a separate application, with a declaration of irrevocable option, to the relevant Commissioner. They use the form in the Schedule to the rule and apply within the first quarter of the tax year for which they are opting. - **SECP certificate.** Rule 231D(4) requires each company to provide an SECP certificate confirming it has complied with the Code of Corporate Governance. - **One return.** Under rule 231D(5), the group return is prepared under the holding company's name. Tax is paid, or refund claimed, as if the subsidiaries' business were the holding company's business. Audited accounts of every group company are attached. - **Subsidiaries still file.** Rule 231D(6) requires each subsidiary to file its own return with a copy of the application, stating that the income returned is not taxable. - **Withholding continues separately.** Rule 231D(9) applies the Ordinance's withholding provisions to each subsidiary, and each company files its own withholding statements. - **Same accounting period and arm's length.** Rule 231D(11) requires the same accounting period for all companies. Rule 231D(12) requires transactions inside the group and with associates to be carried out and recorded at arm's length. ### Worked example (illustrative figures) Ravi Holdings Limited, Lahore, owns all the shares of two companies, Chenab Foods Limited and Jhelum Packaging Limited. All three are incorporated in Pakistan, have the same year end and have been designated by SECP. They opt for group taxation from tax year 2027. For tax year 2027, the three companies' results under the head "Income from Business" are: | Company | Result | |---|---| | Ravi Holdings Limited | Profit Rs. 300,000,000 | | Chenab Foods Limited | Profit Rs. 50,000,000 | | Jhelum Packaging Limited | Loss Rs. 80,000,000 | Because rule 231D(5) treats the subsidiaries' business as the holding company's, the group's result is computed as one: 300,000,000 + 50,000,000 minus 80,000,000 = Rs. 270,000,000. Jhelum Packaging also has an assessed loss of Rs. 40,000,000 from tax year 2025, before the option. Section 59AA(4) and rule 231D(5) exclude it from the group computation, so the group figure stays at Rs. 270,000,000. During the year, Ravi Holdings transfers a packing machine to Jhelum Packaging for Rs. 20,000,000. Its written down value just before the transfer is Rs. 12,000,000. If the section 97 conditions are met, no gain arises to Ravi Holdings, and under section 97(2)(b)(i) Jhelum Packaging's cost for tax purposes is Rs. 12,000,000, not Rs. 20,000,000. ### What if the transfer is between group companies that are not taxed as one unit? Section 97 does not depend on section 59AA. It applies where a resident company disposes of an asset to another resident company and all four conditions in section 97(1) hold: 1. both companies belong to a wholly owned group of resident companies at the time of disposal; 2. the transferee undertakes to discharge any liability in respect of the asset; 3. any such liability does not exceed the transferor's cost of the asset; and 4. the transferee is not exempt from tax for that tax year. Section 97(4) defines a wholly owned group: one company beneficially holds all the issued shares of the other, or a third company beneficially holds all the issued shares of both. Section 97(2) then carries the asset across at its tax value: written down value for a depreciable asset or amortised intangible, the tax value for stock-in-trade, and the transferor's cost in other cases. The asset keeps the character it had in the transferor's hands, and depreciation or amortisation deductions for the asset that the transferor has not yet set off pass to the transferee. ### Common mistakes - **Assuming majority ownership is enough.** Section 59AA requires a 100% owned group. Groups with lower holdings fall under the separate group relief rules, covered on the linked group relief page. - **Including a foreign subsidiary.** Section 59AA(3) limits group taxation to companies locally incorporated under the Companies Act, 2017. - **Carrying in pre-group losses.** Section 59AA(4) excludes them. - **Treating the option as a yearly choice.** Section 59AA(2) makes it irrevocable. - **Stopping withholding statements for subsidiaries.** Rule 231D(9) requires each company to file its own. ### What to check in the official text Read section 59AA and rule 231D together. Rule 231D is taken from the Income Tax Rules as amended to 24 November 2023, and it still refers to the Companies Ordinance, 1984, while section 59AA now refers to the Companies Act, 2017. Section 59AA(5) depends on SECP's corporate governance requirements and group designation rules or regulations, which are not in this corpus. Confirm the current SECP requirements and any later amendment to rule 231D before relying on this procedure. Also read clause (103A) of Part I and clauses (11B) and (11C) of Part IV of the Second Schedule for the filing condition each one attaches. ### Frequently asked #### Can a group that owns 80% of a subsidiary use section 59AA? No. Section 59AA(1) is limited to holding companies and subsidiaries of a 100% owned group. Rule 231D(1) of the Income Tax Rules treats a company as 100% owned where the holding company owns all its equity shares except shares held by nominees to meet company law requirements. Groups with lower holdings are dealt with under the separate group relief rules, which have their own conditions. #### Can a group change its mind after opting for group taxation? Section 59AA(2) says the companies give an irrevocable option. The section does not provide a way to withdraw it. Rule 231D(8) deals only with the case where a subsidiary is divested and group taxation stops applying to it. #### Can a subsidiary's old losses be used against the group's profits? No. Section 59AA(4) says relief under group taxation is not available for losses from before the group was formed. Rule 231D(5) adds that losses of subsidiaries for tax years before the option was exercised, including unabsorbed depreciation, are ignored. ### Citations - [Income Tax Ordinance, 2001, section 59AA (Group taxation)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#59aa-group-taxation), as amended to 2026-06-30: "Holding companies and subsidiary companies of 100% owned group may opt to be taxed as one fiscal unit." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 231D (Procedure for group taxation under section 59AA)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#231d-procedure-for-group-taxation-under-section-59aa), as amended to 2023-11-24: "the tax liability shall be discharged or the refund shall be claimed respectively as if the business of the subsidiary companies were the business of the holding company." Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Ordinance, 2001, section 97 (Disposal of asset between wholly-owned companies)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#97-disposal-of-asset-between-wholly-owned-companies), as amended to 2026-06-30: "no gain or loss shall be taken to arise on the disposal if the following conditions are satisfied" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (103A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clauses (11B) and (11C)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## For how many years can a company carry forward business losses and unabsorbed depreciation? Source: https://qanoondigest.com/faq/companies/company-business-loss-carry-forward-six-years Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Six tax years. Section 57(2) of the Income Tax Ordinance carries a business loss forward to the six tax years after the loss year, oldest first. The part from depreciation and amortisation has no time limit under section 57(4), but offsets only 50% of balance business income, or 100% if taxable income is under Rs. 10 million. **Applies to:** Companies with an assessed loss under the head "Income from Business", including companies merging under a scheme of amalgamation. A company's business loss does not disappear at the end of the year, but most of it has an expiry date. Part VIII of Chapter IV of the Income Tax Ordinance, 2001 sets the rules, and it treats two parts of a loss differently: the ordinary business loss, and the part that comes from capital allowances. ### What happens to a loss in the year it arises? Section 56(1) first sets the loss against income under any other head for the same year, except salary. A proviso says a business loss cannot be adjusted against income from property. Under section 56(3), where there is a loss under business and another head, the business loss is set off last. Whatever cannot be set off in that year moves to section 57. ### What does section 57 say? **The six-year rule.** Section 57(1) carries forward the unabsorbed business loss (other than a speculation loss, which has its own separate rule) and sets it against income under the head "Income from Business" in the next year. Section 57(2) repeats this year by year, "but no loss can be carried forward to more than six tax years immediately succeeding the tax year for which the loss was first computed". **Oldest first.** Section 57(3): where losses from more than one year are carried forward, the loss of the earliest tax year is set off first. **Longer periods for named cases.** Section 57(2A) gives ten years to certain losses of a government-owned bank from 1995 to 2001, section 57(2B) gives eight years to losses of a resident company in the hotel business from tax years commencing on or after 1 July 2020, and section 57(2C) gives ten years to Pakistan International Airlines Corporation Limited. **Capital allowances.** Section 57(4) deals with the loss attributable to deductions under sections 22 (depreciation), 23 (initial allowance), 23B (accelerated depreciation for alternate energy projects) and 24 (intangibles). That part is set off against fifty percent of the balance business income after the section 57(1) set off, "and so on until completely set off". A proviso raises this to one hundred percent where taxable income for the year is less than Rs. 10 million. Section 57(5) says these deductions are counted last in deciding whether a loss has been absorbed, so the ordinary loss is used up first. ### Worked example (illustrative figures) Thar Cement Works (Pvt) Ltd has an assessed business loss of Rs. 40,000,000 for tax year 2024. Of this, Rs. 20,000,000 is attributable to depreciation under section 22. All amounts are invented. **Splitting the loss (section 57(5))** 1. Unabsorbed depreciation: Rs. 20,000,000, governed by section 57(4). 2. Ordinary business loss: Rs. 40,000,000 - Rs. 20,000,000 = Rs. 20,000,000, usable up to tax year 2030. **Tax year 2025: business income Rs. 16,000,000** 1. Set off ordinary loss: Rs. 16,000,000. Ordinary loss left: Rs. 20,000,000 - Rs. 16,000,000 = Rs. 4,000,000. 2. Balance business income: nil, so no depreciation is absorbed. **Tax year 2026: business income Rs. 30,000,000** 1. Set off remaining ordinary loss: Rs. 30,000,000 - Rs. 4,000,000 = Rs. 26,000,000 balance. 2. Taxable income is above Rs. 10 million, so the 50% limit applies: Rs. 26,000,000 x 50% = Rs. 13,000,000. 3. Depreciation set off: Rs. 13,000,000. Taxable income: Rs. 26,000,000 - Rs. 13,000,000 = Rs. 13,000,000. 4. Unabsorbed depreciation still carried forward, with no time limit: Rs. 20,000,000 - Rs. 13,000,000 = Rs. 7,000,000. Where the Rs. 10 million test sits close to the line, section 57(4) does not say whether "taxable income for the year" is measured before or after the depreciation set off. ### What if two companies amalgamate? Section 57A(1) sets the assessed loss for the tax year of the amalgamating company, "other than brought forward and capital loss", against the business profits of the amalgamated company, and vice versa, in the year of amalgamation. Any unadjusted amount carries forward for six tax years after the year of amalgamation. Section 57A(2) applies section 57(4) and (5) to unabsorbed depreciation. A proviso makes both conditional on the amalgamated company continuing the amalgamating company's business for at least five years. Section 57A(3) treats the set off as income if the scheme's conditions set by the State Bank, the SECP or a court are not met. ### What if the business is bought rather than merged? Section 59A(4)(b) says sections 56 to 59 do not entitle a person who succeeds another person in a business, otherwise than by inheritance, to carry forward and set off the predecessor's loss. ### Common mistakes - **Counting the loss year as year one.** The six years are those "immediately succeeding" the loss year. - **Treating the whole loss as depreciation.** Only the part from sections 22, 23, 23B and 24 escapes the six-year limit, and it is capped at 50% of balance income. - **Filing late in a loss year.** Section 182A(1)(b) denies carry forward of the loss for a year whose return missed the due date. - **Setting business loss against rental income.** The proviso to section 56(1) does not allow it. - **Carrying forward an unassessed loss.** Section 59A(7) allows carry forward only of a loss assessed or treated as assessed under the orders it lists. ### What to check in the official text Read sections 56, 57, 57A and 59A with their footnotes, and section 182A on late returns. Speculation losses, capital losses, group relief and group taxation follow separate provisions and are not covered here. ### Frequently asked #### How many years can a company carry forward a business loss? Six tax years immediately succeeding the tax year for which the loss was first computed, under section 57(2). The oldest loss is set off first under section 57(3). #### Does unabsorbed depreciation expire? Section 57(4) sets no time limit. It carries the loss attributable to deductions under sections 22, 23, 23B and 24 forward until completely set off, but only against 50% of the balance business income, or 100% if taxable income for the year is less than Rs. 10 million. #### Can a company lose its carry forward by filing late? Yes. Section 182A(1)(b) says a person who does not file its return by the due date is not allowed to carry forward any loss for that tax year. ### Citations - [Income Tax Ordinance, 2001, section 57 (Carry forward of business losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#57-carry-forward-of-business-losses), as amended to 2026-06-30: "no loss can be carried forward to more than six tax years immediately succeeding the tax year for which the loss was first computed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 57 (Carry forward of business losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#57-carry-forward-of-business-losses), as amended to 2026-06-30: "Provided that such loss shall be set off against hundred percent of the said balance income if the taxable income for the year is less than ten million Rupees." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 56 (Set off of losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#56-set-off-of-losses), as amended to 2026-06-30: "the adjustment of business loss shall not be allowed against income from property for the tax year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 57A (Set off of business loss consequent to amalgamation)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#57a-set-off-of-business-loss-consequent-to-amalgamation), as amended to 2026-06-30: "the unadjusted loss shall be carried forward for adjustment upto a period of six tax years succeeding the year of amalgamation" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 59A (Limitations on set off and carry forward of losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#59a-limitations-on-set-off-and-carry-forward-of-losses), as amended to 2026-06-30: "any person who has succeeded, in such capacity, any other person carrying on any business or profession, otherwise than by inheritance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 182A (Return not filed within due date)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182a-return-not-filed-within-due-date), as amended to 2026-06-30: "not be allowed, for that tax year, to carry forward any loss under Part VIII of Chapter IV" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## For how many years can excess minimum tax be carried forward and adjusted against later tax? Source: https://qanoondigest.com/faq/companies/minimum-tax-carry-forward-two-years Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Two tax years. Section 113(2)(c) of the Income Tax Ordinance carries forward minimum tax paid in excess of tax at normal rates, and its second proviso allows adjustment only in the two tax years immediately after the year of payment. The Finance Act, 2025 replaced three with two. The Ordinance gives no refund of any amount left unused. **Applies to:** Companies, and other persons within section 113, whose minimum tax on turnover exceeded their tax at normal rates in a tax year. Excess minimum tax is a short-lived credit. When a company pays minimum tax on turnover that is more than its tax at the normal corporate rate, section 113 of the Income Tax Ordinance, 2001 lets it set the difference against its normal tax in later years. As amended to 30 June 2026, the window is two tax years. ### What does the law say? Section 113(2)(c) applies where tax paid under sub-section (1), the minimum tax, exceeds the actual tax payable under Part I, clause (1) of Division I, or Division II of the First Schedule. In that case "the excess amount of tax paid shall be carried forward for adjustment against tax liability under the aforesaid Part of the subsequent tax year". Two provisos follow: 1. **Nil-tax years.** 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". In a loss year the whole minimum tax goes forward, not just an excess. 2. **Time limit.** The amount is carried forward and adjusted against tax liability for two tax years immediately succeeding the tax year for which the amount was paid. An Explanation, added by the Finance Act, 2023, says "the aforesaid Part" means clause (1) of Division I or Division II of Part I of the First Schedule. For a company, Division II is the corporate rate table, 29% for most companies in tax year 2027. ### How has the period changed? The footnotes to section 113 record the history of the second proviso: | Change | Period | |---|---| | Proviso as substituted by the Finance Act, 2021 | five tax years | | Finance Act, 2022 substituted the word "five" | three tax years | | Finance Act, 2025 substituted the word "three" | two tax years | The Finance Act, 2025 text in this corpus reads: in section 113, sub-section (2), clause (c), in the second proviso, "for the word "three", the word "two" shall be substituted". The Ordinance text we hold does not contain a transitional rule for amounts paid before that change. How excess amounts from earlier years are treated is not settled by the section itself. ### How does it work in practice? Each year's excess is its own amount with its own window. Minimum tax paid for tax year 2027 can be adjusted in tax years 2028 and 2029. Minimum tax paid for tax year 2028 can be adjusted in tax years 2029 and 2030. The adjustment is against tax liability under the normal rate table. In a later year where the company is again paying minimum tax because its normal tax is lower, the section does not say whether any adjustment is possible that year. It also does not say whether an adjustment can bring a year's tax below that year's minimum tax. Section 113 does not settle either point, and this page does not resolve them. ### Worked example (illustrative figures) Karachi Packaging (Pvt) Ltd is a resident company whose business is not listed separately in Division IX, so the rate for "In all other cases", 1.25%, applies. All figures are invented, and the 1.25% rate is assumed to stay the same in later years for the sake of the example. **Tax year 2027** 1. Turnover: Rs. 400,000,000. 2. Minimum tax: Rs. 400,000,000 x 1.25% = Rs. 5,000,000. 3. Tax at the Division II rate on taxable income: Rs. 3,200,000. 4. The company pays the higher figure, Rs. 5,000,000. 5. Excess to carry forward: Rs. 5,000,000 - Rs. 3,200,000 = Rs. 1,800,000, usable in tax years 2028 and 2029. **Tax year 2028, profits recover** 1. Turnover: Rs. 360,000,000. Minimum tax: Rs. 360,000,000 x 1.25% = Rs. 4,500,000. 2. Tax at the Division II rate: Rs. 7,000,000. Normal tax is higher, so section 113 does not apply this year. 3. Adjust the carried forward excess: Rs. 7,000,000 - Rs. 1,800,000 = Rs. 5,200,000. 4. Rs. 5,200,000 is still above the year's minimum tax of Rs. 4,500,000, so the question of adjusting below minimum tax does not arise. 5. The Rs. 1,800,000 is fully used. **The same company, if profits do not recover** 1. In tax years 2028 and 2029 the company again pays minimum tax because its normal tax is lower each year. 2. The two-year window for the tax year 2027 excess ends with tax year 2029. 3. Section 113 gives no further period for the Rs. 1,800,000 after that. ### What if ...? **What if the company made a loss?** Then no tax was payable at normal rates, and the first proviso carries forward the entire minimum tax paid, for the same two tax years. **What if the company also pays Alternative Corporate Tax?** That is a separate mechanism under section 113C with its own ten-year carry forward. Section 113C(5) says its mechanism does not prejudice the carry forward of minimum tax under section 113. ### Common mistakes - **Using the old five or three year period.** The second proviso now reads two tax years. - **Counting the year of payment as one of the two.** The period is the two tax years "immediately succeeding" the year of payment. - **Adjusting against the wrong tax.** The Explanation limits adjustment to tax under clause (1) of Division I or Division II of Part I of the First Schedule. - **Expecting a refund of the balance.** Section 113 provides for adjustment, not refund. ### What to check in the official text Read section 113(2)(c), both provisos and the Explanation, with the footnotes recording the Finance Acts of 2021, 2022, 2023 and 2025. Check the Division IX Table for your business's rate and the Division II Table for your normal rate. If you hold excess amounts from years before the Finance Act, 2025, the section as printed does not say which period applies to them. ### Frequently asked #### How many tax years can excess minimum tax be carried forward? Two. The second proviso to section 113(2)(c) allows the amount to be carried forward and adjusted against tax liability for the two tax years immediately succeeding the tax year for which it was paid. #### Against which tax is the excess adjusted? Against tax under clause (1) of Division I or Division II of Part I of the First Schedule, as the Explanation to section 113(2)(c) clarifies. For a company that means tax at the Division II corporate rate. #### Can unused excess minimum tax be refunded? Section 113 does not provide for a refund. It allows adjustment only within the two tax years after the year of payment, and it says nothing about the amount after that. ### Citations - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "the excess amount of tax paid shall be carried forward for adjustment against tax liability under the aforesaid Part of the subsequent tax year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "tax years immediately succeeding the tax year for which the amount was paid." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IX (Minimum tax under section 113), Table, S. No. 4](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division II (Rates of Tax for Companies), Table](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113C (Alternative Corporate Tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113c-alternative-corporate-tax), as amended to 2026-06-30: "shall not prejudice or affect the entitlement of the taxpayer regarding carrying forward and adjustment of minimum tax referred to in section 113" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2025, Finance Act, 2025, amendment to section 113(2)(c), second proviso: "three" replaced by "two"](https://qanoondigest.com/acts/finance-act/finance-act-2025), as amended to 2025 Official source: https://download1.fbr.gov.pk/Docs/2025629106147620FInanceAct2025.pdf --- ## Does my company have to withhold sales tax from suppliers' invoices as a withholding agent? Source: https://qanoondigest.com/faq/companies/company-sales-tax-withholding-agent-one-fifth Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Often, yes. Rule 1(2)(d) of the Sales Tax Special Procedure (Withholding) Rules, 2007 names companies registered for sales tax, federal excise or income tax as withholding agents. Section 3(7) and the Eleventh Schedule set the amount: one fifth of invoiced tax, one tenth for distributors, or 5% of gross value from non-active suppliers, subject to the Schedule's exclusions. **Applies to:** Companies registered for sales tax, federal excise duty or income tax that buy taxable goods, and their accounts payable teams. A company that buys taxable goods can be required to hold back part of the sales tax on its suppliers' invoices and pay it to the government itself. Two texts in this corpus deal with it, and they are of different ages, so which one a reader relies on matters. ### Which texts apply? 1. **The Sales Tax Special Procedure (Withholding) Rules, 2007.** The edition in this corpus is amended only to 30 June 2015. Any SRO amending the Rules after that date is not in the corpus and is not reflected here. 2. **The Sales Tax Act, 1990, as amended to 30 June 2026.** Section 3(7) says tax shall be withheld "at the rate as specified in the Eleventh Schedule, by any person or class of persons" being purchasers of goods or services, as withholding agents, in the manner the Board prescribes. The Eleventh Schedule was inserted by the Finance Act, 2019 and amended as recently as the Finance Act, 2026. Where the two differ, the Eleventh Schedule is the later text and is part of the Act itself. ### What do the 2007 Rules say? Rule 1(2) lists the withholding agents. Clause (d) names "companies as defined in the Income Tax Ordinance, 2001 (XLIX of 2001), which is registered for sales tax, federal excise duty or income tax". A company holding only an NTN is therefore covered. Rule 2(2) requires a withholding agent, other than a recipient of advertisement services, to deduct one fifth of the total sales tax shown on the invoice of a registered person and pay the balance to the supplier. Rule 2(2A) sets one tenth for suppliers registered as a wholesaler, dealer or distributor. Rule 2(8) requires the agent to give the supplier a certificate showing the tax deducted. Rule 2(6) says an agent registered for sales tax or federal excise deposits the withheld tax with its own return for the month in which the purchase was made. An agent that holds only an NTN files the return in the Annexure to the Rules electronically. Rule 3(2) lets the supplier adjust its output tax, "taking due credit of the sales tax deducted by the withholding agent". ### What does the Eleventh Schedule say now? For companies as withholding agents, the Table reads: | S. No. | Supplier | Deduction | |---|---|---| | 1 | Active taxpayers | 1/5th of sales tax as shown on invoice | | 2 | Active taxpayer registered as a wholesaler, dealer or distributor | 1/10th of sales tax as shown on invoice | | 4 | Persons other than active taxpayers | 5% of gross value of supplies | S. No. 4 excludes companies exporting surgical instruments, and the Finance Act, 2026 extended it to associations of persons and individuals. Section 2(1A) defines an active taxpayer as a registered person who does not fall into any of four categories: blacklisted or suspended; failing to file sales tax returns by the due date for two consecutive tax periods; failing to file its income tax return by the due date; or failing to file its quarterly or annual withholding tax statement under the Income Tax Ordinance. ### Which purchases are excluded? The Schedule lists goods and supplies to which it does not apply, including electrical energy, natural gas, specified petroleum products, vegetable ghee and cooking oil, telecommunication services and Third Schedule goods. Clause (viii), substituted by the Finance Act, 2024, excludes "Supplies made by an Active Taxpayer as defined in the Sales Tax Act, 1990 to another registered person", except supplies under S. Nos. 5, 7, 9, 10, 11, 12 and 13. Read as printed, a company registered for sales tax does not deduct one fifth when it buys ordinary goods from an active taxpayer. A company registered only for income tax is not a registered person under the Sales Tax Act, so clause (viii) does not remove its deduction. The Schedule does not add more detail on this point. ### Worked example (illustrative figures) Margalla Software (Pvt) Ltd, Islamabad, holds an NTN but is not registered for sales tax. It buys office furniture from an active taxpayer manufacturer. Figures are invented; the fractions are those in the Schedule. 1. Value of supply: Rs. 1,000,000. Sales tax on invoice at 18%: Rs. 180,000. 2. Deduction under S. No. 1: Rs. 180,000 / 5 = Rs. 36,000. 3. Sales tax paid to the supplier: Rs. 180,000 - Rs. 36,000 = Rs. 144,000. 4. Total paid to the supplier: Rs. 1,000,000 + Rs. 144,000 = Rs. 1,144,000. 5. Rs. 36,000 is deposited with the government, and a certificate is given to the supplier. If Margalla instead bought Rs. 500,000 of goods from a supplier that is not an active taxpayer, S. No. 4 would require 5% of gross value: Rs. 500,000 x 5% = Rs. 25,000. ### What if the 2015 Rules and the Schedule differ? Rule 2(3)(ii) of the 2015 edition requires one percent of value on purchases from persons liable to be registered but not registered. S. No. 4 of the Schedule in the 2026 Act sets 5% of gross value for suppliers other than active taxpayers. The later Act text governs the rate; how the Rules were amended after 2015 is not in this corpus. ### Common mistakes - **Using the 2015 Rules alone.** The rates now come from section 3(7) and the Eleventh Schedule. - **Deducting from every supplier.** Clause (viii) and the other exclusions remove many purchases. - **Checking registration instead of active status.** S. Nos. 1, 2 and 4 turn on whether the supplier is an active taxpayer. - **Treating this as income tax withholding.** Income tax withheld from supplier payments under the Income Tax Ordinance is a separate obligation with its own rates. ### What to check in the official text Read section 3(7), section 2(1A) and the Eleventh Schedule with its exclusions in the Sales Tax Act, and rules 1 to 3 of the 2007 Rules. Check the current consolidated Rules and any SRO issued after 30 June 2015 for the deposit procedure. ### Frequently asked #### Is every company a sales tax withholding agent? Rule 1(2)(d) of the 2007 Withholding Rules covers companies as defined in the Income Tax Ordinance that are registered for sales tax, federal excise duty or income tax. The Eleventh Schedule to the Sales Tax Act lists companies as withholding agents in S. Nos. 1, 2 and 4. #### How much sales tax does a company withhold? Under the Eleventh Schedule, one fifth of the sales tax shown on the invoice of an active taxpayer, one tenth where the active taxpayer is registered as a wholesaler, dealer or distributor, and 5% of gross value where the supplier is not an active taxpayer. #### Does a sales tax registered company withhold from an active taxpayer supplier? Clause (viii) after the Eleventh Schedule Table excludes supplies made by an active taxpayer to another registered person, except supplies under S. Nos. 5, 7 and 9 to 13. As printed, that removes the one fifth deduction on ordinary purchases by a registered company from an active taxpayer. ### Citations - [Sales Tax Special Procedure (Withholding) Rules, 2007, section 1 (Short title, application and commencement)](https://qanoondigest.com/rules/sales-tax-special-procedure-withholding-rules-2007/sales-tax-special-procedure-withholding-rules-2007-2015-06-30#1-short-title-application-and-commencement), as amended to 2015-06-30: "companies as defined in the Income Tax Ordinance, 2001 (XLIX of 2001), which is registered for sales tax, federal excise duty or income tax" Official source: https://download1.fbr.gov.pk/Docs/2015941394735438reupdatedSalesTaxSpecialprocedure(Withholding)Rules2007updatedupto30.06.2015.pdf - [Sales Tax Special Procedure (Withholding) Rules, 2007, section 2 (Responsibility of a withholding agent)](https://qanoondigest.com/rules/sales-tax-special-procedure-withholding-rules-2007/sales-tax-special-procedure-withholding-rules-2007-2015-06-30#2-responsibility-of-a-withholding-agent), as amended to 2015-06-30: "shall deduct an amount equal to one fifth of the total sales tax shown in the sales tax invoice issued by a registered person" Official source: https://download1.fbr.gov.pk/Docs/2015941394735438reupdatedSalesTaxSpecialprocedure(Withholding)Rules2007updatedupto30.06.2015.pdf - [Sales Tax Special Procedure (Withholding) Rules, 2007, section 3 (Responsibility of the [registered supplier)](https://qanoondigest.com/rules/sales-tax-special-procedure-withholding-rules-2007/sales-tax-special-procedure-withholding-rules-2007-2015-06-30#3-responsibility-of-the-registered-supplier), as amended to 2015-06-30: "taking due credit of the sales tax deducted by the withholding agent" Official source: https://download1.fbr.gov.pk/Docs/2015941394735438reupdatedSalesTaxSpecialprocedure(Withholding)Rules2007updatedupto30.06.2015.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "at the rate as specified in the Eleventh Schedule, by any person or class of persons" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, Eleventh Schedule, Table, S. Nos. 1, 2 and 4, and clause (viii) of the exclusions after the Table](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“active taxpayer” means a registered person who does not fall in any of the following categories" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Is a single member company (SMC) taxed as a company or as the owner personally? Source: https://qanoondigest.com/faq/companies/single-member-company-tax-treatment Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer An SMC is taxed as a company. Section 80 treats any company as defined in the Companies Act, 2017 as a company, so its profit is taxed at the Division II rate (29%, or 20% for a small company, in tax year 2027) and section 114 requires a return. The owner's dividends are taxed separately under section 5. **Applies to:** Founders and sole shareholders of single member companies registered under the Companies Act, 2017, and the people who prepare their accounts. A single member company is a separate taxpayer from the person who owns it. The Income Tax Ordinance, 2001, as amended to 30 June 2026, taxes it under the rules for companies, and the owner is taxed only on what the company pays out to them. The figures on this page are for tax year 2027. ### What does the law say? The Ordinance does not use the words "single member company" anywhere. What it does is define "company" broadly. Section 80(2)(b)(i) says that "company" means "a company as defined in the Companies Act, 2017". A single member company is registered under that Act, so for income tax purposes it is a company like any other. It is not an individual and it is not an association of persons: section 80(2)(a) expressly says an association of persons "does not include a company". Three consequences follow: 1. **Rate.** The company's taxable income is taxed at the rates in Division II of Part I of the First Schedule, not the individual slabs in Division I. For tax year 2027 the Division II Table sets 29% for "any other company" and 20% for a small company. 2. **Return.** Section 114(1)(a) requires "every company" to file a return of income. Clause (ab), which ties the filing duty to taxable income above the tax-free amount, applies only to persons "other than a company". An SMC files even in a year with no income or a loss. 3. **Owner's income.** Money the SMC distributes to its owner as a dividend is taxed in the owner's hands under section 5. ### How does it work in practice? The SMC computes its own taxable income and pays tax on it at the company rate. Under the proviso to section 114(2A), for tax year 2026 onwards a company's financial statements filed with the return must be in an electronically readable file format. When the SMC pays a dividend, section 5 charges the owner at the Division III rate on the gross amount of the dividend. For an ordinary company paying an ordinary dividend, clause (b) of Division III sets 15%. Clause (d) sets 25% where the paying company has no tax payable because of exempt income, carried-forward business losses or tax credits. Section 8 makes this a final tax: the dividend is not added to the owner's other income and no expense can be deducted against it. The owner also has a filing duty. Section 114(1)(ae) covers "every person whose income for the year is subject to final taxation", which includes a person who received a dividend. ### Worked example (illustrative figures) Sana Tariq owns all the shares of a Lahore garments SMC. In tax year 2027 the company has taxable income of Rs. 12,000,000. Its turnover is Rs. 300,000,000, which is above the Rs. 250,000,000 limit in the small company definition, so it is taxed in the "any other company" row. 1. Company tax: Rs. 12,000,000 x 29% = **Rs. 3,480,000**, payable by the company. 2. The company later pays Sana a cash dividend of Rs. 5,000,000. It has paid tax on its income, so Division III clause (b) applies: Rs. 5,000,000 x 15% = **Rs. 750,000**. 3. Sana receives Rs. 5,000,000 - Rs. 750,000 = **Rs. 4,250,000**. Under section 8 that dividend is not taxed again in her own return. If the same company had met every condition of the small company definition in clause (59AB) of section 2, step 1 would be Rs. 12,000,000 x 20% = Rs. 2,400,000. The dividend steps would not change. ### What if the owner takes money out without declaring a dividend? Clause (19) of section 2 defines "dividend" to include, under sub-clause (e), any payment by a private company "by way of advance or loan to a shareholder or any payment by any such company or trust on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company or trust, in either case, possesses accumulated profits". Whether a particular SMC is a "private company as defined in the Companies Act, 2017" is decided by that Act, which is outside this corpus. Where it is, a loan from the company to its sole owner can be taxed as a dividend. ### What if the SMC makes a loss? The loss belongs to the company. It is carried forward against the company's own business income under the Ordinance's loss rules, and it cannot be set against the owner's salary or other personal income, because the owner and the company are different persons under section 80. The company still has to file its return under section 114(1)(a). ### Common mistakes - **Treating the SMC's profit as the owner's personal income.** The company is the taxpayer. The owner is taxed only on dividends and any other amounts the company pays them. - **Applying individual slabs.** The Division I slabs are for individuals and associations of persons. An SMC uses Division II. - **Skipping the company return because there was no profit.** Section 114(1)(a) has no income threshold for companies. - **Assuming every new SMC gets 20%.** The small company rate needs all the conditions in clause (59AB), including turnover not above Rs. 250,000,000 and capital plus undistributed reserves not above Rs. 50,000,000. - **Assuming the dividend rate is always 15%.** Division III clause (d) sets 25% where the company had no tax payable because of exemption, losses or credits. ### What to check in the official text Read section 80(2)(b), section 114(1), section 5, section 8 and clauses (19) and (59AB) of section 2 in the official PDF, then Divisions II and III of Part I of the First Schedule. Whether a company is a single member company, and whether it is a private company, is decided under the Companies Act, 2017, which is not part of this corpus. Minimum tax on turnover and Alternative Corporate Tax can also affect what a company pays, and are covered on separate pages about companies. ### Frequently asked #### Does the Income Tax Ordinance have special rules for single member companies? No. The Ordinance does not mention single member companies by name. An SMC is covered because section 80 treats a company as defined in the Companies Act, 2017 as a company, so the ordinary company rules apply to it. #### Does an SMC with no profit still have to file a return? Yes. Section 114(1)(a) lists every company as a person required to file a return. Unlike other persons under clause (ab), a company has no income threshold. #### Can the owner avoid dividend tax by taking a loan from the SMC? Not necessarily. Clause (19)(e) of section 2 treats an advance or loan by a private company to a shareholder as a dividend, to the extent the company has accumulated profits. Whether an SMC is a private company is a question under the Companies Act, 2017, which this corpus does not hold. ### Citations - [Income Tax Ordinance, 2001, section 80 (Person)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#80-person), as amended to 2026-06-30: "a company as defined in the" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "Subject to this Ordinance, the following persons are required to furnish a return of income for a tax year, namely:-" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 5 (Tax on dividends)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#5-tax-on-dividends), as amended to 2026-06-30: "Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division III of Part I of the First Schedule, on every person who receives a dividend from a" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 8 (General provisions relating to taxes imposed under sections 5, 5A, 5AA, 6, 6A, 7, 7A, 7B and 7G)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#8-general-provisions-relating-to-taxes-imposed-under-sections-5-5a-5aa-6-6a-7-7a-7b-and-7g), as amended to 2026-06-30: "shall be a final tax on the amount in respect of which the tax is imposed and-" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "by way of advance or loan to a shareholder or any payment by any such company or trust on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company or trust, in either case, possesses accumulated profits" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division II (Rates of Tax for Companies) and Division III (Rate of Dividend Tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is a dividend one company receives from another company taxable, and is it exempt within a group? Source: https://qanoondigest.com/faq/companies/intercorporate-dividend-tax-group-companies Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 5 taxes every person receiving a dividend, companies included, at the Division III rates, usually 15%, and section 8 makes it a final tax. The only group exemption is clause (103A) of Part I of the Second Schedule, for dividends within companies taxed as one fiscal unit under section 59AA, and only once the group return is filed. **Applies to:** Holding companies, subsidiaries and other companies that receive dividends from Pakistani companies, including corporate groups considering group taxation. A dividend paid by one company to another is taxable in the receiving company's hands in the same way as a dividend paid to an individual. There is one exemption for groups, and it is narrower than many holding companies expect. This page follows the Income Tax Ordinance, 2001 as amended to 30 June 2026, which gives the position for tax year 2027. ### What does the law say? Section 5(1) imposes tax "on every person who receives a dividend from a company" at the rate in Division III of Part I of the First Schedule. The Ordinance treats a company as a person, so a company shareholder is covered. Section 5(2) computes the tax on the gross amount of the dividend, and section 5(3) says the section "shall not apply to a dividend that is exempt from tax under this Ordinance". Section 8(1) makes the section 5 tax "a final tax". A footnote to section 8 records that the Finance Act, 2013 omitted a proviso that read "Provided that the provision of this section shall not apply to dividend received by a company." Since that omission, final tax treatment covers corporate shareholders as well. The Division III rates are the same for a corporate shareholder as for anyone else: 7.5% for qualifying IPP pass through dividends, 15% in most cases, 25% where the paying company had no tax payable because of exemption, carried-forward losses or tax credits, and special rates for mutual funds and REIT special purpose vehicles. For a mutual fund dividend, clause (ba) adds that "where the corporate entity is recipient of the dividend, the component derived from the debt securities shall be taxed at the rate of twenty-nine percent". ### When is a group dividend exempt? Clause (103A) of Part I of the Second Schedule exempts: > Any income derived from inter-corporate dividend within the group companies entitled to group taxation under section 59AA ... subject to the condition that return of the group has been filed for the tax year. Section 59AA lets "Holding companies and subsidiary companies of 100% owned group" opt to be taxed as one fiscal unit. The option is irrevocable, limited to companies locally incorporated under the Companies Act, 2017, and open only to companies that meet SECP corporate governance and group designation requirements and are designated as entitled to group taxation. So the exemption needs all of these: 1. a 100% owned group; 2. an irrevocable option for group taxation under section 59AA, with SECP designation; and 3. the group return filed for the tax year. ### What happened to the exemption for group relief companies? Two changes narrowed the exemption: - Clause (103A) once also referred to section 59B. A footnote records that the expression "or section 59B" was omitted by the Finance Act, 2016. - Clause (103C) exempted dividend income of a company that was eligible for group relief under section 59B. It was inserted in 2019 and omitted by the Finance Act, 2021. Under the current text, a group that uses group relief for losses but has not opted for group taxation has no exemption for dividends passing between its companies. ### How does it work in practice? The paying company deducts tax at source from the gross dividend at the rates in Division I of Part III of the First Schedule, and for most companies that is the end of it: section 8(1)(e)(ii) treats the receiving company's liability as discharged to the extent tax was deducted at source. The deduction provision does not itself mention clause (103A). How a paying company inside a section 59AA group is relieved from deducting on an exempt dividend is dealt with elsewhere in the Ordinance and in rules not covered on this page. ### Worked example (illustrative figures) A Lahore holding company receives two dividends in tax year 2027, both from subsidiaries that paid tax on their income. **Dividend 1: Rs. 50,000,000 from a subsidiary it owns 80%.** The group is not 100% owned, so section 59AA cannot apply and clause (103A) is not available. - Rs. 50,000,000 x 15% = **Rs. 7,500,000** deducted by the subsidiary. - The holding company receives Rs. 42,500,000. The Rs. 50,000,000 is not added to its taxable income, because the tax is final under section 8. **Dividend 2: Rs. 20,000,000 from a wholly owned subsidiary, with the group designated and taxed as one fiscal unit under section 59AA, and the group return filed.** - Clause (103A) exempts the dividend, and section 5(3) takes it out of section 5. - Tax on the dividend: **Rs. 0**. If the group return for that year had not been filed, the condition in clause (103A) would not be met and the 15% rate would apply: Rs. 20,000,000 x 15% = Rs. 3,000,000. ### Common mistakes - **Taxing the dividend at the corporate rate.** A dividend is charged under section 5, not at the Division II company rate, and is final. - **Assuming any subsidiary dividend is exempt.** Only dividends within a section 59AA group qualify, and section 59AA requires 100% ownership. - **Relying on clause (103C).** It was omitted by the Finance Act, 2021. Group relief under section 59B no longer carries a dividend exemption. - **Forgetting the filing condition.** Clause (103A) requires the group return for the tax year to have been filed. ### What to check in the official text Read sections 5, 8, 59AA and 59B, clause (103A) of Part I of the Second Schedule and Division III of Part I of the First Schedule in the official PDF. Section 59AA(6) says group taxation may be regulated through rules made by the Board, and the SECP group designation requirements it refers to are outside this corpus. Confirm the group's designation before relying on the exemption. ### Frequently asked #### Is a dividend received by a company taxed at the 29% corporate rate? No. A dividend is charged under section 5 at the Division III rate, usually 15%, on the gross amount. Section 8 makes that a final tax, so the dividend is kept out of the company's taxable income taxed at the Division II rate. #### Are dividends between a holding company and its 75% subsidiary exempt? Not under the current text. Clause (103A) exempts only dividends within group companies entitled to group taxation under section 59AA, which requires a 100% owned group. The exemption for groups eligible for group relief, clause (103C), was omitted by the Finance Act, 2021. #### What is the condition for the clause (103A) exemption? The dividend must be between group companies entitled to group taxation under section 59AA, and the clause adds the condition that the return of the group has been filed for the tax year. ### Citations - [Income Tax Ordinance, 2001, section 5 (Tax on dividends)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#5-tax-on-dividends), as amended to 2026-06-30: "Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division III of Part I of the First Schedule, on every person who receives a dividend from a" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (103A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 59AA (Group taxation)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#59aa-group-taxation), as amended to 2026-06-30: "Holding companies and subsidiary companies of 100% owned group may opt to be taxed as one fiscal unit." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 8 (General provisions relating to taxes imposed under sections 5, 5A, 5AA, 6, 6A, 7, 7A, 7B and 7G)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#8-general-provisions-relating-to-taxes-imposed-under-sections-5-5a-5aa-6-6a-7-7a-7b-and-7g), as amended to 2026-06-30: "shall be a final tax on the amount in respect of which the tax is imposed and-" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 59B (Group relief)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#59b-group-relief), as amended to 2026-06-30: "may surrender its assessed loss" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division III (Rate of Dividend Tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What is minimum tax on turnover under section 113, what counts as turnover, and what rate does a company pay? Source: https://qanoondigest.com/faq/companies/minimum-tax-on-turnover-company-section-113 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 113 applies to a resident company whose tax for the year is nil or below the Division IX percentage of its turnover, for example because of losses, exemptions or allowances. The company pays tax at that percentage instead, 1.25% of turnover in the general case, and the excess over normal tax is carried forward for two tax years. **Applies to:** Resident companies and permanent establishments of non-resident companies, especially those with thin margins, losses or large allowances; also individuals and AOPs with turnover of Rs. 100 million or more. Minimum tax is a floor. A company that reports little or no taxable income still pays a small percentage of its turnover. Section 113 of the Income Tax Ordinance, 2001 sets the rule, and Division IX of Part I of the First Schedule sets the percentages. This page uses the Ordinance as amended to 30 June 2026. ### What does the law say? Section 113(1) applies to a **resident company**, a **permanent establishment of a non-resident company**, and to individuals and associations of persons with turnover of one hundred million rupees or more in tax year 2017 or any later year. It bites where, for any reason allowed under the Ordinance or any other law, including: - a loss for the year; - setting off a loss of an earlier year; - exemption from tax; - credits or rebates; or - allowances or deductions, including depreciation and amortisation, no tax is payable, or the tax payable is less than the Division IX percentage of the company's turnover from all sources. Where it applies, section 113(2) treats the company's turnover as its income chargeable to tax, and the company pays minimum tax at the Division IX rate "instead of the actual tax payable". For this comparison, the Explanation to section 113(1) says "tax payable or paid" does not include tax on deemed income assessed as a final discharge, or super tax. So super tax under section 4C does not help a company clear the minimum tax floor. ### What counts as turnover? Section 113(3) defines turnover as: 1. **Sales of goods:** gross sales or gross receipts, exclusive of sales tax and federal excise duty, and exclusive of trade discounts shown on invoices or bills. Amounts taken as deemed income and assessed as a final discharge of tax liability are also left out. 2. **Services:** gross fees for rendering services or giving benefits, including commissions, except those covered by a final discharge of tax liability for which tax is separately paid or payable. 3. **Contracts:** gross receipts from executing contracts, with the same exception for final tax receipts. 4. **Share of an AOP:** the company's share of the above amounts of any association of persons of which it is a member. An Explanation to section 113(2)(a) adds that turnover covers receipts from all business activities, including receipts from sale of immovable property where these are taxable under the head Income from Business. ### What rate applies? The Division IX Table, as printed in the consolidated source, reads in outline: | S. No. | Persons | Minimum tax as % of turnover | |---|---|---| | 1 | Sui Southern Gas Company Limited and Sui Northern Gas Pipelines Limited (annual turnover above Rs. 1 billion), Pakistan International Airlines Corporation, poultry industry (see the note below on this row) | 0.75% | | 2 | Oil refineries, motorcycle dealers registered under the Sales Tax Act, 1990, oil marketing companies | 0.5% | | 3 | Petroleum agents and distributors registered under the Sales Tax Act, 1990, rice mills and dealers, Tier-1 FMCG retailers integrated with the Board's system, e-commerce and online marketplace turnover, used vehicle traders, flour mills | 0.25% | | 4 | In all other cases | 1.25% | Most manufacturing, trading and services companies fall in serial 4 at **1.25%**. The Finance Act, 2026 omitted the old entry for distributors of pharmaceutical products, fast moving consumer goods and cigarettes from serial 3. Clause (24D) of Part II of the Second Schedule now sets **0.5%** for distributors, dealers, sub-dealers and wholesalers of listed goods (including pharmaceuticals, fertilizer, cigarettes, sugar, electronics, beverages and packaged foods), provided they appear on the active taxpayers' lists under both the Sales Tax Act, 1990 and the Ordinance. ### Worked example (illustrative figures) Gujranwala Ceramics (Pvt) Ltd, an ordinary resident company, for tax year 2027: 1. Invoiced sales including sales tax: Rs. 590,000,000. Sales tax on those invoices: Rs. 90,000,000. Trade discounts shown on invoices: Rs. 10,000,000. 2. Turnover from sales: Rs. 590,000,000 - Rs. 90,000,000 - Rs. 10,000,000 = Rs. 490,000,000. 3. Commission earned as a sales agent: Rs. 10,000,000. Total turnover: **Rs. 500,000,000**. 4. Minimum tax at 1.25%: Rs. 500,000,000 x 1.25% = **Rs. 6,250,000**. 5. Normal tax: taxable income after heavy depreciation is Rs. 15,000,000; at 29% that is Rs. 4,350,000. 6. Rs. 4,350,000 is less than Rs. 6,250,000, so the company pays Rs. 6,250,000. 7. The excess, Rs. 6,250,000 - Rs. 4,350,000 = Rs. 1,900,000, is carried forward under section 113(2)(c) for adjustment against Division II tax in tax years 2028 and 2029. If the company had a loss and no tax payable at all, the first proviso to section 113(2)(c) carries forward the whole Rs. 6,250,000. ### What if ...? **What if Alternative Corporate Tax is higher still?** Section 113C makes a company's tax the higher of corporate tax (itself the higher of Division II tax and minimum tax) and Alternative Corporate Tax on accounting income. Minimum tax is therefore not always the last step. **What if the company is a member of a partnership?** Section 113(3)(d) adds the company's share of the AOP's turnover to its own. **What if some sales suffered a final tax?** Turnover excludes amounts assessed as a final discharge of tax liability, so those sales stay out of the section 113 base. ### Common mistakes - **Calculating 1.25% on invoice value including sales tax.** Sales tax, federal excise duty and invoiced trade discounts are excluded. - **Counting super tax towards the floor.** The Explanation to section 113(1) excludes it. - **Carrying the excess forward indefinitely.** Section 113(2)(c) allows two tax years; the period was three before the Finance Act, 2025. - **Leaving out commission, contract receipts or AOP share.** Section 113(3)(b) to (d) include them. ### What to check in the official text The Division IX Table is badly laid out in the consolidated source: part of serial 1 runs across a page break and some entries may not have survived extraction. Confirm the full list of sectors and rates in the official PDF of the Ordinance before relying on a reduced rate. Read section 113 in full, clause (24D) of Part II of the Second Schedule for its conditions, and check for any notification that changes the rates, which this corpus does not hold. ### Frequently asked #### What is the minimum tax rate for an ordinary company? Serial 4 of the Division IX Table, in all other cases, sets 1.25% of turnover. Lower rates apply to the sectors listed in serials 1 to 3 and, subject to conditions, to the distributors and dealers covered by clause (24D) of Part II of the Second Schedule. #### Is sales tax part of turnover for minimum tax? No. Section 113(3)(a) takes gross sales or gross receipts exclusive of sales tax and federal excise duty and of trade discounts shown on invoices or bills. #### Can the extra tax paid as minimum tax be recovered later? Section 113(2)(c) carries forward the excess of minimum tax over the tax payable under Division II and allows it to be adjusted against that tax for the two tax years immediately after. If no tax was payable at all, the whole minimum tax is carried forward. ### Citations - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "exclusive of Sales Tax and Federal Excise duty or any trade discounts shown on invoices, or bills, derived from the sale of goods" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "the company’s share of the amounts stated above of any association of persons of which the company is a member" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IX (Minimum tax under section 113), Table](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part II, clause (24D), as substituted by the Finance Act, 2026](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 4C (Super tax on high earning persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4c-super-tax-on-high-earning-persons), as amended to 2026-06-30: "A super tax shall be imposed for tax year 2022 and onwards at the rates specified in Division IIB of Part I of the First Schedule, on income of every person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113C (Alternative Corporate Tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113c-alternative-corporate-tax), as amended to 2026-06-30: "shall be higher of the Corporate Tax or Alternative Corporate Tax" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Does a company that supplies taxable goods have to register for sales tax and file monthly returns? Source: https://qanoondigest.com/faq/companies/company-sales-tax-registration-and-returns Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It depends on what the company does, not on being a company. Section 14 of the Sales Tax Act, 1990 requires registration of manufacturers other than cottage industry, importers, wholesalers, dealers, distributors, certain retailers and exporters seeking refunds. Once registered, section 26 requires a return for each tax period, normally monthly, and section 34 adds default surcharge on late tax. **Applies to:** Newly incorporated and existing companies that manufacture, import, export or trade in goods in Pakistan. A company's income tax registration and its sales tax registration are two separate things under two separate laws. Incorporation brings the income tax duties with it, but sales tax registration depends on whether the company falls into one of the categories in section 14 of the Sales Tax Act, 1990. ### What does the law say? Section 14(1) requires registration of every person making taxable supplies in Pakistan, including zero-rated supplies, in the course or furtherance of a taxable activity, who falls in any of these categories: | Clause | Category | |---|---| | (a) | A manufacturer who is not running a cottage industry | | (b) | A retailer liable to pay sales tax under the Act or rules, except one paying through the electricity bill under section 3(9) | | (c) | An importer | | (d) | An exporter who intends to obtain a sales tax refund against zero-rated supplies | | (e) | A wholesaler, dealer or distributor | | (f) | A person required under another federal or provincial law to register for a duty or tax collected as if it were sales tax | Section 14(1A), added by the Finance Act, 2025, separately requires registration of persons selling digitally ordered goods through an online marketplace, website or app, other than cottage industry and electricity-bill retailers. Section 2(5AB) defines a cottage industry as a manufacturing concern with no industrial gas or electricity connection, located in a residential area, with no more than ten workers and annual turnover from all supplies not above eight million rupees. All four conditions must be met. Section 14(2) lets a person not making taxable supplies apply for registration if it needs it for imports or exports. Section 14(2A) lets the Commissioner compulsorily register a person who should be registered but has not applied, after a hearing. ### How is it different from income tax registration? Section 181 of the Income Tax Ordinance, 2001 requires every taxpayer to apply for registration under that Ordinance. That gives the company its income tax identity. It does not register the company under the Sales Tax Act. A company that only provides services may be outside section 14 altogether, and sales tax on services in the provinces is charged under provincial laws that are outside this corpus. ### What are the obligations after registration? **Charging tax.** Section 3(1) charges sales tax at eighteen percent of the value of taxable supplies made by a registered person, unless a schedule or notification sets another rate. **Returns.** Section 26(1) requires every registered person to furnish a true, complete and correct return by the due date, showing purchases, supplies, tax due and paid for the tax period. Section 2(43) makes a tax period one month unless the Board notifies otherwise, and section 2(9) makes the due date the 15th day of the month following the end of the tax period, or another date the Board specifies. The Board may require quarterly returns or an additional annual return from some persons. **Revisions.** Section 26(3) allows a revised return within one hundred and twenty days, with the Commissioner's approval. Under section 26(3A) no approval is needed within sixty days if the revision increases tax payable or reduces the refund, unless the Board's risk system restricts it. **Late payment.** Section 34(1)(a) charges default surcharge at twelve percent per annum or KIBOR plus three percent per annum, whichever is higher, on tax not paid on time or on inadmissible credit or refund. Under section 34(2)(b), for unpaid tax the period runs "from the 16th day of a month (following the due date of the tax period to which the default relates) to the day preceding the date on which the tax due is actually paid". ### Worked example (illustrative figures) Chenab Sports Industries (Pvt) Ltd is incorporated in Sialkot and starts manufacturing footballs in a factory with an industrial electricity connection. It fails the cottage industry test, so section 14(1)(a) requires it to register. For its first month, suppose its tax due after input tax adjustment is Rs. 1,800,000, and it pays 73 days late. Assume twelve percent per annum is the higher of the two section 34 rates for the period, and that surcharge is worked out day by day, which section 34 does not specify: 1. Annual surcharge on the amount: Rs. 1,800,000 x 12% = Rs. 216,000. 2. For 73 days, one fifth of a 365-day year: Rs. 216,000 / 5 = Rs. 43,200. Default surcharge of Rs. 43,200 is payable in addition to the Rs. 1,800,000. ### What if the company stays unregistered? Three things follow from the Act. Section 3(1A) charges further tax at four percent of value on taxable supplies made to a person who has not obtained a registration number or is not an active taxpayer, so its suppliers must charge it more. The definition of "registered person" in section 2 says a person liable to be registered but not registered is not entitled to any benefit available to a registered person under the Act or the rules. And the provisions printed with section 14 in this edition let the Board direct disconnection of gas and electricity, and let the Commissioner suspend and then bar bank accounts after three consecutive opportunities to register. The bank account power takes effect only from a date the Board notifies. ### Common mistakes - **Treating the NTN as sales tax registration.** Section 181 of the Ordinance and section 14 of the Act are separate registrations. - **Assuming a small company is a cottage industry.** All four conditions in section 2(5AB) must be met. - **Confusing the return with the surcharge clock.** Section 26 fixes when the return is due; section 34(2)(b) sets its own start date for default surcharge on unpaid tax. - **Assuming services are covered here.** Provincial sales tax on services is outside this corpus. ### What to check in the official text Read section 14 with its sub-sections, section 2 clauses (5AB), (9) and (43), section 26 and section 34. The registration procedure, payment date and return form are in the Sales Tax Rules, 2006 and Board notifications, which should be checked for the current tax period. ### Frequently asked #### Does incorporating a company automatically register it for sales tax? No. Income tax registration is under section 181 of the Income Tax Ordinance, 2001, and sales tax registration is under section 14 of the Sales Tax Act, 1990. Section 14 turns on the company's activity, such as manufacturing, importing or wholesale trade. #### When is a sales tax return due? Section 26 requires the return by the due date, which section 2(9) sets as the 15th day of the month following the end of the tax period unless the Board specifies another date. A tax period is one month unless the Board notifies otherwise. #### What is the default surcharge on late sales tax? Section 34 charges twelve percent per annum or KIBOR plus three percent per annum, whichever is higher, on the tax due. Where the default is on account of tax fraud, the rate is two percent per month. ### Citations - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "a manufacturer who is not running a cottage industry" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 26 (* Return)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#26-return), as amended to 2026-06-30: "indicating the purchases and the supplies made during a tax period, the tax due and paid and such other information, as may be prescribed" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 34 (Default Surcharge)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#34-default-surcharge), as amended to 2026-06-30: "if a registered person does not pay the tax due or any part thereof, whether wilfully or otherwise, in time or in the manner specified under this Act" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "where taxable supplies are made to a person who has not obtained registration number" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 2 (Definitions)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#2-definitions), as amended to 2026-06-30: "“tax period” means a period of one month or such other period as the" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Income Tax Ordinance, 2001, section 181 (Taxpayer’s registration)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181-taxpayer-s-registration), as amended to 2026-06-30: "shall apply in the prescribed form and in the prescribed manner for registration" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What tax must a company deduct when paying a foreign company for royalties, technical fees or services, and can treaty rates be used? Source: https://qanoondigest.com/faq/companies/company-payments-to-foreign-companies-152 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 152 requires a payer to deduct tax when paying a non-resident: 15% of the gross amount for royalties and technical fees taxable under section 6, 7% for construction and similar contracts in Pakistan, and 20% for most other payments. Section 107 gives notified tax treaties effect over the Ordinance. Treaty rates are not quoted here. **Applies to:** Companies in Pakistan paying foreign companies or other non-residents for royalties, technical services, contracts, insurance, advertising or other services. When a company in Pakistan pays a foreign company, section 152 of the Income Tax Ordinance, 2001 usually requires it to deduct tax before the money leaves. The rate depends on what is being paid for and whether the foreign company has a permanent establishment in Pakistan. This page reads the Ordinance as amended to 30 June 2026, so the rates are those for tax year 2027. ### What does the law say? Section 152 has several deduction rules for non-residents. The ones a trading or manufacturing company meets most often are: | Sub-section | Payment | Rate source | Rate | |---|---|---|---| | (1) | Royalty or fee for technical services chargeable under section 6 | First Schedule, Part I, Division IV | 15% of the gross amount | | (1A) | Contract or sub-contract under a construction, assembly or installation project in Pakistan, other construction contracts and related services, and advertisement by TV satellite channels | Part III, Division II, para (1) | 7% of the gross amount payable | | (1AA) | Insurance or re-insurance premium | Part III, Division II, para (1A) | 5% | | (1AAA) | Advertisement services by a non-resident media person relaying from outside Pakistan | Part III, Division II, para (3) | 10% | | (2) | Any other amount paid to a non-resident | Part III, Division II, para (2) | 20% of the gross amount paid | Division IV of Part I also charges 15% on fees for offshore digital services. For those, section 152(1C) puts the deduction duty on the bank or financial institution making the remittance, not on the paying company. Section 6 is the charging section behind sub-section (1). It taxes a non-resident on Pakistan-source royalty or fee for technical services on the gross amount. Section 6(3) takes out a royalty effectively connected with a permanent establishment in Pakistan, a fee for services rendered through such an establishment, and an exempt royalty or fee. ### What if the foreign company has a permanent establishment in Pakistan? Section 152(2A) applies to payments by a prescribed person, which includes a company, to a permanent establishment in Pakistan of a non-resident. It covers goods, services and contracts. The rates in Division II are: | Payment to a permanent establishment | Rate | |---|---| | Goods, payee a company | 5% | | Goods, other payee | 5.5% | | Listed services such as transport, courier, IT, engineering, car rental and inspection | 8% (4% for IT and IT enabled services) | | Other services | 15% | | Contracts, sportspersons | 15% | | Other contracts | 8% | ### Can treaty rates be used? Section 107(1) lets the Federal Government enter into tax treaties and implement them by notification. Section 107(2) says that the agreement and the notification "shall, notwithstanding anything contained in any law for the time being in force, have effect" where they provide relief from tax or determine Pakistan-source income. Sub-section (2) is itself made subject to another anti-avoidance provision of the Ordinance, so read it in full. Section 152 itself refers to treaties in sub-section (5). A payer who intends to pay a non-resident without deduction must first give the Commissioner written notice. Payments "liable to reduced rate under relevant agreement for avoidance of double taxation" are excluded from that notice requirement. This page does not quote any treaty rate, because the treaties are not in this corpus. Whether a lower rate applies depends on the specific treaty with the payee's country of residence and on the payee qualifying under it. ### Worked example (illustrative figures) Karachi Pharma Limited makes three payments to foreign companies without a permanent establishment in Pakistan in November 2026: 1. Royalty for a product licence, Rs. 10,000,000: 10,000,000 x 15% = Rs. 1,500,000 deducted under section 152(1). 2. A contract with a foreign engineering company to install a production line at its Karachi plant, Rs. 4,000,000: 4,000,000 x 7% = Rs. 280,000 deducted under section 152(1A). 3. A payment for a service that is not a technical service and not covered by any other sub-section, Rs. 2,000,000: 2,000,000 x 20% = Rs. 400,000 deducted under section 152(2). Total deducted: 1,500,000 + 280,000 + 400,000 = Rs. 2,180,000. If a treaty gives a lower rate on the royalty, the treaty rate replaces the 15% to the extent section 107 gives it effect. ### Common mistakes - **Applying 20% to a royalty.** Royalties and fees for technical services taxable under section 6 go through section 152(1) at 15%. Section 152(2) covers amounts not covered by the other sub-sections. - **Paying without deduction because the payee says it is not taxable.** Section 152(5) requires notice to the Commissioner first. Under section 152(6), the Commissioner can direct deduction. - **Assuming a treaty rate applies automatically.** It depends on the treaty's terms and on section 107(2). - **Deducting from the net amount.** Each rate applies to the gross amount paid or payable. ### What to check in the official text Read section 152 in full: the consolidated text prints several substituted and omitted versions next to the current wording. Check section 152(3), which lists amounts to which section 152(2) does not apply, and section 152(7), which lists payments for imports of goods to which the notice requirement does not apply. For treaty relief, obtain the notified treaty and check the Income Tax Rules for any form or certificate requirements. Neither is in this corpus. ### Frequently asked #### What rate applies to a royalty paid to a foreign company? Section 152(1) requires deduction at the rate in Division IV of Part I of the First Schedule, which is 15% of the gross amount of royalty or fee for technical services. This applies where the royalty is Pakistan-source and chargeable under section 6, and is not effectively connected with a permanent establishment in Pakistan. #### Does the company need the Commissioner's permission to apply a treaty rate? Section 152(5) requires a notice to the Commissioner before paying a non-resident without deduction. It expressly excludes payments liable to a reduced rate under a double taxation agreement. The Ordinance text held here does not set out a separate procedure for claiming a treaty rate, so check the Income Tax Rules and the treaty itself. #### What if the foreign company has a permanent establishment in Pakistan? Payments to a permanent establishment for goods, services or contracts fall under section 152(2A) and the rates in paragraphs (4) to (6) of Division II, such as 8% for many listed services. A royalty or fee connected with a permanent establishment is taken out of section 6 and treated as business income of the establishment. ### Citations - [Income Tax Ordinance, 2001, section 152 (Payments to non-residents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#152-payments-to-non-residents), as amended to 2026-06-30: "or fees for technical services to a non-resident person that is chargeable to tax under section 6 shall deduct tax from the gross amount paid" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 6 (Tax on certain payments to non-residents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#6-tax-on-certain-payments-to-non-residents), as amended to 2026-06-30: "where the services giving rise to the fee are rendered through a permanent establishment in Pakistan of the non-resident person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IV (Rate of Tax on Certain Payments)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division II (Payments to non-residents), paragraphs (1) to (6)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 107 (Agreements for the avoidance of double taxation and prevention of fiscal evasion)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#107-agreements-for-the-avoidance-of-double-taxation-and-prevention-of-fiscal-evasion), as amended to 2026-06-30: "the agreement and the provisions made by notification for implementing the agreement shall, notwithstanding anything contained in any law for the time being in force, have effect" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much tax must a company deduct from payments to suppliers for goods, services and contracts, and is it higher for suppliers not on the Active Taxpayers List? Source: https://qanoondigest.com/faq/companies/company-withholding-on-supplier-payments-153 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 153 makes every company a withholding agent for payments to residents. Division III rates for tax year 2027 include 5% on goods sold by a company, 7% or 14% on most services and 7.5% on a company's contracts. Rule 1 of the Tenth Schedule doubles the rate for payees not on the active taxpayers' list. **Applies to:** Companies paying resident suppliers, service providers and contractors in Pakistan, and the accounts payable staff who process those payments. Every company in Pakistan is a withholding agent for payments to its suppliers. Section 153 of the Income Tax Ordinance, 2001 sets the duty, Division III of Part III of the First Schedule sets the rates, and the Tenth Schedule raises them for payees missing from the active taxpayers' list. This page reads the law as amended to 30 June 2026, so the rates are those for tax year 2027 (payments from 1 July 2026 to 30 June 2027). ### What does the law say? Section 153(1) requires every "prescribed person" making a payment, in full or in part and including an advance, to a resident person to deduct tax at the time of payment: - **(a)** for the sale of goods, including toll manufacturing, except where payments are less than Rs. 75,000 in aggregate during a financial year; - **(b)** for rendering or providing services, except where payments are less than Rs. 30,000 in aggregate during a financial year; - **(c)** on the execution of a contract, including a contract signed by a sportsperson, but not a contract for goods or services. Section 153(7) lists the prescribed persons, and item (b) is "a company". Every company is covered whatever its size. ### What are the rates for tax year 2027? The rates below come from Division III of Part III of the First Schedule, including the changes made by the Finance Act, 2026. | Payment | Payee | Rate | |---|---|---| | Sale of rice, cotton seed or edible oils | Any | 1.5% | | Sale of goods (other than toll manufacturing) | Company | 5% | | Sale of goods (other than toll manufacturing) | Other | 5.5% | | Toll manufacturing | Company | 9% | | Toll manufacturing | Other | 11% | | Listed services: transport, freight forwarding, courier, manpower outsourcing, security guard, software development, IT and IT enabled, engineering including architectural, warehousing, car rental, building maintenance, inspection and certification, testing and training, telecommunication, travel and tour and the other services named in paragraph (2)(i) | Any | 7% (4% for IT and IT enabled services) | | Independent professional services such as doctors, lawyers, architects, accountants, software engineers or developers working independently | Any | 15% | | Advertising services, paid to electronic and print media | Any | 1.5% | | Terminal and port operating services | Company | 12% | | Services not covered above | Any | 14% | | Contracts | Sportsperson | 15% | | Contracts | Company | 7.5% | | Contracts | Other | 8% | An Explanation under paragraph (2)(i) limits the 7% rate to service providers whose services are subject to withholding on gross receipts and who have not challenged taxation of gross receipts in any court. ### How does it work in practice? **Base.** Tax is deducted from the gross amount payable, including sales tax. **Timing.** The deduction happens at the time of payment, including advance payments. **Non-ATL payees.** Rule 1 of the Tenth Schedule says that where tax is deducted from a person not appearing in the active taxpayers' list, the rate "shall be increased by hundred percent of the rate specified in" the Ordinance. The rate doubles. **Certificates.** Section 159(2) requires the full deduction unless an exemption or lower rate certificate under section 159(1) is in force for the payee. Section 153(4) separately lets the Commissioner allow a reduced rate, but only where the tax is not minimum tax, and the reduction cannot exceed eighty percent of the Division III rate. For public limited companies, the Commissioner may allow payment without any deduction. Both sections say a certificate applied for by a company is to be issued within fifteen days, and is treated as issued through Iris if the Commissioner does not act. ### Worked example (illustrative figures) Margalla Foods Limited, Islamabad, makes three payments in September 2026. Each payee's annual payments are above the Rs. 75,000 and Rs. 30,000 limits. | Payment | Gross amount | Rate if payee on ATL | Tax | Rate if payee not on ATL | Tax | |---|---|---|---|---|---| | Packaging bought from a company (not toll manufacturing), invoice including sales tax | Rs. 2,360,000 | 5% | Rs. 118,000 | 10% | Rs. 236,000 | | Security guard services from a company | Rs. 500,000 | 7% | Rs. 35,000 | 14% | Rs. 70,000 | | Warehouse repair contract with an individual contractor | Rs. 1,000,000 | 8% | Rs. 80,000 | 16% | Rs. 160,000 | Check: 2,360,000 x 5% = 118,000; 500,000 x 7% = 35,000; 1,000,000 x 8% = 80,000. Each non-ATL figure is twice the ATL figure. ### What if ...? **What if the supplier is an importer selling goods as imported?** Section 153(5)(a) excludes a sale of goods by the importer where tax under the import collection provision has been paid and the goods are sold in the same condition as imported. **What if the payment is a refund of a security deposit?** Section 153(5)(c) excludes it. **What if the supplier is a non-ATL person who was not required to file a return?** Rule 2 of the Tenth Schedule lets the withholding agent notify the Commissioner electronically, before deducting, with the reasons. If the Commissioner passes no order within thirty days, the contention is treated as accepted. ### Common mistakes - **Deducting on the price before sales tax.** Section 153(1) uses the gross amount including sales tax. - **Assuming only large companies must deduct.** Section 153(7) names "a company" without a size limit. - **Skipping advances.** Section 153(1) covers payments "by way of advance". - **Using the ATL rate for a supplier who has dropped off the list.** Rule 1 of the Tenth Schedule applies whenever the payee is not on the list. - **Treating the Rs. 30,000 and Rs. 75,000 limits as per invoice.** They are aggregates for the financial year. ### What to check in the official text The consolidated text of section 153 prints the version replaced in 2011 alongside the current section, so read the current sub-sections (1) to (7) carefully in the official PDF. Check the full list of services in paragraph (2)(i) of Division III, because the table above shortens it. Also check whether the Board has notified any exemption, and whether any SRO affects your sector: SROs are not in this corpus. ### Frequently asked #### Is withholding on goods worked out on the price before or after sales tax? After. Section 153(1) requires the deduction from the gross amount payable including sales tax, if any. A Rs. 1,180,000 invoice that includes Rs. 180,000 of sales tax is subject to withholding on the full Rs. 1,180,000. #### How much more is deducted from a supplier who is not on the active taxpayers' list? Rule 1 of the Tenth Schedule increases the rate by hundred percent of the rate specified in the Ordinance. In effect the rate doubles: 5% on goods sold by a company becomes 10%, and 14% on general services becomes 28%. #### Can a supplier give the company a certificate to reduce the deduction? Yes, if the Commissioner has issued one. Section 159(2) requires the payer to deduct the full amount unless a certificate under section 159(1) is in force, in which case the payer follows the certificate. Section 153(4) separately allows a reduced rate certificate, capped at a reduction of eighty percent of the rate, where the tax is not minimum tax. ### Citations - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "making the payment, deduct tax from the gross amount payable (including sales tax, if any) at the rate specified in Division III of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), paragraphs (1), (2) and (3)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (Rate of deduction or collection of tax) and rule 2 (Persons not required to file return or statement)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 159 (Exemption or lower rate certificate)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#159-exemption-or-lower-rate-certificate), as amended to 2026-06-30: "unless there is in force a certificate issued under sub-section (1) relating to the collection or deduction of such tax, in which case the person shall comply with the certificate." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How is income for super tax worked out, and are brought-forward losses and depreciation deducted? Source: https://qanoondigest.com/faq/companies/super-tax-income-base-brought-forward-losses Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 4C(2) defines income for super tax as the sum of profit on debt, dividends, capital gains, brokerage and commission, taxable income under section 9, imputable income and income computed under the Fourth, Fifth, Seventh and Eighth Schedules. Brought-forward depreciation and business losses, and for Schedule income brought-forward amortisation too, are expressly not deducted. **Applies to:** Companies and other persons near or above the section 4C thresholds, especially those carrying forward business losses or unabsorbed depreciation from earlier years. Super tax is not charged on taxable income. Section 4C(2) of the Income Tax Ordinance, 2001 sets up its own measure of "income", and the main practical difference is that losses and depreciation carried forward from earlier years do not reduce it. A company that pays little normal tax because of old losses can still cross a super tax threshold. The text below is the Ordinance as amended to 30 June 2026. ### What does the law say? Section 4C(2) says that, for super tax, "income" is the sum of four parts: 1. **Clause (i):** profit on debt, dividend, capital gains, brokerage and commission. 2. **Clause (ii):** taxable income under section 9, **other than brought forward depreciation and brought forward business losses**, excluding the amounts already counted in clause (i). 3. **Clause (iii):** imputable income as defined in clause (28A) of section 2, excluding amounts in clause (i). 4. **Clause (iv):** income computed under the Fourth, Fifth, Seventh and Eighth Schedules, **other than brought forward depreciation, brought forward amortization and brought forward business losses**. The Division IIB rate is then applied to this total. ### What does each part mean? **Clause (i)** pulls in investment and commission income whether or not it is taxed separately or as a final tax elsewhere. A company with large dividend or bank profit income counts that income for super tax. **Clause (ii)** starts from the company's taxable income for the year but ignores the set-off of brought-forward items. For normal tax, section 57 allows a business loss to be carried forward and set off for up to six tax years after the year the loss was first computed, and section 57(4) carries forward unabsorbed depreciation and similar deductions. Those carried-forward amounts are simply left out when the super tax base is built. **Clause (iii)** covers income that has suffered a final tax. Clause (28A) of section 2 defines imputable income as "the income which would have resulted in the same tax, had this amount not been subject to final tax". In other words, the final tax paid is converted back into the income that would produce it, and that figure goes into the base. Clause (iii) does not itself say which rate is used for that back calculation. **Clause (iv)** does the same for income computed under the special Schedules, and for these it also excludes brought-forward amortisation. ### Worked example (illustrative figures) Chenab Steel Mills Limited, Lahore, is an ordinary company (row 4 of Division IIB, threshold Rs. 500 million). For the tax year: | Item | Amount | |---|---| | Business income for the year after current-year deductions, excluding the items below | Rs. 700,000,000 | | Profit on debt from bank deposits | Rs. 40,000,000 | | Dividends received | Rs. 30,000,000 | | Business loss brought forward from an earlier year | Rs. 150,000,000 | | Unabsorbed depreciation brought forward | Rs. 60,000,000 | **Normal tax base.** Setting off the brought-forward items: Rs. 700,000,000 - Rs. 150,000,000 - Rs. 60,000,000 = Rs. 490,000,000. (Under section 57(4), unabsorbed depreciation is set off against fifty percent of the balance income after the loss: 50% of Rs. 550,000,000 is Rs. 275,000,000, which is more than Rs. 60,000,000, so the whole amount is set off.) **Super tax base under section 4C(2):** 1. Clause (i): Rs. 40,000,000 + Rs. 30,000,000 = Rs. 70,000,000. 2. Clause (ii): Rs. 700,000,000, with no deduction for the Rs. 150,000,000 loss or the Rs. 60,000,000 depreciation. 3. Clauses (iii) and (iv): nil in this example. 4. Total income for super tax: Rs. 70,000,000 + Rs. 700,000,000 = **Rs. 770,000,000**. **Super tax.** Rs. 770,000,000 exceeds Rs. 500,000,000, so row 4 applies: 8% x Rs. 770,000,000 = **Rs. 61,600,000**. **What the add-back cost.** Had the brought-forward items been deducted, the base would have been Rs. 70,000,000 + Rs. 490,000,000 = Rs. 560,000,000 and super tax Rs. 44,800,000. The difference, Rs. 16,800,000, is 8% of the Rs. 210,000,000 of brought-forward items. ### What if ...? **What if brought-forward losses bring taxable income to nil?** Normal tax may be nil (subject to minimum tax), but clause (ii) still counts the year's income before those losses. Super tax can be payable in a year with no normal tax. **What if the company made a loss this year?** The exclusion is only for brought-forward items. A current-year loss is part of the year's taxable income computation, and section 4C(2) does not add it back. **What if the company has income taxed under a Schedule, such as the Fifth Schedule?** Clause (iv) takes that Schedule income, again without brought-forward depreciation, amortisation or business losses. ### Common mistakes - **Using the return's taxable income figure as the super tax base.** That figure is after brought-forward set-offs. Section 4C(2) is not. - **Leaving out dividends and profit on debt because they are taxed separately.** Clause (i) includes them. - **Counting investment income twice.** Clause (ii) and clause (iii) both exclude amounts already in clause (i). - **Assuming brought-forward losses expire faster for super tax.** They are not used for super tax at all; section 57 governs their normal-tax life. ### What to check in the official text Read section 4C(2) in full, clause (28A) of section 2 and section 57 in the official PDF of the Ordinance, then the Division IIB Table for the rate that applies to your row. If you have income under the Fourth, Fifth, Seventh or Eighth Schedule, read the computation rules in that Schedule, because clause (iv) adopts the income those rules produce. Section 4C(6) allows the Board to make rules for super tax; any such rules are not held in this corpus. ### Frequently asked #### Can a company set off a brought-forward business loss against super tax income? No. Clause (ii) of section 4C(2) takes taxable income other than brought forward depreciation and brought forward business losses. The loss still reduces taxable income for normal tax under section 57, but not the super tax base. #### Are dividends and profit on debt part of super tax income even if taxed separately? Yes. Clause (i) of section 4C(2) lists profit on debt, dividend, capital gains, brokerage and commission as the first part of the base. Clause (ii) then excludes those amounts from taxable income so they are not counted twice. #### Does a current-year loss reduce super tax income? The exclusion in section 4C(2) is for brought-forward depreciation, amortisation and business losses. Current-year deductions are not named in that exclusion, so taxable income for the year is taken after them. ### Citations - [Income Tax Ordinance, 2001, section 4C (Super tax on high earning persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4c-super-tax-on-high-earning-persons), as amended to 2026-06-30: "taxable income (other than brought forward depreciation and brought forward business losses) under section 9 of the Ordinance, excluding amounts specified in clause (i)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 4C (Super tax on high earning persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4c-super-tax-on-high-earning-persons), as amended to 2026-06-30: "income computed, other than brought forward depreciation, brought forward amortization and brought forward business losses under Fourth, Fifth" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "imputable income” in relation to an amount subject to final tax means the income which would have resulted in the same tax, had this amount not been subject to final tax" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 9 (Taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#9-taxable-income), as amended to 2026-06-30: "The taxable income of a person for a tax year shall be the total income" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 57 (Carry forward of business losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#57-carry-forward-of-business-losses), as amended to 2026-06-30: "no loss can be carried forward to more than six tax years immediately succeeding the tax year for which the loss was first computed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IIB (Super Tax on high earning persons), Table as substituted by the Finance Act, 2026](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Does super tax under section 4C apply to my company, and at what income level and rate? Source: https://qanoondigest.com/faq/companies/super-tax-section-4c-company-threshold Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 4C imposes super tax at the Division IIB rates. The Table substituted by the Finance Act, 2026 charges 10% of the income of a banking company, of Fifth Schedule Part I income and of fertilizer sellers where that income exceeds Rs. 150 million, and 8% of the income of any other person where it exceeds Rs. 500 million. **Applies to:** Companies and other persons whose income as defined in section 4C is above Rs. 150 million (banks, petroleum exploration and production income, fertilizer sellers) or above Rs. 500 million (all others). Super tax is a separate charge on high incomes, added to normal income tax. Whether a company pays it depends on two things: which kind of person it is, and whether its "income" as defined in section 4C crosses the threshold for that kind of person. This page reads the Division IIB Table as it stands in the Income Tax Ordinance, 2001 amended to 30 June 2026. ### What does the law say? Section 4C(1) imposes super tax "for tax year 2022 and onwards at the rates specified in Division IIB of Part I of the First Schedule, on income of every person". The charge is not limited to companies: it applies to every person, and the Table decides who actually pays. The Finance Act, 2026 replaced the Division IIB Table with this one: | S. No. | Income under section 4C and person | Rate of tax | |---|---|---| | 1 | Income of a banking company exceeding Rs. 150 million | 10% of the income | | 2 | Income of a person, which is computed as per Part I of the Fifth Schedule, exceeding Rs. 150 million, so far as it does not exceed the limit specified in rule 4 of that Part | 10% of the income | | 3 | Income of a person engaged in deriving income from sale of any kind of fertilizer, exceeding Rs. 150 million | 10% of the income | | 4 | Income of a person other than those in S. No. 1, 2 and 3, exceeding Rs. 500 million | 8% of the income | The Table replaced a sliding scale. The earlier Table (substituted by the Finance Act, 2025) charged graded percentages starting above Rs. 150 million and reached 10% above Rs. 500 million. ### How does it work in practice? **Find the row.** A banking company, a person with Fifth Schedule Part I income (the computation rules for petroleum exploration and production and certain related activities) and a fertilizer seller are tested against Rs. 150 million. Every other company, including manufacturers, traders, telecom, cement and textile companies, is tested against Rs. 500 million. **Work out the income.** "Income" for super tax is not taxable income. Section 4C(2) builds it from profit on debt, dividends, capital gains, brokerage and commission, taxable income before brought-forward losses and depreciation, imputable income and Schedule income. The linked page on the super tax income base explains this in detail. **Apply the rate.** The Table expresses each rate as a percentage "of the income". It does not say "of the amount exceeding" the threshold, and nothing in the Table provides marginal relief. **Pay it.** Section 4C(3) makes super tax payable on the date and in the manner that applies to tax on taxable income, which is the due date for furnishing the company's return. Section 4C(5A) also applies section 147, so super tax is built into quarterly advance tax. ### Worked example (illustrative figures) Four companies, each with its section 4C income already worked out for the tax year: | Company | Row | Income under section 4C | Super tax | |---|---|---|---| | Indus Cement Limited, Chakwal | 4 | Rs. 620,000,000 | 8% x 620,000,000 = Rs. 49,600,000 | | Sutlej Agro Traders (Pvt) Ltd, Multan, which sells fertilizer | 3 | Rs. 200,000,000 | 10% x 200,000,000 = Rs. 20,000,000 | | Karachi Packaging Limited | 4 | Rs. 450,000,000 | No row applies: nil | | Karachi Packaging Limited, a year later | 4 | Rs. 510,000,000 | 8% x 510,000,000 = Rs. 40,800,000 | The last two lines show how the Table reads as printed: moving from Rs. 450 million to Rs. 510 million moves the company from no super tax to Rs. 40,800,000, because the 8% is stated as a percentage of the whole income. ### What if ...? **What if the company is mainly an exporter?** Clause (104B) of Part IV of the Second Schedule, inserted by the Finance Act, 2026, says section 4C does not apply to a person whose export proceeds realised for the tax year are more than eighty percent of total turnover for that year. **What if a company both sells fertilizer and does other business?** Row 3 speaks of a person "engaged in deriving income from sale of any kind of fertilizer". The Table does not say how income from other activities of the same person is treated. This is not resolved in the text held here. **What if the company has Fifth Schedule income above the rule 4 limit?** Row 2 applies "so far as it does not exceed the limit specified in rule 4 of that Part". The Table does not state what rate, if any, applies to the part above that limit. Read rule 4 of Part I of the Fifth Schedule in the official text. ### Common mistakes - **Testing every company against Rs. 150 million.** Since the Finance Act, 2026 Table, the Rs. 150 million threshold applies only to rows 1 to 3. Other companies are tested against Rs. 500 million. - **Using taxable income as the base.** Section 4C(2) has its own definition, which adds back brought-forward losses and depreciation. - **Treating super tax as part of normal tax for minimum tax comparison.** The Explanation to section 113(1) excludes tax under section 4C from "tax payable or paid" for that comparison. - **Leaving super tax out of advance tax.** Section 4C(5A) applies section 147. ### What to check in the official text The Division IIB Table is hard to read in the consolidated source: the new Table and the replaced one are printed on the same pages, with rows of the old Table running on after the new one. Check the figures against the official PDF of the Ordinance and against the Finance Act, 2026, which prints the new Table cleanly. The new Table has no tax year column, and the Finance Act, 2026 came into force on 1 July 2026 unless it provides otherwise; confirm from the official text which tax year it first governs. Also read section 4C in full, clause (104A) and clause (104B) of Part IV of the Second Schedule, and rule 4 of Part I of the Fifth Schedule if row 2 applies to you. ### Frequently asked #### Does super tax apply to a company with income of Rs. 300 million? Only if it falls in one of the first three rows of the Division IIB Table: a banking company, a person with income computed under Part I of the Fifth Schedule, or a person deriving income from the sale of fertilizer. For any other company the Table has no row below Rs. 500 million. #### Is the 8% charged on the whole income or only on the amount above Rs. 500 million? The Table states the rate as 8% of the income, and it contains no wording limiting it to the excess over Rs. 500 million. Read as printed, it applies to the whole income once the threshold is crossed. #### Are exporters exempt from super tax? Clause (104B) of Part IV of the Second Schedule, inserted by the Finance Act, 2026, provides that section 4C does not apply to a person whose realised export proceeds for the tax year are more than eighty percent of total turnover for the year. ### Citations - [Income Tax Ordinance, 2001, section 4C (Super tax on high earning persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4c-super-tax-on-high-earning-persons), as amended to 2026-06-30: "A super tax shall be imposed for tax year 2022 and onwards at the rates specified in Division IIB of Part I of the First Schedule, on income of every person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IIB (Super Tax on high earning persons), Table as substituted by the Finance Act, 2026](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2026, Section amending the First Schedule to the Income Tax Ordinance, Part I, paragraph (ii): new Table for Division IIB](https://qanoondigest.com/acts/finance-act/finance-act-2026), as amended to 2026 Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clause (104B), inserted by the Finance Act, 2026](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 147 (Advance tax paid by the taxpayer)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#147-advance-tax-paid-by-the-taxpayer), as amended to 2026-06-30: "C is the taxpayer’s turnover for the latest tax year; and D is the tax paid in the quarter for which a tax credit is allowed under section 168" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "tax payable or paid under section 4B" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Why can my company not adjust all its input tax, and how does the 90 percent limit in section 8B work? Source: https://qanoondigest.com/faq/companies/company-input-tax-90-percent-limit Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 8B(1) of the Sales Tax Act, 1990 stops a registered person from adjusting input tax above ninety percent of the output tax for a tax period, so some sales tax is payable every month. Fixed assets and capital goods are outside the cap. An audited company can claim the excess yearly with an auditor-certified statement. **Applies to:** Sales-tax-registered companies whose monthly input tax is close to, or above, their output tax. A company registered for sales tax normally pays the difference between the tax it charges on its sales (output tax) and the tax it paid on its purchases (input tax). Section 8B of the Sales Tax Act, 1990 limits that deduction, so even a company whose purchases carry almost as much tax as its sales pays something each month. ### What does the law say? Section 8B(1) says that, in relation to a tax period, a registered person "shall not be allowed to adjust input tax in excess of ninety per cent of the output tax for that tax period". A tax period is normally one month. Put simply, on running purchases, at least ten percent of the month's output tax is paid in cash, however large the input tax. The sub-section has three provisos: - **Capital goods are outside the cap.** The restriction "shall not apply in case of fixed assets or Capital goods". - **The Board may exclude persons.** The Board can, by notification in the official Gazette, take any person or class of persons out of sub-section (1). - **The limit can move with compliance.** A proviso added by the Finance Act, 2026 lets the Board reduce or enhance the limit for a registered person based on compliance or non-compliance with production monitoring, digital invoicing, e-bility, POS or other electronic systems prescribed by the Board. Section 8B(4) separately lets the Board prescribe any other limit for any person or class of persons, and, after the Finance Act, 2025, use a data-based automated risk management system to defer certain input tax or fix higher or lower limits. A person affected by action under sub-section (4) can apply to the Commissioner, who must decide within thirty days. ### How does the company recover the input tax above 90 percent? There are two routes in the Act. **Carry forward to the next month.** The first proviso to section 10(1) says excess input tax on supplies other than zero-rated supplies or exports "may be carried forward to the next tax period, along with the input tax as is not adjustable in terms of sub-section (1) of section 8B". It is then treated as input tax for that next period, where the 90 percent cap applies again. **Yearly adjustment or refund for audited companies.** Section 8B(2)(i) allows adjustment or refund of the input tax that sub-section (1) did not allow, for registered persons whose accounts are subject to audit under the Companies Ordinance, 1984, "upon furnishing a statement along with annual audited accounts, duly certified by the auditors, showing value additions less than the limit prescribed". Section 8B(3) says this adjustment or refund is made yearly, in the second month following the end of the company's financial year. For other registered persons, section 8B(2)(ii) leaves the conditions to a Board notification. Section 8B(5) refers an auditor found guilty of misconduct in giving this certificate to the Council for disciplinary action under the Chartered Accountants Ordinance, 1961. ### Worked example (illustrative figures) Ravi Packaging (Pvt) Ltd in Lahore makes cartons. The figures are invented. The 18% rate is the standard rate in section 3(1). | Step | Amount | |---|---| | Taxable sales in March | Rs. 10,000,000 | | Output tax at 18% | Rs. 1,800,000 | | Input tax on paper, glue and ink | Rs. 1,750,000 | | 90% of output tax (Rs. 1,800,000 x 90%) | Rs. 1,620,000 | | Input tax adjusted in March | Rs. 1,620,000 | | Sales tax payable (Rs. 1,800,000 - Rs. 1,620,000) | Rs. 180,000 | | Input tax not adjusted (Rs. 1,750,000 - Rs. 1,620,000) | Rs. 130,000 | Without section 8B, the company would have paid Rs. 50,000 (Rs. 1,800,000 - Rs. 1,750,000). The cap raises the payment to Rs. 180,000. The Rs. 130,000 not adjusted is carried to April under section 10(1). If Ravi Packaging's audited accounts show that its value addition for the year was below the limit, section 8B(2)(i) and (3) allow it to claim what remains unadjusted, in the second month after its financial year ends. Now suppose Ravi Packaging also bought a new corrugating machine in March and paid Rs. 100,000 input tax on it. Because the first proviso to section 8B(1) excludes capital goods, a reading of the text is that this Rs. 100,000 is not held back by the cap, which would reduce the March payment to Rs. 80,000 (Rs. 180,000 - Rs. 100,000). The Act does not set out the arithmetic for combining capital and non-capital input tax in one period, so confirm how the return form treats it. ### Which input tax is never allowed at all? The 90 percent cap only limits timing. Section 8(1) goes further and denies input tax outright on, among other things: - goods or services used for any purpose other than taxable supplies, or not related to taxable supplies; - goods or services on which the supplier has not deposited the tax, and purchases where CREST shows a discrepancy or the input tax is not verifiable in the supply chain; - fake invoices; - goods and services acquired for personal or non-business consumption; - building and construction materials and fittings attached to immoveable property, with exceptions for goods bought for resale or used directly in manufacturing taxable goods; - vehicles in Chapter 87 of the First Schedule to the Customs Act, 1969, their parts, electrical and gas appliances, furniture, furnishings and office equipment (other than electronic cash registers), unless bought for resale; - goods or services the supplier has not declared in its return, or on which it has not paid the tax shown, from a date the Board notifies. Section 8(2) adds that a company making both taxable and non-taxable supplies can reclaim only the proportion of input tax attributable to taxable supplies. Input tax denied under section 8 never enters the 90 percent calculation. ### What if...? **The company is a Tier-1 retailer that has not integrated its outlet.** Section 8B(6) reduces the adjustable input tax for the whole tax period by 60% if the outlet is not integrated as required under section 3(9A). **The company manufactures electric vehicles at the reduced Eighth Schedule rate.** Section 8B(4A) limits input tax to the amount of output tax, with no refund or carry forward of the excess. **The company forgot to claim an invoice in the right month.** The proviso to section 7(1) lets a registered person claim input tax it did not deduct in the relevant period in the return for any of the six succeeding tax periods. The 90 percent cap still applies in the month it is claimed. ### Common mistakes - **Treating the cap as a permanent loss.** Section 10(1) carries the unadjusted amount forward, and section 8B(2) provides a yearly route for audited companies. - **Applying the cap to machinery.** The first proviso to section 8B(1) excludes fixed assets and capital goods. - **Assuming 90 percent is fixed.** The Board can change it for a person under the Finance Act, 2026 proviso or under section 8B(4). - **Counting disallowed input tax.** Input tax on vehicles, furniture or non-business items is removed by section 8 before the cap is applied, not recovered through it. ### What to check in the official text Read section 8B in full, including the provisos to sub-section (1) and sub-sections (4), (4A) and (6), with the first proviso to section 10(1) and the list in section 8(1). Section 8B(2)(i) still refers to the Companies Ordinance, 1984 as printed; the text does not update that reference. Any notification excluding persons from the cap, changing the limit or setting conditions under section 8B(2)(ii) is an SRO this site does not hold, so check it separately. ### Frequently asked #### Does the 90 percent limit apply to input tax on machinery? No. The first proviso to section 8B(1) says the restriction does not apply in case of fixed assets or capital goods. The cap bites on input tax on items such as raw materials, packing and other running purchases. #### Is the input tax above 90 percent lost? Not under the text of the Act. The first proviso to section 10(1) carries input tax that is not adjustable under section 8B(1) forward to the next tax period, and section 8B(2) and (3) allow a yearly adjustment or refund for a company whose accounts are audited, on an auditor-certified statement. #### Can the Board change the 90 percent figure? Yes. Section 8B(1) lets the Board exclude persons from the cap and, under a proviso added by the Finance Act, 2026, reduce or enhance the limit based on compliance with digital systems. Section 8B(4) also lets it prescribe other limits by notification. ### Citations - [Sales Tax Act, 1990, section 8B (Adjustable input tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8b-adjustable-input-tax), as amended to 2026-06-30: "shall not be allowed to adjust input tax in excess of ninety per cent of the output tax for that tax period" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 10 (Refund of input tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#10-refund-of-input-tax), as amended to 2026-06-30: "such excess input tax may be carried forward to the next tax period, along with the input tax as is not adjustable in terms of sub-section (1) of section 8B, and shall be treated as input tax for that period" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 8 (Tax credit not allowed)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#8-tax-credit-not-allowed), as amended to 2026-06-30: "goods and services acquired for personal or non-business consumption" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 7 (Determination of tax liability)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#7-determination-of-tax-liability), as amended to 2026-06-30: "Provided that where a registered person did not deduct input tax within the relevant period, he may claim such tax in the return for any of the six succeeding tax periods." Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf - [Sales Tax Act, 1990, section 3 (Scope of tax)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#3-scope-of-tax), as amended to 2026-06-30: "there shall be charged, levied and paid a tax known as sales tax at the rate of" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## What is a small company for tax purposes, and does it get a lower rate? Source: https://qanoondigest.com/faq/companies/small-company-definition-and-tax-rate Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 2 of the Income Tax Ordinance, a small company is registered on or after 1 July 2005, has paid-up capital plus undistributed reserves up to Rs. 50 million, up to 250 employees and turnover up to Rs. 250 million, was not formed by splitting or reconstituting a company, and is not an SME. It pays 20%. **Applies to:** Owners and finance staff of private companies in Pakistan checking whether their company qualifies for the small company rate. Pakistan's Income Tax Ordinance, 2001 has a lower corporate rate for companies it calls "small companies". The label is a legal definition with five conditions, all of which must hold. A company that meets them pays 20% on its taxable income instead of the 29% rate for most other companies. ### What does the law say? Clause (59AB) of section 2 defines "Small Company" as a company registered on or after the first day of July, 2005, under the Companies Act, 2017, which: | Condition | Text of the definition | |---|---| | (i) Capital | has paid up capital plus undistributed reserves not exceeding fifty million rupees | | (ia) Employees | has employees not exceeding two hundred and fifty any time during the year | | (ii) Turnover | has annual turnover not exceeding two hundred and fifty million rupees | | (iii) Origin | is not formed by the splitting up or the reconstitution of company already in existence | | (iv) Not an SME | is not a small and medium enterprise as defined in clause (59A) | The footnotes show the limits have been raised over time. The capital limit was "twenty-five" million until the Finance Act, 2015 substituted "fifty", and the words "and fifty" were inserted into the turnover limit. Clause (59A) defines a "small and medium enterprise" as a person engaged in manufacturing, as the Ordinance defines that term, whose business turnover in a tax year does not exceed two hundred and fifty million rupees. A small manufacturer meeting that definition is therefore an SME and, because of condition (iv), not a small company. The separate treatment of SMEs is not covered on this page. ### What rate does a small company pay? Division II of Part I of the First Schedule sets the company rates. Its Table, as substituted by the Income Tax (Amendment) Act, 2025 and amended to 30 June 2026, reads: | Type of company | Rate of tax | |---|---| | Small company | 20% | | Banking company | 44% for tax year 2025, 43% for tax year 2026, 42% for tax year 2027 and onwards | | Any other company | 29% | So for tax year 2027 a small company pays 20% of taxable income, and an ordinary company that fails any condition pays 29%. ### How does it work in practice? The conditions are tested on the company's own position. Three of them look at the year: - employees "any time during the year", so a single peak above 250 is enough to fail; - "annual turnover"; and - paid-up capital plus undistributed reserves. The other two are fixed facts: the registration date on or after 1 July 2005, and the way the company came into existence. A company registered before 1 July 2005 can never qualify, however small it is. The definition does not say which date the capital and reserves test is measured at, or give a transition rule when a company crosses a limit mid-year. It does not explain those points, and this page does not resolve them. ### Worked example (illustrative figures) Three private companies in Rawalpindi, all figures invented, tax year 2027. **Noor Software Solutions (Pvt) Ltd**, registered 2016, paid-up capital plus undistributed reserves Rs. 35,000,000, peak staff 60, turnover Rs. 140,000,000, formed from scratch, not a manufacturer. 1. All five conditions are met, so it is a small company. 2. Taxable income: Rs. 12,000,000. 3. Tax: Rs. 12,000,000 x 20% = Rs. 2,400,000. 4. At the 29% rate it would have been Rs. 12,000,000 x 29% = Rs. 3,480,000. The difference is Rs. 1,080,000. **Potohar Traders (Pvt) Ltd**, same figures but registered in 2003. It fails the registration date test and pays 29%. **Margalla Logistics (Pvt) Ltd**, registered 2019, turnover Rs. 240,000,000, but formed by splitting a larger existing company. It fails sub-clause (iii) and pays 29%. ### What if ...? **What if turnover goes above Rs. 250 million?** Sub-clause (ii) is no longer met, so the company is not a small company and the "Any other company" rate applies. **Does a small company escape minimum tax?** Our copy of clause (11A) of Part IV of the Second Schedule, which lists persons to whom section 113 minimum tax does not apply, prints two versions of the list. One includes "a Small Company as defined in section 2", and the other, which carries later amendments, does not show that entry clearly. We cannot confirm from our copy whether the entry is in force. Check the official PDF. **Is a small company a "company" for all purposes?** Section 80, which defines "company", includes a Small Company as defined in section 2, so the general company rules apply unless a provision says otherwise. ### Common mistakes - **Looking only at turnover.** All five conditions must be met, including capital, staff and registration date. - **Assuming any small manufacturer qualifies.** A manufacturer with turnover up to Rs. 250 million is an SME under clause (59A) and is excluded by sub-clause (iv). - **Using older rates.** Earlier provisos set 25%, then a falling scale down to 20% from tax year 2023. The current Table sets 20%. ### What to check in the official text Read clauses (59A) and (59AB) of section 2 with their footnotes, and the Division II Table in Part I of the First Schedule. Confirm the list in clause (11A) of Part IV of the Second Schedule against the official PDF before assuming anything about minimum tax. ### Frequently asked #### What is the tax rate for a small company in Pakistan? 20% of taxable income. The Table in Division II of Part I of the First Schedule, as amended to 30 June 2026, lists Small company at 20%, Banking company at 42% for tax year 2027 onwards, and Any other company at 29%. #### What turnover limit applies to a small company? Annual turnover not exceeding two hundred and fifty million rupees, under sub-clause (ii) of the definition in section 2. The company must also meet the capital, employee, origin and non-SME conditions. #### Can a company created by splitting an existing company be a small company? No. Sub-clause (iii) of the definition requires that the company is not formed by the splitting up or the reconstitution of a company already in existence. ### Citations - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "“Small Company” means a company registered on or after the first day of July, 2005" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "has employees not exceeding two hundred and fifty any time during the year;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division II (Rates of Tax for Companies), Table: Small company 20%](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clause (11A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 80 (Person)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#80-person), as amended to 2026-06-30: "a Small Company as defined in section 2" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 113 (Minimum tax on the income of certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#113-minimum-tax-on-the-income-of-certain-persons), as amended to 2026-06-30: "This section shall apply to a resident company" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## When are a company's quarterly withholding tax statements due, and what is the penalty for filing late? Source: https://qanoondigest.com/faq/companies/withholding-tax-statements-due-dates-penalty Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 165 requires quarterly withholding statements by 20 October, 20 January, 20 April and 20 July, even for nil quarters. Under S. No. 1A of the section 182 Table, lateness costs Rs. 50,000 if withheld tax was paid on time and filing is within ninety days, otherwise Rs. 2,500 a day, minimum Rs. 10,000. **Applies to:** Companies and other persons that collect or deduct tax at source and must file withholding statements with the Commissioner. A company that deducts or collects tax at source reports it to the Commissioner every quarter under section 165 of the Income Tax Ordinance, 2001. This page reads section 165 and the penalty Table in section 182 as amended to 30 June 2026. ### What does the law say? Section 165(1) requires every person who collects tax under Division II of Part V of Chapter X, or deducts tax under Division III, or collects or deducts under Chapter XII or the Tenth Schedule, to furnish a quarterly statement in the prescribed form. The statement sets out: - the name, CNIC number, NTN and address of each person from whom tax was collected or to whom payments were made with tax deducted; - the total payments made to each person from which tax was deducted; - the total tax collected or deducted for each person; and - any other particulars prescribed. The first proviso to section 165(1) says the statement must be filed "even where no withholding tax is collected or deducted during the period". A second proviso switches section 165 off where the same information has already been furnished by a bank under the separate bank reporting provision. ### When are the statements due? Section 165(2) sets the schedule: | Quarter ending | Due on or before | |---|---| | 30 September | 20 October | | 31 December | 20 January | | 31 March | 20 April | | 30 June | 20 July | Section 165 also requires more than the four quarterly statements: - **Annual statement.** Section 165(7) requires an annual statement for the tax year to be e-filed within thirty days of the end of the tax year. - **Reconciliation statement.** Section 165(8) requires a statement reconciling the annual statement with the amounts in the return, audited accounts or financial statements, e-filed by the due date for the return of income. - **Salary statement.** Section 165(6) requires an employer deducting tax from salary to file an annual statement in the prescribed form and manner. ### What is the penalty for a late statement? Section 182(1) makes a person who commits an offence in column (2) of its Table liable to the penalty in column (3). Serial No. 1A covers failure to furnish a statement under section 165, 165A, 165B or 165C within the due date. As amended by the Finance Act, 2025, the penalty is: - **Rs. 50,000** if the person had already paid the tax collected or withheld within the due date for payment, and the statement is filed within ninety days from the due date for filing the statement; and - **in all other cases, Rs. 2,500 for each day of default** from the due date, with a minimum penalty of Rs. 10,000. A proviso adds that where it is established that no tax was required to be deducted or collected during the relevant period, the minimum penalty is Rs. 10,000. Rule 7 of the Tenth Schedule adds a separate risk. Where a withholding agent's statement does not give complete or accurate particulars of payees not on the active taxpayers' list, the Commissioner is to start penalty proceedings within thirty days of the statement being filed. ### Worked example (illustrative figures) Faisalabad Weaving Mills Limited files its statement for the quarter ending 30 September 2026 on 5 December 2026. The due date was 20 October 2026. Counting from the due date, the statement is 46 days late (11 days in October, 30 in November and 5 in December). - **Case A: all tax deducted in the quarter was deposited on time.** The statement was filed within ninety days of the due date, so the penalty is Rs. 50,000. - **Case B: some deducted tax was deposited late.** The daily branch applies: 46 x 2,500 = Rs. 115,000. This is above the Rs. 10,000 minimum. Now suppose the statement is only 10 days late. Under Case B the penalty is 10 x 2,500 = Rs. 25,000. Under Case A it is Rs. 50,000. As printed, the branch meant for the compliant withholding agent can produce the higher figure for short delays. The Finance Act, 2025 changed that figure from Rs. 5,000 to Rs. 50,000, and the Table does not explain how the two branches interact. ### What if the company needs more time? Section 165(4) lets a person apply in writing to the Commissioner for an extension of time. The Commissioner may grant it by written order if satisfied that there is reasonable cause. Section 165(2B) also lets the Commissioner require a statement for any period by notice. ### Common mistakes - **Skipping a nil quarter.** The first proviso to section 165(1) requires a statement even when nothing was deducted. - **Using half-yearly dates.** The Finance Act, 2020 replaced the half-yearly statements with quarterly ones. - **Forgetting the annual and reconciliation statements.** Section 165(7) and (8) sit on top of the quarterly filings. - **Leaving out non-ATL payee details.** Rule 7 of the Tenth Schedule links incomplete particulars to penalty proceedings. ### What to check in the official text The section 182 Table is printed as a broken table in the consolidated text. Read S. No. 1A in the official PDF and in the Finance Act, 2025, which substituted "50000" for "5000" in column (3). The Ordinance says the statements are in the "prescribed form": the form and e-filing rules are in the Income Tax Rules, and the FBR portal steps are outside this corpus. ### Frequently asked #### Does a company have to file a statement for a quarter in which it deducted no tax? Yes. The first proviso to section 165(1) requires every person covered by the section to file a withholding statement even where no withholding tax is collected or deducted during the period. #### What is the penalty if a statement is filed 10 days late? It depends on which branch of S. No. 1A applies. If all tax withheld was paid by its due date and the statement is filed within ninety days, the penalty is Rs. 50,000. In other cases it is Rs. 2,500 for each day of default, with a minimum of Rs. 10,000, which for 10 days is Rs. 25,000. #### Can a mistake in a filed statement be corrected? Section 165(2A) allows a revised statement within sixty days of filing the original, where the person discovers an omission or wrong statement. ### Citations - [Income Tax Ordinance, 2001, section 165 (Statements)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#165-statements), as amended to 2026-06-30: "shall be required to file withholding statement even where no withholding tax is collected or deducted during the period" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 182 (Offences and penalties)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#182-offences-and-penalties), as amended to 2026-06-30: "be liable to the penalty mentioned against that offence in column (3) thereof" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 182, Table, S. No. 1A (failure to furnish a statement under section 165, 165A, 165B or 165C), as amended by the Finance Act, 2025](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2025, Amendment of section 182 Table of the Income Tax Ordinance, S. No. 1A: figure 5000 substituted by 50000](https://qanoondigest.com/acts/finance-act/finance-act-2025), as amended to 2025 Official source: https://download1.fbr.gov.pk/Docs/2025629106147620FInanceAct2025.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 7 (withholding statement particulars of persons not on the active taxpayers' list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- # Doctors, lawyers and other professionals Tax on fees, clinic and chamber income, and withholding on professional services. ## Does a professional have to pay advance tax in quarterly installments on practice income? Source: https://qanoondigest.com/faq/professionals/advance-tax-installments-professional-income Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, if your latest assessed taxable income, excluding salary taxed at source and some other income, was Rs. one million or more. Section 147 then requires quarterly advance tax of a quarter of last year's assessed tax, less that quarter's credits, by 15 September, 15 December, 15 March and 15 June. Section 137 makes the balance due with the return. **Applies to:** Self-employed doctors, lawyers, accountants and other individual professionals whose practice income is not taxed through salary withholding, for tax year 2027. An employee's tax is taken out of every salary payment. A self-employed doctor or advocate has no employer doing that, so the Income Tax Ordinance, 2001 uses advance tax in section 147 to collect tax during the year instead of all at once when the return is filed. ### What does the law say? **Who is covered.** Section 147(1) makes every taxpayer whose income was charged to tax for the latest tax year liable to pay advance tax, leaving out three kinds of income: - income charged under the separate charging provisions listed in clause (b); - income subject to deduction of tax at source from salary (clause (c)); and - income from which tax was collected or deducted at source and for which no tax credit is allowed (clause (d)). **The Rs. one million threshold.** Section 147(2) says the section does not apply to an individual whose latest assessed taxable income, excluding those three kinds of income, is less than Rs. one million. **The formula for individuals.** Section 147(4B) applies to an individual with latest assessed income of Rs. one million or more. The advance tax for each quarter is: > (A / 4) minus B - **A** is the tax assessed for the latest tax year. - **B** is the tax paid in the quarter for which a tax credit is allowed, other than tax deducted from salary. **Due dates.** Section 147(5) makes an individual's advance tax payable by: | Quarter | Due on or before | | --- | --- | | September quarter | 15 September | | December quarter | 15 December | | March quarter | 15 March | | June quarter | 15 June | **Credit and refund.** Advance tax paid is a tax credit against the tax due for the year under section 147(8), and any part that cannot be used is refunded under section 147(10). ### How does it relate to the due date in section 137? Section 137(1) makes the tax payable on taxable income for a tax year due on the due date for furnishing the return for that year. Advance tax is a set of installments paid before that date and credited against the final figure. If the four installments fall short of the tax on the return, the balance is due with the return. The proviso to section 137(2) confirms that advance tax due under section 147 is payable on the dates in section 147(5), not on the return date. Section 147(7) treats unpaid advance tax as if it were tax due under an assessment order, which brings in the Ordinance's recovery provisions. ### Worked example (illustrative figures) Kamran Shah is an advocate in Peshawar with no salary. His return for tax year 2026 was assessed, and his made-up figures are: - latest assessed taxable income (tax year 2026): Rs. 3,000,000, all from practice; - tax assessed for tax year 2026 (A): Rs. 590,000. 1. **Is he covered?** Rs. 3,000,000 is above Rs. one million, so section 147(2) does not exclude him. 2. **Quarterly base:** Rs. 590,000 / 4 = Rs. 147,500. 3. **September quarter 2026:** clients withheld Rs. 60,000 from his fees during the quarter, and the example assumes that tax is allowed as a tax credit. B = Rs. 60,000. Advance tax = Rs. 147,500 minus Rs. 60,000 = Rs. 87,500, due by 15 September 2026. 4. **December quarter 2026:** no tax was withheld. B = 0. Advance tax = Rs. 147,500, due by 15 December 2026. When he files his tax year 2027 return, all advance tax paid and the creditable withholding are set against the tax on his actual tax year 2027 income. Whether tax withheld from a professional's fees counts as a creditable payment or as a minimum tax is covered on a separate page in this category. ### What if ...? **What if I am a salaried doctor with a private clinic?** Salary taxed at source is excluded when testing the Rs. one million threshold, and tax deducted from salary is not part of B. Only the clinic income, and other non-excluded income, is counted. **What if my latest assessed income was below Rs. one million?** Section 147(2) takes an individual out of the section. The tax for the year is then due with the return under section 137(1). **What if I expect a bad year?** Section 147(6) allows an estimate of lower tax to be filed before the last installment is due, with the reduced amount paid in equal installments on the remaining dates. Section 147(6B) requires the estimate to include turnover for completed quarters, estimated turnover for the rest, evidence of expenses and tax payments, and a computation of estimated taxable income. ### Common mistakes - **Counting salary toward the Rs. one million test.** Section 147(2) excludes income subject to deduction at source from salary. - **Using the company dates.** Section 147(5A) sets 25 September, 25 December, 25 March and 15 June for companies and associations of persons. Individuals use the 15th of the month in section 147(5). - **Treating advance tax as extra tax.** Section 147(8) credits it against the year's liability, and section 147(10) refunds any excess. - **Ignoring an unpaid installment.** Section 147(7) makes it recoverable like tax under an assessment order. ### What to check in the official text Read section 147, especially sub-sections (1), (2), (4B), (5), (6) and (7), and section 137(1) and the proviso to section 137(2). Section 147(7A) lets the Board prescribe how estimates are furnished through IRIS; any such procedure is outside this corpus. ### Frequently asked #### When are advance tax installments due for an individual? Section 147(5) sets four dates: 15 September for the September quarter, 15 December for the December quarter, 15 March for the March quarter and 15 June for the June quarter. For tax year 2027 these fall in September 2026, December 2026, March 2027 and June 2027. #### I started practice this year. Do I pay advance tax? Section 147(1) applies to a taxpayer whose income was charged to tax for the latest tax year, and the individual formula in section 147(4B) is based on tax assessed for that year. The Ordinance does not set a separate advance tax rule for an individual with no latest assessment; section 147(6A) covers only companies and associations of persons. #### What if my income this year will be lower than last year? Section 147(6) lets you file an estimate of the lower tax with the Commissioner before the last installment is due and pay the reduced amount. Section 147(6B) lists what the estimate must contain, and the Commissioner can reject an estimate that lacks supporting evidence after giving you a hearing. ### Citations - [Income Tax Ordinance, 2001, section 147 (Advance tax paid by the taxpayer)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#147-advance-tax-paid-by-the-taxpayer), as amended to 2026-06-30: "latest assessed taxable income excluding income referred to in clauses" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 137 (Due date for payment of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#137-due-date-for-payment-of-tax), as amended to 2026-06-30: "shall be due on the due date for furnishing the taxpayer’s return of income for that year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can a professional get an exemption or reduced-rate certificate so clients deduct less tax from fees? Source: https://qanoondigest.com/faq/professionals/exemption-lower-rate-certificate-professional-fees Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Rarely. Section 153(4) of the Income Tax Ordinance lets the Commissioner allow a reduced rate only where the tax is not minimum, and section 153(3) makes tax on services minimum tax. Section 159 certificates need the amount to be exempt, taxable at a lower rate, or covered by a full tax credit. High expenses or a loss are not listed. **Applies to:** Doctors, lawyers, accountants, architects and other independent professionals whose fees have tax deducted under section 153 and who think the deduction is more than their tax. Professionals with heavy running costs often ask whether they can stop clients from taking the full rate out of every fee. The Income Tax Ordinance has two routes to a lower deduction: an order under section 153(4) and a certificate under section 159. On the current text, both are narrow for fees from services. ### What does the law say? **The deduction and its rate.** Section 153(1)(b) requires prescribed persons to deduct tax from payments for services. The First Schedule, Part III, Division III, paragraph (2)(ii) sets 15% for tax year 2027 on independent professional services such as those of doctors, lawyers, architects and accountants. **Minimum tax.** Section 153(3) says tax deductible under section 153(1) "shall be minimum tax". Its provisos exclude certain sales of goods by manufacturers and listed companies, and certain contracts by listed companies. They do not exclude services. **Section 153(4): Commissioner's order.** On application by the person receiving the payment, the Commissioner may, "in cases where tax deductible under sub-section (1) is not minimum", allow payment "after deduction of tax at reduced rate but such reduction shall not exceed eighty percent of the rate specified in the said Division". Public limited companies may be allowed payment without any deduction. Provisos set a fifteen day time limit, and deemed issue through Iris, for applications by companies. **Section 159: exemption or lower rate certificate.** Section 159(1) says that where the Commissioner is satisfied that an amount to which Division III applies is: - (a) exempt from tax under the Ordinance; - (b) "subject to tax at a rate lower than that specified in the First Schedule"; or - (c) subject to a hundred percent tax credit under the Ordinance, the Commissioner shall, on written application in the prescribed form, issue an exemption or lower rate certificate. Section 159(2) then binds the payer: it deducts the full amount "unless there is in force a certificate issued under sub-section (1) relating to the collection or deduction of such tax". ### What does this mean for a professional? **Section 153(4) does not reach services.** The power only exists where the tax "is not minimum". Tax on services is minimum under section 153(3), so the condition is not met on the face of the text. **Section 159 depends on the nature of the amount.** Each of the three grounds is about how the Ordinance treats the amount: exempt, taxed at a lower rate, or fully credited. The grounds do not mention expenses, low profit or losses. A professional whose fees are an ordinary taxable receipt at the normal rate does not fall under any of them as written. **Minimum tax limits the benefit anyway.** Section 153(3) fixes the deducted tax as the minimum on the fees. Even a lower deduction would not reduce the minimum tax the Ordinance sets on those fees, unless the certificate itself rests on one of the section 159 grounds. The Ordinance does not spell out how a lower rate certificate interacts with minimum tax, so this page does not resolve that. ### Worked example (illustrative figures) Hina is a chartered accountant practising alone in Faisalabad. In tax year 2027 corporate clients pay her fees of Rs. 5,000,000, and her office rent, staff and software cost Rs. 4,200,000. 1. Tax deducted at 15%: Rs. 5,000,000 x 15% = Rs. 750,000. 2. Profit from the practice: Rs. 5,000,000 - Rs. 4,200,000 = Rs. 800,000. 3. Minimum tax on the fees under section 153(3): Rs. 750,000. Hina applies for a reduced rate. - **Under section 153(4):** not available, because the tax on her fees is minimum tax. - **Under section 159(1):** her fees are not exempt, not taxed at a lower First Schedule rate, and not subject to a full tax credit. The high costs leading to a profit of Rs. 800,000 are not one of the listed grounds. The deduction remains Rs. 750,000 and is her minimum tax on those fees. ### What if ...? **Part of the income is exempt.** If a specific receipt is exempt under the Ordinance, section 159(1)(a) is the route, and the certificate would cover that amount. **The practice is run by a company.** The limits on section 153(4) and the Iris provisos are written with companies in mind, and some provisos to section 153(3) turn on the type of payee. A practice run through a company is outside the scope of this page. ### Common mistakes - **Relying on the old section 153(4).** Before the Finance Act, 2024, section 153(4) could allow payment without deduction. The substituted text allows only a reduced rate, and still only where the tax is not minimum. - **Treating a loss as grounds for a certificate.** Section 159(1) does not list it. - **Asking the client to deduct less without a certificate.** Section 159(2) requires the full deduction unless a certificate is in force. ### What to check in the official text Read section 153(3) and (4) in full, including the provisos, and section 159(1) and (2). Check the prescribed application form under the Income Tax Rules. Confirm the rate in the First Schedule, Part III, Division III, paragraph (2). ### Frequently asked #### Can a doctor get a section 153(4) reduced rate order? Section 153(4) applies only in cases where tax deductible under section 153(1) is not minimum. Section 153(3) makes tax on services minimum tax, and its provisos do not exclude services, so on the text a section 153(4) order does not reach professional fees. #### Can I get a section 159 certificate because my practice runs at a loss? Section 159(1) lists three grounds: the amount is exempt under the Ordinance, is subject to tax at a rate lower than the First Schedule rate, or is subject to a hundred percent tax credit. A loss or high expenses is not one of the three grounds as written. #### If I do hold a certificate, must the client follow it? Yes. Section 159(2) says the payer deducts the full amount unless a certificate issued under section 159(1) is in force, in which case the payer shall comply with the certificate. ### Citations - [Income Tax Ordinance, 2001, section 159 (Exemption or lower rate certificate)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#159-exemption-or-lower-rate-certificate), as amended to 2026-06-30: "subject to tax at a rate lower than that specified in the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 159 (Exemption or lower rate certificate)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#159-exemption-or-lower-rate-certificate), as amended to 2026-06-30: "unless there is in force a certificate issued under sub-section (1) relating to the collection or deduction of such tax" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "after deduction of tax at reduced rate but such reduction shall not exceed eighty percent of the rate specified in the said Division" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "the income of resident person referred to in sub-section (3) means the amount on which tax is deductible under sub-section (1) or" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), paragraph (2), sub-paragraph (ii)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## If most patients or clients pay in cash, how does the law treat cash income and cash expenses? Source: https://qanoondigest.com/faq/professionals/cash-fees-and-cash-expenses-professionals Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Cash fees are ordinary practice income. The Ordinance does not ban cash receipts, but section 21 disallows cash salaries above Rs. 32,000 a month and cash expenses above Rs. 250,000 under one head, section 174 and rule 30 require numbered receipts and daily records, and section 111 taxes receipts or spending a professional cannot explain. **Applies to:** Doctors, dentists, advocates and other self-employed professionals whose patients or clients pay mostly in cash, for tax year 2027. A general practitioner in a small town or an advocate at a district court may see very little money arrive by bank transfer. The Income Tax Ordinance, 2001 does not tax cash any differently from bank receipts, but it attaches conditions to cash in three places: how expenses are paid, what records are kept, and what happens when money cannot be explained. ### What does the law say about cash income? Fees are income when they are practice receipts, whatever form they take. Nothing in the Ordinance exempts cash fees or taxes them at a different rate. The practice profit is fees less allowed expenses, as for any business. The duty that bites on cash is **record-keeping**. Section 174(1) requires every taxpayer to keep the records that are prescribed. The Income Tax Rules, 2002 prescribe them: - **Rule 29(1)** requires every person with business income to keep proper books covering all sums of money received and spent, all services provided and obtained, all assets and all liabilities. - **Rule 30(3)** sets the minimum for professionals, a group that expressly includes medical practitioners, legal practitioners, accountants, auditors, architects and engineers: - a serially numbered and dated patient-slip, invoice or receipt for each receipt, showing the professional's name, address, National Tax Number or CNIC, the treatment or service (confidential details are not required), the amount charged, and the name and address of the patient or client; - a daily appointment and engagement diary; - a daily record of receipts, payments and expenses; and - vouchers of purchases and expenses. General medical practitioners do not have to record the patient's address on the slip or keep the appointment diary. Rule 29(3) makes duplicate copies of the slips part of the records. Section 174(3) and rule 29(4) require the records to be kept for six years after the end of the tax year. ### What does the law say about cash expenses? Section 21 disallows several expenses when they are paid in cash: | Rule | What it says | | --- | --- | | Section 21(m) | A salary above Rs. 32,000 a month is not deductible unless paid by crossed cheque, direct transfer to the employee's bank account or digital means | | Section 21(l) | An expense under a single account head that in aggregate exceeds Rs. 250,000 is not deductible unless paid from the business bank account by crossed cheque, draft, pay order or other crossed banking instrument. Online transfers between business accounts and credit card payments count, if verifiable from bank statements | | Exceptions to 21(l) | Expenses not exceeding Rs. 25,000, and utility bills, freight charges, travel fare, postage, and taxes, duties, fees, fines or other statutory obligations | | Section 174(2) | The Commissioner may disallow or reduce any deduction for which there is no receipt or other evidence, unless there was reasonable cause | Section 21(l) speaks of "business bank account". A professional who pays practice bills from a personal account should read the clause closely, because the text ties the exemption to that account. ### Worked example (illustrative figures) Dr. Imran Qureshi runs a general practice in Multan. Most of his income arrives in cash. His made-up tax year 2027 expenses, all paid in cash, are: | Expense | Amount | Treatment | | --- | --- | --- | | Receptionist, Rs. 40,000 a month | Rs. 480,000 | Disallowed, section 21(m) | | Nurse, Rs. 30,000 a month | Rs. 360,000 | Allowed, not above Rs. 32,000 a month | | Clinic renovation, one payment | Rs. 300,000 | Disallowed, section 21(l), above Rs. 250,000 | | Repair of a steriliser, one payment | Rs. 20,000 | Allowed, not above Rs. 25,000 | | Electricity bills | Rs. 150,000 | Allowed, utility bills are excepted | Step by step: 1. Cash expenses paid: Rs. 480,000 + Rs. 360,000 + Rs. 300,000 + Rs. 20,000 + Rs. 150,000 = Rs. 1,310,000. 2. Disallowed: Rs. 480,000 + Rs. 300,000 = Rs. 780,000. 3. Allowed: Rs. 1,310,000 minus Rs. 780,000 = Rs. 530,000. If the receptionist's salary and the renovation had been paid through the business bank account, all Rs. 1,310,000 would have passed these two clauses. The example assumes the renovation is a revenue repair; if it were a capital improvement, section 21(n) would send it to depreciation instead. ### What if ...? **What if I cannot explain a deposit or a purchase?** Section 111(1) covers any amount credited in the books, any investment, money or valuable article owned, and any expenditure, where the person offers no explanation of its source or the Commissioner finds the explanation unsatisfactory. The amount is added to income: suppressed receipts go under Income from Business, and other unexplained amounts under Income from Other Sources. Section 111(2) places Pakistan-source amounts in the tax year to which they relate, and section 174(3) keeps the six-year limit on records from applying to foreign matters caught by section 111(2)(ii). **What if a patient pays a single large bill in cash?** Section 21(s) disallows fifty percent of the expenditure claimed in respect of a sale where the taxpayer received more than Rs. 200,000 otherwise than through a banking channel or digital means against a single invoice, including invoices for services. The clause does not explain how the expenditure linked to one invoice is to be worked out for a professional practice. **What if I buy supplies from someone without an NTN?** Section 21(q) disallows ten percent of the expenditure attributable to purchases from persons who are not National Tax Number holders, whether paid in cash or not. ### Common mistakes - **Recording only bank receipts.** Rule 29(1) covers all money received, so cash fees belong in the daily record. - **Paying all staff in cash.** The Rs. 32,000 limit in section 21(m) disallows the whole salary, not only the part above it. - **Splitting a large payment to stay under Rs. 25,000.** Section 21(l) looks at the aggregate under a single account head. - **Discarding patient slips.** Duplicate slips are part of the records under rule 29(3) and must be kept for six years. ### What to check in the official text Read section 21, clauses (l), (m), (q) and (s), section 174 and section 111. The record formats are in rules 29 and 30 of the Income Tax Rules, 2002, amended to 24 November 2023; later changes to those rules are outside this corpus. Section 174(5) lets the Board require certain persons to install electronic resources by notification in the official Gazette; any such notification is not in this corpus. ### Frequently asked #### Is it illegal for a doctor to accept fees in cash? The Income Tax Ordinance does not prohibit cash receipts. Cash fees are income like any other fees. What the law adds is a duty under section 174 and rule 30(3) to issue a numbered patient-slip, invoice or receipt for each receipt and to keep a daily record. #### Can I deduct staff salaries paid in cash? Only up to Rs. 32,000 a month per person. Section 21(m) disallows any salary above that amount unless it is paid by crossed cheque, direct transfer to the employee's bank account or digital means. #### What happens if my bank deposits are more than the income I declare? If a credit, investment or expense has no satisfactory explanation of its source, section 111 allows the Commissioner to add it to income. Suppressed receipts go under Income from Business, and other unexplained amounts under Income from Other Sources. ### Citations - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "made other than by a crossed cheque drawn on a bank or by crossed bank draft or crossed pay order or any other crossed banking instrument showing transfer of amount from the business bank account of the taxpayer" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 174 (Records)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#174-records), as amended to 2026-06-30: "every taxpayer shall maintain in Pakistan such accounts, documents and records as may be prescribed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 111 (Unexplained income or assets)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#111-unexplained-income-or-assets), as amended to 2026-06-30: "the person offers no explanation about the nature and source of the amount credited or the investment, money, valuable article, or funds from which the expenditure was made" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 29 (Books of account, documents and records to be maintained)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#29-books-of-account-documents-and-records-to-be-maintained), as amended to 2023-11-24: "all sums of money received and expended by the taxpayer and the matters in respect of which the receipt and expenditure takes place" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Rules, 2002, Income Tax Rules, 2002, rule 30(3): patient-slip, invoice or receipt, appointment diary, daily record and vouchers for professionals](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24), as amended to 2023-11-24 Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf --- ## How does a doctor or lawyer claim credit for tax deducted by several hospitals or clients? Source: https://qanoondigest.com/faq/professionals/claim-credit-withholding-certificates-professionals Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Each hospital or client that deducts tax must give you a certificate under section 164 of the Income Tax Ordinance. In your section 114 return you declare the gross fees, because section 168 treats the deducted tax as your income, and you claim every deduction as a tax credit for the tax year in which it was deducted. **Applies to:** Doctors, lawyers, accountants, architects and other independent professionals who receive fees from several payers that deduct tax under section 153. A consultant who visits three hospitals, or a lawyer on retainer with several companies, can end the year with a stack of deduction certificates. The Income Tax Ordinance links them to your return through three sections: section 164 makes each payer document the deduction, section 168 turns it into income and a credit, and section 114 requires the return to state it. ### What does the law say? **Section 164: the payer's certificate.** Section 164(1) requires every person deducting tax from a payment under Division III (which includes section 153) to give the person paid, at the time of deduction, copies of the Computerized Payment Receipt (CPR) or equivalent document along with "a certificate setting out the amount of tax collected or deducted and such other particulars as may" be prescribed. Section 164(2) requires a person filing a return to attach copies of the CPR or SWAPS Payment Receipt on which each certificate is based. **Section 168: income and credit.** Section 168(1)(a) says the tax deducted from a payment "shall be treated as income derived by the person to whom the payment was made". Section 168(1)(b) treats it as tax paid by you. Section 168(2) gives a tax credit for it "for the tax year in which the tax was collected or deducted". **Section 114: the return.** Section 114(2)(a) and (b) say a return is in the prescribed form, with the prescribed annexures, and "shall fully state all the relevant particulars or information as specified in the form of return". **The rate being credited.** For tax year 2027 the First Schedule, Part III, Division III, paragraph (2)(ii) sets 15% for independent professional services. Under section 153(3) that tax is minimum tax on the amount it was deducted from. ### How does it work in practice? 1. **Collect a certificate for every deduction.** Match each certificate to the payer, the gross amount, the tax and the CPR. 2. **Add up gross fees, not net receipts.** Section 168(1)(a) puts the deducted tax back into income. Your bank shows net receipts, so the return figure will be higher. 3. **Keep the year straight.** The credit goes to the tax year of deduction under section 168(2). Tax year 2027 runs from 1 July 2026 to 30 June 2027. 4. **Claim the total as a credit.** The combined deductions reduce the tax due. Because the tax is minimum tax, the total deducted is also the least tax on those fees. 5. **Attach the receipts.** Section 164(2) asks for copies of the CPR or SPR with the return. ### Worked example (illustrative figures) Dr. Sana is a gynaecologist in Islamabad, on the Active Taxpayers List. In tax year 2027 she consults at three private hospitals, all companies, as a visiting consultant and not as an employee. | Hospital | Gross fees | Tax at 15% | Net received | |---|---|---|---| | Hospital A | Rs. 1,800,000 | Rs. 270,000 | Rs. 1,530,000 | | Hospital B | Rs. 900,000 | Rs. 135,000 | Rs. 765,000 | | Hospital C | Rs. 600,000 | Rs. 90,000 | Rs. 510,000 | | **Total** | **Rs. 3,300,000** | **Rs. 495,000** | **Rs. 2,805,000** | Check: Rs. 3,300,000 - Rs. 495,000 = Rs. 2,805,000. - Income from the hospitals in her return: Rs. 3,300,000, not the Rs. 2,805,000 she received. - Tax credit under section 168: Rs. 495,000. - Minimum tax on those fees under section 153(3): Rs. 495,000. If her normal tax on total income is more than Rs. 495,000, she pays the difference with the return. If it is less, the Rs. 495,000 stays as her tax on the hospital fees. ### What if ...? **A certificate shows the wrong amount.** Section 164 puts the duty to issue a correct certificate on the payer. The Ordinance does not give the professional a separate correction procedure, so the practical route is to ask the payer to correct its record. **A client deducted at 30%.** That is the doubled rate for a person not on the Active Taxpayers List. The full amount deducted is still credited under section 168. How much of the extra can be adjusted is dealt with on the separate page about the ATL. **Fees were received from individuals with no deduction.** Those fees are still income and go in the return. There is simply no credit to claim against them. ### Common mistakes - **Declaring net receipts.** This understates income by exactly the tax deducted and conflicts with the payers' own statements. - **Claiming a credit in the wrong year.** Section 168(2) ties the credit to the year of deduction, not the year of the work or the year the invoice was raised. - **Leaving out a small certificate.** Every deduction is income and a credit. Omitting one understates both. - **Mixing salary and fees.** If a hospital employs you, tax on your salary is not a section 153 deduction and has its own certificate and rules. ### What to check in the official text Read sections 164 and 168 in full, section 114(2) on what a return contains, and section 153(3) on minimum tax. Confirm the tax year 2027 rate in the First Schedule, Part III, Division III, paragraph (2). The prescribed particulars of the certificate are set by rules and forms, and the FBR portal steps for entering credits are not covered in this corpus. ### Frequently asked #### Do I declare the fee I received or the fee before tax? The fee before tax. Section 168(1)(a) treats the tax deducted from a payment as income derived by the person to whom the payment was made. If a hospital paid you Rs. 85,000 after deducting Rs. 15,000, the income in the return is Rs. 100,000. #### Which year do I claim the credit in? Section 168(2) allows the credit in computing tax due for the tax year in which the tax was deducted. A deduction made in June 2027 belongs to tax year 2027 even if the fee relates to work done earlier. #### What if a hospital does not give me a certificate? Section 164(1) requires the payer to furnish the certificate and copies of the CPR at the time of deduction. The Ordinance does not set out a separate procedure for a professional to follow when a payer fails to provide one. ### Citations - [Income Tax Ordinance, 2001, section 164 (Certificate of collection or deduction of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#164-certificate-of-collection-or-deduction-of-tax), as amended to 2026-06-30: "a certificate setting out the amount of tax collected or deducted and such other particulars as may" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "shall be treated as income derived by the person to whom the payment was made" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "shall fully state all the relevant particulars or information as specified in the form of return" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "the income of resident person referred to in sub-section (3) means the amount on which tax is deductible under sub-section (1) or" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), paragraph (2), sub-paragraph (ii)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## If a company or hospital client did not deduct tax from my professional fee, who is liable: me or the client? Source: https://qanoondigest.com/faq/professionals/client-failed-to-deduct-tax-from-fee Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Both, in different ways. Section 161 of the Income Tax Ordinance makes the client personally liable for tax it failed to deduct under section 153, and section 21(c) blocks its expense claim. Section 162 also lets the Commissioner recover the tax from the professional, who must declare the full fee and gets no section 168 credit. **Applies to:** Doctors, lawyers, accountants, architects and other professionals, other than employees, paid in full without deduction by a company, hospital or other prescribed person. A missed deduction does not cancel the tax. It moves the question of who pays it. The Income Tax Ordinance gives the Commissioner a route against the client that should have deducted, a route against the professional who was paid in full, and a penalty on the client's own expense claim. The fee itself stays taxable in the professional's return. ### What does the law say? **The duty to deduct.** Section 153(1)(b) requires every prescribed person paying a resident person "for the rendering of or providing of services" to deduct tax from the gross amount payable. The duty does not apply where payments for services total less than Rs. 30,000 in a financial year. For tax year 2027 (1 July 2026 to 30 June 2027), the rate in the First Schedule, Part III, Division III, paragraph (2)(ii) is 15% "in the case of independent professional services such as doctors, lawyers, architects, accountants, software engineers or developers, working independently". **The client's liability.** Section 161(1)(a) covers a person who "fails to... deduct tax from a payment as required under Division III". Such a person "shall be personally liable to pay the amount of tax to the Commissioner", who may pass an order and recover it. Under section 161(1A), no recovery is made without first giving the client an opportunity of being heard. **Recovery from the professional.** Section 162(1) lets the Commissioner pass an order and recover the amount not deducted "from the person... to whom the payment was made". Section 162(2) adds that this recovery does not free the client from default surcharge or from the disallowance of its expense. **The client's expense.** Section 21(c) disallows any expenditure from which the payer was required to deduct tax, unless it deducted and paid that tax. A proviso says "recovery of any amount of tax under sections 161 or 162 shall be considered as tax paid". **Your credit.** Section 168(2) allows a tax credit for tax "deducted from a payment made to a person". It applies to tax that was actually deducted. ### How does it work in practice? The client and the professional are exposed at the same time, but the Ordinance limits double collection: - **Client pays.** If the Commissioner recovers from the client under section 161, section 161(2) entitles the client to recover that tax from the professional "from whom the tax should have been... deducted". - **Professional pays.** If the tax is established to have been paid by the professional, section 161(1B) says no recovery is made from the client. The client instead pays default surcharge at twelve per cent per annum, from the date it failed to deduct to the date the tax was paid. - **Client's books.** Until the tax is paid or recovered, section 21(c) denies the client a deduction for the fee in computing its business income. For the professional, the fee is income from business and goes into the return in full. Because nothing was deducted, there is no deducted amount for section 168 to credit. Tax on that income is paid through the return rather than having been taken at source. Section 153(3) also matters. It says the tax "deductible" under section 153(1) on the income of a resident person shall be minimum tax. Its explanation refers to "the amount on which tax is deductible". The wording ties minimum tax to what should have been deducted, not only to what was. How the minimum tax rule works for professionals is covered on a separate page. ### Worked example (illustrative figures) Dr. Sana is a consultant radiologist in Lahore, not an employee of the hospital. In tax year 2027 a private hospital run as a company pays her Rs. 1,200,000 in reporting fees and deducts nothing. | Step | Figure | |---|---| | Fees paid by the hospital | Rs. 1,200,000 | | Rate under paragraph (2)(ii) | 15% | | Tax that should have been deducted: 1,200,000 x 15% | Rs. 180,000 | **Position of the hospital.** Under section 161 it is personally liable for Rs. 180,000. Under section 21(c) it cannot deduct the Rs. 1,200,000 fee until the tax is paid or recovered. **Position of Dr. Sana.** She declares the full Rs. 1,200,000 in her return. No section 168 credit is available, because no tax was deducted. Under section 162 the Commissioner could recover the Rs. 180,000 from her directly. **If Dr. Sana's tax is paid first.** Suppose it is established that the tax was paid six months after the date the hospital should have deducted it. Section 161(1B) stops recovery from the hospital, which owes default surcharge instead: - Rs. 180,000 x 12% = Rs. 21,600 a year - Rs. 21,600 x 6 / 12 = Rs. 10,800 ### What if the client is not a prescribed person? Then there was no failure. A patient paying for a consultation, or a family paying an advocate from personal funds, is usually not on the section 153(7) list, so no deduction was required and sections 161 and 162 do not arise. The fee is still income and still goes in the return. ### What if the total fees were under Rs. 30,000? Section 153(1)(b) excludes payments for services that are less than Rs. 30,000 in aggregate in a financial year. If a prescribed client paid less than that in total, no deduction was required. ### Common mistakes - **"The client missed it, so I owe nothing."** The fee is income whether or not tax was deducted, and section 162 reaches the person who was paid. - **Claiming a credit for tax never deducted.** Section 168 credits deducted tax. A figure the client should have withheld is not a credit. - **Assuming both sides pay in full.** Section 161(1B) stops recovery from the client once the tax is established as paid by the professional, leaving the client with default surcharge. - **Forgetting the client's side.** Section 21(c) and default surcharge are the client's costs, and section 162(2) keeps them in place even when tax is recovered from the professional. ### What to check in the official text Read section 161 with sub-sections (1A), (1B) and (2), section 162, the proviso to section 21(c), section 168(2), and section 153(1)(b) with section 153(3). Confirm the rate in the First Schedule, Part III, Division III, paragraph (2)(ii). The Ordinance does not set out how a professional's own payment is to be "established" for section 161(1B); that procedure is not in this corpus. ### Frequently asked #### Is the client or the professional liable when tax was not deducted from a fee? Section 161 makes the client that failed to deduct personally liable to pay the tax to the Commissioner. Section 162 separately allows the Commissioner to recover the same amount from the person to whom the payment was made, so the professional is not outside the law's reach either. #### Can I claim a tax credit for tax my client should have deducted but did not? No. Section 168(2) gives a credit for tax that has been deducted from a payment made to you. Where nothing was deducted, there is no deducted amount to credit, and the full fee is taxed in your return. #### What happens to the client if I pay the tax myself? Section 161(1B) says that if it is established the tax has meanwhile been paid by the person from whom it should have been deducted, no recovery is made from the client. The client is still liable for default surcharge at 12% per annum from the date it failed to deduct to the date the tax was paid. ### Citations - [Income Tax Ordinance, 2001, section 161 (Failure to pay tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#161-failure-to-pay-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be personally liable to pay the amount of tax to the Commissioner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 162 (Recovery of tax from the person from whom tax was not collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#162-recovery-of-tax-from-the-person-from-whom-tax-was-not-collected-or-deducted), as amended to 2026-06-30: "recover the amount not collected or deducted from the person from whom the tax should have been collected or to whom the payment was made" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "any expenditure from which the person is required to deduct or collect tax under Part V of Chapter X or Chapter XII, unless the person has paid or deducted and paid the tax as required by Division IV of Part V of Chapter X" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "except where payment is less than thirty thousand Rupees in aggregate, during a financial year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), paragraph (2), sub-paragraph (ii)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What expenses can a doctor or lawyer deduct: clinic or chamber rent, staff salaries, council fees, books? Source: https://qanoondigest.com/faq/professionals/deductible-expenses-clinic-law-chamber Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 20 of the Income Tax Ordinance allows a doctor or lawyer to deduct any expense incurred wholly and exclusively for the practice, such as clinic or chamber rent and staff pay. Section 21 then disallows personal spending, fines, capital outlays and some cash payments, and section 174 lets the Commissioner refuse a deduction that has no receipt or record. **Applies to:** Self-employed doctors, dentists, advocates, accountants and other professionals computing practice income under Income from Business, for tax year 2027. Practice income is taxed on profit, not gross fees. The Income Tax Ordinance, 2001 decides which costs count in three steps: a broad permission in section 20, exceptions in section 21, and a record-keeping condition in section 174. ### What does the law say? **Section 20: the general test.** Section 20(1) allows a deduction for any expenditure incurred in the tax year "wholly and exclusively for the purposes of business". A profession is a business under the Ordinance, so this test applies to a clinic, a dental practice or a law chamber. There is no list of approved professional expenses. Each cost is judged against that one test. **Section 20(2): assets are depreciated, not expensed.** Where the expenditure buys a depreciable asset or an intangible with a useful life of more than one year, it is not deducted at once. It is depreciated or amortised under the special provisions that follow. Section 22(2) applies the rate in Part I of the Third Schedule to the asset's written down value each year. **Section 21: what is never deductible.** Section 21 lists items that are not allowed even if they relate to the practice. The clauses most relevant to a professional are: | Clause | What is disallowed | | --- | --- | | 21(a) | Income tax itself, or any tax levied on profits | | 21(c) | An expense from which the payer was required to deduct or collect tax, unless that tax was deducted and paid as required | | 21(d) | Entertainment spending above the limits or outside the conditions that are prescribed | | 21(e) | Contributions to a fund that is not a recognised provident fund or an approved pension, superannuation or gratuity fund | | 21(g) | Any fine or penalty for breaking a law, rule or regulation | | 21(h) | Personal expenditure | | 21(l) | An expense under one account head above Rs. 250,000 in aggregate not paid through the business bank account by a crossed or banking instrument, with exceptions | | 21(m) | A salary above Rs. 32,000 a month not paid by crossed cheque, direct transfer to the employee's bank account or digital means | | 21(n) | Capital expenditure, except as allowed through depreciation | | 21(q) | Ten percent of expenditure attributable to purchases from persons who are not National Tax Number holders | **Section 174: records.** Every taxpayer must keep the accounts, documents and records that are prescribed. Section 174(2) allows the Commissioner to disallow or reduce a deduction where the taxpayer cannot, without reasonable cause, produce a receipt or other evidence of it. Records are kept for six years after the end of the tax year, and longer while a proceeding is pending. ### How does it work for common practice costs? - **Clinic or chamber rent.** Rent for premises used for the practice meets the section 20 test. If part of a house is used as a clinic, only the practice part is spent "wholly and exclusively" for the practice; the household share is personal under section 21(h). Where the Ordinance requires tax to be withheld from the rent, section 21(c) disallows the rent unless it was. - **Staff salaries.** Pay to a receptionist, nurse, clerk or munshi is a practice expense. Section 21(m) disallows any salary above Rs. 32,000 a month paid in cash. Section 21(c) applies to salaries too where tax had to be deducted from them. - **Council, bar association and PMDC fees.** The Ordinance does not mention them. They stand or fall on the section 20(1) test and are not listed in section 21. - **Books and law reports.** Books with a useful life of more than one year are depreciable assets. The Third Schedule lists "technical or professional books" in the 15% class. - **Medicines and consumables.** Items used up in the practice are ordinary expenses. Section 21(q) cuts ten percent of the expenditure attributable to purchases from suppliers without a National Tax Number. - **Utility bills.** These are ordinary expenses and are expressly exempt from the banking-channel rule in section 21(l). ### Worked example (illustrative figures) Bilal Ahmed is an advocate with a chamber in Lahore. His made-up figures for tax year 2027 (1 July 2026 to 30 June 2027) are: | Item | Amount | Treatment | | --- | --- | --- | | Fees received | Rs. 4,800,000 | Income | | Chamber rent, paid by bank transfer | Rs. 720,000 | Allowed, section 20 | | Clerk's salary, Rs. 35,000 a month in cash | Rs. 420,000 | Disallowed, section 21(m) | | Munshi's salary, Rs. 25,000 a month in cash | Rs. 300,000 | Allowed, below Rs. 32,000 a month | | Electricity bills | Rs. 180,000 | Allowed, utility bill | | Bar association annual fee | Rs. 15,000 | Allowed on the assumption it meets the section 20 test | | Family dinner charged to the chamber | Rs. 60,000 | Disallowed, personal, section 21(h) | | Traffic fine | Rs. 5,000 | Disallowed, section 21(g) | | New law reports and textbooks | Rs. 100,000 | Depreciated, not expensed | Step by step: 1. Depreciation on the books: 15% of Rs. 100,000 = Rs. 15,000. 2. Allowed deductions: Rs. 720,000 + Rs. 300,000 + Rs. 180,000 + Rs. 15,000 + Rs. 15,000 = Rs. 1,230,000. 3. Income from Business: Rs. 4,800,000 minus Rs. 1,230,000 = Rs. 3,570,000. Had the clerk been paid by bank transfer, the Rs. 420,000 would also have been deductible and business income would have been Rs. 3,150,000. The example assumes no tax had to be withheld from the rent or salaries; if it did and was not, section 21(c) would disallow those amounts as well. ### What if ...? **What if I pay a large bill in cash?** Section 21(l) disallows an expense under a single account head above Rs. 250,000 in aggregate unless it goes through the business bank account by crossed or banking instrument, online transfer or credit card. Expenses up to Rs. 25,000, utility bills, freight, travel fare, postage and payments of taxes, duties, fees or fines are outside that clause. **What if I have no receipt?** Section 174(2) lets the Commissioner disallow or reduce the deduction unless there was reasonable cause. ### Common mistakes - **Deducting equipment or books in full.** Section 20(2) sends assets with a life over one year to depreciation. - **Treating the practice as a household account.** Personal and family costs are disallowed by section 21(h), even if paid from the practice account. - **Paying staff in cash.** Above Rs. 32,000 a month, section 21(m) removes the salary from deductions entirely, not just the excess. ### What to check in the official text Read section 20 and every clause of section 21, since several clauses (such as 21(d), 21(p) and 21(r)) depend on limits or conditions to be prescribed that are not set out in the Ordinance itself. Rule 30(3) of the Income Tax Rules, 2002 lists the minimum records for professionals, including numbered receipts and vouchers for expenses. Provincial sales tax on services is outside this corpus and is not covered here. ### Frequently asked #### Can a doctor deduct clinic rent and staff salaries? Yes, where they are spent wholly and exclusively for the practice, which is the test in section 20(1). Section 21 adds conditions: a salary above Rs. 32,000 a month must be paid by crossed cheque, bank transfer or digital means, and a payment on which the Ordinance requires tax to be withheld is not deductible unless that tax was deducted and paid. #### Are Bar Council or PMDC fees deductible? The Ordinance does not name professional body fees either way. They are judged by the general test in section 20(1), wholly and exclusively for the purposes of the business, and are not on the section 21 list of disallowed items. The law does not go further than that. #### Can I deduct the full cost of law books or medical textbooks in the year I buy them? No. Section 20(2) requires an asset with a useful life of more than one year to be depreciated. Part I of the Third Schedule lists technical or professional books at 15% of written down value each year. ### Citations - [Income Tax Ordinance, 2001, section 20 (Deductions in computing income chargeable under the head “Income from Business”)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#20-deductions-in-computing-income-chargeable-under-the-head-income-from-business), as amended to 2026-06-30: "a deduction shall be allowed for any expenditure incurred by the person in the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "any fine or penalty paid or payable by the person for the violation of any law, rule or regulation" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 174 (Records)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#174-records), as amended to 2026-06-30: "every taxpayer shall maintain in Pakistan such accounts, documents and records as may be prescribed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 22 (Depreciation)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#22-depreciation), as amended to 2026-06-30: "the depreciation deduction for a tax year shall be computed by applying the rate specified in Part I of the Third Schedule against the written down value of the asset at the beginning of the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Third Schedule, Part I (Depreciation), serial II: furniture (including fittings), machinery and plant, motor vehicles, technical or professional books, 15%](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, Income Tax Rules, 2002, rule 30(3): records for professionals (medical practitioners, legal practitioners, accountants and others)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24), as amended to 2023-11-24 Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf --- ## Can a doctor claim depreciation on an ultrasound machine, dental chair or other practice equipment? Source: https://qanoondigest.com/faq/professionals/depreciation-medical-equipment-professional-assets Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 22 of the Ordinance allows depreciation on assets used in the practice, at the rates in Part I of the Third Schedule: 15% for machinery and plant and for furniture, 30% for computer hardware, 10% for buildings. Section 23 adds a 25% initial allowance in the first year for eligible new plant and machinery, but not for furniture. **Applies to:** Doctors, dentists, clinics run by individuals, and other professionals who buy equipment, furniture, computers or books for their practice, for tax year 2027. Equipment is usually the largest purchase a clinic or practice makes, and the Income Tax Ordinance, 2001 does not let its cost be deducted in one go. Section 20(2) sends any asset with a useful life of more than one year to depreciation, and the rules for that are in sections 22 and 23 and the Third Schedule. ### What does the law say? **Which assets qualify?** Section 22(15) defines a "depreciable asset" as tangible movable property, immovable property (other than unimproved land) or a structural improvement to immovable property that: 1. has a normal useful life exceeding one year; 2. is likely to lose value through normal wear and tear or obsolescence; and 3. is used wholly or partly by the person in deriving income from business chargeable to tax. An ultrasound machine, a dental chair, an autoclave, clinic furniture, a laptop or a law library all meet that description when they are used in the practice. **Section 22: annual depreciation.** Section 22(2) applies the rate in Part I of the Third Schedule to the asset's written down value at the beginning of the year. The written down value falls each year by the depreciation already allowed, so the deduction shrinks over time. **Section 23: initial allowance.** A person who places an eligible depreciable asset into service in Pakistan for the first time in a tax year gets an extra first-year deduction at the rate in Part II of the Third Schedule, applied to cost. Part II sets that rate at 25% for plant and machinery. Section 23(5) excludes from "eligible depreciable asset": - road transport vehicles, unless plying for hire; - furniture, including fittings; - plant or machinery that has been used previously in Pakistan; - plant or machinery whose entire cost was deducted under another section in the year of purchase; and - immovable property or structural improvements to it. ### What rates apply? Part I of the Third Schedule, as it stands in the text amended to 30 June 2026, sets these rates on written down value: | Class | Rate | | --- | --- | | Building (all types) | 10% | | Furniture (including fittings), machinery and plant (not otherwise specified), motor vehicles (all types), technical or professional books | 15% | | Computer hardware including printer, monitor and allied items | 30% | | A ramp built to provide access to persons with disabilities, not exceeding Rs. 250,000 each | 100% | The Schedule has no separate class for medical, dental or laboratory equipment. Whether a particular item, such as a dental chair, is machinery and plant or furniture is not answered by the text. The annual rate is 15% either way, but the answer matters for the initial allowance, which furniture does not get. ### Worked example (illustrative figures) Dr. Sana Iqbal runs a clinic in Faisalabad. In tax year 2027 she buys, all new and never used in Pakistan before: - an ultrasound machine for Rs. 4,000,000, treated here as machinery and plant; - clinic furniture for Rs. 400,000; - a computer and printer for Rs. 200,000. **Ultrasound machine** 1. Initial allowance: 25% of Rs. 4,000,000 = Rs. 1,000,000. 2. Written down value for the first year: Rs. 4,000,000 minus Rs. 1,000,000 = Rs. 3,000,000 (section 22(5)(a)). 3. Depreciation: 15% of Rs. 3,000,000 = Rs. 450,000. 4. First-year total: Rs. 1,000,000 + Rs. 450,000 = Rs. 1,450,000. **Furniture:** no initial allowance. 15% of Rs. 400,000 = Rs. 60,000. **Computer and printer:** 30% of Rs. 200,000 = Rs. 60,000. The example claims no initial allowance on it, because the Schedule lists computer hardware as its own class and does not say whether it also counts as plant and machinery for Part II. **Total deduction for tax year 2027:** Rs. 1,450,000 + Rs. 60,000 + Rs. 60,000 = Rs. 1,570,000. **Second year for the ultrasound:** opening written down value is Rs. 4,000,000 minus Rs. 1,450,000 = Rs. 2,550,000, and depreciation is 15% of that, Rs. 382,500. ### What if ...? **What if the equipment is second-hand?** It is still depreciable under section 22. If it is plant or machinery used previously in Pakistan, section 23(5)(c) denies the initial allowance. **What if I use the asset partly for personal purposes?** Section 22(3) restricts the deduction to the fair proportional part for business use. A car used for house calls and family trips is the usual case. Section 22(13)(a) also caps the cost of a passenger vehicle not plying for hire at Rs. 7.5 million for depreciation. **What if I sell the machine later?** Section 22(8) gives no depreciation in the year of disposal. If the sale price is above written down value, the excess is business income; if below, the shortfall is deductible. **What if I buy the clinic building?** Buildings are in the 10% class, the cost of the land is excluded under section 22(13)(b), and immovable property gets no initial allowance. ### Common mistakes - **Expensing the whole cost.** Section 20(2) requires depreciation for assets with a useful life over one year. - **Claiming the initial allowance on furniture or cars.** Section 23(5) excludes both, unless the vehicle is plying for hire. - **Ignoring withholding on the purchase.** The proviso to section 22(1) denies depreciation on an amount paid to a seller for a capital asset where the tax the Ordinance required to be deducted from that payment was not deducted and deposited. - **Depreciating beyond cost.** Section 22(7) caps total depreciation and initial allowance at the asset's cost. ### What to check in the official text Read section 22, including the definitions in sub-section (15), and section 23(5) for the exclusions from initial allowance. The rate tables are in Parts I and II of the Third Schedule. The Third Schedule text reproduces an older, substituted table in a footnote; the rates above are from the current table that follows it. ### Frequently asked #### What depreciation rate applies to an ultrasound machine or X-ray unit? The Third Schedule does not name medical equipment. If the machine falls in machinery and plant (not otherwise specified), the rate is 15% of written down value, and a new machine placed into service in Pakistan for the first time also qualifies for the 25% initial allowance under section 23. #### Is there an initial allowance on clinic furniture? No. Section 23(5)(b) excludes furniture, including fittings, from eligible depreciable assets. Furniture is depreciated at 15% of written down value each year under section 22 without any initial allowance. #### Do I get a full year's depreciation if I buy equipment in June? The current text of section 22 applies the rate to written down value at the beginning of the year and contains no reduction for part-year use. A sub-section that apportioned by months was omitted in 2004, and a later 50% first-year reduction was omitted by the Finance Act, 2022. ### Citations - [Income Tax Ordinance, 2001, section 22 (Depreciation)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#22-depreciation), as amended to 2026-06-30: "the depreciation deduction for a tax year shall be computed by applying the rate specified in Part I of the Third Schedule against the written down value of the asset at the beginning of the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 23 (Initial allowance)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#23-initial-allowance), as amended to 2026-06-30: "The amount of the initial allowance of a person shall be computed by applying the rate specified in Part II of the Third Schedule against the cost of the asset." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Third Schedule, Part I (Depreciation), serials I to III and V: building 10%; furniture, machinery and plant, motor vehicles, technical or professional books 15%; computer hardware 30%](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Third Schedule, Part II (Initial allowance), paragraph (1): 25% for plant and machinery](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 20 (Deductions in computing income chargeable under the head “Income from Business”)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#20-deductions-in-computing-income-chargeable-under-the-head-income-from-business), as amended to 2026-06-30: "a deduction shall be allowed for any expenditure incurred by the person in the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How is a doctor's or lawyer's private practice income taxed in Pakistan: as salary or as business income? Source: https://qanoondigest.com/faq/professionals/how-doctors-lawyers-income-is-taxed Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer As business income. Section 2(10) of the Income Tax Ordinance defines business to include a profession, but not employment. So fees a doctor, lawyer or accountant earns in private practice fall under the head Income from Business in section 18, computed as receipts less expenses allowed by section 20. Only pay from an employer is taxed as Salary. **Applies to:** Self-employed doctors, dentists, lawyers, accountants, architects and other professionals who earn fees from their own practice in Pakistan, for tax year 2027. A doctor, lawyer or accountant in private practice is taxed on the practice as a business, not as an employee. The Income Tax Ordinance, 2001 does not have a separate head for professional income. It folds professions into business through one definition, and everything else follows from that. ### What does the law say? **Section 2(10): a profession is a business.** The Ordinance defines "business" to include "any trade, commerce, manufacture, profession, vocation or adventure", and then says it "does not include employment". A medical practice, a law chamber or an accountancy practice is a profession, so it is a business for tax purposes. Work done as someone's employee is carved out. **Section 11: five heads of income.** All income is sorted into Salary, Income from Property, Income from Business, Capital Gains and Income from Other Sources. Under section 11(2), income under a head is the amounts chargeable under that head, reduced by the deductions allowed for that head. **Section 18: Income from Business.** Section 18(1)(a) charges "the profits and gains of any business carried on by a person at any time in the year" under the head Income from Business. Because of section 2(10), that includes the profits of a practice. **Section 20: deductions.** Section 20(1) allows a deduction for expenditure incurred in the year "wholly and exclusively for the purposes of business". Section 20(2) says that where the expense buys a depreciable asset or an intangible with a useful life of more than one year, it is depreciated or amortised under the Ordinance's depreciation and amortisation rules instead of being deducted at once. **Section 9: taxable income.** Taxable income is total income for the year, reduced (but not below zero) by any deductible allowances. Practice profit is one part of total income. ### How does it work in practice? The practice is treated like any other business owned by an individual: 1. Add up the fees received from patients or clients in the tax year. 2. Subtract the expenses the Ordinance allows for the practice, such as clinic or chamber rent, staff wages and consumables, subject to the list of deductions the Ordinance does not allow. 3. Spread the cost of equipment, furniture and similar assets through depreciation rather than deducting it in one year. 4. The result is Income from Business. Add any other income, such as rent or salary, to reach total income, and then taxable income. Section 153 points the same way from another direction. For withholding on payments for services, it defines "services" to include the services of "accountants, architects, dentists, doctors, engineers, interior decorators and lawyers, otherwise than as an employee". The Ordinance therefore treats a professional's fees as a payment for services, separate from salary, unless the professional is working as an employee. ### Worked example (illustrative figures) Dr. Ayesha Malik runs a dental clinic in Lahore on her own account. Her made-up figures for tax year 2027 (1 July 2026 to 30 June 2027) are: | Item | Amount | | --- | --- | | Fees received from patients | Rs. 6,000,000 | | Clinic rent | Rs. 900,000 | | Salaries of a dental assistant and receptionist | Rs. 1,080,000 | | Dental materials and consumables | Rs. 620,000 | | Electricity and other running costs | Rs. 300,000 | Step by step: 1. Expenses: Rs. 900,000 + Rs. 1,080,000 + Rs. 620,000 + Rs. 300,000 = Rs. 2,900,000. 2. Income from Business: Rs. 6,000,000 minus Rs. 2,900,000 = Rs. 3,100,000. 3. She has no other income and claims no deductible allowances, so her taxable income under section 9 is Rs. 3,100,000. The tax on that figure comes from the rate table for individuals other than salaried individuals, covered on the rates page in this category. If she bought a new dental chair during the year, its cost would not appear in step 1. It would be depreciated under the rules that section 20(2) points to. ### What if ...? **What if I am also employed by a hospital?** Pay from the hospital as its employee falls under the Salary head, which is separate. Private clinic fees stay under Income from Business. Both go into one return, and the combined figure decides which rate table applies. **What if the practice makes a loss?** Section 11(3) treats deductions above receipts as a loss for that head. Section 11(4) sends it to Part VIII of Chapter III, which governs how losses are set off and carried forward. **What if a company deducted tax from my fees?** The tax deducted does not change the head of income. The fees remain business income. How the deducted tax is credited is covered on the withholding pages in this category. ### Common mistakes - **Thinking "fees" means salary.** The definition of salary does mention fees, but only fees received by an employee from employment. Fees from your own patients or clients are business income. - **Recording only the cash received in hand.** Where a payer deducts tax, the full fee is income, not just the net amount paid. - **Deducting personal spending.** Section 20(1) requires the expense to be wholly and exclusively for the practice. Household costs are not practice expenses. - **Expensing equipment in full.** An X-ray machine or a law library with a useful life over one year is depreciated, not deducted in the year of purchase. ### What to check in the official text Read the definition of "business" in section 2(10), then sections 11, 18 and 20. The list of deductions not allowed, which follows section 20, is worth reading against your own expenses. The rate table is in Division I of Part I of the First Schedule. Rules made by professional bodies such as the Pakistan Medical and Dental Council or bar councils are outside this corpus and are not covered here. ### Frequently asked #### Is a doctor's clinic income taxed as salary? No, not when the doctor runs the clinic for their own account. Section 2(10) treats a profession as a business and excludes employment, so clinic fees go under Income from Business in section 18. Only amounts received as an employee from an employer fall under the Salary head. #### Can a lawyer deduct chamber rent and clerk wages? Section 20(1) allows a deduction for expenditure incurred in the year wholly and exclusively for the purposes of business, and a profession counts as a business. Chamber rent and staff wages meet that test when they are spent on the practice. The Ordinance also lists deductions that are not allowed, so check each expense against that list. #### Which tax rates apply to practice income? Business income is added to the person's other income to reach taxable income under section 9, and the individual rate table in the First Schedule applies to that total. The rates for tax year 2027 are set out on a separate page in this category. ### Citations - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "“business” includes any trade, commerce, manufacture, profession, vocation or adventure or concern in the nature of trade, commerce, manufacture, profession or vocation, but does not include employment" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 11 (Heads of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#11-heads-of-income), as amended to 2026-06-30: "all income shall be classified under the following heads" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 18 (Income from business)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#18-income-from-business), as amended to 2026-06-30: "the profits and gains of any business carried on by a person at any time in the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 20 (Deductions in computing income chargeable under the head “Income from Business”)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#20-deductions-in-computing-income-chargeable-under-the-head-income-from-business), as amended to 2026-06-30: "a deduction shall be allowed for any expenditure incurred by the person in the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 9 (Taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#9-taxable-income), as amended to 2026-06-30: "The taxable income of a person for a tax year shall be the total income" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "“services” includes the services of accountants, architects, dentists, doctors, engineers, interior decorators and lawyers, otherwise than as an employee" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What legal powers does FBR use to post officers at hospitals and ask for doctors' income details? Source: https://qanoondigest.com/faq/professionals/fbr-officers-at-hospitals-information-notices Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer FBR relies on general powers, not a hospital rule. Section 175C lets the Board or a Chief Commissioner post officers at any business premises. Section 176 lets the Commissioner require any person to give information about their own or another person's tax affairs. Sections 174(5) and 99C allow notified systems and special procedures, including for medical practitioners and hospitals. **Applies to:** Doctors, clinics, private hospitals and hospital administrators who receive FBR notices, officer visits or information requests under the Income Tax Ordinance, 2001, as amended to 30 June 2026. FBR has no single "hospital power" in the Income Tax Ordinance, 2001. What it has is a set of general powers that reach any business, including a hospital or clinic, plus one section that names medical practitioners and hospitals as a sector the Board may put on a special procedure. This page sets out what each power says and what it does not say. ### What does the law say? **Section 175C: posting officers at business premises.** Inserted by the Finance Act, 2025, section 175C lets the Board or the Chief Commissioner post an officer of Inland Revenue, or other officials working under their control, "to the business premises of any person or class of such persons". The stated purpose is to monitor production, supply of goods or rendering of services, and unsold stock, "for determining tax payable under this Ordinance". The posting is subject to such conditions and restrictions as the Board or Chief Commissioner imposes. **Section 176: notices for information.** The Commissioner may, by written notice, require any person, "whether or not liable for tax", to: - furnish information relevant to any tax leviable under the Ordinance (section 176(1)(a)); or - attend and be examined on oath about "the tax affairs of that person or any other person", and produce accounts, documents or computer-stored information (section 176(1)(b)). Section 176(4) gives the Commissioner the powers of a civil court for enforcing attendance, compelling production of records and receiving evidence on affidavit. Section 176(5) says the section applies notwithstanding any law or rules relating to privilege or the public interest in relation to producing accounts, documents or computer-stored information. **Section 174(5): electronic systems.** As substituted by the Finance Act, 2026, the Board may require any person or class of persons to install and use a prescribed electronic resource, or to act as an integrated enterprise, through a notification in the official Gazette. The purpose is receiving, storing, matching and accessing information on transactions that bear on tax liability. **Section 99C: special procedure for named sectors.** The Board, with the approval of the Minister-in-charge, may by notification in the official Gazette prescribe a special procedure for scope and payment of tax, record keeping, filing of return and assessment. The sectors named include "medical practitioners, hospitals, educational institutions", in the cities or territories the notification specifies. **Section 175: entry to premises.** Separately, section 175(1) gives the Commissioner, or an officer authorised in writing, access "at all times and without prior notice" to premises, accounts, documents or computers, including real-time electronic access, to enforce the Ordinance. ### How does it work in practice? The powers work at different levels: | Power | Who uses it | Needs a notification? | What it reaches | |---|---|---|---| | Section 175C | Board or Chief Commissioner | No, but conditions may be imposed | Business premises of a person or class of persons | | Section 176 | Commissioner | No, a written notice | Any person, about their own or another person's tax affairs | | Section 174(5) | Board | Yes, Gazette notification | Electronic resource or integrated enterprise | | Section 99C | Board with Minister's approval | Yes, Gazette notification | Named sectors, including medical practitioners and hospitals | | Section 175 | Commissioner or authorised officer | No | Premises, accounts, documents, computers | For a hospital, section 176 is the one that reaches doctors' income through a third party. A hospital that pays consultants can be asked, as "any person", for information about "any other person", which would include the doctors it pays. For a doctor's own clinic, sections 175C and 175 reach the premises directly. ### Worked example (illustrative figures) The facts below are invented. A private hospital in Rawalpindi has 40 visiting consultants who are paid a share of patient fees. The hospital receives a written notice under section 176(1)(a) asking for a list of consultants and the amounts paid to each in tax year 2026. 1. The notice is issued by the Commissioner in writing, which is what section 176(1) requires. 2. The information concerns other persons, the consultants. Section 176(1)(b) expressly covers examination about "any other person", and clause (a) covers any information relevant to any tax under the Ordinance. 3. Section 176(3) lets the hospital, at its option, furnish the information electronically in computer readable media. 4. If the hospital does not provide a hard copy or disk of computer-stored information, section 176(3) lets the Commissioner require production of the computer itself and retain it for as long as needed to copy the information. Separately, if the Board issued an order under section 175C for a class of persons that included the hospital, an officer could be posted to its premises to monitor services rendered. The order itself would set the conditions. ### What if ...? **What if the notice asks for patient records?** Section 176(5) overrides law or rules on privilege in relation to producing accounts, documents or computer-stored information. The Ordinance does not specifically mention medical confidentiality or patient records. The corpus does not resolve how the two interact, and this page does not either. **What if an officer arrives without a written order?** Section 175C does not say, in the text held here, what document the posted officer must carry. Section 175 requires the officer to be the Commissioner or someone "authorised in writing by the Commissioner". The conditions under section 175C are left to the Board or Chief Commissioner. **What if a special procedure for doctors has been notified?** Section 99C only creates the power. Any notification made under it, and any notification under section 174(5), is not in this corpus. Their content cannot be stated here. ### Common mistakes - **Treating section 99C as a tax on doctors.** It is an enabling power. Without a notification, it does not by itself change how a doctor's income is taxed. - **Assuming only taxpayers get section 176 notices.** The section applies to any person "whether or not liable for tax". - **Assuming section 175C is limited to factories.** It covers "rendering of services", not only production of goods. - **Confusing section 174(5) with record keeping.** Section 174(1) is the general duty to keep prescribed records. Sub-section (5) is the separate power to require an electronic resource by notification. ### What to check in the official text Read sections 99C, 174, 175, 175C and 176 in the official PDF. Check whether the Board has issued any notification under section 99C or section 174(5), and any order under section 175C, that names hospitals, clinics or medical practitioners. None is held in this corpus. The penalties for not complying with a notice sit elsewhere in the Ordinance and are not covered on this page. ### Frequently asked #### Does the Ordinance have a section that is only about hospitals? No section in the corpus is limited to hospitals. Section 175C applies to the business premises of any person or class of persons, and section 176 applies to any person. Section 99C names medical practitioners and hospitals, but it only allows a special procedure to be prescribed by notification. #### Can a hospital be asked about fees it paid to consultants? Section 176(1) lets the Commissioner require any person to furnish information relevant to any tax under the Ordinance, and to be examined about the tax affairs of that person or any other person. The text does not exclude hospitals or the fees they pay to doctors. #### Is there a notification under section 99C for doctors? Section 99C allows one to be issued by notification in the official Gazette. No such notification is held in this corpus, so this page cannot say whether one exists or what it provides. ### Citations - [Income Tax Ordinance, 2001, section 175C (Posting of officer of Inland Revenue)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#175c-posting-of-officer-of-inland-revenue), as amended to 2026-06-30: "the Board or the Chief Commissioner may post an officer of Inland Revenue or such other officials with any designation working under the control of the Board or the Chief Commissioner, to the business premises of any person or class of such persons" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 176 (Notice to obtain information or evidence)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#176-notice-to-obtain-information-or-evidence), as amended to 2026-06-30: "The Commissioner may, by notice in writing, require any person, whether or not liable for tax under this Ordinance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 174 (Records)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#174-records), as amended to 2026-06-30: "The Board may require any person or class of persons to install and use an electronic resource of such type and description as may be prescribed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 99C (Special procedure for certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#99c-special-procedure-for-certain-persons), as amended to 2026-06-30: "prescribe special procedure for scope and payment of tax, record keeping, filing of return and assessment in respect of small businesses, construction businesses, medical practitioners, hospitals, educational institutions" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 175 (Power to enter and search premises)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#175-power-to-enter-and-search-premises), as amended to 2026-06-30: "shall, at all times and without prior notice, have full and free" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Are doctors' consultations and tuition or coaching in Islamabad subject to ICT sales tax on services? Source: https://qanoondigest.com/faq/professionals/islamabad-sales-tax-doctors-tutors Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Not as a named service. Table-1 of the Islamabad Capital Territory (Tax on Services) Ordinance, 2001 has no entry for doctors' consultations. It does tax personal care by beauty parlours and clinics including cosmetic and plastic surgery, laboratories other than pathological or diagnostic tests for patients, telemedicine centres as IT-enabled services, and training or coaching other than education services. **Applies to:** Doctors, clinics, laboratories, tutors, academies and coaching centres rendering services in Islamabad Capital Territory, under the Schedule as amended to 30 June 2025. Section 3 of the Islamabad Capital Territory (Tax on Services) Ordinance, 2001 taxes only the services listed in its Schedule. So the question for a doctor or tutor in Islamabad is whether any entry in Table-1 or Table-2 describes what they do. For ordinary medical consultation, none does. For several activities around medicine and teaching, entries do. ### What does the law say? **Section 3(1): the charge.** Tax is charged at the rates in column (4) of Table-1 on "the value of the taxable services rendered or provided in the Islamabad Capital Territory". Services in Table-2 are charged at the rates and on the conditions printed in Table-2. **Section 2: meanings.** Words used but not defined in the Ordinance take their meaning from the Sales Tax Act, 1990. **The entries that touch medicine and teaching.** From the Schedule as amended to 30 June 2025: | Entry | Description (from the Schedule) | Rate | |---|---|---| | Table-1, serial 8 | Personal care by beauty parlours, clinics and slimming clinics, body massage centres, pedicure centres, including cosmetic and plastic surgery by such parlours/clinics, excluding (i) annual turnover not exceeding Rs.3.6 million, or (ii) where air-conditioning is not installed or available | Fifteen percent | | Table-2, serial 2 | The same personal care services, with the same two exclusions | Five per cent, no input tax adjustment or refund | | Table-1, serial 26 | Services provided by laboratories other than services relating to pathological or diagnostic tests for patients | Fifteen percent | | Table-1, serial 11 | IT services and IT-enabled services; IT-enabled services include medical transcription, remote monitoring and telemedicine centres | Fifteen percent | | Table-1, serial 58 | Training or coaching services other than education services | Fifteen percent | | Table-1, serial 38 | Valuation services; competency and eligibility testing services, excluding education testing services rendered under a bilateral or multilateral agreement signed by the Government of Pakistan | Fifteen percent | No entry names medical consultation, general practice, hospitals or doctors. ### How does it work in practice? **For a doctor or clinic.** Consultation fees are not a listed service. A clinic offering cosmetic or plastic surgery alongside personal care services needs to check serial 8 of Table-1 and serial 2 of Table-2. A laboratory needs to separate tests for patients, which are outside serial 26, from other laboratory work, which is inside it. A telemedicine centre falls within the IT-enabled services wording of serial 11. **For a tutor or academy.** Serial 58 taxes "training or coaching services other than education services". Neither the ICT Ordinance nor its Schedule defines education services. Section 2 points to the Sales Tax Act, 1990 for undefined words, and this page does not state that the Act defines the term. Whether school-subject tuition is education services, or coaching, is not answered by the text held here. **On the two beauty and clinic entries.** Table-1 serial 8 prints fifteen percent and Table-2 serial 2 prints five per cent for the same description. The proviso to section 3(1) says Table-2 services are charged at Table-2 rates. The Ordinance text does not further explain how the two entries relate. ### Worked example (illustrative figures) The figures are invented. The rates are from the Schedule. A skin and cosmetic clinic in F-7, Islamabad is air-conditioned and has annual turnover of Rs. 12,000,000, so neither exclusion in serial 8 applies. In one month it bills Rs. 500,000 for cosmetic procedures and Rs. 300,000 for ordinary dermatology consultations. 1. Consultations: no entry lists them, so no ICT tax is shown for this Rs. 300,000. 2. Cosmetic procedures at the Table-1 rate: 15% of Rs. 500,000 = Rs. 75,000. 3. Cosmetic procedures at the Table-2 rate: 5% of Rs. 500,000 = Rs. 25,000, with no input tax adjustment or refund. Step 2 and step 3 show the two printed rates side by side. Which applies depends on how the two tables are read together, which the text held here does not spell out. ### What if ...? **What if my clinic's turnover is Rs. 3,000,000?** Both serial 8 and Table-2 serial 2 exclude cases where annual turnover does not exceed Rs.3.6 million. **What if I teach online from Islamabad?** Section 3 looks at where the service is rendered or provided. The Ordinance text held here has no specific rule for online teaching. **What if my academy prepares students for entry tests?** Serial 38 excludes only education testing services under agreements signed by the Government of Pakistan. Preparation classes are a different activity and would be looked at under serial 58. The borderline is not resolved in the text. ### Common mistakes - **Assuming every clinic service is exempt.** Consultation is not listed, but cosmetic surgery by parlours or clinics, some laboratory work and telemedicine are. - **Treating all laboratory work as exempt.** Only pathological or diagnostic tests for patients are carved out. - **Reading serial 58 as taxing all teaching.** It excludes education services, a term the Ordinance does not define. - **Applying ICT tax outside Islamabad.** Provincial sales tax on services laws are outside this corpus. ### What to check in the official text Read sections 2 and 3 and serial numbers 8, 11, 26, 38 and 58 of Table-1 and serial 2 of Table-2 in the official PDF of the ICT Ordinance amended to 30 June 2025. Section 3(4) lets the Board notify a Negative List of exempt services in Table-3; no Table-3 is printed in the edition held here, so check whether one has been notified. ### Frequently asked #### Does a GP or specialist in Islamabad charge ICT sales tax on consultation fees? No entry in Table-1 or Table-2 of the Schedule, as amended to 30 June 2025, names medical consultation, doctors or hospitals. Section 3 charges tax only on services listed in the Schedule. Other activities of a clinic may still fall under listed entries. #### Is a diagnostic laboratory taxed? Serial number 26 of Table-1 taxes services provided by laboratories at fifteen percent, other than services relating to pathological or diagnostic tests for patients. Pathological or diagnostic tests for patients are therefore outside that entry. #### Is tuition taxed as coaching? Serial number 58 of Table-1 taxes training or coaching services other than education services at fifteen percent. The Ordinance does not define education services, so where tuition ends and taxable coaching begins is not settled by the text. ### Citations - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, section 3 (Scope of tax)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30#3-scope-of-tax), as amended to 2025-06-30: "there shall be charged, levied and paid a tax known as sales tax at rates specified in column (4) of Table-1 of the Schedule to this Ordinance of the value of the taxable services rendered or provided in the Islamabad Capital Territory" Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, Schedule, Table-1, serial numbers 8, 11, 26, 38 and 58](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, Schedule, Table-2, serial number 2](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, section 2 (Interpretation)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30#2-interpretation), as amended to 2025-06-30: "the words and expression used but not defined shall have the same meaning as in the Sales Tax Act, 1990" Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf --- ## What income tax slab rates apply to a professional's practice income in tax year 2027? Source: https://qanoondigest.com/faq/professionals/tax-rates-professionals-tax-year-2027 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer For tax year 2027, a self-employed doctor, lawyer or accountant is taxed under clause (1) of Division I, Part I of the First Schedule, which section 4 applies to taxable income. Tax is 0% up to Rs. 600,000, then rises in five slabs to 45% above Rs. 5,600,000. A professional firm barred from incorporating pays 40% in the top slab. **Applies to:** Self-employed individual professionals and professional firms whose salary, if any, is 75% or less of taxable income, for tax year 2027 (1 July 2026 to 30 June 2027). A professional's practice profit is business income, so the rate that applies is the individual rate for people who are not salaried. The Income Tax Ordinance, 2001 keeps two tables for individuals in Division I of Part I of the First Schedule, and the difference between them is large at every income level above Rs. 600,000. ### What does the law say? **Section 4** imposes income tax for each tax year at the rates in Division I or II of Part I of the First Schedule on every person with taxable income. **Section 9** makes taxable income the total income for the year less any deductible allowances. **Clause (1) of Division I** sets the rates on the income of "every individual and association of persons except a salaried individual". This is the table for self-employed professionals and professional firms. It was last substituted by the Finance Act, 2024, and the text as amended to 30 June 2026 shows no later change, so it applies to tax year 2027. **Clause (2)** sets a separate table for an individual whose income under the head Salary exceeds seventy-five per cent of taxable income. The Finance Act, 2026 substituted that table. ### What are the tax year 2027 rates? **Clause (1): individuals and associations of persons other than salaried individuals** | Taxable income | Tax | | --- | --- | | Up to Rs. 600,000 | 0% | | Over Rs. 600,000 up to Rs. 1,200,000 | 15% of the amount over Rs. 600,000 | | Over Rs. 1,200,000 up to Rs. 1,600,000 | Rs. 90,000 + 20% of the amount over Rs. 1,200,000 | | Over Rs. 1,600,000 up to Rs. 3,200,000 | Rs. 170,000 + 30% of the amount over Rs. 1,600,000 | | Over Rs. 3,200,000 up to Rs. 5,600,000 | Rs. 650,000 + 40% of the amount over Rs. 3,200,000 | | Over Rs. 5,600,000 | Rs. 1,610,000 + 45% of the amount over Rs. 5,600,000 | A proviso to this table says that for an association of persons that is a professional firm prohibited from incorporating by any law or by the rules of the body regulating its profession, the 45% rate in the last slab is 40%. **Clause (2): salary more than 75% of taxable income, for comparison** | Taxable income | Tax | | --- | --- | | Up to Rs. 600,000 | 0% | | Over Rs. 600,000 up to Rs. 1,200,000 | 1% of the amount over Rs. 600,000 | | Over Rs. 1,200,000 up to Rs. 2,200,000 | Rs. 6,000 + 11% of the amount over Rs. 1,200,000 | | Over Rs. 2,200,000 up to Rs. 3,200,000 | Rs. 116,000 + 20% of the amount over Rs. 2,200,000 | | Over Rs. 3,200,000 up to Rs. 4,100,000 | Rs. 316,000 + 25% of the amount over Rs. 3,200,000 | | Over Rs. 4,100,000 up to Rs. 5,600,000 | Rs. 541,000 + 29% of the amount over Rs. 4,100,000 | | Over Rs. 5,600,000 up to Rs. 7,000,000 | Rs. 976,000 + 32% of the amount over Rs. 5,600,000 | | Over Rs. 7,000,000 | Rs. 1,424,000 + 35% of the amount over Rs. 7,000,000 | **Surcharge.** Section 4AB, printed within section 4 in the consolidated text, adds a surcharge for every individual and association of persons at ten percent of the income tax under Division I where taxable income exceeds Rs. 10 million. Its proviso says no surcharge is payable by an individual deriving income chargeable under the head Salary. ### Worked example (illustrative figures) **An advocate in Karachi.** Advocate Farhan Siddiqui has made-up taxable income of Rs. 4,000,000 from his practice in tax year 2027, and no salary. 1. Rs. 4,000,000 falls in the slab over Rs. 3,200,000 up to Rs. 5,600,000. 2. Amount over Rs. 3,200,000: Rs. 800,000. 3. 40% of Rs. 800,000 = Rs. 320,000. 4. Tax: Rs. 650,000 + Rs. 320,000 = Rs. 970,000. The same Rs. 4,000,000 under the clause (2) salaried table would be Rs. 316,000 + 25% of Rs. 800,000 = Rs. 516,000. The self-employed figure is Rs. 454,000 higher. **A consultant physician in Islamabad.** Dr. Nadia Qureshi has made-up taxable income of Rs. 12,000,000 from private practice. 1. Amount over Rs. 5,600,000: Rs. 6,400,000. 2. 45% of Rs. 6,400,000 = Rs. 2,880,000. 3. Tax under Division I: Rs. 1,610,000 + Rs. 2,880,000 = Rs. 4,490,000. 4. Taxable income exceeds Rs. 10 million, so the surcharge is 10% of Rs. 4,490,000 = Rs. 449,000. 5. Total: Rs. 4,490,000 + Rs. 449,000 = Rs. 4,939,000. ### What if ...? **What if I also draw a salary?** The table depends on the share of salary in taxable income. Only where salary exceeds 75% does clause (2) apply, and then to the whole taxable income. At 75% or below, clause (1) applies to everything, salary included. **What if we practise as a firm?** A firm that is an association of persons also uses the clause (1) table. If it is a professional firm that the law or its regulating body prohibits from incorporating, its top slab is 40% instead of 45%. Which firms meet that condition depends on rules outside this corpus. How an association's income and its members' shares are taxed is covered on the partnership page in this category. **What if tax was deducted from my fees?** Tax withheld is credited against the tax worked out from these tables. It does not change which table applies. ### Common mistakes - **Using the salaried table for practice income.** Clause (2) is limited to individuals whose salary is more than 75% of taxable income. - **Applying the top rate to the whole income.** Each rate applies only to the amount above the slab's starting point, plus the fixed amount for the lower slabs. - **Forgetting the surcharge.** Above Rs. 10 million of taxable income, a self-employed professional pays ten percent on top of the tax. - **Assuming the 40% rate applies to individuals.** The proviso refers to an association of persons that is a professional firm, not to a sole practitioner. ### What to check in the official text Read clauses (1) and (2) of Division I, Part I of the First Schedule in the official PDF, including the proviso on professional firms, and section 4AB within section 4. Check section 9 for how taxable income is reached. Tax credits, minimum tax on withheld fees and advance tax change what is payable at the end of the year but not the slab table itself. ### Frequently asked #### Do doctors and lawyers get the salaried slab rates? Not on practice income alone. Clause (2) of Division I applies only where salary exceeds seventy-five per cent of taxable income. A professional with no salary, or with salary at or below that share, is taxed under the clause (1) table, which is steeper. #### What is the top rate for a self-employed professional in tax year 2027? 45% of taxable income above Rs. 5,600,000, on top of a fixed Rs. 1,610,000 for the income below that point. Where taxable income exceeds Rs. 10 million, section 4AB adds a surcharge of ten percent of the tax. For a professional firm that is an association of persons barred from incorporating, the 45% rate becomes 40%. #### Did the Finance Act, 2026 change the rates for professionals? The consolidated text shows the clause (1) table was last substituted by the Finance Act, 2024, with no later footnote changing it. The Finance Act, 2026 substituted the clause (2) table for salaried individuals and changed the wording of the surcharge provision. ### Citations - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1), Table and proviso on professional firms (Table substituted by the Finance Act, 2024)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), Table (substituted by the Finance Act, 2026)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 4 (Tax on taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4-tax-on-taxable-income), as amended to 2026-06-30: "a surcharge shall be payable by every individual and association of persons at the rate of ten percent" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 9 (Taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#9-taxable-income), as amended to 2026-06-30: "The taxable income of a person for a tax year shall be the total income" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is private tuition or academy income taxable, and how is it declared alongside a teaching salary? Source: https://qanoondigest.com/faq/professionals/private-tuition-income-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Fees from home tuition or running an academy are profits of a business, because section 2(10) defines business to include a profession or vocation, and section 18 charges them under Income from Business. A teaching salary stays under section 12. Both go into one taxable income, and section 114 requires a return once that income passes the untaxed amount. **Applies to:** School and college teachers who tutor at home or in an academy, and individuals who run a tuition academy, for tax year 2027 (1 July 2026 to 30 June 2027). Private tuition is taxable income under the Income Tax Ordinance, 2001. The Ordinance does not have a separate category for tutors. It treats tutoring on your own account as a business and a teaching job as employment, then adds the two together for the rate tables. ### What does the law say? **Section 2(10): tutoring is a business.** Business "includes any trade, commerce, manufacture, profession, vocation" and similar concerns, "but does not include employment". Teaching students for fees on your own account is a profession or vocation, so it falls inside this definition. **Section 11: separate heads.** All income is classified under five heads. Salary and Income from Business are two of them. Under section 11(2), income under each head is the amounts chargeable under that head less the deductions allowed for that head. **Section 12: the teaching job.** Salary means "any amount received by an employee from any employment". Section 2(22) says employment includes "a position entitling the holder to a fixed or ascertainable remuneration". A school or college pay packet is salary. **Section 18: the tuition.** Section 18(1)(a) charges "the profits and gains of any business carried on by a person at any time in the year" under Income from Business. Profit means fees received less the expenses allowed for that business. **Section 114: the return.** Section 114(1)(ab) requires a return from every person other than a company whose taxable income exceeds the maximum amount not chargeable to tax. Other clauses of section 114(1) add further triggers, such as having obtained a National Tax Number. **Section 99C: a possible special regime.** The Board may, by Gazette notification, prescribe a special procedure for scope and payment of tax, record keeping, filing of return and assessment for sectors including "educational institutions". No such notification is in this corpus. ### How does it work in practice? 1. Take salary for the year from the school's records. 2. Work out tuition profit: fees received less expenses of the tuition business, such as rent of a room used only for classes. 3. Add both to reach taxable income. 4. Check the 75% test in Division I, Part I of the First Schedule. If salary exceeds seventy-five per cent of taxable income, the clause (2) table applies to the whole income. Otherwise the clause (1) table applies. 5. Subtract tax already deducted by the employer and any other creditable tax. The balance is paid with the return. An academy owner with no salary simply reports academy profit under Income from Business and uses the clause (1) table. ### Worked example (illustrative figures) The incomes are invented. The rates are the tax year 2027 rates in Division I. **Case A: light tuition.** Ms. Sana Iqbal teaches at a private school in Lahore for a salary of Rs. 1,500,000. Her evening tuition makes a profit of Rs. 360,000. 1. Taxable income: Rs. 1,500,000 + Rs. 360,000 = Rs. 1,860,000. 2. Salary share: Rs. 1,500,000 ÷ Rs. 1,860,000 = 80.6%. That exceeds 75%, so clause (2) applies. 3. Clause (2) slab over Rs. 1,200,000 up to Rs. 2,200,000: Rs. 6,000 + 11% of Rs. 660,000 = Rs. 6,000 + Rs. 72,600 = Rs. 78,600. **Case B: heavy tuition.** Same salary, but tuition profit is Rs. 700,000. 1. Taxable income: Rs. 2,200,000. 2. Salary share: Rs. 1,500,000 ÷ Rs. 2,200,000 = 68.2%. That is not more than 75%, so clause (1) applies. 3. Clause (1) slab over Rs. 1,600,000 up to Rs. 3,200,000: Rs. 170,000 + 30% of Rs. 600,000 = Rs. 170,000 + Rs. 180,000 = Rs. 350,000. In Case B, the larger tuition income moved the whole income onto the table for individuals other than salaried individuals. Tax on the same salary is then computed at the higher rates too. ### What if ...? **What if I only tutor and have no job?** All the income is Income from Business and clause (1) applies. Section 114(1)(ab) requires a return once taxable income exceeds the untaxed amount, which in the clause (1) table is Rs. 600,000 for tax year 2027. **What if the academy pays me per class?** Payment per class may or may not be a position with "fixed or ascertainable remuneration". The Ordinance does not decide this for particular contracts. If it is employment, the amount is salary. If it is not, it is business income. **What if the tuition makes a loss?** Under section 11(3), a loss arises for the business head when its deductions exceed its receipts. Section 11(4) sends it to the loss rules in Part VIII of Chapter III. ### Common mistakes - **Leaving tuition out because the employer files paperwork.** The employer's deduction is on salary. Tuition profit is outside it. - **Taxing each income on its own table.** One table, chosen by the 75% test, applies to the whole taxable income. - **Deducting tuition expenses from salary.** Section 11(2) allows deductions under the head they belong to. - **Assuming section 99C already applies.** It is a power to notify a procedure. Without a notification it changes nothing. ### What to check in the official text Read sections 2(10), 2(22), 11, 12, 18 and 114 in the official PDF, and the clause (1) and clause (2) tables of Division I, Part I of the First Schedule. Check for any notification under section 99C covering educational institutions. Sales tax on coaching services in Islamabad is covered on a separate page; provincial services taxes are outside this corpus. ### Frequently asked #### Is tuition income tax free if it is paid in cash? No. Section 18 charges the profits and gains of any business, and nothing in it depends on how fees are paid. Cash fees are part of business receipts in the same way as bank transfers. #### I teach at an academy on a fixed monthly amount. Is that salary or business? Section 2(22) says employment includes a position entitling the holder to a fixed or ascertainable remuneration, and section 12 charges amounts from employment as Salary. Whether a particular arrangement is employment depends on its facts, which the Ordinance does not settle case by case. #### Does a tuition academy fall under the special procedure in section 99C? Section 99C allows the Board to prescribe a special procedure for educational institutions by notification. No such notification is held in this corpus, so this page cannot say whether one applies to academies. ### Citations - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "includes any trade, commerce, manufacture, profession, vocation or adventure or concern in the nature of trade, commerce, manufacture, profession or vocation, but does not include employment" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 11 (Heads of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#11-heads-of-income), as amended to 2026-06-30: "all income shall be classified under the following heads" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "Salary means any amount received by an employee from any employment, whether of a revenue or capital nature" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 18 (Income from business)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#18-income-from-business), as amended to 2026-06-30: "the profits and gains of any business carried on by a person at any time in the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "every person (other than a company) whose taxable income for the year exceeds the maximum amount that is not chargeable to tax under this Ordinance for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clauses (1) and (2), Tables (clause (2) Table substituted by the Finance Act, 2026)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is the tax deducted from my professional fees a minimum tax, or can I adjust it or get a refund? Source: https://qanoondigest.com/faq/professionals/is-tax-on-professional-fees-minimum-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It is minimum tax. Section 153(3) of the Income Tax Ordinance says tax deductible on payments for services is minimum tax on that income. It counts as a credit under section 168, and you pay any balance if normal tax is higher. You cannot get back the part that is only higher than the normal tax on those fees. **Applies to:** Doctors, dentists, lawyers, accountants, architects, engineers and other professionals, other than employees, whose fees have had income tax deducted under section 153. The tax a hospital, company or other prescribed person deducts from your fees is not the end of the matter, and it is not a simple advance either. It sits in between. The Income Tax Ordinance calls it minimum tax, and that label decides whether you pay more, pay nothing further, or can ask for money back. ### What does the law say? **Deduction.** Section 153(1)(b) requires a prescribed person paying for "the rendering of or providing of services" to deduct tax from the gross amount payable. Section 153(7) says "services" includes "the services of accountants, architects, dentists, doctors, engineers, interior decorators and lawyers, otherwise than as an employee". **Rate for tax year 2027.** The First Schedule, Part III, Division III, paragraph (2)(ii), as substituted by the Finance Act, 2026, sets 15% "in the case of independent professional services such as doctors, lawyers, architects, accountants, software engineers or developers, working independently". Tax year 2027 covers income from 1 July 2026 to 30 June 2027. **Minimum tax.** Section 153(3) says the tax deductible under sub-sections (1) and (2), on the income of a resident person, "shall be minimum tax". The provisos that follow carve out certain sales of goods and certain contracts by listed companies. None of them covers services. An Explanation then fixes what "income" means here: "the amount on which tax is deductible under sub-section (1) or (2)". **Credit.** Section 168(1)(b) treats the deducted amount as tax paid by you. Section 168(2) gives you a tax credit for it in computing tax due for the tax year of the deduction, and section 4(3)(c) applies section 168 credits after other credits. **Refund.** Section 170(1) allows a refund only of tax paid "in excess of the amount which the taxpayer is properly chargeable". ### What does "minimum tax" mean for me? The Ordinance does not contain one general definition of "minimum tax". Read together, section 153(3) and its Explanation make the deducted tax the least amount of tax on the fees it was deducted from. In practice that gives two outcomes: - **Normal tax is higher.** Your fees are included in the return with your other income. Tax is worked out under section 4 and the First Schedule. The deducted amount is subtracted as a credit, and you pay the balance. - **Normal tax is lower, nil, or you made a loss.** The deducted tax stays as your tax on those fees. The part above normal tax is not an overpayment you can reclaim under section 170, because the minimum tax is the amount you are properly chargeable with. An older version of section 153(3), omitted by the Finance Act, 2020, allowed excess minimum tax on some services to be carried forward for up to five years. That clause no longer appears in the current text, so there is no carry forward in the Ordinance as it now stands. ### Worked example (illustrative figures) Dr. Ayesha is a consultant physician in Lahore. She is not an employee of the private hospital where she sees patients, and the hospital is a company. In tax year 2027 the hospital pays her fees of Rs. 2,400,000 and she is on the Active Taxpayers List. 1. Tax deducted by the hospital: Rs. 2,400,000 x 15% = Rs. 360,000. 2. Minimum tax on those fees under section 153(3): Rs. 360,000. **Case A.** Suppose her normal tax on her total taxable income, worked out under the First Schedule, comes to Rs. 500,000 (an assumed figure for this example). - Credit under section 168: Rs. 360,000. - Balance payable with the return: Rs. 500,000 - Rs. 360,000 = Rs. 140,000. **Case B.** Suppose instead that clinic rent and staff costs leave her with normal tax of Rs. 250,000 (again assumed). - The minimum tax on the hospital fees is Rs. 360,000, which is higher than Rs. 250,000. - Her tax on those fees stays at Rs. 360,000. The difference of Rs. 110,000 is not refundable, because it is not tax paid above what section 153(3) makes chargeable. ### When can a refund still arise? Minimum tax limits refunds of the section 153 deduction itself. It does not stop section 170 working for other overpayments. Examples consistent with the text include tax deducted when no deduction was due, such as by a payer who is not a prescribed person, and other adjustable taxes or advance tax paid during the year that go beyond your liability. Section 168(5) says a section 168 credit that cannot be used in the year "shall be refunded to the taxpayer in accordance with section 170". Section 170(2) requires the application in the prescribed form within three years of the later of the assessment order or the date the tax was paid. Section 170(4) gives the Commissioner sixty days to decide. ### What if the fees are declared as nil in the return? If you file a return declaring no practice income, the deductions shown in the payers' certificates still exist, and section 168(1)(a) treats each deducted amount as income you derived. Declaring nil does not reverse section 153(3). The deducted tax remains minimum tax on the amount it was deducted from. ### Common mistakes - **Calling it final tax.** Section 153(3) uses "minimum", not "final". Your fees still go into the return, and more tax is due if normal tax is higher. - **Treating it as fully adjustable.** Adjustable tax can be refunded if liability turns out lower. Minimum tax cannot, to the extent it covers those fees. - **Relying on the old carry forward.** The five year carry forward of excess minimum tax on services was in a clause omitted in 2020. - **Assuming salary deductions work the same way.** Section 153 applies to services "otherwise than as an employee". Tax on a salary is deducted under a different section. ### What to check in the official text Read section 153(3) with its provisos and Explanation, and section 153(7) for the definition of services. Check the rate in the First Schedule, Part III, Division III, paragraph (2), which the Finance Act, 2026 rewrote. Read sections 4(3), 168 and 170 for how credits and refunds are applied. The Ordinance does not spell out a formula for combining minimum tax on some receipts with normal tax on other income, so check your computation against the return form for the year. ### Frequently asked #### Is tax deducted from a doctor's or lawyer's fees final tax? No. Section 153(3) makes tax deductible under section 153(1) minimum tax, not final tax. The fees stay in your return, the deducted amount is a credit under section 168, and if normal tax on your income is higher you pay the difference. #### Can I get a refund if my practice made a loss? Not of the minimum tax itself. Section 153(3) sets the deducted tax as the minimum tax on the fees from which it was deducted, so a loss or low profit does not turn it into an overpayment. A refund under section 170 is for tax paid above the amount you are properly chargeable with. #### What rate is deducted from professional fees in tax year 2027? The First Schedule, Part III, Division III, paragraph (2)(ii) sets 15% for independent professional services such as doctors, lawyers, architects, accountants and software engineers working independently. The rate is doubled for a person not on the Active Taxpayers List. ### Citations - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "the income of resident person referred to in sub-section (3) means the amount on which tax is deductible under sub-section (1) or" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), paragraph (2), sub-paragraph (ii)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 170 (Refunds)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#170-refunds), as amended to 2026-06-30: "A taxpayer who has paid tax in excess of the amount which the taxpayer is properly chargeable under this Ordinance may apply to the Commissioner for a refund of the excess." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 4 (Tax on taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4-tax-on-taxable-income), as amended to 2026-06-30: "any tax credit allowed under sections 3[ ] 147 and 168." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do doctors, lawyers and accountants registered with PMDC, a Bar Council or ICAP have to file a return even with low income? Source: https://qanoondigest.com/faq/professionals/must-pmdc-bar-council-members-file-return Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 114(1)(b)(ix) of the Income Tax Ordinance requires every resident person registered with a professional body, naming the Pakistan Medical and Dental Council, Pakistan Engineering Council, Pakistan Bar Council or a Provincial Bar Council, ICAP and ICMAP, to file a return. The duty applies even when income is below the Rs. 600,000 taxable threshold. **Applies to:** Resident doctors, dentists, engineers, advocates and accountants registered with a professional body, including those early in practice with low or no income, for tax year 2027. Many junior doctors and newly enrolled advocates assume that no tax means no return. Section 114 of the Income Tax Ordinance, 2001 does not work that way. It lists several separate reasons to file, and registration with a professional body is one of them on its own. ### What does the law say? Section 114(1) lists the persons who must furnish a return of income for a tax year. For an individual professional, the relevant triggers are: | Clause | Who must file | | --- | --- | | 114(1)(ab) | A person whose taxable income for the year exceeds the maximum amount not chargeable to tax | | 114(1)(b)(i) | A person charged to tax in either of the two preceding tax years | | 114(1)(b)(ii) | A person claiming a loss carried forward | | 114(1)(b)(iii) to (vi) | Owners of property or a flat of the sizes and in the areas described, or of a motor vehicle above 1000 CC | | 114(1)(b)(vii) | A person who has obtained a National Tax Number | | 114(1)(b)(viii) | A holder of a commercial or industrial electricity connection with an annual bill above Rs. 500,000 | | 114(1)(b)(ix) | A resident person registered with a chamber of commerce and industry, a trade or business association, a market committee, or any professional body | | 114(1A) | An individual whose Income from Business is above Rs. 300,000 but not above Rs. 400,000 | Clause (ix) names the professional bodies expressly: the Pakistan Engineering Council, the Pakistan Medical and Dental Council, the Pakistan Bar Council or any Provincial Bar Council, the Institute of Chartered Accountants of Pakistan and the Institute of Cost and Management Accountants of Pakistan. The words "any professional body including" mean the list is not closed. Clause (b) applies to "any person not covered by" clauses (a), (ab), (ac) or (ad). In plain terms, a person who does not have to file because of income can still have to file because of one of the clause (b) triggers. Clause (ix) contains no income condition at all. ### How does it work in practice? - **Residence matters.** Clause (ix) applies to "a resident person". A registered professional who is not resident in Pakistan for the tax year is outside this particular clause, though other triggers can still apply. - **The return has contents.** Section 114(2) requires the return to be in the prescribed form, to state all the particulars in the form, to be signed, to come with evidence of payment of tax due and to be accompanied by a wealth statement. Section 114(2A) requires electronic filing on IRIS. - **Registration under section 181.** Every taxpayer must apply for registration in the prescribed form. For individuals, section 181(4) uses the CNIC as the National Tax Number from tax year 2015 onwards. Having an NTN is itself a filing trigger under clause (b)(vii). ### Worked example (illustrative figures) Hina Raza enrolled as an advocate with the Punjab Bar Council in 2026 and practises in Rawalpindi. Her made-up practice income for tax year 2027 is Rs. 450,000. 1. **Income test.** Under clause (1) of Division I, Part I of the First Schedule, the rate on taxable income up to Rs. 600,000 is 0% for an individual who is not a salaried individual. Rs. 450,000 is below that, so clause (ab) does not require her to file. 2. **Section 114(1A).** Her business income of Rs. 450,000 is above Rs. 400,000, so this sub-section does not catch her either. 3. **Professional body.** She is a resident person registered with a Provincial Bar Council. Clause (b)(ix) requires her to file a return for tax year 2027. Her tax on that income is nil, but the return is still due. The same analysis applies to a house officer registered with the Pakistan Medical and Dental Council, or a newly qualified chartered accountant who is a member of ICAP. ### What if ...? **What if I am registered but not practising?** Clause (ix) turns on registration, not on practice or income. The Ordinance does not create an exception for inactive members. **What if I did not file and receive a notice?** Section 114(4) allows the Commissioner to require a person who should have filed to do so within thirty days of service of a notice, or another period the notice allows. Under section 114(5), the notice can cover the last five completed tax years, or ten where no return was filed for any of the last five. **What if I also draw a salary from a hospital or firm?** Salary does not remove the clause (ix) duty. It may also bring you within clause (ab) if total taxable income is above the threshold for your case. ### Common mistakes - **Treating nil tax as no return.** Section 114 separates the duty to file from the amount of tax. - **Thinking only the Pakistan Bar Council counts.** Enrolment with any Provincial Bar Council is named in the same clause. - **Assuming a CNIC is not an NTN.** Section 181(4) makes it one for individuals, which is a trigger under clause (b)(vii). ### What to check in the official text Read section 114(1), especially clause (b)(ix), and section 114(1A). The zero-rate band is in the clause (1) Table of Division I, Part I of the First Schedule. Section 114(1)(c) also lets the Board notify further classes of persons who must file; any such notification is not in this corpus. Due dates for filing and FBR portal steps are not covered on this page. ### Frequently asked #### I am a house officer registered with PMDC and earn very little. Do I have to file? Section 114(1)(b)(ix) applies to a resident person registered with any professional body including the Pakistan Medical and Dental Council. The clause does not set an income floor, so registration alone brings the filing duty. #### Does enrolment with a Provincial Bar Council count, or only the Pakistan Bar Council? Both. The clause names the Pakistan Bar Council or any Provincial Bar Council. It also covers the Pakistan Engineering Council, ICAP, ICMAP and, in general words, any professional body, chamber of commerce, trade association or market committee. #### Do I need a separate National Tax Number? Section 181(1) requires every taxpayer to apply for registration. Section 181(4) says that from tax year 2015 an individual's CNIC is used as the National Tax Number. ### Citations - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "any professional body including Pakistan Engineering Council, Pakistan Medical and Dental Council, Pakistan Bar Council or any Provincial Bar Council, Institute of Chartered Accountants of Pakistan or Institute of Cost and Management Accountants of Pakistan" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 181 (Taxpayer’s registration)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181-taxpayer-s-registration), as amended to 2026-06-30: "CNIC shall be used as National Tax Number" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1), Table, serial 1: taxable income not exceeding Rs. 600,000, 0%](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## I am a salaried doctor who also runs an evening clinic. How are both incomes taxed in one return? Source: https://qanoondigest.com/faq/professionals/salaried-doctor-with-private-clinic Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Hospital pay is Salary under section 12 and clinic profit is Income from Business under section 18. Both go into one taxable income. If salary exceeds 75% of it, the First Schedule salaried table applies to the whole amount; otherwise the steeper non-salaried table does. Your employer's section 149 deduction is then credited against the tax. **Applies to:** Doctors, dentists and other professionals employed by a government or private hospital, college or firm who also earn fees from their own private practice, for tax year 2027. A doctor who is paid a salary by a hospital and also sees private patients in the evening has income under two heads. The Income Tax Ordinance, 2001 computes each head separately, adds them together, and then applies a single rate table to the total. The share of salary in that total decides which table it is. ### What does the law say? **Section 11: separate heads.** All income is classified under five heads, including Salary and Income from Business. Section 11(2) says income under each head is the amounts chargeable under that head less the deductions allowed for that head. **Section 12: the hospital pay.** Section 12(1) charges salary received by an employee under the head Salary. Section 12(2) defines salary as "any amount received by an employee from any employment", including pay, allowances, perquisites and fees received as an employee. **Section 18: the clinic.** Section 18(1)(a) charges the profits and gains of any business under the head Income from Business. A private practice is a business because the Ordinance defines business to include a profession. **The First Schedule: one table, chosen by the 75% test.** Clause (2) of Division I, Part I applies where "the income of an individual chargeable under the head 'salary' exceeds seventy-five per cent of his taxable income". In every other case the individual falls under clause (1), the table for individuals other than salaried individuals. **Section 149: what the employer deducts.** The person paying salary must deduct tax at the employee's average rate, computed on the estimated income chargeable under the head Salary for the year. Section 149(1) lets the employer adjust for tax withheld from the employee under other heads, after obtaining documentary evidence. ### How does it work in practice? 1. Work out salary for the year from the employer's records. 2. Work out clinic profit: fees received less the clinic's allowable expenses. 3. Add the two, with any other income, to reach taxable income. 4. Divide salary by taxable income. If the result is more than 75%, use the clause (2) table. If it is 75% or less, use clause (1). 5. Apply that table to the whole taxable income. 6. Subtract the tax the employer deducted under section 149, and any other tax deducted or paid in advance that is creditable. The balance is payable with the return. ### Worked example (illustrative figures) The figures below are invented. The rates are the tax year 2027 rates from Division I. **Case A: a large clinic.** Dr. Bilal Ahmed is a medical officer at a hospital in Multan with salary of Rs. 2,400,000. His evening clinic makes a profit of Rs. 1,200,000. 1. Taxable income: Rs. 2,400,000 + Rs. 1,200,000 = Rs. 3,600,000. 2. Salary share: Rs. 2,400,000 ÷ Rs. 3,600,000 = 66.7%. That is not more than 75%, so clause (1) applies. 3. Clause (1) slab over Rs. 3,200,000: Rs. 650,000 + 40% of Rs. 400,000 = Rs. 650,000 + Rs. 160,000 = Rs. 810,000. 4. Assume the employer computed its section 149 deduction on salary alone, using the clause (2) table: Rs. 116,000 + 20% of Rs. 200,000 = Rs. 156,000. 5. Balance with the return: Rs. 810,000 minus Rs. 156,000 = Rs. 654,000. **Case B: a small clinic.** Same salary, but clinic profit is Rs. 600,000. 1. Taxable income: Rs. 3,000,000. 2. Salary share: Rs. 2,400,000 ÷ Rs. 3,000,000 = 80%. That is more than 75%, so clause (2) applies. 3. Clause (2) slab over Rs. 2,200,000: Rs. 116,000 + 20% of Rs. 800,000 = Rs. 116,000 + Rs. 160,000 = Rs. 276,000. 4. Balance after the same Rs. 156,000 employer deduction: Rs. 120,000. In Case A, the extra Rs. 600,000 of clinic profit moved the whole income onto the steeper table, which is why the balance rises far more than the clinic profit alone would suggest. ### What if ...? **What if my salary is exactly 75% of taxable income?** Clause (2) requires salary to exceed seventy-five per cent. At exactly 75%, clause (1) applies. **What if my taxable income is above Rs. 10 million?** Section 4AB, printed within section 4, adds a ten percent surcharge for individuals whose taxable income exceeds Rs. 10 million. Its proviso says no surcharge is payable by "an individual deriving income chargeable under the head 'Salary'". The text does not say whether that relief covers someone whose income is partly salary and partly business. The law is unclear on this point for mixed-income individuals, and this page does not resolve it. **What if the hospital pays me per patient rather than a salary?** Whether you are an employee or an independent professional for that work changes whether section 149 or the withholding on professional fees applies. That question is covered on the visiting consultant page in this category. ### Common mistakes - **Splitting the tables.** Salary is not taxed on one table and the clinic on another. One table covers the whole taxable income. - **Treating the employer's deduction as the final tax.** Section 149 is based on salary only. It does not reflect clinic income. - **Setting clinic expenses against salary.** Deductions belong to the head they relate to under section 11(2). - **Rounding the 75% test.** A salary share of 75.0% is not more than 75%. ### What to check in the official text Read clauses (1) and (2) of Division I, Part I of the First Schedule in the official PDF, then sections 11, 12, 18 and 149. Check the surcharge wording in section 4AB within section 4. Any service rules that limit private practice by government doctors are outside this corpus and are not covered here. ### Frequently asked #### Is my salary taxed on the salaried table and my clinic on the business table? No. Division I of Part I of the First Schedule picks one table for the individual, based on whether salary exceeds seventy-five per cent of taxable income. That table is then applied to the whole taxable income, salary and clinic profit together. #### My employer already deducts tax. Why would I owe more? Section 149 requires the employer to deduct tax on the estimated income of the employee chargeable under the head Salary. Clinic income is not part of that estimate, so the employer's deduction does not cover the tax on the clinic or the effect of the clinic on which table applies. The difference is settled through the return. #### Can clinic expenses reduce my salary income? Deductions are allowed head by head under section 11(2). Clinic rent, staff and supplies are deducted in working out Income from Business, not from salary. A loss from the clinic is a loss for the business head and is dealt with under the loss rules in Part VIII of Chapter III. ### Citations - [Income Tax Ordinance, 2001, section 11 (Heads of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#11-heads-of-income), as amended to 2026-06-30: "all income shall be classified under the following heads" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "Salary means any amount received by an employee from any employment, whether of a revenue or capital nature" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 18 (Income from business)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#18-income-from-business), as amended to 2026-06-30: "the profits and gains of any business carried on by a person at any time in the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clauses (1) and (2), Tables (clause (2) Table substituted by the Finance Act, 2026)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 4 (Tax on taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4-tax-on-taxable-income), as amended to 2026-06-30: "a surcharge shall be payable by every individual and association of persons at the rate of ten percent" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do lawyers, accountants, architects, engineers and consultants in Islamabad charge sales tax on their services? Source: https://qanoondigest.com/faq/professionals/islamabad-sales-tax-legal-accounting-consultancy Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, for services rendered in Islamabad Capital Territory. Section 3 of the Islamabad Capital Territory (Tax on Services) Ordinance, 2001 charges sales tax on services listed in Table-1 of its Schedule. Table-1 lists legal practitioners, accountants and auditors, architects and town planners, engineering and other consultants, each at fifteen percent. Registration follows the Sales Tax Act, 1990. **Applies to:** Lawyers, chartered and other accountants, auditors, architects, town planners, engineers and consultants rendering services in Islamabad Capital Territory, under the Schedule as amended to 30 June 2025. In Islamabad, sales tax on services is a federal levy under the Islamabad Capital Territory (Tax on Services) Ordinance, 2001, not a provincial one. The Ordinance charges tax on the services listed in its Schedule, and the list includes most professional firms. ### What does the law say? **Section 3(1): the charge.** Sales tax is charged "at rates specified in column (4) of Table-1 of the Schedule" on "the value of the taxable services rendered or provided in the Islamabad Capital Territory". A proviso says services in Table-2 are charged at the rates and on the conditions printed in Table-2. **Section 1(2): extent.** The Ordinance extends to the whole of Islamabad Capital Territory. **Table-1: the professional entries.** The Schedule as amended to 30 June 2025 lists these entries, each with the rate printed in column (4): | Serial | Service (as described in Table-1) | Rate | |---|---|---| | 9 | Management consultancy services | Fifteen percent | | 12 | Services provided by technical, scientific and engineering consultants | Fifteen percent | | 13 | Services provided by other consultants including but not limited to human resource and personnel development services; market research services and credit rating services | Fifteen percent | | 21 | Services provided by architects, town planners and interior decorators | Fifteen percent | | 47 | Services provided or rendered by legal practitioners and consultants | Fifteen percent | | 48 | Services provided by accountants and auditors | Fifteen percent | | 51 | Services provided or rendered by corporate law consultants | Fifteen percent | **Table-2: software consultants.** Serial number 11 of Table-2 lists services provided by software or IT-based system development consultants at five percent, "subject to the conditions that no input tax adjustment or refund shall be admissible". **Section 3(1A): exports.** Export of services is charged at zero per cent. **Section 3(3): Sales Tax Act machinery.** The provisions of the Sales Tax Act, 1990, and rules and notifications under it, apply to this tax for manner, time and mode of payment, registration and de-registration, records and audit, enforcement, penalties and allied matters. **Sales Tax Act section 14: registration.** Section 14(1)(f) requires registration by a person who is required under any other Federal law to be registered for a tax collected or paid as if it were a levy of sales tax. Section 3(2) of the ICT Ordinance charges this tax in the same manner as sales tax under the Sales Tax Act. ### How does it work in practice? 1. Identify whether the service is rendered or provided in Islamabad Capital Territory. 2. Find the matching Table-1 or Table-2 entry. 3. Apply the rate in column (4) to the value of the service. 4. Registration, payment and returns follow the Sales Tax Act, 1990 machinery applied by section 3(3). A further proviso to section 3(1), added by the Finance Act, 2025, lets the Board require service providers in Table-1 and Table-2 to integrate with its computerised system for real-time reporting, from a date and in a manner set by general order. No such order is held in this corpus. ### Worked example (illustrative figures) The fee is invented. The rate is from serial number 47 of Table-1. A law chamber in Islamabad's Blue Area bills a client Rs. 400,000 for drafting and vetting a commercial lease. Assume the fee is the value of the service. 1. Rate for legal practitioners: fifteen percent. 2. Tax: 15% of Rs. 400,000 = Rs. 60,000. 3. Total charged to the client: Rs. 400,000 + Rs. 60,000 = Rs. 460,000. If the same chamber advised a client abroad on a matter that counts as an export of services, section 3(1A) sets the rate at zero per cent. ### What if ...? **What if my office is in Rawalpindi but the client is in Islamabad?** Section 3(1) looks at services "rendered or provided in the Islamabad Capital Territory". The Ordinance text held here does not set out detailed place of supply rules for services that cross the ICT boundary. The law is unclear on this in the corpus, and provincial laws that may also claim the service are outside it. **What if my consultancy fits two entries?** For example, an engineering firm doing management advice could fit serial 9 or serial 12. Both are fifteen percent, so the rate is the same, but the Ordinance does not set a rule for choosing an entry. **What if I am a software consultant?** Table-2 serial 11 prints five percent with no input tax adjustment or refund. Table-1 serial 11 also lists IT services at fifteen percent. The proviso to section 3(1) sends Table-2 services to Table-2 rates. Which entry a given engagement falls under is a question of fact the text does not resolve. ### Common mistakes - **Assuming professionals are outside sales tax.** Table-1 names legal practitioners, accountants, auditors, architects and consultants. - **Using provincial rates in Islamabad.** ICT services are taxed under the federal ICT Ordinance, not provincial laws. - **Looking for a small-firm exemption.** None is printed in these entries. - **Confusing this with income tax withholding on fees.** Sales tax under the ICT Ordinance is separate from income tax deducted from professional fees under the Income Tax Ordinance. ### What to check in the official text Read section 3 and Table-1 and Table-2 of the Schedule in the official PDF of the ICT Ordinance amended to 30 June 2025, and section 14 of the Sales Tax Act, 1990. Section 3(4) lets the Board specify a Negative List of exempt services in Table-3 by notification; no Table-3 is printed in the edition held here. Check for any such notification, and for any general order on real-time integration. ### Frequently asked #### What rate applies to legal services in Islamabad? Serial number 47 of Table-1 lists services provided or rendered by legal practitioners and consultants at fifteen percent. Corporate law consultants appear separately at serial number 51, also at fifteen percent. #### Does this tax apply to my services in Lahore or Karachi? The ICT Ordinance charges tax on services rendered or provided in the Islamabad Capital Territory and extends only to that territory. Services in the provinces fall under provincial sales tax on services laws, which are outside this corpus. #### Is there a turnover threshold below which a lawyer need not charge the tax? The Table-1 entries for legal, accounting, architecture and consultancy services print no turnover exclusion. Turnover limits appear only in some other entries, such as construction and beauty parlours. ### Citations - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, section 3 (Scope of tax)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30#3-scope-of-tax), as amended to 2025-06-30: "there shall be charged, levied and paid a tax known as sales tax at rates specified in column (4) of Table-1 of the Schedule to this Ordinance of the value of the taxable services rendered or provided in the Islamabad Capital Territory" Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, Schedule, Table-1, serial numbers 9, 11, 12, 13, 21, 47, 48 and 51](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, Schedule, Table-2, serial number 11](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30), as amended to 2025-06-30 Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Islamabad Capital Territory (Tax on Services) Ordinance, 2001, section 1 (Short title, extent and commencement)](https://qanoondigest.com/ordinances/islamabad-capital-territory-tax-on-services-ordinance-2001/islamabad-capital-territory-tax-on-services-ordinance-2001-2025-06-30#1-short-title-extent-and-commencement), as amended to 2025-06-30: "It extends to whole of Islamabad Capital Territory." Official source: https://download1.fbr.gov.pk/Docs/2025711172945966ICTOUpdatedupto30.06.2025.pdf - [Sales Tax Act, 1990, section 14 (Registration)](https://qanoondigest.com/acts/sales-tax-act-1990/sales-tax-act-1990-2026-06-30#14-registration), as amended to 2026-06-30: "a person who is required, under any other Federal law or Provincial law, to be registered for the purpose of any duty or tax collected or paid as if it were a levy of sales tax" Official source: https://download1.fbr.gov.pk/Docs/20267171373418951SalesTaxAct1990updatedupto30.06.2026.pdf --- ## Does a clinic owner or lawyer have to deduct tax from the salaries of staff, clerks and juniors? Source: https://qanoondigest.com/faq/professionals/deduct-tax-staff-salaries-clinic-chamber Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, where tax is due on the salary. Section 149 of the Income Tax Ordinance requires every person responsible for paying salary to deduct tax at the employee's average rate when paying. Section 165 requires statements of the deductions, and section 21(c) disallows the salary expense in the practice's accounts unless the tax was deducted and paid. **Applies to:** Doctors, dentists, lawyers and other professionals who employ receptionists, nurses, clerks, associates or other staff on salary, for tax year 2027. A professional who hires staff becomes a withholding agent for their salaries. The Ordinance does not limit this duty to companies or large employers: a sole practitioner running a clinic in Rawalpindi or a chamber in Karachi is covered in the same way. ### What does the law say? **Section 149(1)** says every person responsible for paying salary to an employee "shall, at the time of payment, deduct tax from the amount paid at the employee's average rate of tax computed at the rates specified in Division I of Part I of the First Schedule on the estimated income of the employee chargeable under the head 'Salary'" for the tax year. The deduction is adjusted for tax withheld from the employee under other heads, the donation and pension fund tax credits the employee is entitled to, supported by documents, and any earlier excess, shortfall or failure to deduct. **Section 149(2)** sets the average rate as A/B, where A is the tax on the employee's estimated annual salary (plus any surcharge) and B is that estimated salary. **Section 165** requires statements. Every person deducting tax under Division III of Part V of Chapter X, which includes section 149, files quarterly statements with each payee's name, CNIC or NTN and address, payments and tax. Section 165(2) sets the due dates: 20 April, 20 July, 20 October and 20 January for the quarters ending March, June, September and December. Section 165(6) adds an annual statement for salary deductions. **Section 21(c)** disallows, in computing Income from Business, any expenditure from which tax must be deducted "unless the person has paid or deducted and paid the tax". Staff salaries are such an expenditure. **Section 161** makes a person who fails to deduct, or deducts but fails to pay, "personally liable to pay the amount of tax to the Commissioner", after an opportunity of being heard. ### How does it work in practice? The tax year 2027 rates for employees whose salary is more than 75% of taxable income come from clause (2) of Division I: | Taxable income | Tax | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,001 to Rs. 1,200,000 | 1% of the amount over Rs. 600,000 | | Rs. 1,200,001 to Rs. 2,200,000 | Rs. 6,000 + 11% of the amount over Rs. 1,200,000 | | Rs. 2,200,001 to Rs. 3,200,000 | Rs. 116,000 + 20% of the amount over Rs. 2,200,000 | | Rs. 3,200,001 to Rs. 4,100,000 | Rs. 316,000 + 25% of the amount over Rs. 3,200,000 | | Rs. 4,100,001 to Rs. 5,600,000 | Rs. 541,000 + 29% of the amount over Rs. 4,100,000 | | Rs. 5,600,001 to Rs. 7,000,000 | Rs. 976,000 + 32% of the amount over Rs. 5,600,000 | | Above Rs. 7,000,000 | Rs. 1,424,000 + 35% of the amount over Rs. 7,000,000 | ### Worked example (illustrative figures) Dr. Saima Javed runs a dental clinic in Faisalabad. All salaries are made up. **Receptionist, Rs. 45,000 a month.** 1. Estimated annual salary: Rs. 45,000 x 12 = Rs. 540,000. 2. This is below Rs. 600,000, so tax is 0% and nothing is deducted. **Associate dentist on salary, Rs. 150,000 a month.** 1. Estimated annual salary: Rs. 150,000 x 12 = Rs. 1,800,000. 2. Tax: Rs. 6,000 + 11% of (Rs. 1,800,000 - Rs. 1,200,000) = Rs. 6,000 + Rs. 66,000 = Rs. 72,000. 3. Average rate: Rs. 72,000 / Rs. 1,800,000 = 4%. 4. Monthly deduction: Rs. 150,000 x 4% = Rs. 6,000. **If she deducts nothing from the associate.** Under section 21(c), the Rs. 1,800,000 salary is disallowed in computing her business income. Under section 161 she is personally liable for the Rs. 72,000. Serial 15 of the section 182 Table sets a penalty of the higher of Rs. 40,000 and 10% of the tax (Rs. 7,200), which is Rs. 40,000. ### What if ...? **What if the associate pays the tax himself later?** Section 161(1B) says that where the tax has meanwhile been paid by the employee, no recovery is made from the employer, but default surcharge applies at twelve per cent a year from the date of failure to the date of payment. **What if a junior is not an employee?** Section 149 applies to salary paid to an employee. Fees paid to an independent junior or visiting consultant fall under different rules, covered on the visiting consultant page in this category. **What if I file a statement late?** Serial 1A of the section 182 Table sets Rs. 50,000 where the tax was paid on time and the statement is filed within ninety days of the due date, and otherwise Rs. 2,500 for each day of default, subject to a minimum of Rs. 10,000. A proviso sets the minimum at Rs. 10,000 where no tax was required to be deducted in the period. ### Common mistakes - **Thinking only companies withhold.** Section 149 applies to every person responsible for paying salary. - **Deducting a flat percentage.** The rate is the employee's average rate on estimated annual salary under section 149(2). - **Deducting but not depositing.** Section 21(c) requires the tax to be deducted and paid, and section 161 applies to both failures. - **Skipping statements in nil months.** The proviso to section 165(1) requires statements even where nothing was deducted. ### What to check in the official text Read sections 149, 165, 21(c) and 161, the clause (2) table of Division I, Part I of the First Schedule, and serials 1A and 15 of the Table in section 182. Deposit timing is prescribed in the Income Tax Rules, so check the current rules for the payment date. ### Frequently asked #### Does a small clinic with one receptionist have to deduct tax? Section 149 applies to every person responsible for paying salary, with no turnover threshold. Whether any tax is actually deducted depends on the employee's estimated annual salary: under the clause (2) table for tax year 2027, taxable income up to Rs. 600,000 is taxed at 0%. #### What happens if I pay salaries without deducting tax that was due? Section 21(c) disallows the salary expense in computing your business income unless the tax was deducted and paid. Section 161 makes you personally liable for the tax not deducted, and serial 15 of the section 182 Table sets a penalty of Rs. 40,000 or 10% of the tax, whichever is higher. #### Do I file statements even if no tax was deducted? Section 165(6) requires an annual statement from every person deducting tax under section 149. The proviso to section 165(1) requires the quarterly statement even where no tax was deducted in the period, for persons covered by that sub-section. ### Citations - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 165 (Statements)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#165-statements), as amended to 2026-06-30: "Every person deducting tax from payment under section 149 shall furnish to the Commissioner an annual statement in the prescribed form and manner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "any expenditure from which the person is required to deduct or collect tax under Part V of Chapter X or Chapter XII, unless the person has paid or deducted and paid the tax as required by Division IV of Part V of Chapter X" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 161 (Failure to pay tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#161-failure-to-pay-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be personally liable to pay the amount of tax to the Commissioner" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (2), Table (salaried individuals, substituted by the Finance Act, 2026)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 182, Table, serials 1A (failure to furnish statements) and 15 (failure to deduct or pay tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is a medical or law practice taxed differently if run as a partnership firm or company? Source: https://qanoondigest.com/faq/professionals/practice-as-partnership-or-company Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Under section 92 of the Income Tax Ordinance a partnership firm is taxed as an association of persons, separately from its partners, whose shares are then exempt. It uses the individual slab table, with the top 45% rate cut to 40% for a professional firm barred from incorporating. A company is taxed separately from its shareholders at company rates. **Applies to:** Doctors, lawyers, accountants and other professionals practising through a partnership firm or a company, or choosing between the two, for tax year 2027. 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. ### Frequently asked #### Do partners pay tax again on their share of the firm's profit? Not ordinarily. Section 92(1) taxes the association separately and says the amount a member receives as member out of the association's income is exempt where the association has paid tax. A second proviso removes the exemption where an association with turnover of Rs. 300 million or more does not file audited financial statements with its return. #### What is the top rate for a professional firm in tax year 2027? A firm uses the clause (1) table in Division I, where the top slab is Rs. 1,610,000 plus 45% of income above Rs. 5,600,000. The proviso to that table reduces the 45% to 40% for an association of persons that is a professional firm prohibited from incorporating by any law or the rules of the body regulating the profession. #### What rate does a company pay? The Table in Division II sets 29% for a company other than a banking company or small company, and 20% for a small company as the Ordinance defines that term. Dividends the company pays are taxed separately in the shareholders' hands, as section 94(2) provides. ### Citations - [Income Tax Ordinance, 2001, section 92 (Principles of taxation of associations of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#92-principles-of-taxation-of-associations-of-persons), as amended to 2026-06-30: "shall be liable to tax separately from the members of the association" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 94 (Principles of taxation of companies)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#94-principles-of-taxation-of-companies), as amended to 2026-06-30: "A company shall be liable to tax separately from its shareholders" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1), Table and proviso on professional firms prohibited from incorporating](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division II (Rates of Tax for Companies), Table (substituted by the Income Tax (Amendment) Act, 2025)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "“services” includes the services of accountants, architects, dentists, doctors, engineers, interior decorators and lawyers, otherwise than as an employee" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 21 (Deductions not allowed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#21-deductions-not-allowed), as amended to 2026-06-30: "any profit on debt, brokerage, commission, salary or other remuneration paid by an association of persons to a member of the association" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is the 25% tax rebate for full-time teachers and researchers still available, and did it cover tuition or medical teachers? Source: https://qanoondigest.com/faq/professionals/teachers-researchers-tax-rebate-status Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No, not for tax year 2026 or 2027. Clause (3A) of Part III of the Second Schedule reduced tax on salary income of full-time teachers and researchers at recognised non-profit institutions by 25%. It excluded medical teachers with private practice or a share of patient fees, never covered tuition income, and ceased to have effect after tax year 2025. **Applies to:** Full-time teachers, researchers and medical faculty employed by education or research institutions, checking tax years 2023 to 2027. The reduction for full-time teachers and researchers sits in Part III of the Second Schedule to the Income Tax Ordinance, 2001, which lists reductions in tax liability. In the edition amended to 30 June 2026, clause (3A) is still printed, but its own wording limits it to tax years 2023, 2024 and 2025. ### What does the law say? **The reduction.** Clause (3A) provides that the tax payable by "a full-time teacher or a researcher, employed in a non-profit education or research institution duly recognized by Higher Education Commission, a Board of Education or a University recognized by the Higher Education Commission, including government research institution, shall be reduced by an amount equal to 25% of tax payable on his income from salary". **The medical proviso.** The first proviso says the clause "shall not apply to teacher of medical profession who derive income from private medical practice or who receive share of consideration received from patients". **The time limit.** The second proviso says the clause "shall be deemed to have been in force with effect from the first day of July, 2022 and shall cease to have effect after tax year 2025". A footnote records that clause (3A) was inserted by the Finance Act, 2025. **What a tax year is.** Section 74(1) makes the tax year a period of twelve months ending on 30 June, named after the calendar year in which that date falls. So the clause covered: | Tax year | Period | |---|---| | 2023 | 1 July 2022 to 30 June 2023 | | 2024 | 1 July 2023 to 30 June 2024 | | 2025 | 1 July 2024 to 30 June 2025 | Tax year 2026 (1 July 2025 to 30 June 2026) and tax year 2027 fall after the cut-off. ### How does it work in practice? Four conditions had to be met, all from the text of clause (3A): 1. **Full-time.** The person is a full-time teacher or researcher. 2. **Employed.** The person is employed by the institution, so the income is salary under section 12. 3. **Qualifying institution.** The institution is non-profit and recognised by the Higher Education Commission, a Board of Education or an HEC-recognised university, including a government research institution. 4. **Not an excluded medical teacher.** No private medical practice income and no share of patient fees. The reduction is 25% of tax payable on salary income, not 25% of salary and not 25% of all tax. ### Worked example (illustrative figures) The amounts are invented. The tax figure is assumed, not computed from a rate table. Mr. Kamran Yousaf is a full-time lecturer employed by a recognised non-profit university in Peshawar. For tax year 2025 assume his tax payable on salary income was Rs. 240,000. 1. Reduction under clause (3A): 25% of Rs. 240,000 = Rs. 60,000. 2. Tax after reduction: Rs. 240,000 minus Rs. 60,000 = Rs. 180,000. For tax year 2027, assuming the same tax payable on salary of Rs. 240,000, no reduction applies under clause (3A), so the tax stays Rs. 240,000. Now take Dr. Ayesha Malik, an assistant professor at a medical college in Karachi who also runs an evening clinic. The first proviso excluded her for every year the clause was in force, because she derives income from private medical practice. ### What if ...? **What if I also earned tuition income in tax year 2025?** Tuition on your own account is Income from Business, not salary. The reduction was measured on "tax payable on his income from salary". Clause (3A) does not say how tax is split between salary and other income when a person has both. The law is silent on the method, and this page does not supply one. **What if I taught at a private, for-profit academy?** The clause requires a "non-profit education or research institution" with the recognition it lists. An institution run for profit does not match those words. Whether a particular institution qualified depends on its status, which the Ordinance does not list. **What if I was a part-time or visiting teacher?** The clause names a "full-time teacher or a researcher". It does not define full-time. ### Common mistakes - **Claiming the reduction for tax year 2026 or 2027.** The clause ceased after tax year 2025. - **Applying 25% to total tax.** The reduction was 25% of tax payable on salary income only. - **Assuming all medical faculty were excluded.** Only those with private practice income or a share of patient fees were. - **Reading old footnotes as current law.** The footnotes of Part III reproduce earlier teacher reductions in similar words that were omitted or substituted in earlier years. They are history, not operative text. ### What to check in the official text Read clause (3A) of Part III of the Second Schedule in the official PDF of the Ordinance amended to 30 June 2026, including both provisos and the footnote showing it was inserted by the Finance Act, 2025. Read section 74 for how tax years are named. Any later Finance Act that restores or extends the reduction would appear in a newer consolidated edition than the one held in this corpus. ### Frequently asked #### Can I claim the teachers' reduction for tax year 2027? Not under clause (3A) as printed in the Ordinance amended to 30 June 2026. Its second proviso says it ceases to have effect after tax year 2025, and no replacement clause appears in Part III of the Second Schedule in that edition. #### Did the reduction apply to my tuition income? No. Clause (3A) reduced tax by 25% of tax payable on income from salary. Tuition fees earned on your own account are Income from Business, not salary, so they were outside the reduction. #### Were medical college teachers covered? Only some. The first proviso excluded teachers of the medical profession who derive income from private medical practice or who receive a share of consideration received from patients. A medical teacher with neither kind of income was not caught by that proviso. ### Citations - [Income Tax Ordinance, 2001, Second Schedule, Part III, clause (3A) (inserted by the Finance Act, 2025)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "Salary means any amount received by an employee from any employment, whether of a revenue or capital nature" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 74 (Tax year)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#74-tax-year), as amended to 2026-06-30: "the tax year shall be a period of twelve months ending on the 30th day of June" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is a visiting or part-time consultant at a hospital an employee or an independent professional for tax? Source: https://qanoondigest.com/faq/professionals/visiting-consultant-employee-or-professional Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It depends on whether the consultant holds an employment with the hospital. Section 153 covers doctors' services only when given otherwise than as an employee, with 15% withheld from fees. If the consultant is an employee, section 12 treats the pay as Salary and section 149 governs deduction. The Ordinance does not give a checklist, so the facts decide. **Applies to:** Visiting, sessional and part-time consultants, specialists and surgeons who are paid by private hospitals, clinics or medical colleges in Pakistan, for tax year 2027. A visiting consultant is taxed either as the hospital's employee or as an independent professional, and the Income Tax Ordinance, 2001 treats the two very differently. The Ordinance does not settle the question for visiting doctors as a class. It gives definitions, and the answer comes from applying them to the actual arrangement. ### What does the law say? **Section 2: employee, employer, employment.** Section 2 defines an "employee" as "any individual engaged in employment" and an "employer" as "any person who engages and remunerates an employee". "Employment" is defined inclusively. It includes a directorship or other management office in a company, "a position entitling the holder to a fixed or ascertainable remuneration", and holding or acting in any public office. **Section 12: salary.** Any amount received by an employee from any employment is salary, including pay, wages, commission, fees and allowances. Fees count as salary here only when received by an employee from employment. **Section 153: services "otherwise than as an employee".** Section 153 requires a prescribed person paying for services to deduct tax. In section 153(7), "services" includes "the services of accountants, architects, dentists, doctors, engineers, interior decorators and lawyers, otherwise than as an employee". A doctor's services fall inside section 153 only when they are not given as an employee. **Section 149: deduction from salary.** If the consultant is an employee, the payer deducts tax from salary at the employee's average rate under Division I of Part I of the First Schedule, based on estimated salary for the year. ### How does it work in practice? The two routes lead to different results: | Point | Employee of the hospital | Independent professional | | --- | --- | --- | | Head of income | Salary (section 12) | Income from Business | | Deduction by hospital | Section 149, average rate on estimated salary | Section 153(1)(b), 15% of gross fees in tax year 2027 | | Expenses | No deduction against salary for practice costs | Allowable practice expenses reduce business income | | Persons not on the active taxpayers' list | Tenth Schedule rule 10(a) excludes section 149 deductions from the higher-rate rules | Tenth Schedule higher-rate rules are not excluded for section 153 | The label on the contract does not appear in the definitions. What the definitions do point to is whether there is a position with fixed or ascertainable remuneration, and whether the hospital engages and remunerates the doctor as its employee. Beyond that, the Ordinance is silent. It does not mention hours, exclusivity, supervision or who supplies equipment. Those facts may matter in a dispute, but they come from outside this corpus, and this page does not suggest which way they point. Section 153 also applies only to payments by prescribed persons, a list in section 153(7) that includes companies, associations of persons constituted by or under law, non-profit organisations and individuals with turnover of one hundred million rupees or more in any of the preceding tax years. Section 153(1)(b) also excludes services where payment is less than thirty thousand rupees in aggregate during a financial year. ### Worked example (illustrative figures) Dr. Sana Javed, a consultant cardiologist, works with two private hospitals in Islamabad, both run by companies. The figures are invented. **Hospital 1: appointment letter.** Her letter calls her a "visiting consultant" and fixes Rs. 250,000 a month for two sessions a week. On these facts the arrangement looks like a position with fixed remuneration under section 2. If the hospital treats it as employment, it deducts tax under section 149 on her estimated salary. **Hospital 2: per-procedure fees.** She is paid Rs. 40,000 per procedure performed and has no appointment. In one month she performs 10 procedures. 1. Gross fees: 10 × Rs. 40,000 = Rs. 400,000. 2. Deduction under section 153(1)(b) at 15%: Rs. 400,000 × 15% = Rs. 60,000. 3. Net paid to her: Rs. 400,000 minus Rs. 60,000 = Rs. 340,000. The Rs. 400,000 is business income in her return, not Rs. 340,000. ### What if ...? **What if the hospital deducts under section 153 but I think I am an employee, or the other way round?** Sections 2, 12, 149 and 153 give the definitions but no procedure for settling this disagreement. The law does not say that the payer's choice of section decides the question, and this page does not resolve it. **What if I am also a full-time employee elsewhere?** Your salary from the other employer stays Salary. The 75% salary test in the First Schedule then decides which table taxes your combined income. **What if I am not on the active taxpayers' list?** The Tenth Schedule raises deduction rates for persons not on the list, but rule 10(a) excludes tax deducted under section 149. Section 153 deductions are not in that exclusion list. ### Common mistakes - **Relying on the job title.** "Visiting" or "honorary" in a letter does not appear in the definitions. The substance of the position does. - **Assuming all fees are business income.** Under section 12, fees received by an employee from employment are salary. - **Recording only the net payment.** When 15% is withheld, the gross fee is the income. - **Assuming every payer must deduct.** Section 153 applies to prescribed persons only. ### What to check in the official text Read the definitions of employee, employer and employment in section 2, then sections 12, 149 and 153, including the definitions in section 153(7). The rate is in paragraph (2) of Division III, Part III of the First Schedule. Rule 1 and rule 10 of the Tenth Schedule set the position for persons not on the active taxpayers' list. Court decisions on the employee test are outside this corpus and are not covered here. ### Frequently asked #### Does the Ordinance define who is an employee? Only briefly. Section 2 defines an employee as any individual engaged in employment, an employer as any person who engages and remunerates an employee, and says employment includes a position entitling the holder to a fixed or ascertainable remuneration. It gives no list of other factors, so each arrangement turns on its facts. #### What rate does a hospital deduct from a visiting doctor's fees? Where the doctor is not an employee and the hospital is a prescribed person under section 153, the rate for tax year 2027 is 15% of the gross amount, under paragraph (2)(ii) of Division III, Part III of the First Schedule for independent professional services such as doctors. If the doctor is an employee, section 149 applies instead. #### Can the same doctor be an employee of one hospital and independent at another? The Ordinance looks at each payment and the relationship behind it. Nothing in sections 12, 149 or 153 prevents a doctor from holding a salaried post at one hospital while providing services independently to another. Each payer applies the section that fits its own arrangement. ### Citations - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "a position entitling the holder to a fixed or ascertainable remuneration" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 12 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#12-salary), as amended to 2026-06-30: "Salary means any amount received by an employee from any employment, whether of a revenue or capital nature" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "“services” includes the services of accountants, architects, dentists, doctors, engineers, interior decorators and lawyers, otherwise than as an employee" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III, paragraph (2), sub-paragraph (ii) (substituted by the Finance Act, 2026)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 10(a) (tax deducted under section 149 excluded)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Does a professional have to file a wealth statement, and why must it reconcile with income? Source: https://qanoondigest.com/faq/professionals/wealth-statement-professionals Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 116(2) of the Income Tax Ordinance requires every resident individual who files a return to furnish a wealth statement and a wealth reconciliation statement with it. The reconciliation matters because section 111 lets the Commissioner add any investment, asset or expenditure you cannot explain to your income as Income from Other Sources. **Applies to:** Resident doctors, dentists, lawyers, accountants and other professionals who file an income tax return as individuals, and members of professional firms, for tax year 2027. A professional who files an income tax return as a resident individual files a wealth statement with it. The statement is a snapshot of everything you own and owe, and the reconciliation shows how you got from last year's snapshot to this year's. The two work together with section 111, which deals with wealth that income does not explain. ### What does the law say? **Section 116(2)** is the general rule. It says "every resident taxpayer being an individual filing a return of income for any tax year shall furnish a wealth statement and wealth reconciliation statement for that year along with such return". A proviso extends this to members of an association of persons, who furnish their own wealth statements and reconciliations with the return of the association. That covers partners in a medical or law firm. **Section 116(1)** lists what the statement contains, in the prescribed form: - (a) your total assets, including foreign assets, and liabilities, including foreign liabilities, on the specified date; - (b) the total assets and liabilities of your spouse, minor children and other dependents on that date; - (c) any assets, including foreign assets, you transferred to another person during the period, and the consideration received; - (d) the total expenditure incurred by you and by your spouse, minor children and other dependents during the period, with details; - (e) the reconciliation statement of wealth. An Explanation added by the Finance Act, 2024 says a spouse's assets are included only if the spouse is dependent. **Section 114(2)(e)** says a return of income shall be accompanied with a wealth statement as required under section 116. **Section 118(4)** makes the wealth statement due by the due date for the return where it is filed under section 116(2), or by the date in the notice where the Commissioner calls for one under section 116(1). ### Why must it reconcile with income? The reconciliation explains the change in your net wealth over the year. In broad terms, the increase in what you own, after what you owe, should be covered by the income you declared, after your personal and family expenditure. The prescribed form sets the exact layout, which is not reproduced in this corpus. **Section 111(1)** is what gives the reconciliation its weight. Where a person has made an investment, owns money or a valuable article, or has incurred expenditure, and offers no explanation about its nature and source, or the explanation is not satisfactory in the Commissioner's opinion, the amount "shall be included in the person's income chargeable to tax under the head 'Income from Other Sources' to the extent it is not adequately explained". Suppressed receipts are treated under clause (b) as Income from Business. Section 111(2) places a Pakistan-situated amount in the tax year to which it relates. Section 111(3) lets the Commissioner add the difference where the declared cost of an investment or expenditure is less than its reasonable cost. Section 111(4) excludes foreign exchange remitted through normal banking channels up to five million rupees in a tax year, encashed by a scheduled bank with a certificate. ### Worked example (illustrative figures) Dr. Kamran Butt is a paediatrician with a private clinic in Multan. All figures are made up. 1. Net wealth at 30 June 2026 (assets less liabilities, his and dependants'): Rs. 18,000,000. 2. Net wealth at 30 June 2027: Rs. 22,500,000. 3. Increase in net wealth: Rs. 22,500,000 - Rs. 18,000,000 = Rs. 4,500,000. 4. Declared income for tax year 2027, after tax: Rs. 5,200,000. 5. Household and personal expenditure declared: Rs. 1,900,000. 6. Amount available to add to wealth: Rs. 5,200,000 - Rs. 1,900,000 = Rs. 3,300,000. 7. Gap: Rs. 4,500,000 - Rs. 3,300,000 = Rs. 1,200,000. If Dr. Butt shows the Rs. 1,200,000 came from a documented source, such as a loan now listed as a liability or a gift, the reconciliation closes. If he offers no explanation, or one the Commissioner does not accept, section 111(1) allows that Rs. 1,200,000 to be included in his income for the year. ### What if ...? **What if I find a mistake after filing?** Section 116(3) allows a revised wealth statement, with a revised reconciliation and reasons, under intimation to the Commissioner, at any time before the taxpayer receives the assessment notice that sub-section (3) refers to. The Commissioner may declare a revision void if it is not for a bona fide omission. An Explanation says a wealth statement cannot be revised after five years from the due date of the return for that year. **What if I do not file it?** Serial 1AA of the Table in section 182 sets a penalty for failing to furnish a wealth statement or wealth reconciliation statement: 0.1% of taxable income per week or Rs. 100,000, whichever is higher. **What if I hold foreign assets?** The statement under section 116(1) includes foreign assets and liabilities. The Ordinance also has a separate foreign income and assets statement for individuals above certain thresholds, which is not covered on this page. ### Common mistakes - **Treating the wealth statement as optional for professionals.** Section 116(2) applies to every resident individual filing a return, with no income threshold in the current text. - **Leaving out a dependent spouse's or children's assets.** Section 116(1)(b) covers them. - **Declaring a lower price for a property or car than was paid.** Section 111(3) addresses a declared cost below reasonable cost. - **Ignoring household spending.** Section 116(1)(d) asks for the family's total expenditure, which feeds the reconciliation. ### What to check in the official text Read section 116, including the Explanation on a dependent spouse and sub-section (3) on revision, section 111 in full, section 114(2)(e), section 118(4), and serial 1AA of the Table in section 182. The prescribed form of the wealth statement comes from the Income Tax Rules and the Board's forms, which should be checked for the current year. ### Frequently asked #### Does a doctor or lawyer who files a return also have to file a wealth statement? Yes, if resident. Section 116(2) says every resident taxpayer being an individual filing a return of income for any tax year shall furnish a wealth statement and wealth reconciliation statement for that year along with the return. Section 114(2)(e) also says the return shall be accompanied with the wealth statement. #### Do I have to include my spouse's and children's assets? Section 116(1)(b) covers the assets and liabilities of your spouse, minor children and other dependents. An Explanation added by the Finance Act, 2024 clarifies that a spouse's assets are included only if the spouse is dependent. #### What happens if my wealth grows faster than my declared income? Section 111(1) applies where you own money, an investment or a valuable article, or incur expenditure, and offer no explanation of its source or an explanation the Commissioner does not find satisfactory. The unexplained amount is then included in your income under the head Income from Other Sources. ### Citations - [Income Tax Ordinance, 2001, section 116 (Wealth statement)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#116-wealth-statement), as amended to 2026-06-30: "For removal of doubt, it is clarified that assets of spouse shall only be included in the wealth statement of the person if the spouse is dependent" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 111 (Unexplained income or assets)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#111-unexplained-income-or-assets), as amended to 2026-06-30: "shall be included in the person’s income chargeable to tax under the head “Income from Other Sources” to the extent it is not adequately explained" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "shall be accompanied with a wealth statement as required under section 116" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 118 (Method of furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#118-method-of-furnishing-returns-and-other-documents), as amended to 2026-06-30: "A wealth statement shall be furnished by the due date specified in the notice requiring the person to furnish such statement" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 182, Table, serial 1AA (failure to furnish wealth statement or wealth reconciliation statement)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What happens if a doctor or other professional with a practice does not file a tax return? Source: https://qanoondigest.com/faq/professionals/professional-not-filing-return-consequences Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Three things follow. Section 114 of the Income Tax Ordinance lets the Commissioner issue a notice demanding the return. Section 182 imposes a penalty for each day of default, with a minimum of Rs. 50,000 for a professional. And under section 100BA and the Tenth Schedule, tax withheld from someone off the Active Taxpayers List is doubled. **Applies to:** Doctors, dentists, lawyers, accountants and other professionals with practice income who have not filed, or filed late, their income tax return, for tax year 2027 and earlier years. Not filing a return does not stop the tax process. It moves it from you to the Commissioner, adds a penalty, and raises the tax taken from your fees at source until you appear on the Active Taxpayers List (ATL). Each step is set out in the Income Tax Ordinance as amended to 30 June 2026. ### What does the law say? **The duty to file, section 114.** Section 114(1) requires a return from, among others, every person other than a company whose taxable income exceeds the amount not chargeable to tax, and under clause (b)(ix) any resident person registered with a professional body, including the "Pakistan Medical and Dental Council, Pakistan Bar Council or any Provincial Bar Council, Institute of Chartered Accountants of Pakistan or Institute of Cost and Management Accountants of Pakistan". Clause (b)(vii) also covers anyone who has obtained a National Tax Number. **The due date, section 118.** A return of a person other than a company is due "on or before the 30th day of September next following the end of the tax year to which the return relates". For tax year 2027, that is 30 September 2027. **Notices, section 114(4) and (5).** The Commissioner may by notice require a person who should have filed to do so within thirty days, or another period set in the notice. The notice may cover one or more of the last five completed tax years, or the last ten where the person has not filed for any of the last five. **Penalty, section 182.** Serial 1 of the Table applies where a person fails to furnish a return under section 114 within the due date. **ATL, section 100BA.** For a person not appearing on the active taxpayers' list, withholding and the computation of income and tax "shall be determined in accordance with the rules in the Tenth Schedule". Section 181A lets the Board institute the list and regulate it as prescribed. ### How is the late-filing penalty worked out? Serial 1 charges the higher of: - (a) 0.1% of the tax payable for that tax year for each day of default; or - (b) Rs. 1,000 for each day of default. The minimum is Rs. 10,000 for an individual with 75% or more income from salary and Rs. 50,000 in all other cases, which covers a professional in practice. The maximum is 200% of tax payable. The penalty is reduced by 75%, 50% or 25% if the return is filed within one, two or three months after the due date. An Explanation substituted by the Finance Act, 2026 defines tax payable as the higher of the assessed tax or the tax payable for the last year for which a return was duly filed. ### Worked example (illustrative figures) **Dr. Faisal, Quetta, 50 days late.** His made-up tax payable is Rs. 400,000. 1. Option (a): 0.1% x Rs. 400,000 x 50 = Rs. 20,000. 2. Option (b): Rs. 1,000 x 50 = Rs. 50,000. 3. Higher amount: Rs. 50,000, which equals the Rs. 50,000 minimum. 4. He filed within two months, so the 50% reduction applies. The Table does not say whether the reduction is applied before or after the minimum, so the result could be Rs. 25,000 or Rs. 50,000. This page does not resolve that. **Advocate Sana, Peshawar, 100 days late.** Her made-up tax payable is Rs. 2,000,000. 1. Option (a): 0.1% x Rs. 2,000,000 x 100 = Rs. 200,000. 2. Option (b): Rs. 1,000 x 100 = Rs. 100,000. 3. Penalty: Rs. 200,000, below the cap of 200% of Rs. 2,000,000. 4. 100 days is beyond three months, so no reduction applies. ### What if I stay off the Active Taxpayers List? **Doubled withholding.** Rule 1 of the Tenth Schedule increases the rate of any tax to be deducted or collected from a person not on the ATL by 100% of the rate in the Ordinance, subject to exceptions in rule 10. **Provisional assessment.** Under rule 3, where tax was deducted at the higher rate and the return is not filed by the due date, the Commissioner makes a provisional assessment within sixty days, imputing income from the tax deducted and treating it as concealed income. Rule 4 makes it final after forty-five days unless the returns and wealth statements for that year and the preceding year are filed within that time. Rule 5 then allows penalty proceedings under section 182. **Late filers already on the list.** Section 100BA(1) also refers to persons on the ATL who did not file by the due date. Rule 1A of the Tenth Schedule, which set rates for them, was omitted by the Finance Act, 2026, so how section 100BA now applies to that group is not clear from the text. ### Common mistakes - **Thinking low income means no return.** Section 114(1)(b)(ix) covers registered professionals regardless of income. - **Forgetting the wealth statement.** Serial 1AA of the section 182 Table has its own penalty of 0.1% of taxable income per week or Rs. 100,000, whichever is higher. - **Expecting the penalty to start small.** For a professional, the minimum under serial 1 is Rs. 50,000. - **Assuming old years are safe.** Section 114(5) reaches back five years, or ten for persistent non-filers. ### What to check in the official text Read section 114(1), (4) and (5), section 118(3), serials 1 and 1AA of the Table in section 182, section 100BA, section 181A, and rules 1 to 5 and 10 of the Tenth Schedule. The mechanics of inclusion on the ATL are in the Income Tax Rules, and the edition held here is amended only to November 2023. ### Frequently asked #### Is a professional required to file even with low income? Section 114(1)(b)(ix) requires a return from a resident person registered with a professional body, naming the Pakistan Medical and Dental Council, the Pakistan Bar Council, the Provincial Bar Councils, ICAP and ICMAP. That requirement does not depend on the level of income. #### What is the minimum penalty for a late return? Serial 1 of the section 182 Table sets the penalty at the higher of 0.1% of tax payable per day or Rs. 1,000 per day, with a minimum of Rs. 50,000 for anyone other than an individual with 75% or more income from salary. It is capped at 200% of tax payable and reduced by 75%, 50% or 25% if the return is filed within one, two or three months of the due date. #### How far back can FBR ask for unfiled returns? Section 114(5) allows a notice for one or more of the last five completed tax years. Where the person has not filed for any of the last five years, the notice may cover up to the last ten, and the time limit does not apply where the Commissioner records reasons that the person has foreign income or assets. ### Citations - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "Pakistan Medical and Dental Council, Pakistan Bar Council or any Provincial Bar Council, Institute of Chartered Accountants of Pakistan or Institute of Cost and Management Accountants of Pakistan" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 118 (Method of furnishing returns and other documents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#118-method-of-furnishing-returns-and-other-documents), as amended to 2026-06-30: "on or before the 30th day of September next following the end of the tax year to which the return relates" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 182, Table, serial 1 (failure to furnish a return of income) with Explanation substituted by the Finance Act, 2026, and serial 1AA (wealth statement)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "shall be determined in accordance with the rules in the Tenth Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rules 1 to 5 (Rules for persons not appearing in the active taxpayers' list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 181A (Active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181a-active-taxpayers-list), as amended to 2026-06-30: "Active taxpayers’ list shall be regulated as may be prescribed." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Who has to deduct tax when paying a professional's fee, and does a patient or individual client have to? Source: https://qanoondigest.com/faq/professionals/who-deducts-tax-from-professional-fees Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Only a prescribed person listed in section 153(7) of the Income Tax Ordinance must deduct tax from fees for services: the Federal Government, companies, certain AOPs, non-profit organizations, and individuals or AOPs with turnover of Rs. 100 million or more, among others. An ordinary patient or small individual client is not on the list. **Applies to:** Doctors, dentists, lawyers, accountants, architects, engineers and other professionals, other than employees, who are paid fees by a mix of institutions and individuals. The duty to deduct tax from a professional fee depends on who is paying, not on who is being paid. Section 153 of the Income Tax Ordinance places the obligation on a defined list of "prescribed persons". A doctor or lawyer can therefore have tax taken from one client's payment and nothing taken from the next, and both clients can be acting correctly. ### What does the law say? Section 153(1)(b) requires "every prescribed person" making a payment "for the rendering of or providing of services" to a resident person to deduct tax from the gross amount payable. The duty applies "except where payment is less than thirty thousand Rupees in aggregate, during a financial year". Section 153(7)(ii) confirms that "services" includes "the services of accountants, architects, dentists, doctors, engineers, interior decorators and lawyers, otherwise than as an employee". Section 153(7)(i) defines "prescribed person" as: | Clause | Prescribed person | |---|---| | (a) | the Federal Government | | (b) | a company | | (c) | an association of persons constituted by, or under law | | (d) | a non-profit organization | | (e) | a foreign contractor or consultant | | (f) | a consortium or joint venture | | (g) | an exporter or export house, for sub-section (2) only | | (h) | an association of persons with turnover of one hundred million rupees or above in any of the preceding tax years | | (i) | an individual with turnover of one hundred million rupees or above in any of the preceding tax years | | (j) | a person registered under the Sales Tax Act, 1990 with turnover of one hundred million rupees or more in any of the preceding tax years | | (k) | a builder | | (l) | a developer | | (m), (n) | a payment intermediary and a courier service, for sub-section (2A) only | The rate for tax year 2027 is in the First Schedule, Part III, Division III, paragraph (2)(ii): 15% for independent professional services such as doctors, lawyers, architects, accountants and software engineers working independently. ### How does it work in practice? **Who usually deducts.** Private hospitals and clinics run as companies, banks, corporate clients, non-profit organizations, foreign consultants, joint ventures and federal ministries or departments are on the list. When they pay your fee they deduct 15% (or the doubled rate if you are not on the Active Taxpayers List) and give you a certificate under section 164. **Who usually does not.** A patient paying for a consultation, a family paying a lawyer for a property matter, or a small shopkeeper paying an accountant is an individual. An individual is a prescribed person only if the individual's turnover was Rs. 100 million or more in any of the preceding tax years. Most private clients are nowhere near that, so they pay the full fee. **The Rs. 30,000 threshold.** Even a prescribed person does not deduct where its payments to you for services total less than Rs. 30,000 in the financial year. Once the aggregate reaches that figure, the exception no longer applies. **Fees received through an agent.** A proviso to section 153(1) deals with a professional who "receives the payment through an agent or any other third person" who keeps a service charge or fee. In that case the agent is treated as having been paid that charge by the professional, and the professional "shall collect tax along with the payment received". This can matter where a hospital or platform collects fees for you and keeps a share. The wording is compressed, and how it applies to a given hospital arrangement is not spelt out further in the Ordinance. ### Worked example (illustrative figures) Bilal is an advocate in Karachi, on the Active Taxpayers List. In tax year 2027 he is paid by three clients. | Client | Prescribed person? | Paid in year | Tax deducted | |---|---|---|---| | A textile company (private limited) | Yes, clause (b) | Rs. 600,000 | Rs. 600,000 x 15% = Rs. 90,000 | | A shopkeeper, turnover about Rs. 8 million | No | Rs. 200,000 | Nil | | A registered welfare trust | Yes, clause (d) | Rs. 25,000 | Nil, under Rs. 30,000 for the year | Bilal's gross fees are Rs. 825,000, and Rs. 90,000 has been deducted. All Rs. 825,000 goes in his return. The Rs. 90,000 is a credit under section 168 and, under section 153(3), minimum tax on the Rs. 600,000. ### What if a client deducts who should not? If a payer that is not a prescribed person deducts tax from your fee, that is not a deduction the Ordinance required. Whether and how it can be credited depends on whether the amount was actually paid to the government and reported against your name. The Ordinance does not give a separate procedure for that situation. ### Common mistakes - **Assuming every client must deduct.** Only persons on the section 153(7) list do. The individual turnover test is Rs. 100 million in any of the preceding tax years. An older figure of fifty million rupees was replaced by the Finance Act, 2020. - **Applying the Rs. 30,000 test per invoice.** The threshold is the aggregate paid in a financial year. - **Thinking no deduction means no tax.** Fees received without deduction are still income under the Ordinance and are taxed in your return. - **Treating employment pay as a fee.** Section 153 covers services "otherwise than as an employee". Salary is dealt with elsewhere. ### What to check in the official text Read section 153(1) with its proviso on agents, and the full definition of "prescribed person" and "turnover" in section 153(7). Confirm the rate in the First Schedule, Part III, Division III, paragraph (2). Provincial sales tax on professional services is a separate provincial levy and is not covered here. ### Frequently asked #### Does a patient have to deduct tax from a doctor's fee? Not as a rule. Section 153(1) places the duty on a prescribed person, and an individual is prescribed only if the individual's turnover was Rs. 100 million or more in any of the preceding tax years. A patient paying a consultation fee from personal funds is not on the section 153(7) list. #### Is there a minimum amount before tax is deducted? Yes. Section 153(1)(b) excludes payments for services where the payment is less than thirty thousand rupees in aggregate during a financial year. The test is the total paid by that payer in the year, not each single invoice. #### Does the Provincial Government have to deduct under section 153? The list in section 153(7)(i) names the Federal Government, not Provincial Governments. The Ordinance text held here does not add Provincial Governments to that list, though a provincial body that is a company or another listed person would fall under that entry. ### Citations - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "except where payment is less than thirty thousand Rupees in aggregate, during a financial year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "“services” includes the services of accountants, architects, dentists, doctors, engineers, interior decorators and lawyers, otherwise than as an employee" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), paragraph (2), sub-paragraph (ii)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 164 (Certificate of collection or deduction of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#164-certificate-of-collection-or-deduction-of-tax), as amended to 2026-06-30: "a certificate setting out the amount of tax collected or deducted and such other particulars as may" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Why is withholding on my fees doubled when I am not on the Active Taxpayers List? Source: https://qanoondigest.com/faq/professionals/double-withholding-not-on-active-taxpayers-list Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 100BA of the Income Tax Ordinance applies the Tenth Schedule to anyone not on the Active Taxpayers List. Rule 1 of that Schedule increases the withholding rate by one hundred percent. For independent professional fees in tax year 2027, the 15% rate therefore becomes 30% until your name appears on the list maintained under section 181A. **Applies to:** Doctors, lawyers, accountants, architects and other independent professionals whose fees are paid by prescribed persons and who are not, or were not at the time of payment, on the Active Taxpayers List. A professional who is not on the Active Taxpayers List (ATL) pays for it at source. Every prescribed person paying your fees is required to apply a rate twice the normal one. The rule comes from section 100BA and the Tenth Schedule of the Income Tax Ordinance, and it switches off once your name is on the list. ### What does the law say? **Section 100BA.** Section 100BA(1) says the collection or deduction of advance income tax, and the computation of income and tax payable, for a person not appearing on the active taxpayers' list "shall be determined in accordance with the rules in the Tenth Schedule". Section 100BA(2) gives the Tenth Schedule effect notwithstanding anything else in the Ordinance. **Tenth Schedule, rule 1.** Where tax is to be deducted or collected under any provision of the Ordinance from a person not on the ATL, "the rate of tax required to be deducted or collected, as the case may be, shall be increased by hundred percent of the rate specified in this Ordinance". Rule 10 lists sections the Schedule does not apply to. Section 153 is not on that list. **The base rate.** Section 153(1)(b) requires prescribed persons to deduct tax from payments for services, and section 153(7) says services include those of doctors, dentists, lawyers, accountants, architects and engineers "otherwise than as an employee". The First Schedule, Part III, Division III, paragraph (2)(ii) sets the tax year 2027 rate at 15% for independent professional services. **Section 181A.** Section 181A(1) gives the Board "the power to institute active taxpayers' list", and section 181A(2) says it "shall be regulated as may be prescribed". ### How does it work in practice? | Status at time of payment | Rate on fees, tax year 2027 | |---|---| | On the ATL | 15% | | Not on the ATL | 15% + 100% of 15% = 30% | The payer checks your status when it pays you. The rule follows the date of payment, so fees paid before your name appears are deducted at 30% and fees paid after at 15%. **Getting on the list.** Rule 81B(5) of the Income Tax Rules, 2002 (in the edition held here, amended to 24 November 2023) says a person's name is included if the person has filed a return for the tax year whose last date for filing fell in the immediately preceding twelve months. Rule 81B(8) adds the name on the next update date after the person meets that test, and rule 81B(4) sets the update as weekly. Later amendments to rule 81B, if any, are not in this corpus. ### Worked example (illustrative figures) Imran is an architect in Peshawar. A construction company pays him a design fee of Rs. 1,000,000 in August 2026, which is in tax year 2027. He did not file the return that was last due, so he is not on the ATL. 1. Normal rate: 15%. 2. Tenth Schedule increase: 100% of 15% = 15%. 3. Rate applied: 15% + 15% = 30%. 4. Tax deducted: Rs. 1,000,000 x 30% = Rs. 300,000. 5. Had he been on the ATL: Rs. 1,000,000 x 15% = Rs. 150,000. 6. Extra deducted because he was not on the list: Rs. 300,000 - Rs. 150,000 = Rs. 150,000. Imran then files his outstanding return and appears on the list at the next weekly update. A second fee of Rs. 500,000 paid in December 2026 is deducted at 15%: Rs. 75,000. ### What happens to the extra tax? **If you file.** Rule 4(3) of the Tenth Schedule says that where returns have been filed before a provisional assessment, or within 45 days of receiving one, "the tax deducted or collected under rule 1 shall be adjustable against the tax payable in the return filed for the relevant tax year". Tax on professional fees is minimum tax under section 153(3). The Ordinance does not say in terms whether the doubled portion is also minimum tax, or only the base 15%. The text is silent on the point, so this page does not resolve it. **If you do not file.** Rule 3 directs the Commissioner to make a provisional assessment within sixty days of the due date. Income is imputed from the tax deducted at the higher rate and treated as concealed income. Rule 4(1) makes that provisional assessment final after 45 days unless returns are filed within that time. ### What if I was not required to file a return? Rule 2 of the Tenth Schedule lets the withholding agent notify the Commissioner in writing, before deducting, that a person not on the ATL was not required to file a return. The notice gives the person's name, CNIC or NTN, the transaction, and the reasons. If the Commissioner does not respond within thirty days, the claim is treated as accepted. Whether a doctor or lawyer registered with a professional body is required to file is a separate question, covered on its own page in this category. ### Common mistakes - **Thinking an NTN alone is enough.** The rule turns on appearing on the ATL, and rule 81B ties that to filing the return. - **Expecting the payer to refund the extra.** The payer deducts at the rate that applied on the payment date. The Tenth Schedule deals with the extra through your return and assessment, not through the payer. - **Assuming the whole extra is refundable.** Rule 4(3) makes it adjustable, but the interaction with minimum tax is not spelt out. ### What to check in the official text Read section 100BA, the Tenth Schedule rules 1 to 4 and rule 10, section 181A, and the rate in the First Schedule, Part III, Division III, paragraph (2). Check the current version of rule 81B of the Income Tax Rules, as the edition in this corpus stops at November 2023. ### Frequently asked #### What rate is deducted from my fees if I am not on the ATL? Rule 1 of the Tenth Schedule increases the rate by one hundred percent. The tax year 2027 rate for independent professional services is 15% under the First Schedule, so a person not on the list has 30% deducted. #### Can I get the extra tax back once I file? Rule 4(3) of the Tenth Schedule says tax deducted under rule 1 is adjustable against the tax payable in the return where the return is filed before a provisional assessment, or within 45 days of one. The Ordinance does not say expressly whether the doubled part on services is also minimum tax, so how much can be refunded is not settled by the text alone. #### How do I get on the Active Taxpayers List? Section 181A says the list is regulated as prescribed. Rule 81B of the Income Tax Rules, in the edition held here (amended to 24 November 2023), includes a person who has filed a return for the tax year whose due date fell in the preceding twelve months, and adds names on the next weekly update date. ### Citations - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "shall be determined in accordance with the rules in the Tenth Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rules 1, 2, 3 and 4 (Rules for persons not appearing in the active taxpayers' list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III (Payments for Goods or Services), paragraph (2), sub-paragraph (ii)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "“services” includes the services of accountants, architects, dentists, doctors, engineers, interior decorators and lawyers, otherwise than as an employee" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 181A (Active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181a-active-taxpayers-list), as amended to 2026-06-30: "Active taxpayers’ list shall be regulated as may be prescribed." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, Rule 81B (Active Taxpayers List)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24), as amended to 2023-11-24: "A person's name shall be included in ATL, if the person has filed a return under section 114 or a statement under section 115" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf --- ## What rate of withholding tax is deducted from doctors', lawyers' and accountants' fees in tax year 2027? Source: https://qanoondigest.com/faq/professionals/withholding-tax-rate-on-professional-fees Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer 15% of the gross amount. Section 153(1)(b) requires a prescribed person paying for services to deduct tax, and the Finance Act, 2026 set the rate for independent professional services such as doctors, lawyers, architects and accountants at 15% in Division III of Part III of the First Schedule. This is the source of the reported 15% on doctors and lawyers. **Applies to:** Doctors, dentists, lawyers, accountants, architects and other professionals working independently who bill companies, government bodies and other prescribed persons, for tax year 2027. The 15% figure reported for doctors and lawyers comes from one sub-paragraph of the First Schedule to the Income Tax Ordinance, 2001. It is a withholding rate, deducted by certain payers from professional fees, and it applies from 1 July 2026 for tax year 2027. It is not an income tax slab rate. ### What does the law say? **Section 153(1)(b): who deducts and on what.** Every prescribed person making a payment, including an advance, to a resident person for the rendering or providing of services must deduct tax from the gross amount payable, including sales tax if any, at the rate in Division III of Part III of the First Schedule. Payments for services under thirty thousand rupees in aggregate during a financial year are excluded. **Section 153(7): professional services are "services".** The definition says "services" includes "the services of accountants, architects, dentists, doctors, engineers, interior decorators and lawyers, otherwise than as an employee". Fees paid to an employee fall under salary instead. **Division III, paragraph (2)(ii): the rate.** As substituted by the Finance Act, 2026, sub-paragraph (ii) reads: "15% in the case of independent professional services such as doctors, lawyers, architects, accountants, software engineers or developers, working independently". **Section 153(3): minimum tax.** Tax deductible under section 153(1) on the income of a resident person is minimum tax. The explanation says the income meant is the amount on which tax is deductible. ### How does it work in practice? For tax year 2027, paragraph (2) of Division III now has five sub-paragraphs: | Sub-paragraph | Services | Rate | | --- | --- | --- | | (i) | A listed group including transport, IT, engineering and architectural services, car rental and others | 7% (4% for IT and IT enabled services) | | (ii) | Independent professional services such as doctors, lawyers, architects, accountants, software engineers or developers, working independently | 15% | | (iii) | Advertising services, paid to electronic and print media | 1.5% | | (iv) | Terminal and port operating services, paid to companies | 12% | | (v) | Services not covered in (i) to (iv) | 14% | **How the rate has moved.** Footnotes in the consolidated text show the history for professional fees received by someone other than a company: | Period | Rule | Rate | | --- | --- | --- | | Before the Finance Act, 2025 | Services other than sub-paragraph (i), "in any other case" | 11% (9% for companies) | | Tax year 2026 (Finance Act, 2025) | Services other than sub-paragraph (i) | 15% | | Tax year 2027 (Finance Act, 2026) | Independent professional services, named | 15% | So the Finance Act, 2026 did not raise the professional rate. It separated professionals from other services, kept them at 15%, and set 14% for the remaining unlisted services. ### Worked example (illustrative figures) Advocate Hamza Butt of Rawalpindi bills a private limited company Rs. 500,000 for legal work in August 2026. The figures are invented. 1. The company is a prescribed person and the payment is above the thirty thousand rupee threshold. 2. Deduction: Rs. 500,000 × 15% = Rs. 75,000. 3. Paid to him: Rs. 500,000 minus Rs. 75,000 = Rs. 425,000. 4. In his return the fee counts as Rs. 500,000 of income, and the Rs. 75,000 is a minimum tax on it under section 153(3). **If he is not on the active taxpayers' list.** Rule 1 of the Tenth Schedule increases the deduction rate by hundred percent of the rate specified for persons not appearing in the list. On the same fee, 15% becomes 30%: Rs. 500,000 × 30% = Rs. 150,000. ### What if ...? **What if I am an architect or a software developer?** Sub-paragraph (i) lists "engineering services including architectural services" and "software development services" at 7%, while sub-paragraph (ii) names architects and software engineers or developers working independently at 15%. The text does not say which applies when both descriptions fit. This page does not resolve that overlap. **What if my profession is not named?** Sub-paragraph (ii) says "such as", so the list is illustrative. Whether a particular profession counts as an independent professional service, or falls under the 14% rate in sub-paragraph (v), is not spelled out. **What if I want a lower rate certificate?** Section 153(4) lets the Commissioner allow a reduced rate only in cases where the tax deductible under section 153(1) is not minimum. Tax on a resident professional's service fees is minimum tax under section 153(3). ### Common mistakes - **Treating 15% as the income tax rate.** It is deducted at source. Tax on the year's income still comes from the slab table, with the 15% setting a floor for those fees. - **Expecting patients to deduct.** Only prescribed persons deduct under section 153. - **Assuming 2026 was a rate increase for professionals.** The rate was 15% in tax year 2026 as well. - **Declaring only the net amount received.** The gross fee is income. ### What to check in the official text Read section 153, especially sub-sections (1), (3), (4) and the definitions in (7), then paragraph (2) of Division III, Part III of the First Schedule in the official PDF, including its footnotes. Section 5 of the Finance Act, 2026 contains the amendment. Rule 1 of the Tenth Schedule covers persons not on the active taxpayers' list. Provincial sales tax on legal, accounting or medical services is outside this corpus and is not covered here. ### Frequently asked #### Did the Finance Act, 2026 raise the rate on doctors and lawyers to 15%? The rate was already 15% in tax year 2026, when the Finance Act, 2025 set 15% for services other than those in sub-paragraph (i). The Finance Act, 2026 kept 15% but named independent professional services expressly, and moved other unlisted services to a new 14% rate. #### Do my patients have to deduct 15% from consultation fees? Only prescribed persons deduct under section 153. The list in section 153(7) includes the Federal Government, companies, associations of persons constituted by or under law, non-profit organisations and individuals with turnover of one hundred million rupees or more in any of the preceding tax years. An ordinary patient paying a fee is not on that list. #### Is the 15% my final tax? Section 153(3) says tax deductible under section 153(1) on the income of a resident person is minimum tax, and the explanation says that income means the amount on which tax is deductible. So the deduction sets a floor for the tax on those fees. It is not final tax, and the fees are still included in the return. ### Citations - [Income Tax Ordinance, 2001, section 153 (Payments for goods, services and contracts)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#153-payments-for-goods-services-and-contracts), as amended to 2026-06-30: "“services” includes the services of accountants, architects, dentists, doctors, engineers, interior decorators and lawyers, otherwise than as an employee" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division III, paragraph (2), sub-paragraphs (i) to (v) (sub-paragraph (ii) substituted and (iii) to (v) added by the Finance Act, 2026)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2026, section 5 (Amendments of the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2026#5-amendments-of-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2026: "15% in the case of independent professional services such as doctors," Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (rate increased by hundred percent for persons not appearing in the active taxpayers' list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can a doctor or lawyer reduce tax with Zakat, donations or pension fund contributions? Source: https://qanoondigest.com/faq/professionals/tax-credits-donations-pension-professionals Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, within limits. Section 60 of the Income Tax Ordinance allows Zakat paid under the Zakat and Ushr Ordinance as a deduction. Section 61 gives a tax credit for donations to qualifying bodies, capped at 30% of taxable income. Section 63 gives a credit for contributions to an approved pension fund, capped at 20% of taxable income. **Applies to:** Self-employed doctors, dentists, lawyers, accountants and other professionals with business income, for tax year 2027 (1 July 2026 to 30 June 2027). A professional in private practice has no employer pension scheme and no employer deducting tax on salary, but the Ordinance still gives three routes that lower the tax on practice income. They work in different ways: Zakat comes off income, while donations and pension contributions come off tax. ### What does the law say? **Zakat, section 60.** A person is "entitled to a deductible allowance for the amount of any Zakat paid by the person in a tax year" under the Zakat and Ushr Ordinance, 1980. Section 9 makes taxable income the total income "reduced (but not below zero) by the total of any deductible allowances". Section 60(2) excludes Zakat already allowed against profit on debt taxed as income from other sources, and section 60(3) says an unused allowance is not refunded, carried forward or carried back. **Charitable donations, section 61.** A person gets a tax credit for any sum paid, or property given, in the tax year as a donation, voluntary contribution or subscription to: - (a) a board of education or university in Pakistan established by or under a Federal or Provincial law; - (b) an educational institution, hospital or relief fund established or run in Pakistan by the Federal Government, a Provincial Government or a Local Government; - (c) a non-profit organization, or a person eligible for the Ordinance's separate tax credit for charitable organizations; - (d) entities, organizations and funds in the Thirteenth Schedule. **Approved pension fund, section 63.** An eligible person deriving income under the head Salary or the head Income from Business gets a tax credit for any contribution or premium paid in the year to an approved pension fund under the Voluntary Pension System Rules, 2005. Section 63(3) excludes transfers of existing balances from employer schemes. **How credits are used, section 4.** Section 4(2) computes tax by applying the rates to taxable income, and "from the resulting amount shall be subtracted any tax credits allowed to the taxpayer for the year". ### How is each credit worked out? Both sections 61(2) and 63(2) use the formula **(A/B) x C**, where A is the tax assessed before any tax credit under Part X, B is taxable income, and C is the smaller of the amount given and a cap. In effect the credit equals your average rate of tax multiplied by the qualifying amount. | | Section 61 (donations) | Section 63 (pension fund) | |---|---|---| | Cap on C for an individual | 30% of taxable income | 20% of taxable income | | Donation to an associate | 15% of taxable income | Not applicable | | Payment condition | Cash only by crossed cheque drawn on a bank, section 61(4) | Contribution to an approved pension fund | Property donated is valued at fair market value when given, under section 61(3). A proviso to section 63(2) on extra contributions for people aged over forty applied only up to 30 June 2019. ### Worked example (illustrative figures) Dr. Ayesha Malik, a gynaecologist in Lahore, has made-up practice income of Rs. 5,000,000 for tax year 2027. She pays Rs. 100,000 Zakat under the Zakat and Ushr Ordinance, donates Rs. 300,000 by crossed cheque to a government hospital, and contributes Rs. 400,000 to an approved pension fund. 1. Taxable income: Rs. 5,000,000 - Rs. 100,000 Zakat = Rs. 4,900,000. 2. Tax under clause (1) of Division I: Rs. 4,900,000 is in the slab over Rs. 3,200,000 up to Rs. 5,600,000. Rs. 650,000 + 40% of Rs. 1,700,000 = Rs. 650,000 + Rs. 680,000 = Rs. 1,330,000. This is A. 3. Donation cap: 30% of Rs. 4,900,000 = Rs. 1,470,000. C = Rs. 300,000. 4. Donation credit: (Rs. 1,330,000 / Rs. 4,900,000) x Rs. 300,000 = Rs. 81,428.57, about Rs. 81,429. 5. Pension cap: 20% of Rs. 4,900,000 = Rs. 980,000. C = Rs. 400,000. 6. Pension credit: (Rs. 1,330,000 / Rs. 4,900,000) x Rs. 400,000 = Rs. 108,571.43, about Rs. 108,571. 7. Tax after credits: Rs. 1,330,000 - Rs. 81,429 - Rs. 108,571 = Rs. 1,140,000. Without the Zakat deduction, taxable income would be Rs. 5,000,000 and tax Rs. 650,000 + 40% of Rs. 1,800,000 = Rs. 1,370,000, so the Zakat lowered tax by Rs. 40,000 before credits. ### What if ...? **What if some of my fees had tax deducted as minimum tax?** Tax deducted from professional fees by prescribed persons is minimum tax under the Ordinance. The sections read for this page do not say how a Part X credit interacts with that minimum. The separate page on minimum tax on professional fees covers it. **What if I donate to a trust run by a relative?** The proviso to section 61(2) lowers the cap to 15% of taxable income for an individual where the donation goes to an associate. **What if I give Zakat voluntarily, not through the Zakat system?** Section 60 refers to Zakat paid "under the Zakat and Ushr Ordinance, 1980". The Ordinance text does not extend the allowance beyond that. ### Common mistakes - **Treating Zakat as a tax credit.** It reduces taxable income under sections 60 and 9, so its value depends on your slab. - **Claiming cash donations.** Section 61(4) requires a crossed cheque drawn on a bank for cash. - **Giving to any charity.** Only the bodies in section 61(1) qualify. - **Using the full contribution as the credit.** The credit is the average rate times the qualifying amount, not the amount itself. ### What to check in the official text Read sections 60, 61 and 63, including the formula in sub-section (2) of sections 61 and 63 as printed in the official PDF, sections 4 and 9, and the clause (1) rate table in Division I, Part I of the First Schedule. Check whether the recipient of a donation qualifies under section 61(1), and whether the pension fund is approved under the Voluntary Pension System Rules, 2005, which are not in this corpus. ### Frequently asked #### Is Zakat a deduction or a credit? It is a deductible allowance under section 60, so it reduces taxable income rather than the tax itself. Section 60(3) says any part that cannot be deducted for the year is not refunded, carried forward or carried back. #### Does a cash donation count for the credit? Section 61(4) says a cash donation counts only if it was paid by a crossed cheque drawn on a bank. The recipient must also be one of the bodies listed in section 61(1), such as a government hospital, a university established by law, a non-profit organization or an entity in the Thirteenth Schedule. #### Can a self-employed professional claim the pension fund credit? Yes. Section 63(1) extends the credit to an eligible person deriving income under the head Income from Business, not only salary. The contribution must be to an approved pension fund under the Voluntary Pension System Rules, 2005, and the credit is limited by reference to 20% of taxable income. ### Citations - [Income Tax Ordinance, 2001, section 60 (Zakat)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#60-zakat), as amended to 2026-06-30: "shall be entitled to a deductible allowance for the amount of any Zakat paid by the person in a tax year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 61 (Charitable donations)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#61-charitable-donations), as amended to 2026-06-30: "an individual or association of persons, thirty per cent of the taxable income of the person for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 63 (Contribution to an Approved Pension Fund)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#63-contribution-to-an-approved-pension-fund), as amended to 2026-06-30: "deriving income chargeable to tax under the head “Salary” or the head “Income from Business” shall be entitled to a tax credit for a tax year in respect of any contribution or premium paid in the year by the person in approved pension fund under the Voluntary Pension System Rules, 2005" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 9 (Taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#9-taxable-income), as amended to 2026-06-30: "reduced (but not below zero) by the total of any deductible allowances" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 4 (Tax on taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4-tax-on-taxable-income), as amended to 2026-06-30: "from the resulting amount shall be subtracted any tax credits allowed to the taxpayer for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1), Table (rates for individuals and associations of persons other than salaried individuals)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- # Property buyers, sellers and landlords Rental income, tax on buying and selling property, and capital gains. ## Is 236K charged when I buy a society file or pay for an apartment in installments? Source: https://qanoondigest.com/faq/property-owners/236k-on-installments-and-society-files Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. The Explanation to section 236K(1) covers housing societies and public and private real estate projects. Section 236K(3) requires whoever collects installments to collect 236K with them, and its proviso says no further 236K is collected at final transfer once tax equal to the full amount has been collected with the installments. **Applies to:** People buying plots through housing society files, and apartments, shops or houses in off-plan or under-construction projects paid for in installments. Buying on installments does not move 236K out of the picture. It brings the collection forward. Under the Income Tax Ordinance, 2001, as amended to 30 June 2026, a builder, developer or society that takes installments must collect 236K advance tax along with them, and the buyer is not charged again at the final transfer once the full amount has been collected. The rate below is the one in force for tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? Section 236K has three parts that matter here. **Section 236K(1)** requires the person responsible for "registering, recording or attesting transfer" of immovable property to collect advance tax from the purchaser or transferee at the rate in Division XVIII of Part IV of the First Schedule. An Explanation clarifies that this person includes whoever registers, records or attests transfers for a local authority, housing authority, housing society, co-operative society, public and private real estate projects registered or governed under any law, joint ventures, private commercial concerns and the registrar of properties. **Section 236K(3)** covers installment sales. Any person "responsible for collecting payments in installments" for purchase or allotment of immovable property, where the transfer happens only after all installments are paid, must collect advance tax from the allottee or transferee "at the time of collecting installments", at the Division XVIII rate. **The proviso to section 236K(3)** says that where tax has been collected along with installments, no further tax under the section is collected at the time the property is transferred to that buyer, where the tax collected in installments "is equal to the amount payable in this section". ### How does it work in practice? - **Society files.** Section 236K does not use the word "file". What it covers is a housing society or real estate project recording a transfer. When a society records a file moving from one person to another, the Explanation brings that recording within section 236K(1). The seller side is the same: section 236C has an identical Explanation, so the society also collects 236C from the person selling the file. - **Off-plan apartments and shops.** A developer taking installments collects 236K with those installments under section 236K(3). - **Rate and base.** For tax year 2027, Division XVIII reads: "The rate of tax to be collected under section 236K shall be 1.25% of the fair market value of the immovable property." Fair market value comes from section 68: the FBR notified value for the area under section 68(4), or the stamp duty value under section 68(5) where FBR has notified none. - **Adjustable.** Section 236K(2) makes the tax adjustable against the buyer's income tax liability for the year, subject to a proviso for certain non-resident buyers paying through foreign currency or NRP accounts. ### Worked example (illustrative figures) Hamza, a filer in Karachi, books an apartment in a private project. The project will transfer the apartment to him only after 16 quarterly installments. The fair market value for 236K purposes is Rs. 16,000,000. **Total 236K payable** - Rs. 16,000,000 x 1.25% = **Rs. 200,000** **During the installment period** - The developer collects 236K with the installments under section 236K(3). - By the last installment, the 236K collected adds up to Rs. 200,000. **At transfer** - Tax collected with installments (Rs. 200,000) equals the amount payable under the section (Rs. 200,000). - Under the proviso, **no further 236K** is collected when the apartment is transferred into Hamza's name. Section 236K(3) does not say how the total is to be divided between individual installments. It says only that tax is collected "at the time of collecting installments" at the Division XVIII rate. The split in any real schedule comes from the developer, not from the text of the Ordinance. ### What if ...? **What if less than the full 236K was collected with the installments?** The proviso applies only where the tax already collected equals the amount payable under the section. The text does not spell out how a shortfall is dealt with at transfer. **What if I sell my file before possession?** The buyer of the file is a transferee under section 236K(1), and you are a seller under section 236C(1), so both taxes can apply to the file transfer recorded by the society. How any 236K you paid earlier is treated for your own return is a matter for the adjustable tax rules on the related page. **What if the buyer is not on the active taxpayers' list?** The Tenth Schedule sets much higher 236K rates for such buyers. See the non-filer rate page linked below. ### Common mistakes - **"Files are not property, so no 236K."** The Explanation to section 236K(1) turns on who records the transfer (a housing society or real estate project), not on what the document is called. - **"I paid 236K with installments, so I also pay at transfer."** The proviso to section 236K(3) prevents a second collection once the full amount has been collected. - **Using the booking price as the base.** Division XVIII uses fair market value under section 68, which may differ from the price in the booking form. ### What to check in the official text Read section 236K(1) with its Explanation, sub-section (3) and its proviso, and Division XVIII of Part IV of the First Schedule in the consolidated Ordinance amended to 30 June 2026. The FBR valuation notifications under section 68(4) are separate SROs not held here. Check whether your project or area is listed and what value applies to an under-construction unit. The Ordinance does not address those points itself. ### Frequently asked #### Does a private housing society have to collect 236K when it records a file transfer? The Explanation to section 236K(1) says the person responsible for registering, recording or attesting a transfer includes a housing authority, housing society, co-operative society, and public and private real estate projects. The section does not use the word file, but a society recording a transfer falls within that Explanation. #### Will I pay 236K twice, once with installments and again at possession or transfer? Not if the full amount was collected. The proviso to section 236K(3) says no further tax under the section is collected at transfer from a buyer who has paid tax with the installments equal to the amount payable under the section. #### What rate applies to installment purchases for tax year 2027? Division XVIII of Part IV of the First Schedule sets 1.25% of the fair market value of the immovable property for persons on the active taxpayers' list. Section 236K(3) uses the same Division XVIII rate for installment collections. ### Citations - [Income Tax Ordinance, 2001, section 236K (Advance tax on purchase or transfer of immovable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236k-advance-tax-on-purchase-or-transfer-of-immovable-property), as amended to 2026-06-30: "Any person responsible for collecting payments in installments for purchase or allotment of any immovable property where the transfer is to be effected after making payment of all installments" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XVIII (Advance tax on purchase of immovable property), as substituted by the Finance Act, 2026](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 68 (Fair market value)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#68-fair-market-value), as amended to 2026-06-30: "the fair market value of such immovable property shall be deemed to be the value fixed by the District Officer (Revenue) or provincial or any other authority authorized in this behalf for the purposes of stamp duty." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236C (Advance Tax on sale or transfer of immovable Property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236c-advance-tax-on-sale-or-transfer-of-immovable-property), as amended to 2026-06-30: "housing authority, housing society, co-operative society" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule (Rules for persons not appearing in the active taxpayers' list), rule 1, second proviso (236K rates)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much advance tax do I pay when I buy a plot, house or flat in Pakistan (section 236K)? Source: https://qanoondigest.com/faq/property-owners/advance-tax-buying-property-236k Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 236K requires the authority that registers, records or attests the transfer, including a housing society or real estate project, to collect advance tax from the buyer. Division XVIII of Part IV of the First Schedule, as substituted by the Finance Act, 2026, sets it at 1.25% of the property's fair market value for tax year 2027. **Applies to:** Individuals, families and businesses buying a plot, house, flat or other immovable property in Pakistan on or after 1 July 2026. When you buy a plot, house or flat in Pakistan, the office that registers or records the transfer collects income tax from you before it completes the paperwork. This is advance tax under section 236K of the Income Tax Ordinance, 2001. The rate below is from the Ordinance as amended to 30 June 2026 and applies to transfers in tax year 2027, which runs from 1 July 2026 to 30 June 2027. ### What does the law say? Section 236K(1) says any person responsible for registering, recording or attesting the transfer of immovable property "shall collect from the purchaser or transferee advance tax at the rate specified in Division XVIII of Part IV of the First Schedule". The Finance Act, 2026 replaced Division XVIII. Section 5 of that Act substituted this text: "The rate of tax to be collected under section 236K shall be 1.25% of the fair market value of the immovable property." Section 1(2) of the Finance Act, 2026 brings it into force on 1 July 2026 unless otherwise provided. So for a buyer who appears in the active taxpayers' list, the charge is a single flat rate: | Buyer | Rate under section 236K | Base | |---|---|---| | Appears in the active taxpayers' list | 1.25% | Fair market value of the property | ### Who collects it? The collecting party is not the seller. It is whoever registers, records or attests the transfer. The Explanation to section 236K(1) clarifies that this "includes person responsible for registering, recording or attesting transfer for local authority, housing authority, housing society, co-operative society", public and private real estate projects registered or governed under any law, joint ventures, private commercial concerns and the registrar of properties. That means a transfer recorded only in a housing society's own books, with no deed at the sub-registrar, is still inside section 236K. ### What value is the tax charged on? Division XVIII charges 1.25% of the "fair market value of the immovable property". Section 68 governs that value: - Section 68(4) lets the Board notify the fair market value of immovable property for specified areas. These notified values are what people usually call the FBR valuation table. - Section 68(5) says that where the Board has not notified a value for an area, the value fixed by the District Officer (Revenue) or other authority for stamp duty is treated as the fair market value. - Section 68(6)(iii) says the value of immovable property for Division XVIII "shall not be less than the fair market value as determined under sub-section (4) or (5)". The notified or stamp duty value is therefore a floor. Section 68(1) separately defines fair market value as the price the property "would ordinarily fetch on sale or supply in the open market". Division XVIII does not say in terms which figure is used where the agreed price is higher than the notified value, and this page does not settle that point. ### Worked example (illustrative figures) Ayesha, who appears in the active taxpayers' list, buys a 10 marla house in Faisalabad in October 2026. The notified FBR value for the house is Rs. 14,000,000. 1. Base: fair market value, not less than the notified value of Rs. 14,000,000. 2. Rate: 1.25% under Division XVIII. 3. Tax collected: Rs. 14,000,000 x 1.25% = **Rs. 175,000**. If the fair market value used were Rs. 16,000,000 instead, the tax would be Rs. 16,000,000 x 1.25% = Rs. 200,000. ### What if the buyer is not on the active taxpayers' list? The second proviso to rule 1 of the Tenth Schedule replaces the 1.25% rate with banded rates for persons not appearing in the active taxpayers' list: 10.5% where the fair market value does not exceed Rs. 50 million, 14.5% above Rs. 50 million up to Rs. 100 million, and 18.5% above Rs. 100 million. On the Rs. 14,000,000 house above, that is Rs. 14,000,000 x 10.5% = Rs. 1,470,000. The non-filer page sets this out in full. ### What if I am paying in instalments or buying through an overseas scheme? Section 236K(3) requires a person collecting instalments for purchase or allotment of property, where the transfer happens only after all instalments are paid, to collect the Division XVIII tax with the instalments. The proviso says no further tax is collected at transfer from that buyer where the tax already collected equals the amount payable under the section. Section 236K(4) says the section does not apply to a scheme introduced by the Federal or a Provincial Government, or an authority set up under their laws, for expatriate Pakistanis, provided payment is made in foreign exchange remitted from outside Pakistan through normal banking channels. ### What did earlier years look like? The 1.25% flat rate is new from 1 July 2026. The footnote to Division XVIII in the consolidated Ordinance records that the Division it replaced set banded rates by fair market value: 1.5% up to Rs. 50 million, 2% above Rs. 50 million up to Rs. 100 million, and 2.5% above Rs. 100 million. A transfer registered before 1 July 2026 fell under those earlier rates, not the current one. ### Common mistakes - **Thinking the seller pays 236K.** Section 236K(1) collects from the purchaser or transferee. The seller's own tax is a separate collection under a different section. - **Assuming a society transfer is outside the tax.** The Explanation to section 236K(1) names housing societies and real estate projects. - **Using a value below the FBR table.** Section 68(6)(iii) sets the notified or stamp duty value as the minimum. - **Applying the old banded rates to a 2026-27 purchase.** The Finance Act, 2026 substituted a single 1.25% rate from 1 July 2026. ### What to check in the official text Read section 236K, Division XVIII of Part IV of the First Schedule, section 68 and rule 1 of the Tenth Schedule in the official PDF. The notified property values under section 68(4) are issued by separate notification and are not held in this corpus, so confirm the value for your area from that notification. Provincial stamp duty and registration fees are separate provincial levies and are not covered here. ### Frequently asked #### What is the 236K rate for a buyer from 1 July 2026? Division XVIII of Part IV of the First Schedule, as substituted by the Finance Act, 2026, sets 1.25% of the fair market value of the immovable property. It is one flat rate with no value bands. #### Who collects the 236K tax, the seller or the registrar? The person responsible for registering, recording or attesting the transfer collects it from the purchaser. The Explanation to section 236K says this includes housing authorities, housing societies, co-operative societies, public and private real estate projects and the registrar of properties. #### Can the property value for 236K be lower than the FBR valuation? No. Section 68(6) says the value of immovable property for Division XVIII shall not be less than the fair market value notified by the Board under section 68(4), or the stamp duty value under section 68(5) where no notified value exists. ### Citations - [Income Tax Ordinance, 2001, section 236K (Advance tax on purchase or transfer of immovable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236k-advance-tax-on-purchase-or-transfer-of-immovable-property), as amended to 2026-06-30: "shall collect from the purchaser or transferee advance tax at the rate specified in Division XVIII of Part IV of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XVIII (Advance tax on purchase of immovable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 68 (Fair market value)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#68-fair-market-value), as amended to 2026-06-30: "shall not be less than the fair market value as determined under sub-section (4) or (5)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2026, section 5 (Amendments of the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2026#5-amendments-of-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2026: "The rate of tax to be collected under section 236K shall be 1.25% of the fair market value of the immovable property." Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Finance Act, 2026, section 1 (Short title and commencement)](https://qanoondigest.com/acts/finance-act/finance-act-2026#1-short-title-and-commencement), as amended to 2026: "It shall, unless otherwise provided, come into force on the first day of July, 2026." Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1, second proviso (236K rates for persons not appearing in the active taxpayers' list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can a non-filer still buy property after the Finance Act, 2025? Source: https://qanoondigest.com/faq/property-owners/can-non-filer-buy-property-114c Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 114C, added by the Finance Act, 2025, stops registrars from processing an ineligible person's application to transfer property with a fair market value above Rs. 100 million, the Fifteenth Schedule threshold. It takes effect only from a date the Federal Government notifies. Below that value, a non-filer can still buy, but pays 236K at higher rates. **Applies to:** People who do not file income tax returns, or file without declaring enough resources, and want to buy a house, plot or commercial property in Pakistan. A non-filer can still buy property in Pakistan under the Income Tax Ordinance, 2001 as amended to 30 June 2026, but with two limits. Section 114C, added by the Finance Act, 2025, will block purchases above Rs. 100 million by "ineligible" persons once the Federal Government brings it into force. Separately, 236K is already charged at much higher rates on buyers who are not on the active taxpayers' list. ### What does the law say? **Section 114C(1)(b)** says that any application by an ineligible person to the authority that registers, records or attests transfer of immovable property, "of the value exceeding the threshold given in Fifteenth Schedule, shall not be accepted or processed by such authority". The same section covers motor vehicles, securities investments and bank cash withdrawals. **The Fifteenth Schedule**, S. No. 2, sets the property threshold: fair market value "Exceeding one hundred million rupees". It measures value as fair market value defined in clause (22AA) of section 2, which points to section 68. So the test uses the FBR notified value (or the stamp duty value where none is notified), not only the deed price. **Section 114C(4)** defines the terms: - An **eligible person** has filed either (i) a return for the tax year immediately before the year of the transaction, with "sufficient resources" in the wealth statement (or financial statements for a company or AOP) for the transaction, or (ii) a sources of investment and expenditure statement on the Board's web portal declaring sufficient resources for that purchase. - For an individual, the eligible person includes his **immediate family members**, meaning "his parents, spouse and dependent children". - An **ineligible person** is anyone who is not an eligible person. - **Sufficient resources** is defined by reference to one hundred and thirty percent of the cash and cash-equivalent assets (cash, fair market value of gold, stocks, bonds, receivables and similar) declared in the latest wealth statement or sources statement. Capital assets already declared and exchanged for the property count to the extent of the value in the agreement. **Section 114C(2)** says sub-section (1) does not apply to transactions by a non-resident person or a public company, except the cash withdrawal limit. **Section 114C(5)** says the restrictions "shall come into force on such date as the Federal Government may, by notification in official Gazette, appoint", and the notification may reduce or increase the Fifteenth Schedule thresholds. ### How does it work in practice? Until a notification is issued under section 114C(5), the property restriction in section 114C(1)(b) has no operative date. Once in force, the registrar, housing society or other recording authority must refuse to process a transfer to an ineligible buyer where the fair market value exceeds the threshold then applying. Whether or not section 114C is in force, 236K applies to every buyer. For tax year 2027, Division XVIII sets 1.25% of fair market value for buyers on the active taxpayers' list. For buyers not on the list, rule 1 of the Tenth Schedule substitutes these rates: | Fair market value | 236K rate, not on active taxpayers' list | |---|---| | Up to Rs. 50 million | 10.5% | | Over Rs. 50 million up to Rs. 100 million | 14.5% | | Over Rs. 100 million | 18.5% | ### Worked example (illustrative figures) **Case 1: above the threshold.** Imran does not file returns. He agrees to buy a house in Islamabad for Rs. 95,000,000, but the FBR notified value is Rs. 120,000,000. - The value for section 114C is fair market value under section 68: Rs. 120,000,000. - Rs. 120,000,000 exceeds the Rs. 100,000,000 threshold. - Once section 114C is notified, the registering authority cannot accept or process his application. The lower deed price does not change this. **Case 2: below the threshold.** Imran instead buys a flat with a fair market value of Rs. 60,000,000. - Section 114C does not block this purchase, because the value is under Rs. 100,000,000. - 236K as a person not on the active taxpayers' list: Rs. 60,000,000 x 14.5% = **Rs. 8,700,000**. - Had he been on the list: Rs. 60,000,000 x 1.25% = Rs. 750,000. ### What if ...? **What if my spouse files and I do not?** For an individual, the eligible person includes the spouse, parents and dependent children. The Ordinance does not describe how a registrar verifies this. **What if I filed last year but my wealth statement shows little cash?** Filing alone is not enough. Section 114C(4)(a)(i) also requires sufficient resources for the transaction. A sources of investment and expenditure statement is the other route under clause (ii). **What if I live abroad?** Section 114C(2) excludes transactions by a non-resident person from the property restriction. ### Common mistakes - **Treating section 114C as already in force.** It depends on a notification under section 114C(5). - **Using the deed price for the Rs. 100 million test.** The Fifteenth Schedule uses fair market value under section 68. - **Assuming any return makes you eligible.** Section 114C(4)(a)(i) needs a return for the immediately preceding tax year and sufficient resources declared for the transaction. ### What to check in the official text Read section 114C in full, the Fifteenth Schedule, rule 1 of the Tenth Schedule and Division XVIII of Part IV of the First Schedule in the consolidated Ordinance amended to 30 June 2026. Check whether the Federal Government has issued a section 114C(5) notification, and what thresholds it sets. No such notification is held on this site. ### Frequently asked #### Is section 114C already in force for property purchases? Section 114C(5) says the restrictions come into force on a date the Federal Government appoints by notification in the official Gazette, with any changes to the thresholds it considers appropriate. This site does not hold such a notification, so check whether one has been issued. #### Can my father buy property using my return if he does not file? The proviso to section 114C(4)(a) says that for an individual, the eligible person includes his immediate family members, defined as parents, spouse and dependent children. The Ordinance does not spell out the procedure for relying on a family member's return. #### Does section 114C apply to overseas Pakistanis? Section 114C(2) says sub-section (1) does not apply to transactions by a non-resident person or a public company, except the cash withdrawal limit in clause (d). So the property restriction does not apply to a non-resident buyer. ### Citations - [Income Tax Ordinance, 2001, section 114C (Restriction on economic transactions by certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114c-restriction-on-economic-transactions-by-certain-persons), as amended to 2026-06-30: "(b) any application or request by any ineligible person, to any authority responsible for registering, recording or attesting transfer of any immovable property, of the value exceeding the threshold given in Fifteenth Schedule, shall not be accepted or processed by such authority" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Fifteenth Schedule (Threshold for Economic Transactions), S. No. 2, section 114C(1)(b)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "“fair market value” means value as provided in section 68;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236K (Advance tax on purchase or transfer of immovable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236k-advance-tax-on-purchase-or-transfer-of-immovable-property), as amended to 2026-06-30: "shall collect from the purchaser or transferee advance tax at the rate specified in Division XVIII of Part IV of the First Schedule." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule (Rules for persons not appearing in the active taxpayers' list), rule 1, second proviso (236K rates)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 68 (Fair market value)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#68-fair-market-value), as amended to 2026-06-30: "the fair market value of such immovable property shall be deemed to be the value fixed by the District Officer (Revenue) or provincial or any other authority authorized in this behalf for the purposes of stamp duty." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is there any capital gains exemption if I sell my only house or buy another one with the money? Source: https://qanoondigest.com/faq/property-owners/capital-gains-exemption-home-or-reinvestment Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No general exemption exists. Section 37(1A) taxes the gain on any immovable property at the Division VIII rates, with no relief for a sole home or for buying another. Section 79(1)(d) gives non-recognition only where property is compulsorily acquired under a law and the money is reinvested in a like asset within one year. **Applies to:** Homeowners selling a house, flat or plot in Pakistan who expect relief because it is their only home or because they are buying another property. ### What does the law say? Section 37(1A) of the Income Tax Ordinance, 2001 charges the gain on disposal of immovable property in Pakistan at the rates in Division VIII of Part I of the First Schedule. It does not distinguish between a family home, a second house, a plot or a rental flat. Division VIII sets rates by holding period and type for property acquired on or before 30 June 2024, and a flat 15% for persons on the Active Taxpayers' List for property acquired on or after 1 July 2024. Neither part of the table mentions the owner's residence or what the seller does with the money. The provision that comes closest to rollover relief is section 79, the non-recognition rules. Section 79(1) lists six situations in which no gain or loss arises on disposal of an asset. Only one involves reinvestment: > (d) by reason of the compulsory acquisition of the asset under any law where the consideration received for the disposal is reinvested by the recipient in an asset of a like kind within one year of the disposal; A voluntary sale to a buyer is not a compulsory acquisition, so buying a new home with the proceeds does not bring a normal sale inside clause (d). ### How does it work in practice? **Ordinary sale.** The gain is worked out under section 37(2) as consideration received minus cost, and the Division VIII rate applies. Buying another house afterwards does not change that figure. **Compulsory acquisition.** If a government body acquires your property under a law, for example for a road, and you reinvest the compensation in an asset of a like kind within one year, no gain arises. Section 79(4) then sets the cost of the replacement as the cost of the old asset plus any amount by which the price of the replacement exceeds the compensation received. In effect, the untaxed gain is carried into the new property. The Ordinance does not define "like kind", so whether, for example, a plot replaces a house is not settled by the text. **Older holdings.** For property acquired on or before 30 June 2024, time itself can bring the rate to 0: after four years for constructed property, two years for flats and six years for open plots. That applies to everyone, not only homeowners. ### Worked example (illustrative figures) Farhan bought a house in Rawalpindi in September 2024 for Rs. 20,000,000. He sells it in November 2026 for Rs. 25,000,000 and buys a larger house for Rs. 30,000,000. Ignore incidental costs, assume the sale price is not below the notified value, and assume he is on the Active Taxpayers' List. 1. **Gain.** Rs. 25,000,000 - Rs. 20,000,000 = **Rs. 5,000,000**. 2. **Rate.** Acquired after 1 July 2024, filer on the date of disposal: **15%**. 3. **Tax.** 15% of Rs. 5,000,000 = **Rs. 750,000**. The Rs. 30,000,000 purchase does not reduce it. Now suppose instead the Rawalpindi house was compulsorily acquired under a law for Rs. 25,000,000 in compensation, and Farhan bought the Rs. 30,000,000 house within one year. 1. **Gain recognised.** None, under section 79(1)(d). 2. **Cost of the new house.** Rs. 20,000,000 (old cost) + (Rs. 30,000,000 - Rs. 25,000,000) = **Rs. 25,000,000**, under section 79(4). When he later sells the new house, the gain is measured from Rs. 25,000,000, not Rs. 30,000,000. ### What if I have lived in the house for fifteen years? Clause (104A) of Part IV of the Second Schedule says section 4C does not apply to capital gain from the disposal of one residential immovable property if it has been in the person's personal use for the last fifteen years, has been declared in the person's wealth statement for the last fifteen years, and appears as the person's residence in their tax record. It applies once in fifteen years. Section 4C is super tax on high earning persons, so this clause keeps that gain out of super tax. It does not exempt the gain from capital gains tax under section 37(1A). ### What if the house was allotted to me as a government or armed forces employee? Clause (9A) of Part III of the Second Schedule reduces, rather than removes, the capital gains tax on the first sale by an original allottee who is an ex-serviceman, serving member of the Armed Forces, or a serving or former Federal or Provincial Government employee, certified by the allotment authority. The reduction is fifty percent, or seventy-five percent for gains arising after three years from acquisition. ### Common mistakes - **Expecting a principal residence exemption.** Neither section 37 nor Division VIII contains one. - **Treating any reinvestment as rollover.** Section 79(1)(d) is limited to compulsory acquisition under a law, with reinvestment in a like asset within one year. - **Reading clause (104A) as a capital gains exemption.** It refers only to section 4C super tax. ### What to check in the official text Read section 37(1A), all of section 79(1) and (4), and Division VIII of Part I of the First Schedule. For the fifteen-year residence condition, read clause (104A) of Part IV of the Second Schedule, and for original allottees clause (9A) of Part III. Provincial property taxes and stamp duty are outside this corpus and are not covered here. ### Frequently asked #### Is the sale of my only house exempt from capital gains tax? Not under the text amended to 30 June 2026. Section 37(1A) and Division VIII apply to immovable property generally and contain no sole residence exemption. A house acquired on or before 30 June 2024 reaches a 0 rate after four years of holding, but that is a holding period rule, not a home exemption. #### If I use the sale money to buy another house, is the gain deferred? No. The only reinvestment rule for property in section 79 is clause (d), which applies to compulsory acquisition under a law with reinvestment in a like asset within one year. A voluntary sale followed by a new purchase is not covered. #### What does clause (104A) of the Second Schedule do? It switches off super tax under section 4C on the gain from one residential property that meets fifteen-year conditions. It does not remove the capital gains tax charged under section 37(1A). ### Citations - [Income Tax Ordinance, 2001, section 37 (Capital gains)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#37-capital-gains), as amended to 2026-06-30: "the gain arising on the disposal of a capital asset by a person shall be computed in accordance with the following formula" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 79 (Non-recognition rules)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#79-non-recognition-rules), as amended to 2026-06-30: "by reason of the compulsory acquisition of the asset under any law where the consideration received for the disposal is reinvested by the recipient in an asset of a like kind within one year of the disposal;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division VIII (rates under section 37(1A))](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 4C (Super tax on high earning persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4c-super-tax-on-high-earning-persons), as amended to 2026-06-30: "A super tax shall be imposed for tax year 2022 and onwards at the rates specified in Division IIB of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clause (104A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part III, clause (9A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What is the capital gains tax on selling a property I bought on or after 1 July 2024? Source: https://qanoondigest.com/faq/property-owners/capital-gains-tax-property-bought-after-july-2024 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 37(1A) taxes gains on Pakistani property at the Division VIII rates. For property acquired on or after 1 July 2024, a seller on the active taxpayers' list on the date of disposal pays a flat 15% of the gain, with no holding-period relief. Others pay the Division I or II rates, and individuals and AOPs pay at least 15%. **Applies to:** Individuals, associations of persons and companies selling a plot, house, flat or other immovable property in Pakistan that they acquired on or after 1 July 2024. If you bought a property on or after 1 July 2024 and sell it now, the gain is taxed at one rate regardless of how long you held it. The old sliding scale that reduced the tax the longer you kept a plot or house applies only to property acquired on or before 30 June 2024. The rules below are from the Income Tax Ordinance, 2001 as amended to 30 June 2026 and apply to disposals in tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? Section 37(1A) says a gain on disposal of immovable property situated in Pakistan "shall be chargeable to tax under the head capital gains at the rates specified in Division VIII of Part I of the First Schedule". Division VIII has a Table with two sets of columns. Columns (3) to (5) cover property acquired on or before 30 June 2024, with rates that fall by holding period for open plots, constructed property and flats. Column (6) covers property "acquired on or after 1st day of July, 2024", and spans every holding period row. It sets: | Seller on the date of disposal | Rate on the gain | |---|---| | Appears on the active taxpayers' list | 15% | | Individual or association of persons not on the list | Division I rates, but not less than 15% of the gain | | Company not on the list | Division II rates | Status is tested "on the date of disposal of property", not on the date of purchase. ### How is the gain worked out? Section 37(2) computes the gain as A minus B, where A is the consideration received on disposal and B is the cost of the asset. Section 37(4) says the cost does not include expenditure that is deductible under another provision of the Chapter or that falls under clause (b) of the sub-section. Section 68(6)(i) then sets a floor on A: for immovable property, component A "shall not be less than the fair market value as determined under sub-section (4) or (5)", that is, the Board's notified value or, where none exists, the stamp duty value. A deed price below the FBR value does not reduce the gain. ### Worked example (illustrative figures) Hamza bought a 1 kanal house in Islamabad in August 2024 for Rs. 18,000,000. He sells it in November 2026 for Rs. 24,000,000. The notified FBR value at sale is Rs. 22,000,000. He has no other income in the year. 1. A: the higher of the price and the notified value, Rs. 24,000,000. 2. B: cost, Rs. 18,000,000. 3. Gain: Rs. 24,000,000 - Rs. 18,000,000 = Rs. 6,000,000. **If Hamza is on the active taxpayers' list:** Rs. 6,000,000 x 15% = **Rs. 900,000**. **If Hamza is not on the list:** clause (1) of Division I applies to individuals other than salaried individuals. For income above Rs. 5,600,000 the rate is Rs. 1,610,000 plus 45% of the amount above Rs. 5,600,000. - Rs. 6,000,000 - Rs. 5,600,000 = Rs. 400,000. - Rs. 400,000 x 45% = Rs. 180,000. - Rs. 1,610,000 + Rs. 180,000 = **Rs. 1,790,000**, which is above the 15% floor of Rs. 900,000. **A smaller gain, not on the list:** if the gain were Rs. 1,000,000, the Division I slab for income above Rs. 600,000 up to Rs. 1,200,000 is 15% of the amount above Rs. 600,000: Rs. 400,000 x 15% = Rs. 60,000. The 15% floor is Rs. 1,000,000 x 15% = Rs. 150,000, so the tax is **Rs. 150,000**. These non-listed figures assume the gain is the seller's only income. Column (6) says only "at the rates specified in Division I". It does not say whether the gain is taxed on its own through those slabs or together with the seller's other income, and this page does not settle that point. ### What if the seller is a salaried individual or a company? Division I has a separate table in clause (2) for an individual whose salary exceeds 75% of taxable income. Column (6) refers to Division I without choosing between its clauses, so a salaried seller not on the list should read both. A company not on the list is taxed at the Division II rates, and the 15% floor in column (6) is written only for individuals and associations of persons. ### How does the 236C tax fit in? At transfer, section 236C collects 2.75% of the gross consideration from a seller on the list. That is a different base from the gain. In Hamza's case it would be Rs. 24,000,000 x 2.75% = Rs. 660,000, which is credited against the Rs. 900,000 capital gains tax, leaving Rs. 240,000. The adjustable-or-final page covers the exceptions. ### Common mistakes - **Expecting the tax to fall after a few years.** The holding period reductions in columns (3) to (5) do not apply to property acquired on or after 1 July 2024. - **Using the purchase-date status.** Column (6) tests whether the seller is on the list on the date of disposal. - **Using a deed price below the FBR table as A.** Section 68(6)(i) makes the notified or stamp duty value the minimum. ### What to check in the official text Read section 37, section 68, section 236C, and Divisions I, II and VIII of Part I of the First Schedule in the official PDF. The Division VIII Table is printed across several columns and pages, so read column (6) and its proviso in full. The Board's valuation notifications under section 68(4) are not part of this corpus. ### Frequently asked #### Does holding the property longer reduce the tax if I bought after 1 July 2024? No. Column (6) of the Division VIII Table applies one rate to property acquired on or after 1 July 2024 across every holding period row. For a person on the active taxpayers' list it is 15% whether the property is held for one year or ten. #### What rate applies if I am not on the active taxpayers' list when I sell? Column (6) applies the Division I rates to individuals and associations of persons and the Division II rates to companies, and says the rate for individuals and associations of persons shall not be less than 15% of the gain. #### Is the 236C tax collected at sale the same as capital gains tax? No. Section 236C collects 2.75% of the gross consideration at transfer, which is a different base. It is adjustable against the capital gains tax worked out under section 37(1A), apart from the exceptions in section 236C. ### Citations - [Income Tax Ordinance, 2001, section 37 (Capital gains)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#37-capital-gains), as amended to 2026-06-30: "be chargeable to tax under the head capital gains at the rates specified in Division VIII of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division VIII, Table, column (6) (properties acquired on or after 1st day of July, 2024)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1) (rates for individuals and association of persons other than salaried individuals)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 68 (Fair market value)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#68-fair-market-value), as amended to 2026-06-30: "shall not be less than the fair market value as determined under sub-section (4) or (5)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236C (Advance Tax on sale or transfer of immovable Property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236c-advance-tax-on-sale-or-transfer-of-immovable-property), as amended to 2026-06-30: "shall collect from the seller or transferor advance tax at the rate specified in Division X of Part IV of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## I bought my property before 1 July 2024. Is capital gains tax still zero after six years? Source: https://qanoondigest.com/faq/property-owners/capital-gains-tax-property-bought-before-july-2024 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, for an open plot. Under section 37(1A) and Division VIII of the First Schedule, property acquired on or before 30 June 2024 is taxed by holding period: open plots reach 0% after six years, constructed property after four years and flats after two years. The 15% flat rate applies only to property acquired from 1 July 2024. **Applies to:** Individuals, associations of persons and companies selling immovable property in Pakistan that they acquired on or before 30 June 2024. ### What does the law say? Section 37(1A) of the Income Tax Ordinance, 2001 says the gain on disposal of immovable property in Pakistan is taxed under the head "Capital Gains" at the rates in Division VIII of Part I of the First Schedule. The gain itself is worked out under section 37(2): the consideration received (A) minus the cost of the property (B). Division VIII, as it stands in the text amended to 30 June 2026, is one table with two sets of columns. Property acquired **on or before 30 June 2024** is taxed by how long it was held and by type: open plot, constructed property or flat. Property acquired **on or after 1 July 2024** has no holding period relief at all. The Finance Act, 2026 did not change this Division, so the same table applies to sales in tax year 2027 (1 July 2026 to 30 June 2027). For property acquired on or before 30 June 2024, the rates are: | Holding period | Open plots | Constructed property | Flats | |---|---|---|---| | Does not exceed one year | 15% | 15% | 15% | | Exceeds one year, not two years | 12.5% | 10% | 7.5% | | Exceeds two years, not three years | 10% | 7.5% | 0 | | Exceeds three years, not four years | 7.5% | 5% | - | | Exceeds four years, not five years | 5% | 0 | - | | Exceeds five years, not six years | 2.5% | - | - | | Exceeds six years | 0% | - | - | So the answer to "zero after six years" depends on what you own. An open plot needs more than six years. A constructed property is at 0 once it has been held for more than four years, and a flat once it has been held for more than two years. A dash in the table means the property has already reached 0 in an earlier row. ### How does it work in practice? The rate for older property does not depend on whether the seller is on the Active Taxpayers' List. That distinction appears only in the column for property acquired from 1 July 2024, which charges 15% to persons on the list and the normal income tax rates (with a 15% floor for individuals and associations of persons) to those who are not. Separately, when the sale is registered, recorded or attested, section 236C requires the authority to collect advance tax from the seller. Division X of Part IV of the First Schedule sets this at 2.75% of the gross amount of the consideration received. Section 236C(2) makes it adjustable, so it counts against the seller's income tax for the year rather than being a separate charge. It is still collected even where the capital gain falls in a 0% row. There is also a reduction for one group of sellers. Clause (9A) of Part III of the Second Schedule reduces the capital gains tax by fifty percent on the first sale of property acquired or allotted to ex-servicemen and serving personnel of the Armed Forces, or ex-employees and serving personnel of the Federal and Provincial Governments, who are original allottees certified by the allotment authority. Its proviso raises the reduction to seventy-five percent for gains arising after three years from acquisition. ### Worked example (illustrative figures) Bilal bought an open plot in a Lahore housing scheme in March 2021 for Rs. 4,000,000 and paid Rs. 100,000 in incidental buying costs. He sells it in October 2026 for Rs. 9,000,000 and pays Rs. 50,000 in selling costs. Assume Rs. 9,000,000 is not below the notified value. 1. **Holding period.** March 2021 to October 2026 is about five years and seven months. That falls in the row "exceeds five years, not six years", so the open plot rate is **2.5%**. 2. **Gain.** Rs. 9,000,000 - (Rs. 4,000,000 + Rs. 100,000 + Rs. 50,000) = Rs. 9,000,000 - Rs. 4,150,000 = **Rs. 4,850,000**. 3. **Capital gains tax.** 2.5% of Rs. 4,850,000 = **Rs. 121,250**. 4. **Advance tax at transfer.** 2.75% of Rs. 9,000,000 = **Rs. 247,500**, collected under section 236C and adjustable against his tax for tax year 2027. If Bilal waited until after March 2027, the holding period would exceed six years and the rate would be 0%. If the same asset had been a house acquired in March 2021, it would already be at 0, because a constructed property reaches 0 after four years. ### What if the property changes type while I hold it? Division VIII does not define "open plot", "constructed property" or "flat", and it has no separate columns for residential and commercial property. A shop, office or house can only be placed in one of the three existing columns. The text does not say which column applies to a plot on which construction was later completed, or to a shop or office unit in a multi-storey building. This page does not settle those points. ### What if I do not know my exact holding period? For immovable property, the Ordinance does not give a separate definition of "holding period" in section 37 or Division VIII. The table only measures whether the period "exceeds" or "does not exceed" a number of years. Where the dates are close to a boundary, the acquisition and disposal dates on the title documents matter, and the law text does not say which document fixes them. ### Common mistakes - **Assuming every property now pays 15%.** The flat 15% rate for filers applies only to property acquired on or after 1 July 2024. Older property follows the holding period columns. - **Applying the six-year rule to a house or flat.** Six years is the open plot threshold. Constructed property and flats reach 0 sooner. - **Thinking 0% means no tax is collected at registration.** Section 236C advance tax is collected on the transfer regardless of holding period. - **Forgetting that "exceeds" means more than.** A plot held for exactly six years is still in the 2.5% row; the 0% row starts once six years is exceeded. ### What to check in the official text Read section 37(1A) and (2), then Division VIII of Part I of the First Schedule in the official PDF, where the table is laid out in columns (3) to (6). For the advance tax, read section 236C and Division X of Part IV of the First Schedule. Original allottees should also read clause (9A) of Part III of the Second Schedule. Cost and consideration are covered on the page about calculating the gain. ### Frequently asked #### Is capital gains tax zero on a plot I have held for more than six years? Yes, if you acquired the open plot on or before 30 June 2024. Row 7 of the Division VIII table sets 0% where the holding period of an open plot exceeds six years. #### Does the 15% rate for property bought after July 2024 apply to my older house? No. Division VIII has separate columns for property acquired on or before 30 June 2024 and property acquired on or after 1 July 2024. The flat 15% rate for persons on the Active Taxpayers' List sits only in the later column. #### Is advance tax still collected when I sell, even if my capital gains tax is zero? Section 236C requires the registering or attesting authority to collect advance tax from the seller, and it contains no exception for long holding periods. Section 236C(2) makes that tax adjustable against the seller's tax liability. ### Citations - [Income Tax Ordinance, 2001, section 37 (Capital gains)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#37-capital-gains), as amended to 2026-06-30: "the gain arising on the disposal of a capital asset by a person shall be computed in accordance with the following formula, namely:- A - B A is the consideration received by the person on disposal of the asset; and B is the cost of the asset." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division VIII (rates under section 37(1A))](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236C (Advance Tax on sale or transfer of immovable Property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236c-advance-tax-on-sale-or-transfer-of-immovable-property), as amended to 2026-06-30: "collect from the seller or transferor advance tax at the rate specified in Division X of Part IV of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division X (advance tax on sale or transfer of immovable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part III, clause (9A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is capital gains tax charged when I sell agricultural land? Source: https://qanoondigest.com/faq/property-owners/tax-on-selling-agricultural-land Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, the exemption does not reach the sale. Section 41 of the Income Tax Ordinance exempts agricultural income, meaning rent, revenue and produce income from farmland. A gain on selling the land itself is not in that definition, and section 37(1A) taxes gains on disposal of any immovable property in Pakistan, with advance tax collected under section 236C. **Applies to:** Landowners selling agricultural land situated in Pakistan on or after 1 July 2026. Many landowners assume that because agricultural income is exempt from federal income tax, selling the farm is exempt too. The Income Tax Ordinance, 2001 draws a line between income from using farmland and the gain on selling it. This page uses the Ordinance as amended to 30 June 2026, which applies to sales in tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? Section 41(1) exempts "agricultural income" from tax under the Ordinance. Section 41(2) defines it as: - (a) rent or revenue from land in Pakistan used for agricultural purposes; - (b) income from land in Pakistan from agriculture, from a cultivator's or rent-in-kind receiver's processing of the produce to make it fit for market, or from their sale of that produce; - (c) income from certain buildings owned and occupied by the receiver of that rent or revenue, or needed by the cultivator as a dwelling, store or out-building on or near the land. None of these clauses mentions a gain on disposing of the land itself. Section 37(1) charges a gain on disposal of a capital asset under the head "Capital Gains", other than a gain exempt under the Ordinance. Section 37(1A) then provides that the gain on disposal of immovable property situated in Pakistan is chargeable at the rates in Division VIII of Part I of the First Schedule. Section 37(1A) does not carve out agricultural land. A footnote to section 37(5) records that clause (c), "any immovable property", was omitted from the list of exclusions from "capital asset" by the Finance Act, 2012. Since then immovable property has not been excluded from the definition. ### What rate applies? Division VIII of Part I of the First Schedule has two sets of rates, depending on when the property was acquired: | Acquired | Rate under Division VIII | |---|---| | On or after 1 July 2024 | 15% for persons on the Active Taxpayers' List. For individuals and AOPs not on the list, the Division I rate, but not less than 15% of the gain | | On or before 30 June 2024 | By holding period, in separate columns for open plots, constructed property and flats, falling to 0% for an open plot held more than six years | The older table does not have a column named agricultural land. The Ordinance does not say which of the three columns applies to farmland acquired on or before 30 June 2024. That is a gap in the text, and this page does not resolve it. ### How is the tax collected at sale? Section 236C(1) requires whoever registers, records or attests the transfer of any immovable property to collect advance tax from the seller at the Division X rate. Division X of Part IV, as substituted by the Finance Act, 2026, sets 2.75% of the gross amount of the consideration received. Section 236C(2) makes it adjustable against the seller's tax for the year. Section 68(6) says the consideration used for computing the gain under section 37 and for Division X cannot be less than the fair market value notified by the Board under section 68(4) or, where no value is notified, the stamp duty value under section 68(5). ### Worked example (illustrative figures) Ghulam Rasool, who appears on the Active Taxpayers' List, bought 10 acres near Sahiwal in September 2024 for Rs. 20,000,000 and sells in March 2027 for Rs. 26,000,000, which is not below the stamp duty value. The amounts are invented; the rates are Division VIII and Division X. 1. Gain under section 37(2), A - B: Rs. 26,000,000 - Rs. 20,000,000 = Rs. 6,000,000. 2. Capital gains tax at 15%: Rs. 6,000,000 x 15% = Rs. 900,000. 3. Advance tax collected at registration under section 236C: Rs. 26,000,000 x 2.75% = Rs. 715,000. 4. Adjusted against the capital gains tax: Rs. 900,000 - Rs. 715,000 = Rs. 185,000 still payable with the return. The wheat he sold from that land before the sale remains agricultural income under section 41(2)(b). ### What if the land was inherited or received as a gift? The cost and holding rules for inherited and gifted property are covered on the inherited property and gifting pages. Nothing in section 41 changes those rules because the property is farmland. ### Common mistakes - **Reading section 41 as covering the land.** It covers income from the land, not the proceeds of selling it. - **Using the old open-plot table for land bought after July 2024.** Only the 15% column applies to property acquired on or after 1 July 2024. - **Declaring a sale price below the stamp duty value.** Section 68(6) sets a floor for both the gain and the section 236C base. - **Assuming provincial agricultural income tax is covered here.** It is provincial law and outside this corpus. ### What to check in the official text Read section 41, section 37(1) and (1A), Division VIII of Part I and Division X of Part IV of the First Schedule, section 236C and section 68(4) to (6). Check whether the Board has notified values for the relevant rural area under section 68(4), since otherwise the stamp duty value under section 68(5) applies. ### Frequently asked #### Does the agricultural income exemption cover the gain on selling my land? Section 41(2) defines agricultural income as rent or revenue from farmland, income from agriculture, processing and sale of produce by the cultivator, and certain farm buildings. A gain on disposing of the land is not in that list, so section 41 does not exempt it. #### What rate applies to agricultural land I bought after 1 July 2024? Division VIII of Part I of the First Schedule sets 15% for persons appearing on the Active Taxpayers' List. For individuals and AOPs not on the list, the rate is the Division I rate, but not less than 15% of the gain. #### Is provincial agricultural income tax covered here? No. Agricultural income tax is levied by the provinces under their own laws, which are outside this corpus. This page covers only the federal Income Tax Ordinance. ### Citations - [Income Tax Ordinance, 2001, section 41 (Agricultural income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#41-agricultural-income), as amended to 2026-06-30: "any rent or revenue derived by a person from land which is situated in Pakistan and is used for agricultural purposes" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 37 (Capital gains)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#37-capital-gains), as amended to 2026-06-30: "a gain arising on the disposal of a capital asset by a person in a tax year, other than a gain that is exempt from tax under this Ordinance, shall be chargeable to tax in that year under the head “Capital Gains”" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division VIII (rates under section 37(1A))](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236C (Advance Tax on sale or transfer of immovable Property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236c-advance-tax-on-sale-or-transfer-of-immovable-property), as amended to 2026-06-30: "shall collect from the seller or transferor advance tax at the rate specified in Division X of Part IV of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division X (Advance tax on sale or transfer of immovable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 68 (Fair market value)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#68-fair-market-value), as amended to 2026-06-30: "shall not be less than the fair market value as determined under sub-section (4) or (5)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Which expenses can I deduct from rent, such as repairs, property tax or loan interest? Source: https://qanoondigest.com/faq/property-owners/deductions-allowed-against-rental-income Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 15A of the Income Tax Ordinance lists what a landlord may deduct from rent: a repairs allowance of one-fifth of the rent, building insurance, local taxes on the property, ground rent, profit on loans to buy or build it, collection and administration costs up to 4% of rent, legal costs defending title, and irrecoverable rent. **Applies to:** Individuals, associations of persons and companies earning rent from land or a building in Pakistan that is taxed under the head Income from Property. Rent is not taxed on the full amount a tenant pays. Section 15A of the Income Tax Ordinance, 2001 sets out a closed list of deductions a landlord may take before arriving at income chargeable under the head "Income from Property". This page uses the Ordinance as amended to 30 June 2026, which governs tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? Section 15(1) taxes the rent received or receivable in a tax year under the head "Income from Property". Section 15(2) defines rent as any amount received or receivable by the owner of land or a building for its use or occupation, or the right to use or occupy it. Section 15A(1) then allows the following deductions in computing that income: | Clause | Deduction | Limit or condition | |---|---|---| | (a) | Repairs allowance | One-fifth of the rent chargeable for the building, computed before any other section 15A deduction | | (b) | Insurance premium | Paid or payable in the year to insure the building against damage or destruction | | (c) | Local rate, tax, charge or cess | Paid or payable to a local authority or government on the property or its rent, but not income tax under the Ordinance | | (d) | Ground rent | Paid or payable in the year for the property | | (e) | Profit on borrowed money | Loan, including a mortgage, used to acquire, construct, renovate, extend or reconstruct the property | | (f) | Rent-sharing finance | Share in rent and share in appreciation paid to the House Building Finance Corporation or a scheduled bank, excluding return of capital | | (g) | Mortgage or capital charge | Profit or interest paid on the mortgage or charge | | (h) | Administration and collection costs | Spent wholly and exclusively to derive the rent, capped at 4% of the rent computed before any section 15A deduction | | (i) | Legal costs | Legal services to defend title to the property or a suit connected with it | | (j) | Irrecoverable rent | Unpaid rent, only if all three conditions below are met | ### When can unpaid rent be deducted? Clause (j) allows an allowance equal to unpaid rent where there are reasonable grounds to believe it is irrecoverable, and all of these hold: 1. The tenancy was bona fide, the tenant has left or steps have been taken to make the tenant leave, and the tenant does not occupy another property of the landlord. 2. The landlord has taken all reasonable steps to start legal proceedings for recovery, or has reasonable grounds to believe proceedings would be useless. 3. The unpaid rent was already included in the landlord's Income from Property for the year it was due, and tax on it was duly paid. If that rent is later recovered in whole or part, section 15A(2) taxes the recovered amount in the year it comes in. ### How does it work in practice? The deductions are claimed against the rent of each property in the landlord's return. Two points shape the arithmetic. First, clauses (a) and (h) are both measured on the rent "computed before any deduction allowed under this section", so they are calculated on gross rent, not on what is left after other deductions. Second, most items are "paid or payable", so an expense that has fallen due in the year counts even if the cash goes out later. Section 15A(5) says an expense deducted here cannot be deducted again under any other head of income. Section 15A(6) applies the business-head rules on disallowed deductions to these property deductions in the same way. ### Worked example (illustrative figures) Sana owns a flat in Gulshan-e-Iqbal, Karachi, let for the whole of tax year 2027 at Rs. 100,000 a month. All amounts below are invented; the limits are from section 15A. | Step | Item | Amount (Rs.) | |---|---|---| | 1 | Rent chargeable (100,000 x 12) | 1,200,000 | | 2 | Repairs allowance, one-fifth of 1,200,000 | 240,000 | | 3 | Property tax paid on the flat (clause (c)) | 18,000 | | 4 | Building insurance premium | 12,000 | | 5 | Profit paid on the bank loan used to buy the flat | 150,000 | | 6 | Agent's collection fee actually paid: 60,000. Cap is 4% of 1,200,000 = 48,000 | 48,000 | | 7 | Total deductions (240,000 + 18,000 + 12,000 + 150,000 + 48,000) | 468,000 | | 8 | Income from Property (1,200,000 - 468,000) | 732,000 | The Rs. 12,000 of agent's fee above the 4% cap is not deductible under clause (h). The tax rate that then applies to Rs. 732,000 depends on the landlord's status and other income, and is covered on the page about how rental income is taxed. ### What if a deducted expense is never paid? Because clauses allow amounts "paid or payable", section 15A(3) adds a safeguard. If a landlord was allowed a deduction and has not paid the liability, or part of it, within three years of the end of the tax year in which the deduction was allowed, the unpaid amount becomes chargeable as Income from Property in the first tax year after those three years. If the landlord pays it after that, section 15A(4) allows a deduction in the year of payment. ### What if the rent includes furniture, services or machinery? Section 15(3) sends rent from a building let together with plant and machinery to "Income from Other Sources", and section 15(3A) does the same for any part of the rent charged for amenities, utilities or other services connected with renting the building. Section 15A deductions are for income under the property head, so those amounts sit outside this list. ### Common mistakes - **Treating the 4% cap as applying to everything.** The 4% ceiling in clause (h) covers only administration and collection costs. Insurance, local taxes and loan profit have no percentage cap in section 15A. - **Claiming depreciation on the building.** Section 15A has no depreciation deduction for a building taxed under the property head. The list in section 15A(1) is the full set of allowances. - **Deducting the loan principal.** Clause (e) allows the profit on the loan. Clause (f) expressly excludes the return of capital. - **Writing off rent that was never declared.** Clause (j)(iii) requires that the unpaid rent was included in income and taxed for the year it was due. ### What to check in the official text Read section 15A in full, especially clause (h), whose rate was reduced from six to four per cent by the Finance Act, 2020, and the conditions in clause (j). Section 15 defines rent and separates out plant, machinery and amenity charges. Provincial property tax rates themselves are set by provincial law, which is outside this corpus; the Ordinance only allows the amount paid as a deduction. ### Frequently asked #### Do I need repair bills to claim the one-fifth repairs allowance? Section 15A(1)(a) sets the repairs deduction as an allowance equal to one-fifth of the rent chargeable to tax for the building, computed before any other section 15A deduction. The text ties the amount to the rent, not to what was actually spent on repairs. #### Can I deduct the interest or profit on my home loan from rent? Section 15A(1)(e) allows profit paid or payable in the year on money borrowed, including by mortgage, to acquire, construct, renovate, extend or reconstruct the property. Clause (f) covers rent-sharing schemes with the House Building Finance Corporation or a scheduled bank, and clause (g) covers profit on a mortgage or other capital charge. #### What happens if I claimed an expense but never paid it? Under section 15A(3), if a deducted liability stays unpaid three years after the end of the tax year in which the deduction was allowed, the unpaid amount becomes Income from Property in the next tax year. If it is paid later, section 15A(4) allows the deduction again in the year of payment. ### Citations - [Income Tax Ordinance, 2001, section 15A (Deductions in computing income chargeable under the head “Income from Property”)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#15a-deductions-in-computing-income-chargeable-under-the-head-income-from-property), as amended to 2026-06-30: "an allowance equal to one-fifth of the rent chargeable to tax in respect of the building for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 15A (Deductions in computing income chargeable under the head “Income from Property”)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#15a-deductions-in-computing-income-chargeable-under-the-head-income-from-property), as amended to 2026-06-30: "the unpaid amount of the liability shall be chargeable to tax under the head “Income from Property” in the first tax year following the end of the three years" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 15 (Income from property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#15-income-from-property), as amended to 2026-06-30: "“rent” means any amount received or receivable by the owner of land or a building as consideration for the use or occupation of, or the right to use or occupy, the land or building" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is property tax charged on the price in my sale deed or on the FBR valuation table? Source: https://qanoondigest.com/faq/property-owners/fbr-valuation-table-vs-sale-price Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Where the sale deed shows less than the official value, the official value applies. Section 68(6) says the value used for capital gain, 236C, 236K and section 111 cannot be lower than the fair market value notified by FBR under section 68(4), or the stamp duty value under section 68(5) where FBR has notified none. **Applies to:** Buyers and sellers of plots, houses, flats and commercial property in Pakistan whose agreed or deed price is different from the FBR valuation. For income tax purposes, the price written in your sale deed is only a floor if it is higher than the official value. If it is lower, the Income Tax Ordinance, 2001 replaces it with the official figure. This page explains how section 68 sets that figure and where it is used. Rates quoted are those in force for tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? Section 68 defines "fair market value". For most assets, section 68(1) says it is the price the asset "would ordinarily fetch on sale or supply in the open market" at the time. Immovable property has its own rules: - **Section 68(4):** the Board (FBR) may, by notification in the official Gazette, determine the fair market value of immovable property in the areas it specifies. These notifications are what people call the FBR valuation table. - **Section 68(5):** where FBR has not notified a value for an area, the fair market value is deemed to be the value fixed for stamp duty by the District Officer (Revenue) or another authorised provincial authority. - **Section 68(6):** for immovable property, four values "shall not be less than" the fair market value under sub-section (4) or (5): 1. component A (the sale consideration) in the capital gain formula in section 37(2); 2. the "consideration received" on which 236C advance tax is charged under Division X; 3. the "value of immovable property" for Division XVIII, the 236K rate; 4. valuation for section 111, which deals with unexplained income or assets. Two Explanations follow. The first says the section 68(4) or (5) value is for the purposes of this Ordinance only. The second says that if that value differs from an auction price, "the applicable price shall be the higher of the two." ### How does it work in practice? The registrar, society or other authority that records the transfer collects 236C from the seller and 236K from the buyer. For tax year 2027, the First Schedule, Part IV sets: | Tax | Collected from | Rate (tax year 2027) | Base | |---|---|---|---| | Section 236C | Seller | 2.75% | Gross amount of the consideration received | | Section 236K | Buyer | 1.25% | Fair market value of the immovable property | Because of section 68(6), a deed that understates the price does not reduce either base below the notified value. The same floor applies later when the seller works out the capital gain for the return, and when the Commissioner values an investment under section 111. These rates are for persons on the active taxpayers' list. Higher rates for others are covered on the non-filer rate page. ### Worked example (illustrative figures) Ayesha sells a plot in Lahore to Bilal. The deed shows Rs. 18,000,000. The FBR notified value for that plot is Rs. 25,000,000. Ayesha bought it for Rs. 15,000,000. Both are on the active taxpayers' list. **236C on Ayesha (seller)** - Base cannot be less than Rs. 25,000,000 - Rs. 25,000,000 x 2.75% = **Rs. 687,500** - (On the deed price it would have been Rs. 18,000,000 x 2.75% = Rs. 495,000) **236K on Bilal (buyer)** - Base cannot be less than Rs. 25,000,000 - Rs. 25,000,000 x 1.25% = **Rs. 312,500** **Capital gain for Ayesha's return** - Component A cannot be less than Rs. 25,000,000 - Gain = A - B = Rs. 25,000,000 - Rs. 15,000,000 = **Rs. 10,000,000** - On the deed price, the gain would have looked like Rs. 3,000,000. The capital gain is then taxed at the rates in Division VIII of Part I of the First Schedule, which depend on when the property was acquired. See the capital gains pages linked below. ### What if the property was bought at auction? The second Explanation to section 68(6) applies. If a plot sold at auction for Rs. 27,000,000 has an FBR value of Rs. 25,000,000, the higher figure, Rs. 27,000,000, is used. 236K would then be Rs. 27,000,000 x 1.25% = Rs. 337,500, and 236C would be Rs. 27,000,000 x 2.75% = Rs. 742,500. ### What if the deed price is higher than the FBR value? Section 68(6) only sets a minimum. For 236C, Division X uses the "gross amount of the consideration received", so a real price above the FBR value is the base. For 236K, the current wording of Division XVIII uses "fair market value", and section 68(4) says the notified value applies "notwithstanding" sub-section (1). The text does not expressly say whether a higher agreed price replaces the notified value for 236K. That point is not settled by the wording alone. ### Common mistakes - **"Tax follows the deed."** Not when the deed is lower. Section 68(6) overrides it for the four listed purposes. - **"The DC rate always applies."** The stamp duty value under section 68(5) is only the fallback where FBR has not notified a value for the area. - **"A low FBR value lowers my stamp duty too."** The first Explanation limits the section 68 value to the Income Tax Ordinance. - **Forgetting section 111.** If the price actually paid is above what was declared, section 111 deals separately with unexplained investments. Section 68(6)(iv) sets the floor for that valuation too. ### What to check in the official text Read section 68(4) to (6) with both Explanations, and Divisions X and XVIII of Part IV of the First Schedule in the consolidated Ordinance amended to 30 June 2026. The FBR valuation notifications for each city are separate SROs that this site does not hold. Check the notification in force for your area and the date of transfer. Provincial stamp duty valuation tables are also outside this corpus. ### Frequently asked #### If my deed shows Rs. 18 million and the FBR value is Rs. 25 million, which figure is used for 236K? The FBR value. Section 68(6) says the value used for Division XVIII, which sets the 236K rate, cannot be less than the fair market value notified under section 68(4). So 236K is worked out on at least Rs. 25 million. #### What if FBR has not notified a value for my area? Section 68(5) then deems the fair market value to be the value fixed for stamp duty by the District Officer (Revenue) or another provincial authority. That figure becomes the minimum for capital gain, 236C, 236K and section 111. #### Does the FBR value also decide stamp duty or provincial taxes? No. The Explanation to section 68(6) says the value determined under sub-sections (4) or (5) is for the purposes of the Income Tax Ordinance only. Stamp duty and provincial property taxes are set under provincial law, which this site does not cover. ### Citations - [Income Tax Ordinance, 2001, section 68 (Fair market value)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#68-fair-market-value), as amended to 2026-06-30: "the fair market value of such immovable property shall be deemed to be the value fixed by the District Officer (Revenue) or provincial or any other authority authorized in this behalf for the purposes of stamp duty." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236C (Advance Tax on sale or transfer of immovable Property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236c-advance-tax-on-sale-or-transfer-of-immovable-property), as amended to 2026-06-30: "shall collect from the seller or transferor advance tax at the rate specified in Division X of Part IV of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236K (Advance tax on purchase or transfer of immovable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236k-advance-tax-on-purchase-or-transfer-of-immovable-property), as amended to 2026-06-30: "shall collect from the purchaser or transferee advance tax at the rate specified in Division XVIII of Part IV of the First Schedule." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 37 (Capital gains)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#37-capital-gains), as amended to 2026-06-30: "A is the consideration received by the person on disposal of the asset; and B is the cost of the asset." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 111 (Unexplained income or assets)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#111-unexplained-income-or-assets), as amended to 2026-06-30: "and the person offers no explanation about the nature and source of the amount credited or the investment, money, valuable article, or funds from which the expenditure was made" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division X (Advance tax on sale or transfer of immovable property) and Division XVIII (Advance tax on purchase of immovable property), as substituted by the Finance Act, 2026](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How is rental income taxed in Pakistan, and is there a tax-free limit on rent? Source: https://qanoondigest.com/faq/property-owners/how-rental-income-is-taxed Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 15 charges rent under the head Income from Property. The Finance Act, 2021 omitted the separate rent rate table and the Rs. 200,000 small-rent exemption, so rent of individuals and associations of persons is taxed at normal Division I rates. For tax year 2027 the only tax-free amount is the 0% band up to Rs. 600,000 of taxable income. **Applies to:** Individuals and associations of persons who let out a house, flat, shop, plot or other land or building in Pakistan. Rent from property in Pakistan is income tax territory under the Income Tax Ordinance, 2001, not a separate levy. This page covers how the Ordinance, as amended to 30 June 2026, treats rent for tax year 2027 (1 July 2026 to 30 June 2027) for individuals and associations of persons. ### What does the law say? Section 15(1) says rent received or receivable by a person for a tax year, other than exempt rent, "shall be chargeable to tax in that year under the head “Income from Property”". Section 15(2) defines rent as any amount received or receivable by the owner of land or a building as consideration for its use or occupation, or the right to use or occupy it, "and includes any forfeited deposit paid under a contract for the sale of land or a building". Section 15 also moves some receipts out of this head: - Rent for a building let together with plant and machinery is charged under "Income from Other Sources" (section 15(3)). - Amounts included in rent for amenities, utilities or other services connected with the building are also charged under "Income from Other Sources" (section 15(3A)). - Where rent received is less than the fair market rent, the owner is treated as having derived the fair market rent (section 15(4)), unless the fair market rent is included in the tenant's salary (section 15(5)). ### Is there a separate rate or a tax-free limit for rent? Not for tax year 2027. The footnotes to section 15 record that the Finance Act, 2021 omitted two provisions: - **Sub-section (6)**, which taxed rent of individuals and associations of persons at the separate rates in Division VIA of Part I of the First Schedule. - **Sub-section (7)**, which switched off the charge for an individual or association of persons whose rent did not exceed two hundred thousand rupees and who had no taxable income under any other head. With those gone, section 4 applies: tax is imposed "on every person who has taxable income for the year" at the rates in Division I (for individuals and associations of persons). Rent, after the deductions in section 15A, becomes part of that taxable income. ### What are the Division I rates for a landlord? Clause (1) of Division I sets the rates for individuals and associations of persons other than salaried individuals. It applies to a landlord whose salary, if any, is not more than 75% of taxable income: | Taxable income | Tax for tax year 2027 | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,001 to Rs. 1,200,000 | 15% of the amount above Rs. 600,000 | | Rs. 1,200,001 to Rs. 1,600,000 | Rs. 90,000 + 20% of the amount above Rs. 1,200,000 | | Rs. 1,600,001 to Rs. 3,200,000 | Rs. 170,000 + 30% of the amount above Rs. 1,600,000 | | Rs. 3,200,001 to Rs. 5,600,000 | Rs. 650,000 + 40% of the amount above Rs. 3,200,000 | | Above Rs. 5,600,000 | Rs. 1,610,000 + 45% of the amount above Rs. 5,600,000 | The only "tax-free" amount is this 0% band, and it is shared across all heads of income, not reserved for rent. A landlord who is mainly salaried is covered on the rent and salary page. Section 4AB adds a surcharge for individuals and associations of persons at "ten percent of the income tax imposed under Division I" where taxable income exceeds rupees ten million. Its proviso, as amended by the Finance Act, 2026, says no surcharge is payable by an individual deriving income under the head "Salary". ### Worked example (illustrative figures) Tariq lives in Rawalpindi, has no salary or business, and lets a house to a family for Rs. 80,000 a month. The family is not a prescribed person under section 155, so no tax is deducted from the rent. 1. Gross rent for the year: Rs. 80,000 x 12 = Rs. 960,000. 2. Repairs allowance under section 15A(1)(a), one-fifth of rent: Rs. 960,000 / 5 = Rs. 192,000. 3. Income from Property: Rs. 960,000 - Rs. 192,000 = Rs. 768,000. Taxable income is Rs. 768,000. 4. Tax: 15% x (Rs. 768,000 - Rs. 600,000) = 15% x Rs. 168,000 = **Rs. 25,200**. On the same assumptions (only the repairs allowance, no other income), yearly rent of Rs. 750,000 leaves Rs. 600,000 of income after the one-fifth allowance, which falls in the 0% band. ### What if the tenant deducts tax from the rent? Where the tenant is a prescribed person, such as a company, a government, a private school or clinic, or an individual paying Rs. 1.5 million or more a year, section 155 requires the tenant to deduct tax "from the gross amount of rent paid at the rate specified in Division V of Part III of the First Schedule". That deduction is not a separate rent tax. It is collected in advance and credited against the tax worked out on taxable income, as explained on the withholding pages linked below. ### Common mistakes - **Relying on the old Rs. 200,000 rent exemption.** It was omitted in 2021. - **Applying the old separate rent slab table.** Division VIA was omitted in 2021. Rent now joins other income at the Division I rates. - **Declaring rent net of utility and service charges without separating them.** Section 15(3A) moves amounts for amenities, utilities and connected services to "Income from Other Sources"; they are still taxable. - **Letting to a relative at a token rent.** Section 15(4) can treat the owner as having received the fair market rent. ### What to check in the official text Read sections 15 and 15A, section 4, section 4AB and clause (1) of Division I of Part I of the First Schedule in the source PDF, which holds the rate table. The footnotes to section 15 record the omitted sub-sections (6) and (7). Companies are taxed at the Division II rates, not covered here. Provincial property tax on buildings is a provincial levy outside this corpus. ### Frequently asked #### Is rent up to Rs. 200,000 a year tax free in Pakistan? Not any more. Section 15(7), which excused individuals and associations of persons with rent up to Rs. 200,000 and no other taxable income, was omitted by the Finance Act, 2021. What remains is the general 0% band in Division I, which covers taxable income up to Rs. 600,000 from all heads together. #### Is there still a separate tax rate for rental income? No. Section 15(6) and Division VIA of Part I of the First Schedule, which set a separate rent rate for individuals and associations of persons, were omitted by the Finance Act, 2021. Rent is now part of taxable income and taxed at the Division I rates. #### Does a forfeited deposit count as rent? Yes. Section 15(2) defines rent to include any forfeited deposit paid under a contract for the sale of land or a building, so a deposit kept when a buyer backs out is taxed as Income from Property. ### Citations - [Income Tax Ordinance, 2001, section 15 (Income from property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#15-income-from-property), as amended to 2026-06-30: "and includes any forfeited deposit paid under a contract for the sale of land or a building" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 15A (Deductions in computing income chargeable under the head “Income from Property”)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#15a-deductions-in-computing-income-chargeable-under-the-head-income-from-property), as amended to 2026-06-30: "an allowance equal to one-fifth of the rent chargeable to tax in respect of the building for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 4 (Tax on taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4-tax-on-taxable-income), as amended to 2026-06-30: "on every person who has taxable income for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1) (Rates of Tax for Individuals and Association of Persons), Table](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 155 (Rent of immoveable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#155-rent-of-immoveable-property), as amended to 2026-06-30: "shall deduct tax from the gross amount of rent paid at the rate specified in Division V of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 4AB (Surcharge), as amended by the Finance Act, 2026](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How is the capital gain on a property sale calculated, and which costs can I deduct? Source: https://qanoondigest.com/faq/property-owners/how-to-calculate-capital-gain-property Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 37(2) sets the gain as A minus B: the consideration received on sale less the cost of the property. Section 76 lets cost include the purchase price, incidental costs of buying and selling, and improvement spending. Section 68(6) says the sale figure cannot be below the value notified by FBR or fixed for stamp duty. **Applies to:** Anyone selling immovable property in Pakistan who needs to work out the taxable capital gain. ### What does the law say? The gain on selling a property is a subtraction. Section 37(2) of the Income Tax Ordinance, 2001 sets the formula **A - B**, where A is the consideration received on disposal and B is the cost of the asset. Section 37(1A) then taxes that gain at the rates in Division VIII of Part I of the First Schedule. Each side of the formula has its own rules. **A, the consideration received.** Section 77(1) says it is the total amount received for the asset "or the fair market value thereof, whichever is the higher", including the value of anything received in kind. For property, section 68(6) adds a floor: component A of the section 37(2) formula "shall not be less than" the fair market value determined under section 68(4) (a value notified by the Board in the official Gazette for an area) or section 68(5) (where no such notification covers the area, the value fixed by the District Officer (Revenue) or other authority for stamp duty). Explanation (2) to section 68(6) says that where that value differs from an auction price, the higher of the two applies. **B, the cost.** Section 76(2) says the cost of a purchased asset is the sum of: | Item | Section 76(2) wording, summarised | |---|---| | Purchase price | total consideration given, including the fair market value of anything given in kind | | Incidental costs | incidental expenditure incurred in acquiring **and disposing of** the asset | | Improvements | expenditure incurred to alter or improve the asset | Items (b) and (c) are left out if they have already been fully allowed as a deduction. If you built the property yourself, section 76(4) makes the cost the total cost of construction plus the same incidental and improvement items. Section 37(4) also keeps out of B any expenditure that is or may be deducted under another provision of the same chapter. ### How does it work in practice? Notice that selling costs go into B, not A. The formula takes the full sale figure as A and adds the costs of disposing of the property to the cost side. The result is the same as netting them off the price. One condition can remove the purchase price from cost altogether. Section 75A(1) says no person shall buy immovable property with a fair market value above five million rupees other than by crossed cheque, crossed demand draft, crossed pay order, another crossed banking instrument or digital means. Under section 75A(3)(b), if the purchase was not made that way, the amount "shall not be treated as cost" under section 76 when working out the gain on a later sale. ### Worked example (illustrative figures) Sana bought a flat in Karachi in August 2024 for Rs. 12,000,000, paid through a bank transfer, and paid Rs. 300,000 in incidental costs at purchase. She spent Rs. 800,000 remodelling the kitchen and bathrooms. In September 2026 she sells for Rs. 16,000,000 and pays Rs. 160,000 in selling costs. The notified value for the flat is Rs. 14,500,000. She is on the Active Taxpayers' List. 1. **A.** She received Rs. 16,000,000, which is higher than the Rs. 14,500,000 notified value, so A = **Rs. 16,000,000**. 2. **B.** Rs. 12,000,000 + Rs. 300,000 + Rs. 160,000 + Rs. 800,000 = **Rs. 13,260,000**. 3. **Gain.** Rs. 16,000,000 - Rs. 13,260,000 = **Rs. 2,740,000**. 4. **Rate.** The flat was acquired after 1 July 2024 and she is on the Active Taxpayers' List on the date of disposal, so Division VIII column (6) gives **15%**. 5. **Tax.** 15% of Rs. 2,740,000 = **Rs. 411,000**, for tax year 2027. Now change one fact: the deed shows Rs. 13,500,000 instead. Section 68(6) lifts A to the Rs. 14,500,000 notified value. The gain becomes Rs. 14,500,000 - Rs. 13,260,000 = Rs. 1,240,000, and tax at 15% is Rs. 186,000. The lower deed price does not lower A below the notified value. ### What if I sell only part of the property? Section 76(7) deals with this. Where part of an asset is disposed of, the cost is apportioned between the part kept and the part sold "in accordance with their respective fair market values determined at the time the person acquired the asset". So if you split a plot and sell half, B for the half you sell is its share of the original cost, measured by values at the date you bought, not by area alone. ### What if the property was bought before July 2024? The formula is the same. Only the rate changes: Division VIII taxes property acquired on or before 30 June 2024 by holding period and type, and several of those rates are 0. See the linked page on older property. ### Common mistakes - **Using the deed price when the notified value is higher.** Section 68(6) sets the notified or stamp duty value as a floor for A. - **Leaving out selling costs.** Section 76(2)(b) covers expenditure incurred in disposing of the asset as well as acquiring it. - **Counting cash purchases.** Where the fair market value was above five million rupees and the price was paid in cash, section 75A(3)(b) says that amount is not treated as cost. - **Adding everyday repairs.** Section 76(2)(c) speaks of expenditure to "alter or improve" the asset. The text does not mention routine maintenance. ### What to check in the official text Read section 37(2) and (4), section 68(4) to (6) with its explanations, section 76(2) and (4), section 77(1) and section 75A. The valuation figures themselves come from Board notifications and provincial stamp duty tables, which are not part of this corpus, so check the value that applied on your sale date with the relevant authority. Rates are in Division VIII of Part I of the First Schedule. ### Frequently asked #### Can I deduct the estate agent's commission when I sell? Section 76(2)(b) includes in cost any incidental expenditure incurred in acquiring and disposing of the asset. The Ordinance does not list specific items, so whether a particular payment counts depends on it being incidental to buying or selling the property. #### What if I sell below the FBR value? Section 68(6) says component A of the section 37(2) formula cannot be less than the fair market value determined under section 68(4) or (5). The gain is then worked out on the higher notified or stamp duty value, not the lower price you received. #### Does renovation spending reduce my gain? Section 76(2)(c) adds to cost any expenditure incurred to alter or improve the asset, unless it has already been fully allowed as a deduction. Ordinary upkeep is not mentioned, so the text covers alteration and improvement only. ### Citations - [Income Tax Ordinance, 2001, section 37 (Capital gains)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#37-capital-gains), as amended to 2026-06-30: "the gain arising on the disposal of a capital asset by a person shall be computed in accordance with the following formula, namely:- A - B A is the consideration received by the person on disposal of the asset; and B is the cost of the asset." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 76 (Cost)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#76-cost), as amended to 2026-06-30: "any incidental expenditure incurred by the person in acquiring and disposing of the asset; and" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 68 (Fair market value)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#68-fair-market-value), as amended to 2026-06-30: "shall not be less than the fair market value as determined under sub-section (4) or (5)." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 77 (Consideration received)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#77-consideration-received), as amended to 2026-06-30: "the total amount received by the person for the asset" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 75A (Purchase of assets through banking channel or digital means)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#75a-purchase-of-assets-through-banking-channel-or-digital-means), as amended to 2026-06-30: "such amount shall not be treated as cost in terms of section 76 of this Ordinance for computation of any gain on sale of such asset." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division VIII (rates under section 37(1A))](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can I adjust the 236K or 236C tax against my income tax, or is it a final tax? Source: https://qanoondigest.com/faq/property-owners/236k-236c-adjustable-or-final-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Both are adjustable. Sub-section (2) of sections 236K and 236C says so, and section 168 credits the tax against tax due for the year of collection. Two exceptions: 236C is minimum tax where property is bought and sold in the same tax year, and for qualifying non-residents paying through FCVA or NRVA it is final. **Applies to:** Buyers and sellers of property in Pakistan who file an income tax return and want to know how the tax collected at transfer is treated. The tax taken from a buyer under section 236K and from a seller under section 236C is, in the ordinary case, a payment in advance of your income tax. You claim it back as a credit in your return for the tax year of the transfer. The Income Tax Ordinance, 2001, as amended to 30 June 2026, carves out two situations where it works differently. This applies to transfers in tax year 2027 (1 July 2026 to 30 June 2027) and later. ### What does the law say? **Section 236K (buyer).** Sub-section (2) says "The advance tax collected under sub-section (1) shall be adjustable". Its proviso then says that if the buyer is a non-resident individual holding a Pakistan Origin Card, NICOP or CNIC who acquired the property through a Foreign Currency Value Account (FCVA) or NRP Rupee Value Account (NRVA) with an authorised bank, the tax collected "shall be final discharge of tax liability for such buyer or transferee". **Section 236C (seller).** Sub-section (2) also makes the tax adjustable, with a proviso: where the property "is acquired and disposed of within the same tax year, the tax collected under this section shall be minimum tax". A separate proviso to sub-section (1) says that for a non-resident seller holding a POC, NICOP or CNIC who acquired the property through an FCVA or NRVA, the tax collected is "final discharge of tax liability in lieu of capital gains taxable under section 37". **Section 168 (how the credit works).** Section 168(1)(b) treats tax collected under Chapter XII, where sections 236C and 236K sit, as "tax paid by the person from whom the tax was collected". Section 168(2) then says the person "shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected". Section 168(3) lists final taxes for which no credit is allowed. Neither section 236C nor section 236K is on that list. ### How does it work in practice? | Situation | 236K (buyer) | 236C (seller) | |---|---|---| | Ordinary resident transfer | Adjustable | Adjustable | | Property bought and sold in the same tax year | Adjustable | Minimum tax | | Non-resident buyer or seller who paid through FCVA or NRVA | Final discharge of the buyer's tax liability | Final discharge in lieu of capital gains under section 37 | The credit is for the tax year in which the tax was collected, which is the year of the registration or attestation, not the year you signed a sale agreement. ### Worked example (illustrative figures) **Case 1: ordinary sale, 236C adjusted against capital gains tax.** Zainab, on the active taxpayers' list, bought a plot in Bahria Town, Rawalpindi in August 2024 for Rs. 10,000,000. She sells it in September 2026 for Rs. 14,000,000. 1. 236C collected at transfer: Rs. 14,000,000 x 2.75% = Rs. 385,000. 2. Capital gain: Rs. 14,000,000 - Rs. 10,000,000 = Rs. 4,000,000. 3. Capital gains tax under Division VIII for property acquired on or after 1 July 2024, for a person on the list: Rs. 4,000,000 x 15% = Rs. 600,000. 4. Credit under section 168: Rs. 385,000. 5. Balance payable with her tax year 2027 return: Rs. 600,000 - Rs. 385,000 = **Rs. 215,000**. **Case 2: bought and sold in the same tax year.** Kamran buys a flat in August 2026 for Rs. 10,000,000 and sells it in March 2027, still within tax year 2027, for Rs. 11,000,000. 1. 236C collected: Rs. 11,000,000 x 2.75% = Rs. 302,500. 2. Capital gain: Rs. 1,000,000. Tax at 15%: Rs. 150,000. 3. The proviso to section 236C(2) calls the Rs. 302,500 minimum tax. On a plain reading, the tax on this disposal does not fall to Rs. 150,000 and the Rs. 152,500 difference is not an ordinary excess credit. Section 236C says nothing more about the computation, so the precise treatment of the difference is not settled by this section alone. ### What if I am the buyer? The 236K tax is credited against your total tax liability for the year, not only against tax on property. If Ayesha paid Rs. 175,000 under section 236K in tax year 2027 and her tax due on her business income for that year is Rs. 400,000, section 168(2) reduces what she still owes to Rs. 225,000. To get that credit, the tax has to be claimed in the return for the year it was collected. ### Common mistakes - **Treating 236C as the full capital gains tax.** For resident sellers it is a credit. The capital gain is charged separately under section 37(1A) at the Division VIII rates, and the credit is set against that. - **Assuming overseas status alone makes the tax final.** The final-discharge provisos need all their conditions: non-resident individual, POC, NICOP or CNIC, and acquisition through an FCVA or NRVA. - **Claiming the credit in the wrong year.** Section 168(2) ties the credit to the tax year in which the tax was collected. ### What to check in the official text Read sections 236C, 236K, 168 and 37, and Division VIII of Part I of the First Schedule. Where tax was collected at the higher rate for persons not on the active taxpayers' list, rule 4(3) of the Tenth Schedule also bears on adjustment. The credit under section 168 is for tax collected from the person claiming it, so the collection record needs to be in that person's name. ### Frequently asked #### Is the 236K tax I paid on buying a house refundable or adjustable? Section 236K(2) makes it adjustable. Section 168(2) allows it as a credit against the tax due on your taxable income for the tax year in which it was collected. Whether any excess is refunded depends on your overall return for that year. #### When is 236C tax a minimum tax? The proviso to section 236C(2) makes it minimum tax where the property is acquired and disposed of within the same tax year. In other cases it is adjustable. #### Is 236C or 236K a final tax for overseas Pakistanis? Only for a non-resident individual holding a POC, NICOP or CNIC who bought through an FCVA or NRVA account. For such a buyer, 236K is a final discharge of the buyer's tax liability. For such a seller, 236C is a final discharge in lieu of capital gains tax under section 37. ### Citations - [Income Tax Ordinance, 2001, section 236K (Advance tax on purchase or transfer of immovable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236k-advance-tax-on-purchase-or-transfer-of-immovable-property), as amended to 2026-06-30: "The advance tax collected under sub-section (1) shall be adjustable" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236C (Advance Tax on sale or transfer of immovable Property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236c-advance-tax-on-sale-or-transfer-of-immovable-property), as amended to 2026-06-30: "is acquired and disposed of within the same tax year, the tax collected under this section shall be minimum tax" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 37 (Capital gains)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#37-capital-gains), as amended to 2026-06-30: "be chargeable to tax under the head capital gains at the rates specified in Division VIII of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division VIII (capital gains on immovable property); Part IV, Divisions X and XVIII](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 4(3) (tax collected under rule 1 adjustable where returns are filed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is the 7E deemed income tax on a second property still payable? Source: https://qanoondigest.com/faq/property-owners/section-7e-deemed-income-abolished Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No, not from 1 July 2026. Section 5 of the Finance Act, 2026 omitted section 7E, the tax on deemed income from extra properties, and omitted Division VIIIC, which set its 20% rate. The Ordinance as amended to 30 June 2026 therefore has no 7E charge for tax year 2027. Section 236C(2A) still mentions 7E. **Applies to:** Resident individuals and others who own more than one plot, house, flat or other immovable property in Pakistan, including open plots held as an investment. Section 7E of the Income Tax Ordinance, 2001 was the charge people called the "deemed income" or "second property" tax. It no longer appears in the Ordinance as amended to 30 June 2026. This page sets out what the Finance Act, 2026 did, what 7E used to charge, and the loose end the consolidated text leaves. A note on reading the official text: in this site's copy of the Ordinance, the heading "7E" sits over an unrelated banking rule on low cost housing advances, which comes from a Schedule. The real section 7E appears only as a footnote recording its omission. This page therefore cites it by label rather than by section number. ### What did the Finance Act, 2026 change? Section 5 of the Finance Act, 2026 made two amendments that together remove the charge: - In the body of the Ordinance: "(4) section 7E shall be omitted;" - In the First Schedule, Part I: "(v) Division VIIIC shall be omitted; and" Division VIIIC was the rate table for 7E. Its omitted text, reproduced in the consolidated Ordinance, read: "The rate of tax under section 7E shall be 20%." Section 1 of the Finance Act, 2026 says the Act comes into force on 1 July 2026 unless it provides otherwise. Tax year 2027 covers 1 July 2026 to 30 June 2027, so the Ordinance for that year has no 7E charge and no 7E rate. ### What did section 7E charge while it applied? The omitted text begins: "For tax year 2022 and onwards, a tax shall be imposed at the rates specified in Division VIIIC". Sub-section (2) treated a resident person as having income equal to five percent of the fair market value of capital assets situated in Pakistan held on the last day of the tax year. At the 20% rate, that is 1% of the value of the assets caught. The omitted sub-section (2) excluded: | Clause | Excluded from 7E | |---|---| | (a) | One capital asset owned by the resident person | | (b) | Self-owned business premises used by a person on the active taxpayers' list | | (c) | Self-owned agricultural land under cultivation, excluding a farmhouse and land annexed to it | | (d) | Assets allotted to Shaheeds and their dependants, those who died or were war wounded in service, and serving or former armed forces and government personnel as original allottees | | (e) | Any property from which income is chargeable to tax and the tax is paid | | (f) | An asset in its first tax year of acquisition where tax under section 236K was paid | | (g) | The remaining assets, where their fair market value in aggregate did not exceed Rs. 25 million | | (h), (i) | Assets of provincial and local governments, and of certain authorities, builders and developers registered with the Directorate General of Designated Non-Financial Businesses and Professions | A proviso said exclusions (a), (e), (f) and (g) did not apply to a person not appearing in the active taxpayers' list, with a narrow exception for people not required to file. "Capital asset" excluded stock-in-trade, shares and securities, depreciable business property and movable assets. ### Worked example (illustrative figures) This shows how 7E worked for a tax year when it was in force. It does not apply for tax year 2027. Saima lives in Faisalabad and is on the active taxpayers' list. On the last day of the tax year she owned: 1. The house she lives in: excluded under clause (a) as her one capital asset. 2. A flat let to a tenant, with the rent declared and taxed: excluded under clause (e). 3. An open plot in a housing scheme, fair market value Rs. 18,000,000. 4. A second open plot, fair market value Rs. 12,000,000. Step 1: Aggregate value of the remaining assets = Rs. 18,000,000 + Rs. 12,000,000 = Rs. 30,000,000. This exceeds Rs. 25 million, so clause (g) does not exclude them. Step 2: Deemed income = 5% x Rs. 30,000,000 = Rs. 1,500,000. Step 3: Tax at 20% = Rs. 1,500,000 x 20% = **Rs. 300,000**. Had the two plots been worth Rs. 24,000,000 together, clause (g) would have excluded them and the 7E tax would have been nil. For tax year 2027 the answer is nil in both cases, because the charge is gone. ### What about the tax years before 2027? The omission took effect with the Finance Act, 2026. Neither the consolidated Ordinance nor section 5 of the Finance Act, 2026, as held in this corpus, contains a transitional rule saying whether 7E liability for tax years 2022 to 2026 continues, is waived, or is still recoverable. The law we hold is silent on this, so this page does not answer it. ### Does section 236C(2A) still require 7E clearance on sale? Section 236C(2A) was inserted by the Finance Act, 2023. As printed in the Ordinance amended to 30 June 2026, it says the registering person shall not register, record or attest a transfer "unless the seller or transferor has discharged its tax liability under section 7E". The Finance Act, 2026 omitted section 7E but did not, in the text we hold, amend or omit sub-section (2A). Its opening words ("Subject to sub-section (2A)") also remain in section 236C(1). How a registering office applies (2A) after 1 July 2026 is not stated in the Ordinance. ### Common mistakes - **Treating the 7E rate as 20% of the property's value.** The 20% applied to deemed income of 5% of value, so the effective charge was 1% of value. - **Assuming 7E covered every second property.** Rented property on which tax was paid, and a first-year purchase that suffered 236K, were excluded, as were holdings of Rs. 25 million or less in aggregate after the other exclusions. - **Mixing up 7E with 236C and 236K.** Those two advance taxes on sale and purchase continue. The Finance Act, 2026 changed their rates, not their existence. - **Reading the "7E" heading on this site as the deemed income section.** That heading holds a banking rule. The deemed income text is in the omission footnote. ### What to check in the official text Read section 5 of the Finance Act, 2026, clauses (4) and (44)(a)(v), and the footnotes to section 7E and Division VIIIC in the consolidated Ordinance, which reproduce the omitted wording. Read section 236C(2A) together with those footnotes. Any notification or later amendment dealing with sub-section (2A) or with 7E liabilities for earlier years is not in this corpus. Provincial property taxes and stamp duty are separate provincial levies and are not covered here. ### Frequently asked #### Was section 7E repealed by the Finance Act, 2026? Yes. Section 5 of the Finance Act, 2026 says "section 7E shall be omitted" and also omits Division VIIIC of Part I of the First Schedule, which held the 20% rate. The Act came into force on 1 July 2026 unless it provides otherwise. #### How much was the 7E tax when it applied? Section 7E treated 5% of the fair market value of a resident person's capital assets in Pakistan, held on the last day of the tax year, as income. Division VIIIC taxed that deemed income at 20%, which works out to 1% of the value of the assets caught, after the listed exclusions. #### Do I still need a 7E clearance when selling a property? Section 236C(2A), as printed in the consolidated Ordinance amended to 30 June 2026, still says a transfer is not to be registered unless the seller has discharged tax liability under section 7E. The consolidated text does not say how that sub-section works now that 7E is omitted, so this point is unresolved in the law we hold. ### Citations - [Finance Act, 2026, section 5 (Amendments of the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2026#5-amendments-of-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2026: "(4) section 7E shall be omitted;" Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Finance Act, 2026, section 1 (Short title and commencement)](https://qanoondigest.com/acts/finance-act/finance-act-2026#1-short-title-and-commencement), as amended to 2026: "It shall, unless otherwise provided, come into force on the first day of July, 2026." Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Income Tax Ordinance, 2001, Section 7E (Tax on deemed income), omitted by the Finance Act, 2026; omitted text reproduced in the footnote](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division VIIIC (Tax on deemed income), omitted by the Finance Act, 2026](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236C (Advance Tax on sale or transfer of immovable Property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236c-advance-tax-on-sale-or-transfer-of-immovable-property), as amended to 2026-06-30: "unless the seller or transferor has discharged its tax liability under section 7E" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236K (Advance tax on purchase or transfer of immovable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236k-advance-tax-on-purchase-or-transfer-of-immovable-property), as amended to 2026-06-30: "shall collect from the purchaser or transferee advance tax at the rate specified in Division XVIII of Part IV of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is gifting a property to my son, wife or brother taxable? Source: https://qanoondigest.com/faq/property-owners/gifting-property-to-family-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No capital gain arises on the gift. Section 79(1)(c) says no gain or loss arises on a gift to a relative as defined in section 85(5), which covers a son, wife and brother. The recipient takes over your cost under section 79(3). A property gift from a non-relative is income of the recipient under section 39(1)(la). **Applies to:** Individuals who give or receive immovable property in Pakistan as a gift, within the family or outside it. ### What does the law say? Four rules in the Income Tax Ordinance, 2001 decide how a property gift is taxed. **No gain for the giver.** Section 79(1)(c) says no gain or loss shall be taken to arise on the disposal of an asset "by reason of a gift of the asset to a relative, as defined in sub-section (5) of section 85". Without this rule, handing over a property would be a disposal like any other. **Who is a relative.** Section 85(5) defines "relative", in relation to an individual, as: - an ancestor, a descendant of any of the grandparents, or an adopted child, of the individual or of the individual's spouse; or - a spouse of the individual or of any of those persons. That covers the three people in the question. A son is a descendant of your grandparents. A wife is your spouse. A brother is a descendant of your grandparents. It also reaches further than many expect: parents, grandparents, sisters, grandchildren, nephews, nieces and cousins are descendants of your grandparents, and a spouse's relatives and the spouses of your relatives are included too. **The recipient takes over your cost.** Section 79(3) says that where clause (c) applies, the person acquiring the asset is treated as acquiring an asset of the same character as you held, "for a cost equal to the cost of the asset for the person disposing of the asset at the time of the disposal". The gain is not wiped out. It is postponed until the recipient sells. **Gifts from outside the family are income.** Section 39(1)(la) brings under "Income from Other Sources" "any amount or fair market value of any property received without consideration or received as gift, other than gift received from" a relative as defined in section 85(5). ### How does it work in practice? For a gift to a relative, nobody has a capital gain on the day of the gift, and the recipient has no income under section 39(1)(la). When the recipient eventually sells, the gain is computed from your original cost. For a gift to someone who is not a relative, section 79(1)(c) does not apply. The recipient is taxed on the fair market value of the property as income from other sources. On your side, the gift is still a disposal, and section 77(1) measures consideration as the amount received "or the fair market value thereof, whichever is the higher". With nothing received, that points to the property's fair market value as your consideration. **Advance tax on registration.** Section 236C requires the person registering, recording or attesting a transfer of any immovable property to collect advance tax from the "seller or transferor", and section 236K requires collection from the "purchaser or transferee". A donor is a transferor and a donee is a transferee, and neither section contains an exception for gifts to relatives. The rate divisions measure the section 236C tax on the gross amount of the consideration received and the section 236K tax on fair market value. The text does not say how the section 236C figure is set where no consideration passes. This page does not resolve whether or how either tax is collected on a gift deed. ### Worked example (illustrative figures) Tariq bought a house in Faisalabad in 2018 for Rs. 6,000,000. In 2026, when it is worth Rs. 15,000,000, he gifts it to his son Hamza. In 2027 Hamza sells it for Rs. 18,000,000. Ignore incidental costs. 1. **Tariq on the gift.** Hamza is a relative, so section 79(1)(c) applies: no gain for Tariq. 2. **Hamza on receipt.** The gift is from a relative, so section 39(1)(la) does not apply: no income for Hamza. 3. **Hamza's cost.** Under section 79(3)(b), Tariq's cost: **Rs. 6,000,000**. 4. **Hamza's gain on sale.** Rs. 18,000,000 - Rs. 6,000,000 = **Rs. 12,000,000**, taxed at the Division VIII rate that applies to his sale. Had Tariq gifted the house to his business partner instead, the partner would have Rs. 15,000,000 of income from other sources in the year of the gift under section 39(1)(la), and Tariq would have a disposal measured at fair market value. ### What if I gift property and the recipient sells it quickly? Section 79 has no minimum holding condition for gifts in the text amended to 30 June 2026. Since the recipient inherits your cost, a quick sale simply taxes your built-up gain in their hands. Which Division VIII column applies to the recipient, and from which date the holding period runs, is not spelled out; section 79(3)(a) only says the asset keeps "the same character". ### Common mistakes - **Treating a gift to a friend like a gift to family.** Only relatives within section 85(5) get non-recognition, and a non-relative recipient has income under section 39(1)(la). - **Assuming the recipient starts at market value.** Section 79(3)(b) gives the recipient your cost, not the value on the day of the gift. - **Assuming no advance tax because it is a gift.** Sections 236C and 236K contain no gift exemption, although how they measure a gift is unclear in the text. ### What to check in the official text Read section 79(1)(c) and (3), section 85(5), section 39(1)(la), section 77(1), and sections 236C and 236K with Divisions X and XVIII of Part IV of the First Schedule. Stamp duty and provincial registration charges on gift deeds are outside this corpus and are not covered here. ### Frequently asked #### Is my brother a relative for the gift rule? Yes. Section 85(5) defines a relative to include a descendant of any of the individual's grandparents, which takes in brothers and sisters, and a spouse of any such person. A gift of property to a brother therefore falls within section 79(1)(c). #### Does my son pay tax on receiving the house? Section 39(1)(la) taxes property received as a gift only where it is not from a relative as defined in section 85(5), and a son is a relative. When he later sells, section 79(3)(b) gives him your original cost, so the gain built up in your hands is taxed on his sale. #### Is advance tax collected on a gift deed? Sections 236C and 236K apply to the registering or attesting of any transfer of immovable property and contain no exception for gifts to relatives. The text does not say how the advance tax is measured where no consideration passes, and this page does not settle that point. ### Citations - [Income Tax Ordinance, 2001, section 79 (Non-recognition rules)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#79-non-recognition-rules), as amended to 2026-06-30: "acquiring the asset for a cost equal to the cost of the asset for the person disposing of the asset at the time of the disposal." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 85 (Associates)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#85-associates), as amended to 2026-06-30: "an ancestor, a descendant of any of the grandparents, or an adopted child, of the individual, or of a spouse of the individual; or" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 39 (Income from other sources)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#39-income-from-other-sources), as amended to 2026-06-30: "any amount or fair market value of any property received without consideration or received as gift, other than gift received from" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 77 (Consideration received)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#77-consideration-received), as amended to 2026-06-30: "the total amount received by the person for the asset" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236C (Advance Tax on sale or transfer of immovable Property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236c-advance-tax-on-sale-or-transfer-of-immovable-property), as amended to 2026-06-30: "collect from the seller or transferor advance tax at the rate specified in Division X of Part IV of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236K (Advance tax on purchase or transfer of immovable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236k-advance-tax-on-purchase-or-transfer-of-immovable-property), as amended to 2026-06-30: "collect from the purchaser or transferee advance tax at the rate specified in Division XVIII of Part IV of the First Schedule." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## I have a salary and also rent out a house. Is the rent added to my salary for tax? Source: https://qanoondigest.com/faq/property-owners/rent-and-salary-combined-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 9 makes taxable income the total of income under all heads, so rent, after section 15A deductions, is added to salary and taxed at one rate schedule. For tax year 2027 the salaried rates in Division I apply only while salary exceeds 75% of taxable income. Otherwise the higher rates for other individuals apply to the whole amount. **Applies to:** Salaried individuals in Pakistan who also receive rent from a house, flat, shop or plot they let out. A salaried person who also lets out property has two heads of income, and the Income Tax Ordinance, 2001 taxes them together. The rates below are from the Ordinance as amended to 30 June 2026 and apply to tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? The Ordinance classifies income under five heads: Salary, Income from Property, Income from Business, Capital Gains and Income from Other Sources. Section 15 puts rent under Income from Property. Section 9 then says taxable income is total income "reduced (but not below zero) by the total of any deductible allowances". Total income is the income under all heads added together. So there is one taxable income, and one set of rates is applied to it. Rent is not taxed on its own scale beside salary. Before rent is added, section 15A allows deductions against it, including "an allowance equal to one-fifth of the rent chargeable to tax in respect of the building for the year" for repairs. ### Which rate table applies: salaried or not? Division I of Part I of the First Schedule has two tables for individuals. - **Clause (2)** applies "Where the income of an individual chargeable under the head “salary” exceeds seventy-five per cent of his taxable income". - **Clause (1)** applies to other individuals and associations of persons. The test compares salary with the whole taxable income, rent included. So adding rent can switch the table. **Clause (2): salary exceeds 75% of taxable income** | Taxable income | Tax for tax year 2027 | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,001 to Rs. 1,200,000 | 1% of the amount above Rs. 600,000 | | Rs. 1,200,001 to Rs. 2,200,000 | Rs. 6,000 + 11% of the amount above Rs. 1,200,000 | | Rs. 2,200,001 to Rs. 3,200,000 | Rs. 116,000 + 20% of the amount above Rs. 2,200,000 | | Rs. 3,200,001 to Rs. 4,100,000 | Rs. 316,000 + 25% of the amount above Rs. 3,200,000 | | Rs. 4,100,001 to Rs. 5,600,000 | Rs. 541,000 + 29% of the amount above Rs. 4,100,000 | | Rs. 5,600,001 to Rs. 7,000,000 | Rs. 976,000 + 32% of the amount above Rs. 5,600,000 | | Above Rs. 7,000,000 | Rs. 1,424,000 + 35% of the amount above Rs. 7,000,000 | **Clause (1): all other individuals** | Taxable income | Tax for tax year 2027 | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,001 to Rs. 1,200,000 | 15% of the amount above Rs. 600,000 | | Rs. 1,200,001 to Rs. 1,600,000 | Rs. 90,000 + 20% of the amount above Rs. 1,200,000 | | Rs. 1,600,001 to Rs. 3,200,000 | Rs. 170,000 + 30% of the amount above Rs. 1,600,000 | | Rs. 3,200,001 to Rs. 5,600,000 | Rs. 650,000 + 40% of the amount above Rs. 3,200,000 | | Above Rs. 5,600,000 | Rs. 1,610,000 + 45% of the amount above Rs. 5,600,000 | The clause (2) table was substituted by the Finance Act, 2026. ### Worked example (illustrative figures) **Case 1: rent is small next to salary.** Ayesha works for a bank in Karachi. Salary Rs. 3,000,000. She lets a flat to a family for Rs. 50,000 a month. 1. Gross rent: Rs. 50,000 x 12 = Rs. 600,000. 2. Repairs allowance (one-fifth): Rs. 120,000. Income from Property: Rs. 480,000. 3. Taxable income: Rs. 3,000,000 + Rs. 480,000 = Rs. 3,480,000. 4. Salary share: Rs. 3,000,000 / Rs. 3,480,000 = about 86%, above 75%, so clause (2) applies. 5. Tax: Rs. 316,000 + 25% x (Rs. 3,480,000 - Rs. 3,200,000) = Rs. 316,000 + Rs. 70,000 = **Rs. 386,000**. 6. Tax on salary alone would be Rs. 116,000 + 20% x Rs. 800,000 = Rs. 276,000. The rent adds Rs. 110,000. **Case 2: rent tips salary below 75%.** Bilal works in Lahore on Rs. 1,800,000 a year and lets a shop to a pharmacy company for Rs. 100,000 a month. 1. Gross rent: Rs. 1,200,000. Repairs allowance: Rs. 240,000. Income from Property: Rs. 960,000. 2. Taxable income: Rs. 1,800,000 + Rs. 960,000 = Rs. 2,760,000. 3. Salary share: Rs. 1,800,000 / Rs. 2,760,000 = about 65%, not above 75%, so clause (1) applies to all of it. 4. Tax: Rs. 170,000 + 30% x (Rs. 2,760,000 - Rs. 1,600,000) = Rs. 170,000 + Rs. 348,000 = **Rs. 518,000**. 5. His employer, working on salary only under clause (2), would deduct Rs. 6,000 + 11% x Rs. 600,000 = Rs. 72,000. The company tenant deducts tax under section 155 at the Division V rate for individuals: Rs. 15,000 + 10% x (Rs. 1,200,000 - Rs. 600,000) = Rs. 75,000. 6. Balance due with the return: Rs. 518,000 - Rs. 72,000 - Rs. 75,000 = Rs. 371,000. ### What if my employer can account for the rent? Section 149(1) tells the employer to deduct tax on estimated income under the head Salary, after "adjustment of tax withheld from employee under other heads", on documentary evidence. That lets tax already deducted from rent be reflected in monthly payroll deductions. It does not make the employer compute tax on the rent, so any extra tax that rent creates is settled in the return. ### Common mistakes - **Using the salaried table without checking the 75% test.** The test uses taxable income including rent, as Case 2 shows. - **Treating tenant deduction as the whole tax on rent.** Section 155 deductions are credits, not a separate final charge. - **Forgetting the section 15A allowance.** The one-fifth repairs allowance and other listed deductions reduce the rent before it is added. ### What to check in the official text Read sections 9, 11, 15, 15A and 149, and Division I of Part I of the First Schedule in the source PDF, which holds both tables and the footnotes showing the Finance Act, 2026 substitution in clause (2). Section 155 rates are in Division V of Part III. Provincial property tax is outside this corpus. ### Frequently asked #### Is rent taxed separately from salary in Pakistan? No. Section 9 builds one taxable income from income under all heads, and Salary and Income from Property are two of those heads. Rent, after the section 15A deductions, is added to salary and one rate table is applied to the total. #### Which tax table applies if I have salary and rent? Clause (2) of Division I, the salaried table, applies only where income under the head Salary exceeds seventy-five per cent of taxable income. If rent and other income bring salary to 75% or below, clause (1), the table for other individuals, applies to the whole taxable income. #### Does my employer deduct tax on my rent? Section 149 requires the employer to deduct tax on estimated income under the head Salary. It allows adjustment of tax withheld from the employee under other heads, such as tax a tenant deducted under section 155, but the tax on the rent itself is settled in the return. ### Citations - [Income Tax Ordinance, 2001, section 9 (Taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#9-taxable-income), as amended to 2026-06-30: "reduced (but not below zero) by the total of any deductible allowances" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 15 (Income from property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#15-income-from-property), as amended to 2026-06-30: "and includes any forfeited deposit paid under a contract for the sale of land or a building" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 15A (Deductions in computing income chargeable under the head “Income from Property”)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#15a-deductions-in-computing-income-chargeable-under-the-head-income-from-property), as amended to 2026-06-30: "an allowance equal to one-fifth of the rent chargeable to tax in respect of the building for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clauses (1) and (2) (rates for individuals, and for individuals whose salary exceeds seventy-five per cent of taxable income), Tables](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "adjustment of tax withheld from employee under other heads" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 155 (Rent of immoveable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#155-rent-of-immoveable-property), as amended to 2026-06-30: "shall deduct tax from the gross amount of rent paid at the rate specified in Division V of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## My tenant deducted tax from the rent. Is that my final tax, or do I still file? Source: https://qanoondigest.com/faq/property-owners/is-rent-withholding-final-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No, it is not final. Section 155(2), which made the deduction a final tax on property income, was omitted by the Finance Act, 2010. Under section 168 the deduction is a tax credit against the tax computed on total taxable income for the year. The return still settles the tax: any shortfall is paid and any excess is refundable. **Applies to:** Landlords in Pakistan whose tenant, such as a company, government office, school, clinic or large individual tenant, deducted tax from rent under section 155. When a company, school or other prescribed tenant pays rent, it keeps back tax under section 155 of the Income Tax Ordinance, 2001 and gives the landlord a smaller cheque. Many landlords assume that settles their tax. It does not. This page uses the Ordinance as amended to 30 June 2026, for tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? Section 155(1) requires the tenant to "deduct tax from the gross amount of rent paid at the rate specified in Division V of Part III of the First Schedule". It says nothing about the deduction being final. It once did. The footnote to section 155 records that sub-section (2), which read "The tax deducted under sub-section (1) shall be a final tax on the income from property", was omitted by the Finance Act, 2010. Section 168 now governs the deduction: - Section 168(1)(a): the amount deducted is treated as income derived by the landlord. The landlord's rent is the gross figure, before the tenant's deduction. - Section 168(1)(b): the amount deducted is treated as tax paid by the landlord. - Section 168(2): the landlord "shall be allowed a tax credit for that tax in computing the tax due" on taxable income for the tax year in which it was deducted. - Section 168(3) lists deductions that are final taxes and earn no credit. Section 155 is not on the list. - Section 168(5): a credit that cannot be used for the year is refunded. ### How does it work in practice? The landlord works out the tax in three steps: 1. Income from Property: gross rent less the deductions in section 15A, such as the one-fifth repairs allowance and profit on a loan used to acquire or build the property. 2. Tax on total taxable income, including any other income, at the Division I rates. 3. Less the section 155 credit (and any other credits). The difference is payable with the return, or refundable if negative. Section 114(1)(ab) requires a return from every person other than a company "whose taxable income for the year exceeds the maximum amount that is not chargeable to tax". Clause (b) of the same sub-section adds, among others, owners of immovable property of five hundred square yards or more in listed areas and owners of flats of two thousand square feet or more in a rating area. The tenant's deduction does not change these tests. ### Worked example (illustrative figures) Sana lives in Islamabad, has no other income, and lets a building to a clinic for Rs. 200,000 a month. She is on the active taxpayers' list. **Step 1: tax deducted by the clinic (Division V, clause (a)).** - Gross rent: Rs. 200,000 x 12 = Rs. 2,400,000. - Rs. 155,000 + 25% x (Rs. 2,400,000 - Rs. 2,000,000) = Rs. 155,000 + Rs. 100,000 = Rs. 255,000. **Step 2: Income from Property.** - Repairs allowance: Rs. 2,400,000 / 5 = Rs. 480,000. - Income: Rs. 2,400,000 - Rs. 480,000 = Rs. 1,920,000. **Step 3: tax on taxable income (Division I, clause (1)).** - Rs. 170,000 + 30% x (Rs. 1,920,000 - Rs. 1,600,000) = Rs. 170,000 + Rs. 96,000 = Rs. 266,000. **Step 4: reconcile.** - Rs. 266,000 - Rs. 255,000 credit = **Rs. 11,000 payable** with the return. **Variation: a loan on the building.** Suppose Sana also paid Rs. 700,000 of profit on a bank loan taken to construct the building, deductible under section 15A(1)(e). - Income: Rs. 2,400,000 - Rs. 480,000 - Rs. 700,000 = Rs. 1,220,000. - Tax: Rs. 90,000 + 20% x (Rs. 1,220,000 - Rs. 1,200,000) = Rs. 90,000 + Rs. 4,000 = Rs. 94,000. - Rs. 94,000 - Rs. 255,000 credit = **Rs. 161,000 excess**, refundable under section 168(5). The same deduction leaves a balance due in one case and a refund in the other. Only the return shows which. ### What if I also have a salary or business? The rent joins the other income in one taxable income, and the credit is set against the tax on the total. Extra income usually pushes the total into a higher band, so the tenant's deduction is more likely to fall short. The rent and salary page shows this. ### Common mistakes - **Declaring the net cheque as rent.** Section 168(1)(a) treats the deducted amount as the landlord's income, so gross rent is declared. - **Not filing because tax was deducted.** The final-tax rule was omitted in 2010, and section 114 filing tests are separate. - **Missing the credit.** The deduction is only useful to the landlord if it is claimed against the tax computed in the return. ### What to check in the official text Read sections 155, 168, 114 and 15A, the footnote to section 155 recording the omitted sub-section (2), and Divisions V of Part III and I of Part I of the First Schedule in the source PDF. The return form, due dates and portal steps are outside this page and not held in this corpus. ### Frequently asked #### Is withholding tax on rent final tax in Pakistan? No. The footnote to section 155 records that sub-section (2), which read "The tax deducted under sub-section (1) shall be a final tax on the income from property", was omitted by the Finance Act, 2010. Section 155 is also not among the final taxes listed in section 168(3). #### Do I get a refund if my tenant deducted more than my tax? Section 168(5) says a tax credit that cannot be used against the tax for the year shall be refunded to the taxpayer under the Ordinance's refund provisions. The excess only appears once the tax on total taxable income is worked out in the return. #### Do I have to file a return if tax was deducted from my rent? Section 114(1) requires a return from, among others, every individual whose taxable income exceeds the maximum amount not chargeable to tax, and from owners of certain immovable property. A deduction by the tenant does not remove that requirement. ### Citations - [Income Tax Ordinance, 2001, section 155 (Rent of immoveable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#155-rent-of-immoveable-property), as amended to 2026-06-30: "shall deduct tax from the gross amount of rent paid at the rate specified in Division V of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "every person (other than a company) whose taxable income for the year exceeds the maximum amount that is not chargeable to tax under this Ordinance for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 15A (Deductions in computing income chargeable under the head “Income from Property”)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#15a-deductions-in-computing-income-chargeable-under-the-head-income-from-property), as amended to 2026-06-30: "an allowance equal to one-fifth of the rent chargeable to tax in respect of the building for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division V (Income from Property), clause (a), Table](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1) (Rates of Tax for Individuals and Association of Persons), Table](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## If I let my house to a relative at a low rent, does FBR tax me on a higher rent? Source: https://qanoondigest.com/faq/property-owners/low-rent-to-relative-fair-market-rent Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, in general. Section 15(4) of the Income Tax Ordinance says that where rent received is less than the fair market rent, the landlord is treated as having derived the fair market rent for the period the property is let. Section 15(5) removes this only where the fair market rent is taxed in the tenant's hands as salary. **Applies to:** Landlords in Pakistan who let a house, flat or shop to a relative, friend or anyone else at less than the market rent. Letting a house to a brother, a cousin or an elderly parent at a token rent is common in Pakistan. The Income Tax Ordinance, 2001 does not tax the landlord on the token figure alone. It has a specific rule that replaces low rent with fair market rent. This page uses the Ordinance as amended to 30 June 2026, which applies to tax year 2027. ### What does the law say? Section 15(4) says that, subject to sub-section (5), where the rent received or receivable is less than the fair market rent for the property, the person "shall be treated as having derived the fair market rent for the period the property is let on rent in the tax year". Section 15(5) is the only exception in the section: sub-section (4) does not apply where the fair market rent is included in the tenant's income chargeable under the head "Salary". This fits the case of an employer that owns a house and lets it to an employee, where the value is taxed as the employee's salary. ### What counts as fair market rent? Section 68(1) defines the fair market value of property "or rent" as the price it would ordinarily fetch on sale or supply in the open market at that time. Section 68(2) adds that it is determined without regard to any restriction on transfer or to the fact that it is not otherwise convertible to cash. Section 68(4) and (5) let the Board notify, or fall back on stamp duty values for, the fair market value of immovable property. Those sub-sections speak of the value of the property itself, and do not set out a notified rent. In practice, fair market rent under section 68(1) points to what similar properties in the same area let for in the open market. ### How does it work in practice? The rule is applied per property and per period of letting: - The deemed amount is the fair market rent for the period the property is let on rent in the tax year, not for the whole year if the letting started midway. - The landlord's actual rent receipts are replaced by the fair market rent where the actual figure is lower. Where actual rent equals or exceeds market rent, section 15(4) does nothing. - Section 15(4) contains no relief for family relationships, hardship or verbal arrangements. ### Worked example (illustrative figures) Farooq owns a house in Johar Town, Lahore and lets it to his younger brother for all of tax year 2027 at Rs. 30,000 a month. Comparable houses on the same street let for about Rs. 80,000 a month. All amounts are invented. | Step | Item | Amount (Rs.) | |---|---|---| | 1 | Actual rent received (30,000 x 12) | 360,000 | | 2 | Fair market rent for the period let (80,000 x 12) | 960,000 | | 3 | Is actual rent less than fair market rent? | Yes | | 4 | Rent Farooq is treated as having derived under section 15(4) | 960,000 | | 5 | Difference taxed although never received (960,000 - 360,000) | 600,000 | If the brother had moved in on 1 January 2027, the period let in tax year 2027 would be six months, and the deemed rent would be Rs. 80,000 x 6 = Rs. 480,000. Deductions are then taken from the deemed rent as described on the deductions page. ### What if the house is furnished or comes with services? Two separate rules in section 15 change which head applies, not whether fair market rent is used: - **Section 15(3):** rent from a building let together with plant and machinery is not property income. It is chargeable under "Income from Other Sources", matching section 39(1)(f). - **Section 15(3A):** any amount included in rent for amenities, utilities or other services connected with renting the building is chargeable under "Income from Other Sources", matching section 39(1)(fa). So where a relative pays one combined figure for a furnished house with a generator and a guard, the service element is split out under section 15(3A). Section 15(4) speaks of the rent for "the property"; the Ordinance does not spell out how a fair market comparison is made for a mixed letting. ### Common mistakes - **Assuming family lets are outside the rule.** Section 15(4) has no family exception. - **Using the FBR valuation table as rent.** Section 68(4) and (5) values relate to immovable property, not to monthly rent. - **Applying the deemed rent to months the house was empty.** Section 15(4) is limited to the period the property is let on rent. - **Relying on section 15(5) for a relative who is not an employee.** The exception applies only when the fair market rent is taxed as the tenant's salary. ### What to check in the official text Read section 15(3) to (5) together with section 68(1) and (2), and section 39(1)(f) and (fa). Whether rent-free use by a family member is a letting on rent is not stated in these sections, and the Ordinance gives no numeric method for fixing fair market rent. ### Frequently asked #### Does section 15(4) make an exception for close relatives? No. Section 15(4) applies wherever the rent received or receivable is less than the fair market rent, and it does not mention the relationship between landlord and tenant. The only exception written into the section is section 15(5), for fair market rent taxed as the tenant's salary. #### How is fair market rent worked out? Section 68(1) defines fair market value, which covers rent, as the price it would ordinarily fetch on supply in the open market at that time. Section 68 does not provide a rent table, so the figure turns on what comparable properties let for. #### What if my relative lives in the house for free? Section 15(4) speaks of the period the property is let on rent. The Ordinance does not say expressly whether rent-free occupation by a family member counts as a letting, so this page does not state a rule for it. ### Citations - [Income Tax Ordinance, 2001, section 15 (Income from property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#15-income-from-property), as amended to 2026-06-30: "where the rent received or receivable by a person is less than the fair market rent for the property, the person shall be treated as having derived the fair market rent for the period the property is let on rent in the tax year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 15 (Income from property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#15-income-from-property), as amended to 2026-06-30: "Sub-section (4) shall not apply where the fair market rent is included in the income of the lessee chargeable to tax under the head “Salary”." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 68 (Fair market value)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#68-fair-market-value), as amended to 2026-06-30: "shall be determined without regard to any restriction on transfer or to the fact that it is not otherwise convertible to cash" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 39 (Income from other sources)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#39-income-from-other-sources), as amended to 2026-06-30: "income from provision of amenities, utilities or any other service connected with renting of building" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much more tax does a non-filer pay when buying or selling property, and is there still a late-filer rate? Source: https://qanoondigest.com/faq/property-owners/non-filer-tax-rate-property-transfer Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under rule 1 of the Tenth Schedule, a buyer not on the active taxpayers' list pays 236K at 10.5%, 14.5% or 18.5% of fair market value depending on value, against 1.25% for a listed buyer. A non-listed seller pays 236C at 11.5%, against 2.75%. The Finance Act, 2026 omitted rule 1A, which had set separate late-filer rates. **Applies to:** Buyers and sellers of immovable property in Pakistan who do not appear in the active taxpayers' list, and people who file their returns after the due date. A person who is not on the active taxpayers' list pays far more advance tax on a property transfer than a person who is. For tax year 2027 (1 July 2026 to 30 June 2027), a non-listed buyer pays roughly 8 to 15 times the listed rate under section 236K, and a non-listed seller pays a little over 4 times the listed rate under section 236C. The figures below are from the Income Tax Ordinance, 2001 as amended to 30 June 2026. ### What does the law say? Section 100BA(1) says the collection or deduction of advance income tax for a person not appearing on the active taxpayers' list "shall be determined in accordance with the rules in the Tenth Schedule". Section 100BA(2) gives the Tenth Schedule effect notwithstanding anything else in the Ordinance. Rule 1 of the Tenth Schedule generally increases a withholding rate by 100% for non-listed persons, but its provisos set specific rates for property: - The second proviso sets the section 236K rates for the buyer. - The Table under the third proviso, serial number 2, sets the section 236C rate for the seller "on the gross amount of consideration received on sale or transfer of immovable property". ### How do the rates compare? **Buyer, section 236K (base: fair market value)** | Fair market value | On the active taxpayers' list (Division XVIII) | Not on the list (Tenth Schedule) | |---|---|---| | Up to Rs. 50 million | 1.25% | 10.5% | | Above Rs. 50 million up to Rs. 100 million | 1.25% | 14.5% | | Above Rs. 100 million | 1.25% | 18.5% | **Seller, section 236C (base: gross consideration received)** | Seller | Rate | |---|---| | On the active taxpayers' list (Division X) | 2.75% | | Not on the list (Tenth Schedule) | 11.5% | The consolidated footnotes show that the Finance Act, 2025 set the current non-listed 236K rates (replacing 12%, 16% and 20%) and the 11.5% 236C rate (replacing 10%). The listed rates of 1.25% and 2.75% come from the Finance Act, 2026. ### Worked example (illustrative figures) Bilal sells a house in DHA Lahore to Sana for Rs. 30,000,000. The fair market value and the consideration are both Rs. 30,000,000, which is below Rs. 50 million. | | On the list | Not on the list | |---|---|---| | Sana, buyer, 236K | 30,000,000 x 1.25% = Rs. 375,000 | 30,000,000 x 10.5% = Rs. 3,150,000 | | Bilal, seller, 236C | 30,000,000 x 2.75% = Rs. 825,000 | 30,000,000 x 11.5% = Rs. 3,450,000 | If neither party is on the list, the total collected on this one transfer is Rs. 3,150,000 + Rs. 3,450,000 = Rs. 6,600,000, against Rs. 375,000 + Rs. 825,000 = Rs. 1,200,000 if both are. For a Rs. 80,000,000 property, a non-listed buyer falls in the second band: Rs. 80,000,000 x 14.5% = Rs. 11,600,000, against Rs. 1,000,000 at 1.25%. ### Is there still a late-filer rate? No, not in the Tenth Schedule from 1 July 2026. Rule 1A was inserted by the Finance Act, 2024 for persons who appear on the active taxpayers' list but did not file their return by the due date. Its omitted text, preserved in the consolidated footnote, set 236C at 7.5%, 8.5% or 9.5% and 236K at 4.5%, 5.5% or 6.5% by value band, and did not apply to a person who had filed on time for each of the last three tax years. Section 5 of the Finance Act, 2026 says "rule 1A shall be omitted". Section 100BA(1) still refers to persons on the list "who have not filed return by the due date", but with rule 1A gone the Tenth Schedule no longer sets a separate rate for them. A listed late filer is therefore charged at the ordinary 1.25% and 2.75% rates, as the Schedule now reads. ### What if the non-listed person later files a return? Rule 3 of the Tenth Schedule lets the Commissioner make a provisional assessment where tax was collected at the Tenth Schedule rate and the person does not file a return by the due date, imputing income from the tax collected. Under rule 4(2), that provisional assessment abates if the returns and wealth statements are filed within 45 days of receiving the order. Rule 4(3) says that where returns are filed, the tax collected under rule 1 "shall be adjustable against the tax payable in the return filed for the relevant tax year". Rule 2 covers a person who was not required to file a return at all. The collecting agent notifies the Commissioner, who has thirty days to accept the position or direct collection at the rule 1 rate. ### Common mistakes - **Doubling the listed rate.** The general 100% increase in rule 1 is overridden for property by specific rates. The non-listed 236K rate is 10.5% or more, not 2.5%. - **Assuming one band applies to all buyers.** Only non-listed buyers face value bands. Listed buyers pay a flat 1.25%. - **Relying on the old late-filer table.** Rule 1A no longer exists for transfers on or after 1 July 2026. ### What to check in the official text Read section 100BA, rules 1 to 4 of the Tenth Schedule, sections 236C and 236K, and Divisions X and XVIII of Part IV of the First Schedule. Whether a person is on the active taxpayers' list is decided on the list itself, which the Board maintains and which is not part of this corpus. ### Frequently asked #### What is the 236K rate for a non-filer buying property in 2026-27? The second proviso to rule 1 of the Tenth Schedule sets 10.5% where the fair market value does not exceed Rs. 50 million, 14.5% above Rs. 50 million up to Rs. 100 million, and 18.5% above Rs. 100 million. A buyer on the active taxpayers' list pays 1.25%. #### What is the 236C rate for a non-filer selling property? The Table under the third proviso to rule 1 of the Tenth Schedule sets 11.5% of the gross consideration received, against 2.75% under Division X for a seller on the active taxpayers' list. #### Is there still a higher rate for people who file late? Not in the Tenth Schedule. Rule 1A, which set separate 236C and 236K rates for listed persons who filed after the due date, was omitted by section 5 of the Finance Act, 2026. Section 100BA(1) still mentions late filers, but the rule that gave them rates is gone. ### Citations - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "shall be determined in accordance with the rules in the Tenth Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1, second proviso (section 236K) and third proviso, Table, S. No. 2 (section 236C); rules 3 and 4 (provisional assessment)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236K (Advance tax on purchase or transfer of immovable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236k-advance-tax-on-purchase-or-transfer-of-immovable-property), as amended to 2026-06-30: "shall collect from the purchaser or transferee advance tax at the rate specified in Division XVIII of Part IV of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236C (Advance Tax on sale or transfer of immovable Property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236c-advance-tax-on-sale-or-transfer-of-immovable-property), as amended to 2026-06-30: "shall collect from the seller or transferor advance tax at the rate specified in Division X of Part IV of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division X and Division XVIII](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2026, section 5 (Amendments of the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2026#5-amendments-of-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2026: "rule 1A shall be omitted" Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf --- ## If I buy and sell plots frequently, is it capital gain or business income? Source: https://qanoondigest.com/faq/property-owners/property-flipping-business-income-or-capital-gain Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It depends on whether the plots are stock-in-trade. Section 37(5) excludes stock-in-trade from capital assets, and section 18 taxes profits of any business, which section 2 defines to include an adventure in the nature of trade. The Ordinance sets no number of deals that makes someone a trader, and a same-year flip makes section 236C tax a minimum tax. **Applies to:** Individuals and firms in Pakistan who buy and resell plots, files or other immovable property at short intervals. Buying a plot or a society file and selling it a few months later is a familiar pattern in Pakistani property markets. The Income Tax Ordinance, 2001 has two heads that could catch the profit: "Capital Gains" and "Income from Business". Which one applies turns on what the plot is in the seller's hands. This page uses the Ordinance as amended to 30 June 2026, which applies to tax year 2027. ### What does the law say? Section 37(1) charges gains on the disposal of a "capital asset" under the head "Capital Gains". Section 37(5) defines capital asset as property of any kind held by a person, whether or not connected with a business, but excludes, in clause (a), "any stock-in-trade, consumable stores or raw materials held for the purpose of business". Section 18(1)(a) charges "the profits and gains of any business carried on by a person at any time in the year" under "Income from Business". Section 2(10) defines business to include any trade or "adventure or concern in the nature of trade". Read together: if the plots are the stock a person trades in, they are not capital assets, and the profit falls under section 18 as business income. If they are held as investments, the gain falls under section 37. ### Where does the law leave a gap? Two points are not settled by the text: 1. **No numeric test.** The Ordinance gives no number of transactions, no minimum turnover and no holding period that turns an investor into a trader. The question depends on the facts, and the text does not resolve it. 2. **Section 37(1A).** This sub-section opens with "Notwithstanding anything contained in sub-section (1)" and taxes the "gain arising on disposal of immovable property situated in Pakistan" at Division VIII rates. It does not repeat the words "capital asset". The Ordinance does not state how sub-section (1A) interacts with the stock-in-trade exclusion in sub-section (5). This page does not resolve that question. ### How does a same-year flip change the advance tax? Section 236C(1) requires the office registering, recording or attesting the transfer to collect advance tax from the seller. Division X of Part IV of the First Schedule, as substituted by the Finance Act, 2026, sets 2.75% of the gross consideration. Section 236C(2) makes it adjustable, but its proviso says that where the property is "acquired and disposed of within the same tax year, the tax collected under this section shall be minimum tax". This proviso applies whether the seller calls the profit a capital gain or business income; it depends only on the purchase and sale falling in one tax year. ### Worked example (illustrative figures) Bilal, who appears on the Active Taxpayers' List, buys a 10-marla plot in a Bahria Town, Rawalpindi phase in August 2026 for Rs. 8,000,000 and sells it in March 2027 for Rs. 9,500,000. Both dates fall in tax year 2027. Figures are invented; rates are from Division X and Division VIII. 1. Gross consideration: Rs. 9,500,000. 2. Section 236C advance tax at 2.75%: Rs. 9,500,000 x 2.75% = Rs. 261,250. 3. Same tax year purchase and sale, so under the proviso to section 236C(2) the Rs. 261,250 is minimum tax. 4. Gain: Rs. 9,500,000 - Rs. 8,000,000 = Rs. 1,500,000. 5. **If taxed as a capital gain:** property acquired after 1 July 2024, Division VIII rate 15%: Rs. 1,500,000 x 15% = Rs. 225,000. This is lower than the Rs. 261,250 collected, and the collected amount is minimum tax. 6. **If taxed as business income:** the Rs. 1,500,000, less allowable business expenses, is added to Bilal's other income and taxed at the normal rates for his status. Had Bilal sold in August 2027 instead, the purchase and sale would fall in different tax years and the proviso would not apply. ### Common mistakes - **Assuming frequent deals automatically mean business income.** The Ordinance has no count that triggers it. - **Assuming one deal can never be business.** Section 2(10) includes a single "adventure" in the nature of trade. - **Treating 236C as always adjustable.** For a purchase and sale in the same tax year, it is minimum tax. - **Ignoring the purchase-side tax.** Buying also attracts advance tax; see the related page on buying property. ### What to check in the official text Read section 37(1), (1A) and (5), section 18(1), section 2(10), section 236C(2) and its proviso, and Divisions VIII and X of the First Schedule. The text does not give a threshold for trading, so how a particular pattern of deals is classified rests on its facts. ### Frequently asked #### How many plot sales make me a property trader under the Ordinance? The Ordinance gives no number. Section 2 defines business to include an adventure or concern in the nature of trade, and section 37(5)(a) excludes stock-in-trade from capital assets, but neither sets a count of transactions or a holding period that decides the question. #### What changes if I buy and sell a plot in the same tax year? The proviso to section 236C(2) says that where immovable property is acquired and disposed of within the same tax year, the tax collected from the seller under section 236C is minimum tax, instead of ordinary adjustable advance tax. #### Can a property trader deduct expenses? If the gain is business income under section 18, the Ordinance's business deduction rules apply to it rather than the capital gains formula in section 37(2). This page does not list those deductions; they sit in the Income from Business provisions. ### Citations - [Income Tax Ordinance, 2001, section 37 (Capital gains)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#37-capital-gains), as amended to 2026-06-30: "a gain arising on the disposal of a capital asset by a person in a tax year, other than a gain that is exempt from tax under this Ordinance, shall be chargeable to tax in that year under the head “Capital Gains”" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 18 (Income from business)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#18-income-from-business), as amended to 2026-06-30: "the profits and gains of any business carried on by a person at any time in the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 2 (Definitions)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#2-definitions), as amended to 2026-06-30: "“business” includes any trade, commerce, manufacture, profession, vocation or adventure or concern in the nature of trade, commerce, manufacture, profession or vocation, but does not include employment" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236C (Advance Tax on sale or transfer of immovable Property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236c-advance-tax-on-sale-or-transfer-of-immovable-property), as amended to 2026-06-30: "where immovable property referred to in sub- section (1) is acquired and disposed of within the same tax year, the tax collected under this section shall be minimum tax" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division VIII (rates under section 37(1A))](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division X (Advance tax on sale or transfer of immovable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much tax is collected from the seller when a property is sold or transferred (section 236C)? Source: https://qanoondigest.com/faq/property-owners/advance-tax-selling-property-236c Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 236C requires the authority that registers, records or attests a property transfer to collect advance tax from the seller. Division X of Part IV of the First Schedule, as substituted by the Finance Act, 2026, sets 2.75% of the gross consideration received. Section 68(6) says that consideration cannot be taken below the FBR notified or stamp duty value. **Applies to:** Individuals, families and businesses selling or transferring a plot, house, flat or other immovable property in Pakistan on or after 1 July 2026. A seller of property in Pakistan pays income tax at the point of transfer, separately from the buyer. The tax is collected under section 236C of the Income Tax Ordinance, 2001 by the office that registers or records the transfer. The rate here is from the Ordinance as amended to 30 June 2026 and applies to transfers in tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? Section 236C(1) says any person responsible for registering, recording or attesting the transfer of immovable property "shall collect from the seller or transferor advance tax at the rate specified in Division X of Part IV of the First Schedule". Section 5 of the Finance Act, 2026 substituted Division X with a single line: "The rate of tax to be collected under section 236C shall be 2.75% of the gross amount of the consideration received." | Seller | Rate under section 236C | Base | |---|---|---| | Appears in the active taxpayers' list | 2.75% | Gross amount of the consideration received | The Explanation to section 236C(1) says the collecting person includes those registering transfers for a local authority, housing authority, housing society, co-operative society, public and private real estate projects, joint ventures, private commercial concerns and the registrar of properties. ### Can the consideration be shown below the FBR value? No, not for this tax. Section 68(6)(ii) lists "consideration received" as mentioned in Division X, and says it "shall not be less than the fair market value as determined under sub-section (4) or (5)". - Section 68(4) is the value the Board notifies for an area, usually called the FBR valuation table. - Section 68(5) applies where no Board value exists, and uses the value fixed for stamp duty by the District Officer (Revenue) or other authorised authority. So the base is the higher of the actual price received and the notified or stamp duty value. The Explanation to section 68(6) adds that where property is sold by auction and the notified value differs from the auction price, the higher of the two applies. ### Worked example (illustrative figures) Imran, who appears in the active taxpayers' list, sells a flat in Gulshan-e-Iqbal, Karachi in December 2026. **Case 1: deed price below the FBR value.** Deed price Rs. 20,000,000. Notified value Rs. 22,000,000. 1. Base: not less than Rs. 22,000,000 under section 68(6)(ii). 2. Tax: Rs. 22,000,000 x 2.75% = **Rs. 605,000**. **Case 2: deed price above the FBR value.** Deed price Rs. 25,000,000. Notified value Rs. 22,000,000. 1. Base: gross consideration received, Rs. 25,000,000. 2. Tax: Rs. 25,000,000 x 2.75% = **Rs. 687,500**. **Case 3: as Case 1, but Imran is not in the active taxpayers' list.** The Tenth Schedule rate for section 236C is 11.5%. - Rs. 22,000,000 x 11.5% = Rs. 2,530,000. ### Who is excluded from 236C? The proviso to section 236C(1) says the sub-section does not apply to a seller who is the dependant of a Shaheed of the Pakistan Armed Forces, or of a person who died in service of the Armed Forces or of the Federal or a Provincial Government. After the Finance Act, 2024 it also covers war wounded persons, ex-servicemen and serving personnel of the armed forces, and ex-employees and serving personnel of the Federal and Provincial Governments. The relief is for the first sale of property acquired from or allotted by the Federal or a Provincial Government or an authority, certified by the official allotment authority, and acquired or allotted "in recognition of or for services rendered". Sub-section (4), as printed in the consolidated text, separately excludes a seller who is a dependant of a Shaheed or of a person who died in service, and the first sale of immovable property acquired or allotted as an original allottee, duly certified by the official allotment authority. The consolidated text shows an earlier sub-section (4) omitted and this one added by the Income Tax (Fourth Amendment) Act, 2016, so read both provisions together in the official PDF. ### What if the seller is an overseas Pakistani who paid through FCVA or NRVA? The second proviso to section 236C(1) says that where the seller is a non-resident individual holding a POC, NICOP or CNIC who acquired the property through a Foreign Currency Value Account or NRP Rupee Value Account, the tax collected "shall be final discharge of tax liability in lieu of capital gains taxable under section 37". The adjustable-or-final page explains this further. ### What did the rate look like before 1 July 2026? The footnote to Division X records that the Division replaced by the Finance Act, 2026 had three bands by gross consideration: 4.5% up to Rs. 50 million, 5% above Rs. 50 million up to Rs. 100 million, and 5.5% above Rs. 100 million. A transfer registered before 1 July 2026 fell under those rates. ### Common mistakes - **Assuming the buyer's 236K covers the seller.** They are separate collections under separate sections, one from each party. - **Using the deed price when it is below the FBR table.** Section 68(6)(ii) makes the notified or stamp duty value the floor. - **Treating 236C as the capital gains tax itself.** Section 236C(2) makes it adjustable, apart from the stated exceptions. Capital gains on property are charged separately under section 37. ### What to check in the official text Read section 236C, Division X of Part IV of the First Schedule, section 68 and rule 1 of the Tenth Schedule. Sub-section (2A) of section 236C still refers to discharge of liability under section 7E, which the Finance Act, 2026 omitted from the Ordinance. The consolidated text does not say how sub-section (2A) operates after that omission, so check any later notification or amendment. The FBR valuation notifications under section 68(4) are not held in this corpus. Provincial stamp duty and registration charges are outside this corpus. ### Frequently asked #### What is the 236C rate for a seller in 2026-27? Division X of Part IV of the First Schedule, as substituted by the Finance Act, 2026, sets 2.75% of the gross amount of the consideration received. It is a single rate with no bands by sale value. #### Can the sale price in the deed be lower than the FBR value for 236C? The deed can show any price, but section 68(6)(ii) says the consideration received for Division X shall not be less than the fair market value notified under section 68(4) or, where none is notified, the stamp duty value under section 68(5). #### Who does not pay 236C on a sale? The proviso to section 236C(1) and sub-section (4) exclude certain sellers, mainly dependants of Shaheeds and of persons who died in government or armed forces service, and first sales of property allotted to original allottees, as certified by the allotment authority. ### Citations - [Income Tax Ordinance, 2001, section 236C (Advance Tax on sale or transfer of immovable Property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236c-advance-tax-on-sale-or-transfer-of-immovable-property), as amended to 2026-06-30: "shall collect from the seller or transferor advance tax at the rate specified in Division X of Part IV of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division X (Advance tax on sale or transfer of immovable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 68 (Fair market value)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#68-fair-market-value), as amended to 2026-06-30: "shall not be less than the fair market value as determined under sub-section (4) or (5)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2026, section 5 (Amendments of the Income Tax Ordinance, 2001 (XLIX of 2001))](https://qanoondigest.com/acts/finance-act/finance-act-2026#5-amendments-of-the-income-tax-ordinance-2001-xlix-of-2001), as amended to 2026: "The rate of tax to be collected under section 236C shall be 2.75% of the gross amount of the consideration received." Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1, third proviso, Table, S. No. 2 (section 236C for persons not appearing in the active taxpayers' list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 37 (Capital gains)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#37-capital-gains), as amended to 2026-06-30: "be chargeable to tax under the head capital gains at the rates specified in Division VIII of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do I pay tax when I inherit a property, and what happens when I later sell it? Source: https://qanoondigest.com/faq/property-owners/tax-on-inherited-property-sale Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No gain arises when property passes on death: section 75(2) treats it as a disposal by the deceased, and section 79(1)(b) says no gain or loss arises, including on a family settlement after death. When you later sell, section 76(8A) sets your cost at fair market value on transfer, though section 79(3)(b) points to the deceased's cost. **Applies to:** Individuals who receive immovable property in Pakistan by inheritance, will or a family settlement after a death, and who may later sell it. ### What does the law say about inheriting? Two sections of the Income Tax Ordinance, 2001 deal with what happens on death. **Section 75(2)** says the transmission of an asset by succession or under a will "shall be treated as a disposal of the asset by the deceased at the time asset is transmitted". So the Ordinance sees the deceased, not the heir, as the person disposing of the property. **Section 79(1)(b)** then says no gain or loss arises on a disposal "by reason of the transmission of the asset to an executor or beneficiary on the death of a person". The Finance Act, 2026 added an explanation: transmission of immovable property to a beneficiary on death "shall also include the transmission of assets by reason of family settlement amongst the family members consequent upon death of the person". A settlement among heirs after the death is therefore treated the same way as the transmission itself. Section 79(2) turns off the non-recognition rule where the acquirer is non-resident, but only for clauses (d), (e) and (f). Inheritance is clause (b), so an heir living abroad is not affected by that limit. **What about the heir?** The sections written for death treat the heir as acquiring the property at a cost, not as earning income. Section 39(1)(la) separately taxes "any amount or fair market value of any property received without consideration or received as gift, other than gift received from" a relative. The text does not say whether a transmission on death falls within that clause. It does not expressly bring inheritance in, and this page does not settle the point. ### What happens when I sell the inherited property? The sale is an ordinary disposal. Section 37(2) computes the gain as consideration received minus cost, and section 37(1A) applies the Division VIII rates. The difficult part is the cost. **Section 76(8A)**, added by the Finance Act, 2026, says that where an individual acquires immovable property through inheritance, the cost "shall be the fair market value as defined under this Ordinance, of the property as provided under subsection (5) of section 68", on transfer to the beneficiary. Section 68(5) is the value fixed for stamp duty by the District Officer (Revenue) or other authorised authority, used where the Board has not notified a value for the area under section 68(4). **Section 79(3)** points the other way. Where clause (b) of section 79(1) applies, the person acquiring the asset is treated as acquiring an asset of the same character as the deceased held, and "for a cost equal to the cost of the asset for the person disposing of the asset at the time of the disposal". That is the deceased's original cost. Both provisions are in force in the text amended to 30 June 2026. Section 76(1) opens with "Except as otherwise provided in this Ordinance", and section 79(3) was not amended when section 76(8A) was added. The Ordinance does not say which one governs an inherited property. This page does not resolve the conflict. ### Worked example (illustrative figures) Ayesha's father bought a house in Multan in 1998 for Rs. 1,500,000. He died in August 2026, and the house was transferred to Ayesha in October 2026. The stamp duty value on transfer was Rs. 18,000,000, and no Board notification covers the area. In 2027 she sells it for Rs. 22,000,000. Ignore incidental costs. | Reading | Cost (B) | Gain (A - B) | |---|---|---| | Section 76(8A): value on transfer | Rs. 18,000,000 | Rs. 22,000,000 - Rs. 18,000,000 = Rs. 4,000,000 | | Section 79(3)(b): deceased's cost | Rs. 1,500,000 | Rs. 22,000,000 - Rs. 1,500,000 = Rs. 20,500,000 | The difference is Rs. 16,500,000 of gain. At a 15% rate, that is Rs. 600,000 of tax under the first reading and Rs. 3,075,000 under the second. The 15% here is used only to show the scale. Which Division VIII column applies is itself not settled: the text does not say whether the heir's holding period starts on the transfer to her or on the deceased's acquisition. Section 79(3)(a) treats the heir as acquiring an asset "of the same character", but does not mention dates. If the deceased's 1998 date counted, a house held more than four years would sit at 0. ### What if the inheritance happened before 1 July 2026? Section 76(8A) was added by the Finance Act, 2026. The consolidated text does not state whether it applies to property inherited before it took effect. That is a question for the Finance Act, 2026 itself, which this page does not cover. ### Common mistakes - **Assuming inheritance is a taxable sale by the heir.** Section 75(2) makes it a disposal by the deceased, and section 79(1)(b) removes any gain. - **Treating a family settlement as a separate sale.** The 2026 explanation to section 79(1)(b) includes a family settlement consequent upon the death. - **Assuming the cost question is settled.** Section 76(8A) and section 79(3)(b) give different answers, and the text does not rank them. ### What to check in the official text Read section 75(2), section 79(1)(b) with its explanation, section 79(2) and (3), section 76(1) and (8A), and section 68(4) and (5). Advance tax collected by the registering authority on property transfers is covered on the separate pages about advance tax on buying and selling property; the text of those advance tax sections contains no specific exclusion for inheritance. Stamp duty and provincial transfer charges are outside this corpus. ### Frequently asked #### Is there capital gains tax when my father's house passes to me? Section 75(2) treats the transmission as a disposal by the deceased, and section 79(1)(b) says no gain or loss arises on transmission to an executor or beneficiary on death. The Finance Act, 2026 added an explanation that this includes a family settlement among family members after the death. #### What cost do I use when I sell an inherited property? Section 76(8A), added by the Finance Act, 2026, says the cost for an individual who inherits immovable property is its fair market value, as provided under section 68(5), on transfer to the beneficiary. Section 79(3)(b) separately says the recipient takes the deceased's cost, and the text does not say which prevails. #### Does it matter if I live abroad? For inheritance, no. Section 79(2) disapplies the non-recognition rule for a non-resident acquirer only in the cases in clauses (d), (e) and (f) of section 79(1), and inheritance is clause (b). ### Citations - [Income Tax Ordinance, 2001, section 75 (Disposal and acquisition of assets)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#75-disposal-and-acquisition-of-assets), as amended to 2026-06-30: "The transmission of an asset by succession or under a will shall be treated as a disposal of the asset by the deceased at the time asset is transmitted." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 79 (Non-recognition rules)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#79-non-recognition-rules), as amended to 2026-06-30: "by reason of the transmission of the asset to an executor or beneficiary on the death of a person;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 76 (Cost)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#76-cost), as amended to 2026-06-30: "Where an immovable property is acquired by an individual through inheritance, the cost of such property in the hands of that individual shall be the fair market value as defined under this Ordinance, of the property as provided under subsection (5) of section 68 of this Ordinance, on transfer of such property to the beneficiary." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 68 (Fair market value)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#68-fair-market-value), as amended to 2026-06-30: "the fair market value of such immovable property shall be deemed to be the value fixed by the District Officer (Revenue) or provincial or any other authority authorized in this behalf for the purposes of stamp duty." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 37 (Capital gains)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#37-capital-gains), as amended to 2026-06-30: "the gain arising on the disposal of a capital asset by a person shall be computed in accordance with the following formula" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 39 (Income from other sources)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#39-income-from-other-sources), as amended to 2026-06-30: "any amount or fair market value of any property received without consideration or received as gift, other than gift received from" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## If a property is owned jointly by several people, how are rent and gains taxed? Source: https://qanoondigest.com/faq/property-owners/jointly-owned-property-tax-each-owner Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 66 says that where two or more people own property in definite and ascertainable shares, they are not assessed as an association of persons. Each owner's share of the income from the property is included in that owner's own taxable income. The rule does not apply to income taxed under the head Income from Business. **Applies to:** Siblings, spouses, relatives or friends who own a house, plot, flat or shop together in fixed shares and earn rent from it or sell it. When several people own one property in fixed shares, the Income Tax Ordinance, 2001 taxes each of them separately on their own share. The owners are not treated as a single taxpayer. This is common when brothers and sisters inherit a family house and rent it out, or when a husband and wife buy a flat together. The rules below are from the Ordinance as amended to 30 June 2026. ### What does the law say? Section 66 is short. Where any property is owned by two or more persons and "their respective shares are definite and ascertainable": - **Section 66(1)(a):** the owners are not assessed as an association of persons (AOP) in respect of the property; and - **Section 66(1)(b):** each person's share in the income from the property for a tax year is taken into account in computing that person's own taxable income for the year. - **Section 66(2):** the section does not apply in computing income chargeable under the head "Income from Business". Rent itself is charged by **section 15**: rent received or receivable in a tax year is chargeable under the head "Income from Property". **Section 15A** then allows deductions, such as a repairs allowance equal to one-fifth of the rent (section 15A(1)(a)) and any local rate or tax paid to a local authority or government (section 15A(1)(c)). A gain on selling the property is charged by **section 37** under the head "Capital Gains", computed as consideration received (A) minus cost (B). ### How does it work in practice? 1. Work out the property's income for the year: rent under section 15, less the deductions allowed by section 15A. 2. Divide that income by each owner's share. 3. Each owner includes their share in their own return, alongside any salary, business or other income they have, and pays tax at the rates that apply to them. The same logic applies to a sale. Each owner's share of the consideration and of the cost gives that owner's share of the gain. Section 66 speaks of "the income from the property" and excludes only the business head. It does not mention capital gains separately. ### Worked example (illustrative figures) Three siblings in Multan, Kamran, Sadia and Farah, own an inherited house. The shares recorded in the title are Kamran 40%, Sadia 30% and Farah 30%. The house is let for Rs. 150,000 a month, and the siblings pay Rs. 60,000 property tax to the provincial government during the year. **Step 1: income from the property** - Annual rent: Rs. 150,000 x 12 = Rs. 1,800,000 - Repairs allowance, one-fifth of rent: Rs. 1,800,000 / 5 = Rs. 360,000 - Provincial property tax paid: Rs. 60,000 - Income from property: Rs. 1,800,000 - Rs. 360,000 - Rs. 60,000 = **Rs. 1,380,000** **Step 2: split by share** | Owner | Share | Rent | Repairs allowance | Property tax | Income in own return | |---|---|---|---|---|---| | Kamran | 40% | Rs. 720,000 | Rs. 144,000 | Rs. 24,000 | Rs. 552,000 | | Sadia | 30% | Rs. 540,000 | Rs. 108,000 | Rs. 18,000 | Rs. 414,000 | | Farah | 30% | Rs. 540,000 | Rs. 108,000 | Rs. 18,000 | Rs. 414,000 | | Total | 100% | Rs. 1,800,000 | Rs. 360,000 | Rs. 60,000 | Rs. 1,380,000 | Check: Rs. 552,000 + Rs. 414,000 + Rs. 414,000 = Rs. 1,380,000. Each sibling then adds their figure to their own income for the year. Kamran, who also has a salary, adds Rs. 552,000 to his return. Farah, who has no other income, reports only her Rs. 414,000. None of them files an AOP return for the house. **If they later sell.** Suppose the siblings sell a plot they had bought together, in the same shares, for Rs. 30,000,000, and its cost was Rs. 18,000,000. The gain is Rs. 12,000,000. Kamran's share is Rs. 4,800,000 and Sadia's and Farah's are Rs. 3,600,000 each. Each reports their own gain under section 37. The cost of inherited property raises separate questions, covered on the inherited property page. ### What if ...? **What if the shares are not definite?** Section 66 applies only where shares are "definite and ascertainable". If they are not, the section does not give this treatment. This page does not cover how such a case is then assessed. **What if the owners run a business from the property?** Section 66(2) takes income under the head "Income from Business" outside the section, for example a guest house the siblings operate together. **What if the tenant deducts tax from the rent?** Section 155 makes certain tenants deduct tax from rent. How that deduction is credited among co-owners is not addressed in section 66. See the tenant withholding page. ### Common mistakes - **Filing as an AOP.** Co-owners with definite shares are expressly not assessed as an AOP for the property. - **One owner reporting all the rent.** Section 66(1)(b) puts each share in each owner's return. - **Forgetting other income.** Each share is added to that owner's total income. It is not taxed in isolation. ### What to check in the official text Read section 66, sections 15 and 15A, and section 37 in the consolidated Ordinance amended to 30 June 2026. Each owner's share comes from the title documents or the succession, which are governed by laws outside this corpus. Provincial property tax rates are also outside this site. ### Frequently asked #### Do co-owners of a rented house file one joint return? Not where their shares are definite and ascertainable. Section 66(1)(a) says they are not assessed as an association of persons for that property, and section 66(1)(b) puts each person's share of the income into that person's own taxable income. #### How is rent split between co-owners? By each owner's share in the property. Section 66(1)(b) takes into account each person's share in the income from the property, so an owner of 40% includes 40% of the income from that property in their own return. #### Does section 66 apply if the co-owners run the property as a business? No. Section 66(2) says the section does not apply in computing income chargeable under the head Income from Business. A property run as a business by its owners is outside section 66. ### Citations - [Income Tax Ordinance, 2001, section 66 (Income of joint owners)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#66-income-of-joint-owners), as amended to 2026-06-30: "the persons shall not be assessed as an association of persons in respect of the property" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 15 (Income from property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#15-income-from-property), as amended to 2026-06-30: "shall be chargeable to tax in that year under the head “Income from Property”" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 15A (Deductions in computing income chargeable under the head “Income from Property”)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#15a-deductions-in-computing-income-chargeable-under-the-head-income-from-property), as amended to 2026-06-30: "an allowance equal to one-fifth of the rent chargeable to tax in respect of the building for the year," Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 37 (Capital gains)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#37-capital-gains), as amended to 2026-06-30: "a gain arising on the disposal of a capital asset by a person in a tax year, other than a gain that is exempt from tax under this Ordinance, shall be chargeable to tax in that year under the head “Capital Gains”" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 155 (Rent of immoveable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#155-rent-of-immoveable-property), as amended to 2026-06-30: "shall deduct tax from the gross amount of rent paid at the rate specified in Division V of Part III of the First Schedule." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How is a non-refundable advance, security deposit or pagri from a tenant taxed? Source: https://qanoondigest.com/faq/property-owners/advance-rent-security-deposit-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 16 of the Income Tax Ordinance, an amount a building owner receives from a tenant that is not adjustable against rent is taxed as rent in equal parts over the year of receipt and the next nine tax years. Section 155 counts it in gross rent for withholding, and section 39(1)(k) covers money received for vacating a building. **Applies to:** Owners of buildings in Pakistan who receive a lump sum from a tenant that is not set off against monthly rent, and tenants paid to vacate a building. Landlords in Pakistan often take a lump sum at the start of a tenancy, sometimes called pagri, key money or a non-refundable advance. The Income Tax Ordinance, 2001 does not use the word "pagri". It deals with these receipts by what they are: an amount from a tenant that is not adjustable against rent. This page uses the Ordinance as amended to 30 June 2026, which applies to tax year 2027. ### What does the law say? Section 16(1) applies where the owner of a building receives from a tenant an amount that is not adjustable against the rent payable. That amount is treated as rent chargeable under "Income from Property" in the tax year of receipt and the following nine tax years, in equal proportion. In plain terms, one-tenth is taxed in each of ten tax years. Section 16 has two further rules: - **Refund before ten years (section 16(2)).** If the owner refunds the amount (the "earlier amount") when the tenancy ends before ten years, no portion is allocated to the year of refund or any later year. - **New tenant pays a fresh sum (section 16(3)).** If the owner then lets the building to a "succeeding tenant" and receives a new non-adjustable amount, that "succeeding amount" is reduced by the part of the earlier amount already charged to tax. The reduced figure is spread over ten years under section 16(1). ### Which receipts fall under section 16? The test in section 16(1) is whether the amount is adjustable against rent. Three common arrangements separate as follows: | Receipt | How the Ordinance treats it | |---|---| | Advance rent set off against future monthly rent | Rent under section 15, taxed as rent for the period; section 155(1) expressly covers payments "by way of advance" | | Lump sum from the tenant not set off against rent | Section 16: spread equally over ten tax years | | Deposit held and returned in full at the end | Not expressly addressed by section 16 or section 15; the text is silent | Section 15(2) includes in rent "any forfeited deposit paid under a contract for the sale of land or a building". That wording is about sale contracts, not tenancy deposits, so it does not answer the security deposit question. ### How does withholding under section 155 apply? Section 155(1) requires a prescribed person paying rent, such as a company, a government body, a private educational institution, a clinic, or an individual or AOP paying gross rent of Rs. 1.5 million or more in a year, to deduct tax from the gross amount of rent. The Explanation to section 155(1) says the gross amount of rent includes an amount under section 16(1) or (3). So a company tenant paying a non-adjustable lump sum deducts tax on that payment too, at the rate in Division V of Part III of the First Schedule. ### Worked example (illustrative figures) Imran owns a shop in Saddar, Rawalpindi. The figures are invented; the rules are section 16. 1. **Tax year 2027:** a tenant pays Rs. 1,000,000 not adjustable against rent. Rent under section 16(1) is Rs. 1,000,000 / 10 = Rs. 100,000 in each of tax years 2027 to 2036. 2. **Tax year 2030:** the tenancy ends and Imran refunds the Rs. 1,000,000. Tax years 2027, 2028 and 2029 have each carried Rs. 100,000, so Rs. 300,000 has been charged. Under section 16(2), nothing is allocated to 2030 or later. 3. **Tax year 2030:** a succeeding tenant pays Rs. 1,200,000 not adjustable against rent. Under section 16(3), the succeeding amount is reduced by the Rs. 300,000 already charged: Rs. 1,200,000 - Rs. 300,000 = Rs. 900,000. 4. Rs. 900,000 is spread over tax years 2030 to 2039: Rs. 900,000 / 10 = Rs. 90,000 a year. Check: Rs. 300,000 taxed from the first tenant plus Rs. 900,000 from the second equals Rs. 1,200,000, which is the amount Imran keeps. ### What if I am the tenant and I am paid to leave? This is the other side of pagri. Section 39(1)(k) makes chargeable under "Income from Other Sources" any amount received as consideration for vacating possession of a building or part of it, reduced by any amount the person paid to acquire possession. Section 39(2) spreads that amount over the year of receipt and the following nine tax years in equal proportion, the same ten-year pattern as section 16. ### Common mistakes - **Taxing the full lump sum in year one.** Section 16(1) requires equal spreading over ten tax years. - **Forgetting the ten-year tail after a refund.** Portions already taxed are not reversed by section 16(2); only future years drop out. - **Assuming a company tenant can skip withholding on the lump sum.** The Explanation to section 155(1) pulls section 16 amounts into gross rent. - **Treating money received for vacating as property income.** Section 39(1)(k) places it under Income from Other Sources, net of what was paid to acquire possession. ### What to check in the official text Read section 16 in full, the Explanation to section 155(1), and section 39(1)(k) with section 39(2). The section 155 withholding rates are in Division V of Part III of the First Schedule. Whether a particular deposit is "adjustable against the rent" depends on the tenancy agreement, which the Ordinance does not define further. ### Frequently asked #### Is the whole non-refundable amount taxed in the year I receive it? No. Section 16(1) treats it as rent chargeable in the tax year of receipt and the following nine tax years in equal proportion, so one-tenth falls in each of ten tax years. #### What if I return the amount when the tenant leaves early? Section 16(2) says that if the amount is refunded on termination of the tenancy before ten years, no portion is allocated to the year of refund or any later year. The portions already taxed in earlier years stay taxed. #### Is a refundable security deposit taxed as rent? Section 16 deals only with amounts that are not adjustable against rent, and it does not address a deposit held and returned in full. The Ordinance does not expressly settle how a refundable security deposit is treated, so this page does not state a rule for it. ### Citations - [Income Tax Ordinance, 2001, section 16 (Non-adjustable amounts received in relation to buildings)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#16-non-adjustable-amounts-received-in-relation-to-buildings), as amended to 2026-06-30: "the amount shall be treated as rent chargeable to tax under the head “Income from Property” in the tax year in which it was received and the following nine tax years in equal proportion" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 155 (Rent of immoveable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#155-rent-of-immoveable-property), as amended to 2026-06-30: "“gross amount of rent” includes the amount referred to in sub- section (1) or (3) of section 16, if any" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 39 (Income from other sources)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#39-income-from-other-sources), as amended to 2026-06-30: "any amount received by a person as consideration for vacating the possession of a building or part thereof, reduced by any amount paid by the person to acquire possession of such building or part thereof" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 15 (Income from property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#15-income-from-property), as amended to 2026-06-30: "“rent” means any amount received or receivable by the owner of land or a building as consideration for the use or occupation of, or the right to use or occupy, the land or building" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Which tenants must deduct tax from my rent, and at what rate (section 155)? Source: https://qanoondigest.com/faq/property-owners/tenant-withholding-tax-on-rent-155 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 155 requires a prescribed person paying rent to deduct tax from gross rent. These include governments, companies, non-profits, diplomatic missions, private schools, clinics and individuals paying Rs. 1.5 million or more a year. Division V sets a slab scale for individual and AOP landlords and 15% for company landlords, doubled for landlords not on the active taxpayers' list. **Applies to:** Landlords in Pakistan who let property to a government, company, non-profit, school, clinic, boutique or a large individual tenant. Some tenants in Pakistan are legally required to keep back part of the rent and pay it to the government in the landlord's name. The rule is section 155 of the Income Tax Ordinance, 2001. The rates below are from the Ordinance as amended to 30 June 2026 and apply to payments in tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? Section 155(1) says every prescribed person paying rent of immovable property, in full or part and including an advance, "shall deduct tax from the gross amount of rent paid at the rate specified in Division V of Part III of the First Schedule". Rent here includes rent of furniture and fixtures and amounts for services relating to the property. The Explanations add that gross rent includes certain non-adjustable amounts received from the tenant, and that the deduction applies "irrespective of head of income". ### Which tenants are prescribed persons? Section 155(3) lists them: | Clause | Prescribed person | |---|---| | (i) | The Federal Government | | (ii) | A Provincial Government | | (iii) | A Local Government | | (iv) | A company | | (v) | A non-profit organization or a charitable institution | | (vi) | A diplomatic mission of a foreign state | | (via) | A private educational institution, a boutique, a beauty parlour, a hospital, a clinic or a maternity home | | (vib) | Individuals or associations of persons paying gross rent of rupees one and a half million and above in a year | | (vii) | Any other person notified by the Board | A family paying Rs. 100,000 a month (Rs. 1.2 million a year) for a house is not on this list. The same family paying Rs. 150,000 a month (Rs. 1.8 million a year) falls under clause (vib). Notifications under clause (vii) are not held in this corpus. ### What rates apply for tax year 2027? The rate depends on who the landlord is. Clause (a) of Division V covers individual and association of persons landlords: | Gross amount of rent | Tax to be deducted | |---|---| | Up to Rs. 300,000 | Nil | | Rs. 300,001 to Rs. 600,000 | 5% of the gross amount above Rs. 300,000 | | Rs. 600,001 to Rs. 2,000,000 | Rs. 15,000 + 10% of the gross amount above Rs. 600,000 | | Above Rs. 2,000,000 | Rs. 155,000 + 25% of the gross amount above Rs. 2,000,000 | Clause (b) says the rate for a company landlord "shall be 15% of the gross amount of rent". The individual table was substituted by the Finance Act, 2021. Division V does not say in its own words whether the bands are measured per payment or per year. The example below works on the rent for the year; confirm the method for part payments against the official text and any rules or circulars, which are not in this corpus. ### What if the landlord is not on the active taxpayers' list? Section 100BA applies the Tenth Schedule to persons not appearing in the active taxpayers' list. Rule 1 of that Schedule says the rate of deduction "shall be increased by hundred percent", which doubles it. Rule 10 lists deductions the Schedule does not apply to. Section 155 was removed from that list by the Finance Act, 2021, so the increase now applies to rent. Rule 2 sets a separate procedure where the tenant is satisfied that the landlord was not required to file a return: before deducting, the tenant gives the Commissioner a written notice, and the Commissioner decides within thirty days. ### Worked example (illustrative figures) **Individual landlord, school tenant.** Naveed owns a building in Peshawar let to a private school for Rs. 150,000 a month. 1. Gross rent for the year: Rs. 1,800,000. 2. Band: above Rs. 600,000 but not above Rs. 2,000,000. 3. Deduction: Rs. 15,000 + 10% x (Rs. 1,800,000 - Rs. 600,000) = Rs. 15,000 + Rs. 120,000 = **Rs. 135,000** for the year. 4. If Naveed is not on the active taxpayers' list, the rate is increased by one hundred percent: Rs. 270,000. **Company landlord, bank tenant.** A property company in Multan lets a floor to a bank for Rs. 300,000 a month. 1. Gross rent for the year: Rs. 3,600,000. 2. Deduction at 15%: **Rs. 540,000**. If the company is not on the active taxpayers' list, 30%: Rs. 1,080,000. ### What happens to the tax deducted? Section 168(2) says the person from whom tax was deducted "shall be allowed a tax credit for that tax" against tax on taxable income for the year of deduction. Section 155 is not among the final taxes listed in section 168(3). The old final-tax rule in section 155(2) was omitted by the Finance Act, 2010. The related page on whether rent withholding is final tax shows the reconciliation. ### Common mistakes - **Assuming every tenant deducts.** Only the persons in section 155(3) must deduct. An ordinary household paying under Rs. 1.5 million a year does not. - **Applying the 15% company rate to an individual landlord.** Individuals and associations of persons use the slab scale in clause (a). - **Using the pre-2021 table.** The Nil band was Rs. 200,000 and the rates ran to 35% before the Finance Act, 2021 substituted the table. - **Treating the deduction as the landlord's full tax.** It is a credit, not a final tax. ### What to check in the official text Read section 155, Division V of Part III of the First Schedule in the source PDF, section 100BA and rules 1, 2 and 10 of the Tenth Schedule, and section 168. Board notifications adding prescribed persons under section 155(3)(vii) are outside this corpus. Provincial sales tax on renting of property, where a province charges it, is also outside this corpus. ### Frequently asked #### Does an individual tenant have to deduct tax from rent in Pakistan? Only if the individual is a prescribed person. Section 155(3)(vib) covers individuals or associations of persons paying gross rent of Rs. 1.5 million or more in a year. A family paying less than that is not listed and does not deduct under section 155. #### What is the section 155 rate when the landlord is a company? Clause (b) of Division V of Part III of the First Schedule sets 15% of the gross amount of rent for a company landlord. If the company is not on the active taxpayers' list, rule 1 of the Tenth Schedule increases the rate by one hundred percent. #### Is the tax deducted from rent lost to the landlord? No. Section 168 treats it as tax paid by the landlord and allows a credit against the tax on taxable income for the year. It is not a final tax. ### Citations - [Income Tax Ordinance, 2001, section 155 (Rent of immoveable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#155-rent-of-immoveable-property), as amended to 2026-06-30: "shall deduct tax from the gross amount of rent paid at the rate specified in Division V of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division V (Income from Property), clauses (a) and (b)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (Rate of deduction or collection of tax for persons not appearing in the active taxpayers' list) and rule 10](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Who is exempt from 236K or 236C, and is there relief for first-time home buyers? Source: https://qanoondigest.com/faq/property-owners/exemptions-from-236k-and-236c Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Only narrow groups are exempt. Section 236C spares certain Shaheed dependants, service personnel and original allottees on a first sale of allotted property. Section 236K(4) excludes government schemes for expatriate Pakistanis, and section 236O excludes governments, diplomats and holders of an exemption certificate. The Ordinance contains no first-time or small-home buyer exemption. **Applies to:** Buyers and sellers of immovable property in Pakistan looking for an exemption from advance tax under section 236K or 236C. Exemptions from 236K and 236C exist, but they are narrow. Most are tied to who the seller is or to a particular government scheme, not to the size of the property or whether it is your first home. This page lists what the Income Tax Ordinance, 2001, as amended to 30 June 2026, actually excludes, and what it does not. ### What does the law say? #### Exemptions from 236C (tax on the seller) **Proviso to section 236C(1).** Sub-section (1) does not apply to a seller who is the dependant of a Shaheed of the Pakistan Armed Forces, or of a person who died in service of the Armed Forces or the Federal or Provincial Government. The proviso extends to a war wounded person in such service, ex-servicemen and serving personnel of the Armed Forces, and ex-employees or serving personnel of the Federal and Provincial Governments. It applies only to the **first sale** of property acquired from or allotted by the Federal or Provincial Government or a certified authority, where the property was given in recognition of or for services rendered. **Section 236C(4).** Sub-section (1) does not apply to (a) a seller who is a dependant of a Shaheed of the Armed Forces or of a person who died in service of the Armed Forces or the Federal and Provincial Governments, and (b) "the first sale of immovable property which has been acquired or allotted as an original allottee, duly certified by the official allotment authority." As printed in the consolidated text, clause (a)(i) repeats the words "a seller, if the seller is dependent of", and clauses (a) and (b) are joined by "and". The text does not make clear whether (b) is a separate exemption for any original allottee or a condition attached to (a). **Second Schedule, Part I, clause (114B)** exempts the profits and gains of the persons named in the proviso to section 236C(1) on that same first sale. So for them, the capital gain itself is exempt, not just the advance tax. #### Exemptions from 236K (tax on the buyer) **Section 236K(4).** Nothing in section 236K applies to a scheme introduced by the Federal Government, a Provincial Government or an Authority established under federal or provincial law **for expatriate Pakistanis**. A proviso requires payment in foreign exchange remitted from outside Pakistan through normal banking channels. #### Exemptions from both **Section 236O.** Advance tax under the chapter is not collected from: - the Federal Government or a Provincial Government; - a foreign diplomat or a diplomatic mission in Pakistan; or - a person who produces a certificate from the Commissioner that his income during the tax year is exempt. **Second Schedule, Part IV** lists entity-specific exclusions. Clause (95) switches off 236K for three named Pakistan Sukuk companies as payers. Clauses (96) and (97) switch off 236C for named Sukuk companies as recipients. Clause (97A) switches off capital gains tax, 236C and 236K for the National Highway Authority on transfers to and from the named Sukuk companies. None of these help an individual buyer or seller. ### Is there relief for first-time home buyers? Not from 236K. No provision in section 236K, section 236O or the Second Schedule exempts a first home, a small house or a low-priced flat. The Division XVIII rate for tax year 2027 is 1.25% of fair market value, whatever the size of the property. The nearest relief in the Ordinance is different. **Section 63A** gives an individual a tax credit for profit on debt paid on a loan used to build or buy "one personal house having land area up to two thousand five hundred square feet or flat having total area up to two thousand square feet." It is claimed in the annual return and does not reduce 236K at registration. ### Worked example (illustrative figures) **Case 1: a Shaheed's widow sells an allotted plot.** Nasreen, widow of a Shaheed, sells for the first time a plot in Rawalpindi allotted by the government in recognition of her husband's service. Fair market value is Rs. 12,000,000. - 236C on Nasreen: **nil**, under the proviso to section 236C(1). - Without the exemption, it would have been Rs. 12,000,000 x 2.75% = Rs. 330,000. - 236K on the buyer: Rs. 12,000,000 x 1.25% = **Rs. 150,000**. The buyer has no matching exemption. **Case 2: a first-time buyer.** Usman, a salaried filer, buys his first flat in Faisalabad with a fair market value of Rs. 8,000,000. - 236K: Rs. 8,000,000 x 1.25% = **Rs. 100,000**. Being a first purchase changes nothing. - If he financed it with a qualifying bank loan, he may be able to claim the section 63A credit in his return. ### What if ...? **What if I am an overseas Pakistani?** Outside a section 236K(4) scheme, you are not exempt. Two provisos help some non-residents holding a POC, NICOP or CNIC who pay through a Foreign Currency Value Account or NRP Rupee Value Account: the tax collected becomes a final discharge (section 236K(2) for buyers, section 236C(1) for sellers). Part IV clause (111AC) also stops the higher non-filer rate from applying to POC and NICOP holders on these transactions. **What if my income is exempt?** Section 236O(c) requires a certificate from the Commissioner. Without it, the registrar collects the tax. ### Common mistakes - **Assuming the Shaheed exemption covers the whole deal.** It covers the seller's 236C, not the buyer's 236K. - **Treating any government-allotted plot as exempt.** The proviso applies only to the listed persons, on a first sale, of property given in recognition of service. - **Expecting a small-house exemption.** None exists in the text. ### What to check in the official text Read section 236C with its provisos and sub-section (4), section 236K(4), section 236O, and the Second Schedule entries named above in the consolidated Ordinance amended to 30 June 2026. The proof an allottee or dependant needs (allotment authority certificate, Commissioner's certificate) is not spelled out in these sections. Check the procedure with the registering authority. ### Frequently asked #### Is there a 236K exemption for first-time home buyers? No such exemption appears in section 236K, section 236O or the Second Schedule of the Ordinance amended to 30 June 2026. The closest relief for home buyers is the section 63A tax credit on profit paid on a housing loan, which works through the annual return, not at registration. #### Does the Shaheed dependant exemption cover the buyer's 236K? No. The proviso to section 236C(1) and section 236C(4) exempt the seller from 236C only. Section 236K contains no matching exemption, so the buyer of such a property is still subject to 236K unless another exemption applies to the buyer. #### Are overseas Pakistanis exempt from 236K? Only for schemes covered by section 236K(4): schemes of the Federal or Provincial Government or a statutory Authority for expatriate Pakistanis, paid in foreign exchange remitted through normal banking channels. Other non-resident buyers are not exempt, though a proviso to section 236K(2) makes the tax final for certain buyers paying through foreign currency or NRP accounts. ### Citations - [Income Tax Ordinance, 2001, section 236C (Advance Tax on sale or transfer of immovable Property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236c-advance-tax-on-sale-or-transfer-of-immovable-property), as amended to 2026-06-30: "Provided that this sub-section shall not apply to a seller, being the dependant of a Shaheed belonging to Pakistan Armed Forces" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236K (Advance tax on purchase or transfer of immovable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236k-advance-tax-on-purchase-or-transfer-of-immovable-property), as amended to 2026-06-30: "Nothing contained in this section shall apply to a scheme introduced by the Federal Government, or Provincial Government or an Authority established under a Federal or Provincial law for expatriate Pakistanis" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236O (Advance tax under this chapter)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236o-advance-tax-under-this-chapter), as amended to 2026-06-30: "The advance tax under this chapter shall not be collected" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 63A (Tax credit for interest paid on low-cost housing loan)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#63a-tax-credit-for-interest-paid-on-low-cost-housing-loan), as amended to 2026-06-30: "acquisition of one personal house having land area up to two thousand five hundred square feet or flat having total area up to two thousand square feet." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clauses (95), (96), (97), (97A) and (111AC)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part I, clause (114B)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- # Vehicle buyers and owners Tax at registration, token tax collection and tax on transferring a vehicle. ## Who pays advance tax when I lease a car through a bank, and can I claim it in my own return? Source: https://qanoondigest.com/faq/vehicle-owners/leased-car-advance-tax-bank Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 231B(1A), a bank or leasing company must collect advance tax of 4% of the vehicle's value when it leases a car to someone not on the Active Taxpayers' List. The lessee pays it, so section 168 treats it as the lessee's tax paid, adjustable against the lessee's own income tax. Lessees on the list are not charged this tax. **Applies to:** Individuals and businesses leasing a car, jeep, van or similar vehicle from a bank, leasing company, modaraba or other financial institution, conventional or ijara. ### What does the law say? Section 231B(1A) of the Income Tax Ordinance, 2001, as amended to 30 June 2026, reaches a wide group of lessors: a leasing company, a scheduled bank, a non-banking financial institution, an investment bank, a modaraba or a development finance institution, "whether shariah compliant or under conventional mode". When one of them leases a motor vehicle to a person whose name is not on the Active Taxpayers' List, "either through ijara or otherwise", it must collect advance tax "at the rate of four per cent of the value of the motor vehicle". Three other parts of the Ordinance finish the picture: - **Section 231B(5):** advance tax collected under section 231B is adjustable. The same subsection excludes the Federal, Provincial and Local Governments, foreign diplomats and diplomatic missions. - **Section 231B(7):** for this section, "motor vehicle" includes cars, jeeps, vans, pickups, SUVs, trucks, wagons and similar vehicles. It excludes vehicles used for public transportation, carriage of goods and agriculture machinery, rickshaws, motorcycle rickshaws and vehicles up to 200cc. - **Clause (102) of Part IV of the Second Schedule:** section 231B(1A) "shall not apply to light commercial vehicles leased under the Prime Minister's Youth Business Loan Scheme". ### Who actually pays, and who gets the credit? The 4% is collected from the lessee, the person the vehicle is leased to. Section 168(1)(b) treats tax collected under Chapter XII (which contains section 231B) as "tax paid by the person from whom the tax was collected". Section 168(2) then gives that person a tax credit against tax on taxable income for the tax year in which it was collected. So the lessee who paid the 4% claims it in the lessee's own return, not the bank. Section 164 backs this up. The collector must give the person from whom tax is collected a copy of the Computerized Payment Receipt (CPR) and a certificate showing the amount collected, and the return must attach the CPR. See the related page on proof of payment. Other vehicle taxes under section 231B work the same way: credit follows whoever the tax was collected from. Section 231B(3) collects from "the person to whom such sale is made" by the manufacturer, and section 231B(1) collects at registration. The Ordinance does not say, for a leased vehicle, which party those taxes are collected from. That depends on who buys and registers the vehicle, and the credit follows accordingly. ### Worked example (illustrative figures) Sana runs a boutique in Lahore. She leases a car valued at Rs. 4,500,000 through a bank's ijara facility in September 2026, which falls in tax year 2027. 1. **Sana is not on the Active Taxpayers' List at the time of leasing.** The bank collects 4% of Rs. 4,500,000 = **Rs. 180,000** under section 231B(1A). 2. **She files her return for tax year 2027.** Suppose (an invented figure) the tax on her taxable income comes to Rs. 250,000. She claims the Rs. 180,000 as a credit under section 168: Rs. 250,000 - Rs. 180,000 = **Rs. 70,000** still payable. 3. **Had she been on the list when the car was leased,** section 231B(1A) would not have applied, and the bank would have collected nothing under it. ### What happens when the lease ends and the car moves into my name? Section 231B(2) requires the Excise and Taxation registering authority to collect advance tax "at the time of transfer of registration or ownership" of a motor vehicle, at the rates in clause (2) of Division VII of Part IV of the First Schedule. The text read for this page contains no exception for a transfer at the end of a lease, so on its words a transfer from the bank to the lessee is a transfer like any other. Two limits apply: - The proviso to section 231B(2) stops collection on transfers "after five years from the date of first registration in Pakistan". - A proviso to Division VII, clause (2) reduces the rate by ten percent each year from the date of first registration. For a person not on the Active Taxpayers' List, rule 1 of the Tenth Schedule increases section 231B tax "by two hundred percent of the rate specified in First Schedule". The 4% lease rate is written into section 231B(1A) itself rather than in the First Schedule, and the text does not say clearly whether that increase reaches it. This page does not settle that point. ### Common mistakes - **Assuming only conventional leases are covered.** Section 231B(1A) names ijara and shariah-compliant lessors expressly. - **Assuming the bank keeps the credit.** Section 168 gives the credit to the person the tax was collected from, which for the 4% is the lessee. - **Assuming every Youth Loan vehicle is exempt.** Clause (102) covers only light commercial vehicles leased under that scheme, and only section 231B(1A). - **Forgetting the lease-end transfer.** Section 231B(2) can apply again when ownership passes to the lessee within five years of first registration. ### What to check in the official text Read section 231B(1A), (2), (5) and (7), clause (102) of Part IV of the Second Schedule, and sections 164 and 168. Division VII of Part IV of the First Schedule and rule 1 of the Tenth Schedule are in the official PDF. Section 231B(1A) does not say how "the value of the motor vehicle" is fixed. Division VII has a valuation proviso (import value, invoice value or auction value), but it is written for the Division VII table, so the text does not settle whether it governs the lease rate. ### Frequently asked #### I am on the Active Taxpayers' List. Does the bank collect the 4%? No. Section 231B(1A) applies only when the vehicle is leased to a person whose name is not appearing in the active taxpayers' list. The Ordinance text does not say at what date the list is checked, beyond saying the tax is collected at the time of leasing. #### Can I adjust the 4% against my income tax? Yes. Section 231B(5) says advance tax collected under the section is adjustable, and section 168 gives the credit to the person from whom the tax was collected. The lessee who paid it claims it in the return for the tax year in which it was collected. #### Is a pickup leased under the Prime Minister's Youth Business Loan Scheme charged? Clause (102) of Part IV of the Second Schedule says section 231B(1A) does not apply to light commercial vehicles leased under that scheme. The Ordinance does not define light commercial vehicle for this clause. ### Citations - [Income Tax Ordinance, 2001, section 231B (Advance tax on motor vehicles)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#231b-advance-tax-on-motor-vehicles), as amended to 2026-06-30: "either through ijara or otherwise, shall collect advance tax at the rate of four per cent of the value of the motor vehicle." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clause (102)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "shall be treated as tax paid by the person from whom the tax was collected or deducted." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 164 (Certificate of collection or deduction of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#164-certificate-of-collection-or-deduction-of-tax), as amended to 2026-06-30: "a certificate setting out the amount of tax collected or deducted and such other particulars as may" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division VII, clause (2); Tenth Schedule, rule 1](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much advance tax do I pay when I register a new car, and is it based on engine cc or the price? Source: https://qanoondigest.com/faq/vehicle-owners/advance-tax-registering-new-car Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It depends on both. Under section 231B and Division VII of Part IV of the First Schedule, advance tax on a new car is a percentage of its value, from 0.5% up to 850cc to 12% above 3000cc. The engine band picks the percentage; the invoice or import value is what it is applied to. **Applies to:** Individuals and businesses buying and registering a new car, jeep, SUV, van or similar vehicle in Pakistan during tax year 2027. When you buy a new car in Pakistan, income tax is collected in advance, either by the manufacturer at the time of sale or by the Excise and Taxation registering authority at registration. This page uses the Income Tax Ordinance, 2001 as amended to 30 June 2026, so the rates are those for tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? Section 231B(1) requires every motor vehicle registering authority of the Excise and Taxation Department to collect advance tax when a motor vehicle is registered, at the rates in Division VII of Part IV of the First Schedule. Section 231B(3) separately requires every manufacturer of a motor vehicle to collect advance tax at the same Division VII rate from the person to whom it sells a motor car or jeep. The rate table is in clause (1) of Division VII. Each band is a percentage of the value of the vehicle: | Engine capacity | Rate of tax | |---|---| | Up to 850cc | 0.5% of the value | | 851cc to 1000cc | 1% of the value | | 1001cc to 1300cc | 1.5% of the value | | 1301cc to 1600cc | 2% of the value | | 1601cc to 1800cc | 3% of the value | | 1801cc to 2000cc | 5% of the value | | 2001cc to 2500cc | 7% of the value | | 2501cc to 3000cc | 9% of the value | | Above 3000cc | 12% of the value | So the answer to "cc or price?" is both. The engine capacity decides which percentage applies, and the price decides what the percentage is multiplied by. ### What counts as the "value" of the car? The first proviso to Division VII clause (1) defines value by how the car came into the market: - **Imported into Pakistan:** the import value assessed by Customs, increased by customs duty, federal excise duty and sales tax payable at the import stage. - **Manufactured or assembled locally:** the invoice value inclusive of all duties and taxes. - **Auctioned:** the auction value inclusive of all duties and taxes. The second proviso deals with vehicles where engine capacity is not applicable, such as a car without a combustion engine. If the value is Rs. 5 million or more, the tax is 3% of the import value (increased by customs duty, sales tax and federal excise duty) for an imported vehicle, or of the invoice value for a locally manufactured or assembled one. The proviso says nothing about such a vehicle valued below Rs. 5 million, and this page does not fill that gap. ### How does it work in practice? For a locally manufactured car, the manufacturer collects the tax at the time of sale under section 231B(3). Section 231B(4) then says the registration collection under sub-section (1) does not apply if the buyer produces evidence that the manufacturer already collected tax under sub-section (3) from the same person for the same vehicle. For an imported car, the same relief applies where tax under section 148 was collected from the same person at import. Section 231B(5) makes the tax adjustable, which means it counts towards the buyer's final income tax liability for the year when a return is filed. The same sub-section lists who is outside the section: the Federal Government, a Provincial Government, a Local Government, a foreign diplomat and a diplomatic mission in Pakistan. Section 231B(7) defines "motor vehicle" to include a car, caravan automobile, jeep, limousine, pickup, sports utility vehicle, truck, van, wagon and any other automobile. It excludes vehicles used for public transportation, carriage of goods and agriculture machinery, rickshaws and motorcycle rickshaws, and any vehicle with engine capacity up to 200cc. ### Worked example (illustrative figures) **Car 1.** Ayesha in Lahore buys a locally assembled 1,299cc hatchback. The invoice value inclusive of all duties and taxes is Rs. 4,800,000. She appears in the active taxpayers' list. 1. Engine band: 1001cc to 1300cc, so the rate is 1.5%. 2. Tax: Rs. 4,800,000 x 1.5% = Rs. 72,000. 3. The manufacturer collects Rs. 72,000 at sale under section 231B(3). At registration she shows proof of this, and under section 231B(4) the registering authority does not collect again. **Car 2.** Hamza in Islamabad buys a locally assembled vehicle with no engine capacity, invoiced at Rs. 8,000,000, which is above Rs. 5 million. 1. The second proviso applies: 3% of the invoice value. 2. Tax: Rs. 8,000,000 x 3% = Rs. 240,000. ### What if the buyer is not on the active taxpayers' list? The first proviso to rule 1 of the Tenth Schedule says tax under section 231B is increased by two hundred percent of the First Schedule rate for a person not appearing in the active taxpayers' list. Increasing 1.5% by 200% of itself gives 4.5%. For Ayesha's car in the example, that would be Rs. 4,800,000 x 4.5% = Rs. 216,000 instead of Rs. 72,000. ### What if the car was bought by someone else before registration? Section 231B(2A) covers a locally manufactured vehicle that the original buyer sold on before it was registered. The registering authority collects a separate fixed amount under clause (3) of Division VII at registration. That situation has its own page on own-money and premium purchases. ### Common mistakes - **Using an old fixed-rupee table.** Earlier versions of Division VII listed flat amounts such as Rs. 10,000 or Rs. 50,000 by engine size. The table in force for tax year 2027 is a percentage of value for every band. - **Using the ex-factory price.** For a locally manufactured car the proviso uses the invoice value inclusive of all duties and taxes, not a figure before taxes. - **Treating the tax as a fee.** Section 231B(5) makes it adjustable advance tax. It is not a registration fee, and provincial registration fees and motor vehicle tax charged by the Excise and Taxation Department are provincial levies outside this corpus. ### What to check in the official text Read section 231B in full, especially sub-sections (1), (3), (4), (5) and (7), and the Table in clause (1) of Division VII of Part IV of the First Schedule with both provisos. The proviso to section 231B(1) stops collection after five years from the "date of first registration" as specified in clauses (a), (b) and (c) of sub-section (6). Clause (c) of sub-section (6) was omitted by the Finance Act, 2026, so check how that cross-reference reads in the official PDF before relying on it for a vehicle acquired from the Armed Forces or a diplomatic source. ### Frequently asked #### Is the advance tax on a new car a fixed amount by engine size? Not under the current table. Division VII clause (1) sets a percentage of the vehicle's value for each engine band, so two 1,300cc cars at different prices attract different amounts of tax. #### Do I pay once to the dealer and again at registration? Section 231B(4) says the registration collection under sub-section (1) does not apply if you show that tax under sub-section (3) was collected from you by the manufacturer for the same locally manufactured vehicle, or that tax under section 148 was collected from you at import for the same imported vehicle. #### What about an electric car with no engine capacity? The second proviso to Division VII clause (1) sets 3% of the invoice value, or of the import value plus customs duty, sales tax and federal excise duty, where engine capacity is not applicable and the value is Rs. 5 million or more. The table does not state a rate for such a vehicle valued below Rs. 5 million. ### Citations - [Income Tax Ordinance, 2001, section 231B (Advance tax on motor vehicles)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#231b-advance-tax-on-motor-vehicles), as amended to 2026-06-30: "Every motor vehicle registering authority of Excise and Taxation Department shall collect advance tax at the time of registration of a motor vehicle, at the rates specified in Division VII of Part IV of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division VII (Advance Tax on Purchase, Registration and Transfer of Motor Vehicles), clause (1), Table and provisos](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1, first proviso (section 231B for persons not in the active taxpayers' list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much advance income tax does a truck or goods transport vehicle owner pay under s.234? Source: https://qanoondigest.com/faq/vehicle-owners/truck-goods-transport-tax-laden-weight Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 234 and Division III of Part IV of the First Schedule charge goods transport vehicles Rs. 2.50 per kilogram of laden weight, collected with the motor vehicle tax. A vehicle under 8,120 kg stops paying ten years after first registration; one of 8,120 kg or more then pays Rs. 1,200 a year instead. **Applies to:** Owners of trucks, mini trucks, trailers and other goods transport vehicles registered in Pakistan who pay motor vehicle tax (the token) to a provincial Excise and Taxation office. ### What does the law say? Section 234 of the Income Tax Ordinance, 2001 makes whoever collects motor vehicle tax (the provincial token) also collect advance income tax at the rates in Division III of Part IV of the First Schedule. For goods carriers, Division III has two rules, both current in the text amended to 30 June 2026 and so applying in tax year 2027: | Vehicle | Rule | Rate | |---|---|---| | Any goods transport vehicle | Division III, clause (1) | Rs. 2.50 per kilogram of the laden weight | | Goods transport vehicle with laden weight of 8,120 kg or more, after ten years from first registration in Pakistan | Division III, clause (1A) | Rs. 1,200 per annum | Section 234(4) supplies the other half: for a goods transport vehicle with a registered laden weight of less than 8,120 kg, advance tax "shall not be collected after a period of ten years from the date of first registration of vehicle in Pakistan". So after ten years a lighter vehicle drops out of the tax entirely, while a heavier one moves to the flat Rs. 1,200 a year. ### How does it work in practice? The tax is collected by the same office and at the same time as the motor vehicle tax. Section 234(2) says that if the motor vehicle tax is collected in instalments or as a lump sum, the advance tax may be collected in instalments or lump sum "in like manner". How often the token falls due, and the token amount itself, are set by provincial law, which is outside this corpus. Clause (1) does not use the words "per annum", while clause (1A) does. The Rs. 2.50 figure is therefore charged when the motor vehicle tax is collected, following its schedule. This page does not assume a period the text does not state. The weight that matters is the laden weight. Section 234(4) speaks of the "registered laden weight", so the figure on the registration record is the natural reference point. Section 234(5) makes the tax adjustable, so it is a credit against the owner's income tax for the year, not a separate cost that settles the matter. See the related page on whether it is final or adjustable. ### Worked example (illustrative figures) Imran runs a small haulage business from Karachi and is on the Active Taxpayers' List. He owns three vehicles. The weights and dates are invented; the rates are those in Division III. 1. **Mini truck, registered laden weight 5,000 kg, first registered 2021.** It is within ten years of first registration, so clause (1) applies: 5,000 x Rs. 2.50 = **Rs. 12,500** each time the tax is collected with the token. 2. **Six-wheeler, registered laden weight 16,000 kg, first registered 2023.** Also within ten years: 16,000 x Rs. 2.50 = **Rs. 40,000**. 3. **Older heavy truck, registered laden weight 22,000 kg, first registered 2013.** More than ten years have passed since first registration, and the weight is 8,120 kg or more, so clause (1A) replaces the per-kilogram charge: **Rs. 1,200** per annum. If Imran also had a 6,000 kg vehicle first registered in 2013, section 234(4) would stop the advance tax on it altogether, because it is under 8,120 kg and more than ten years old. Total collected on the three vehicles in one collection cycle: Rs. 12,500 + Rs. 40,000 + Rs. 1,200 = **Rs. 53,700**, all of it creditable against Imran's income tax under section 234(5). ### What if the owner is not on the Active Taxpayers' List? Section 100BA says the collection of advance tax from a person not on the Active Taxpayers' List is determined under the Tenth Schedule. Rule 1 of that Schedule increases the rate "by hundred percent" for such persons. Rule 10 lists sections the Schedule does not apply to, and clause (ha) covers tax collected under section 234 on goods and passenger transport vehicles only for the period from the Tax Laws (Second Amendment) Ordinance, 2022 to 30 June 2023. On the text, that period has ended, which suggests the doubled rate applies now: Rs. 5.00 per kilogram in effect, so the 5,000 kg mini truck above would carry Rs. 25,000 instead of Rs. 12,500. The Schedule does not say expressly how rule 1 applies to the flat Rs. 1,200 figure, so this page does not settle that. ### What if the vehicle weighs exactly 8,120 kg? Clause (1A) covers vehicles "with laden weight of 8120 kilograms or more", and section 234(4) covers those of "less than" 8,120 kg. A vehicle of exactly 8,120 kg therefore falls under clause (1A) and keeps paying Rs. 1,200 per annum after ten years. ### Common mistakes - **Using the old Rs. 5 per kilogram figure.** The Finance Act, 2015 substituted clause (1), replacing an earlier text of five rupees per kilogram, and the Finance Act, 2019 removed a separate non-filer rate of four rupees per kilogram from it. - **Relying on old reduced-rate clauses.** Second Schedule clauses that once reduced the truck rate to Rs. 2 per kilogram were omitted by the Finance Act, 2015. - **Applying the car rule to trucks.** Section 234(2A), which stops advance tax on motor cars after ten years, is a separate rule. Goods vehicles follow section 234(4) and clause (1A). - **Treating the tax as final.** It has been adjustable since the Finance Act, 2013. ### What to check in the official text Read section 234(1), (2), (4) and (5), and Division III of Part IV of the First Schedule in the official PDF, since our site copy of the Ordinance does not reproduce the schedule tables. Check rule 1 and rule 10 of the Tenth Schedule if the owner is not on the Active Taxpayers' List. The provincial motor vehicle tax that this tax rides along with is outside this corpus. ### Frequently asked #### Is the Rs. 2.50 per kilogram rate different for filers and non-filers? Division III itself has one rate. The separate filer and non-filer rates were removed by the Finance Act, 2019. However, rule 1 of the Tenth Schedule increases withholding rates by hundred percent for persons not on the Active Taxpayers' List, and on our reading of the text its exclusion for transport vehicles covered only the period up to 30 June 2023. #### My truck is twelve years old. Do I still pay? It depends on the registered laden weight. Under section 234(4) a goods vehicle under 8,120 kg pays no advance tax after ten years from first registration in Pakistan. A vehicle of 8,120 kg or more pays Rs. 1,200 per annum after that point under clause (1A) of Division III. #### Is this tax the final tax on my trucking income? No. Section 234(5) makes the tax adjustable. It was a final tax for goods transport owners before the Finance Act, 2013 replaced that wording. ### Citations - [Income Tax Ordinance, 2001, section 234 (Tax on motor vehicles)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#234-tax-on-motor-vehicles), as amended to 2026-06-30: "collecting motor vehicle tax shall also collect advance tax at the rates specified in" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division III (Tax on Motor Vehicles), clauses (1) and (1A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "shall be determined in accordance with the rules in the Tenth Schedule." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 and rule 10, clause (ha)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can I buy a car in my wife's, father's or brother's name if I am not eligible to buy it myself? Source: https://qanoondigest.com/faq/vehicle-owners/buy-car-in-family-member-name Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 114C lets an eligible individual's status cover only his immediate family members: parents, spouse and dependent children. A brother is not included. Separately, the Benami Transactions (Prohibition) Act, 2017 treats a car held in another's name as benami unless it is in a close relative's name and paid for from the individual's known sources of income. **Applies to:** Individuals who may be ineligible under section 114C and are thinking of booking or registering a car above the threshold in a relative's name. A common plan for someone who cannot book a high-value car in their own name is to put it in a relative's name instead. Two laws in this corpus bear on that: section 114C of the Income Tax Ordinance, 2001 (as amended to 30 June 2026), which decides who may apply, and the Benami Transactions (Prohibition) Act, 2017, which deals with property held in one person's name for another's benefit. ### What does section 114C say about family members? Section 114C(1)(a) stops a manufacturer or Excise registering authority from accepting an application by an "ineligible person" to book, buy or register a motor vehicle valued above the Fifteenth Schedule threshold, which is seven million rupees. The restriction applies from a date the Federal Government notifies under section 114C(5). Section 114C(4)(a) defines an eligible person, and its proviso says that in the case of an individual, the eligible person includes his immediate family members. Section 114C(4)(b) defines immediate family members of an individual to include: - his parents, - his spouse, and - his dependent children. In plain terms, if an individual is eligible, his parents, spouse and dependent children are also treated as eligible. The list does not include brothers, sisters, independent adult children or in-laws. ### How does that work for a wife, father or brother? | Name on the application | Eligible through a family link? | |---|---| | Wife | Yes, if her husband (or another individual whose spouse she is) is eligible. She can also be eligible on her own return or statement | | Father | Yes, if one of his children is an eligible individual, because parents are in that child's immediate family | | Brother | No. A brother is not an immediate family member under section 114C(4)(b); he must be eligible himself | Note the direction of the proviso. It extends an eligible individual's status to his family. It does not make an ineligible person eligible because a relative is. If you are ineligible, the question is whether the relative whose name goes on the application is eligible, directly or through someone else's eligibility. ### What does the Benami Act add? Section 2(8) of the Benami Transactions (Prohibition) Act, 2017 defines a benami transaction to include an arrangement where property is transferred to or held by one person, the consideration is paid by another, and the property is held for the benefit of the person who paid. "Property" in section 2(26) covers movable assets, so a car is included. The same definition excludes property held by an individual in the name of his spouse, any child, his brother and sister, or a lineal ascendant or descendant, where the consideration is paid out of the individual's known sources of income. Section 3 prohibits entering into a benami transaction. Section 4 makes benami property liable to confiscation by the Federal Government. Section 51 sets the offence where a benami transaction is entered into to defeat any law, avoid statutory dues or avoid creditors: rigorous imprisonment of one to seven years and a fine of up to twenty-five percent of the fair market value of the property. ### Worked example (illustrative figures) Imran in Peshawar did not file a return last year and has no sources of investment statement, so he is ineligible under section 114C. He wants a locally manufactured car invoiced at Rs. 8,500,000. 1. **In his wife Nadia's name.** Nadia filed her own return and her wealth statement shows sufficient resources. She is eligible in her own right, so her application is not blocked by section 114C. If Imran pays from his own income, the Benami Act exclusion for a spouse applies only if the money comes from his known sources of income. 2. **In his brother Faisal's name.** Faisal is not in Imran's immediate family under section 114C. Faisal can apply only if he is eligible himself. If Imran pays and the car is really for Imran, the brother exclusion in the Benami Act again depends on the money coming from Imran's known sources of income. ### Common mistakes - **Counting siblings as family for section 114C.** The Ordinance's list is parents, spouse and dependent children. The Benami Act's exclusion list is wider, and the two lists should not be mixed up. - **Assuming the relative's name settles everything.** The Benami Act exclusion turns on the money being from known sources of income, not on the family link alone. - **Ignoring advance tax.** Whoever is named as buyer pays section 231B tax at the rate for their own status in the active taxpayers' list. ### What to check in the official text Read section 114C(4) and (5) of the Ordinance and serial number 1 of the Fifteenth Schedule, then sections 2(8), 3, 4 and 51 of the Benami Act. The Benami Act text in this corpus is the 2017 publication, transcribed from scanned page images, and is not a consolidated edition, so check the official PDF and any later amendments before relying on it. The notification bringing section 114C into force is also outside this corpus. ### Frequently asked #### If my wife is eligible, can she buy the car in her own name? Yes, section 114C looks at the applicant. If she is an eligible person in her own right, or is the immediate family member of an eligible individual, her application is not blocked by section 114C(1)(a). The source of the money is a separate question under the Benami Act. #### Can I use my brother's eligibility? Not through section 114C. Immediate family members are defined as parents, spouse and dependent children, so a brother's eligibility does not extend to you and yours does not extend to him. #### Is a car in my son's name paid from my salary a benami car? Section 2(8)(A)(b)(ii) of the Benami Act excludes property held by an individual in the name of a child, among other close relatives, where the consideration is paid out of the individual's known sources of income. Outside that exclusion, a car paid for by one person and held for that person's benefit in another's name falls within the definition. ### Citations - [Income Tax Ordinance, 2001, section 114C (Restriction on economic transactions by certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114c-restriction-on-economic-transactions-by-certain-persons), as amended to 2026-06-30: "Provided that in case of an individual, the eligible person shall include his immediate family members." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Benami Transactions (Prohibition) Act, 2017, section 2 (Definitions)](https://qanoondigest.com/acts/acts-general/benami-transactions-prohibition-act-2017#2-definitions), as amended to 2017: "any person being an individual in the name of his spouse or in the name of any child or in the name of his brother and sister or lineal ascendant or descendant" Official source: https://download1.fbr.gov.pk/Docs/20172221521619193BenamiTransactionAct2017.pdf - [Benami Transactions (Prohibition) Act, 2017, section 3 (Prohibition of benami transactions)](https://qanoondigest.com/acts/acts-general/benami-transactions-prohibition-act-2017#3-prohibition-of-benami-transactions), as amended to 2017: "No person shall enter into any benami transaction." Official source: https://download1.fbr.gov.pk/Docs/20172221521619193BenamiTransactionAct2017.pdf - [Benami Transactions (Prohibition) Act, 2017, section 4 (Property held benami liable to confiscation)](https://qanoondigest.com/acts/acts-general/benami-transactions-prohibition-act-2017#4-property-held-benami-liable-to-confiscation), as amended to 2017: "Any property, which is subject matter of benami transaction, shall be liable to be confiscated by the Federal Government." Official source: https://download1.fbr.gov.pk/Docs/20172221521619193BenamiTransactionAct2017.pdf - [Benami Transactions (Prohibition) Act, 2017, section 51 (Penalty for benami transaction)](https://qanoondigest.com/acts/acts-general/benami-transactions-prohibition-act-2017#51-penalty-for-benami-transaction), as amended to 2017: "shall be punishable with rigorous imprisonment for a term which shall not be less than one year, but which may extend to seven years" Official source: https://download1.fbr.gov.pk/Docs/20172221521619193BenamiTransactionAct2017.pdf - [Income Tax Ordinance, 2001, Fifteenth Schedule (Threshold for Economic Transactions), S. No. 1, transaction reference 114C(1)(a)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can a non-filer still buy a car, and what is the Rs. 7 million limit for 'ineligible persons'? Source: https://qanoondigest.com/faq/vehicle-owners/can-non-filer-buy-car-7-million Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 114C and the Fifteenth Schedule stop manufacturers and Excise registering authorities from accepting an application from an ineligible person to book, buy or register a car valued above seven million rupees. Eligibility comes from a return and wealth statement, or a sources of investment statement, showing sufficient resources. The restriction applies only from a date the Federal Government notifies. **Applies to:** Individuals, associations of persons and private companies who want to book, buy or register a car, especially those not filing income tax returns. Section 114C was inserted into the Income Tax Ordinance, 2001 by the Finance Act, 2025. It does not add a tax. It restricts certain transactions, including booking, buying or registering a car, by a person the section calls "ineligible". This page uses the Ordinance as amended to 30 June 2026. ### What does the law say? Section 114C(1)(a) says that an application by an ineligible person for booking, purchase or registration of a motor vehicle of a value exceeding the threshold in the Fifteenth Schedule shall not be accepted or processed by any manufacturer of a motor vehicle or by the vehicle registering authority of the Excise and Taxation Department. Serial number 1 of the Fifteenth Schedule sets that threshold at "exceeding seven million rupees". It also says how the value is measured: | Vehicle | Value used for the threshold | |---|---| | Locally manufactured | The invoice value | | Imported | The import value as assessed by the Customs Authority, inclusive of all applicable taxes, duties, levies and charges | A car at or below Rs. 7,000,000 on that measure is outside the restriction. So is any transaction by a non-resident person or a public company, which section 114C(2) excludes from clause (a). ### Who is an "eligible person"? Section 114C(4)(a) gives two routes: 1. **Return route.** The person filed a return of income for the tax year immediately before the year of the transaction and has sufficient resources for the transaction in the wealth statement (for an individual) or the financial statements (for a company or association of persons). 2. **Statement route.** The person filed a "sources of investment and expenditure statement" declaring sufficient resources and explaining them for that particular purchase. Section 114C(4)(d) describes this statement as a declaration filed on the Board's web portal specifying the sources of funds for the transaction. An individual's eligibility also covers his immediate family members, defined as parents, spouse and dependent children. Anyone who is not an eligible person is an "ineligible person" under section 114C(4)(c). ### What are "sufficient resources"? Section 114C(4)(e) defines sufficient resources as one hundred and thirty percent of cash and equivalent assets declared in the sources of investment and expenditure statement or the wealth statement for the latest tax year. Cash and equivalent assets include cash in Pakistani or foreign currency, the fair market value of gold, the net realizable value of stocks, bonds and receivables, and other cash equivalents that may be prescribed. For a company or association of persons, it is the cash and equivalent assets in the financial statements attached to the latest return. A proviso adds that where the car is bought by exchanging a capital asset already declared, the disposal of that asset is treated as a cash equivalent asset to the extent of the value in the agreement. ### Worked example (illustrative figures) Sana in Multan wants to book a locally manufactured SUV invoiced at Rs. 9,000,000. The invoice value exceeds Rs. 7,000,000, so section 114C(1)(a) is engaged once the restriction is notified. She did not file a return last year. 1. She files a sources of investment and expenditure statement declaring Rs. 7,200,000 in bank balances and gold at fair market value. 2. Reading section 114C(4)(e) literally, sufficient resources are 130% of that figure: Rs. 7,200,000 x 130% = Rs. 9,360,000. 3. Rs. 9,360,000 is more than the Rs. 9,000,000 invoice, so on that reading she is an eligible person for this purchase. Had she declared only Rs. 6,500,000, the figure would be Rs. 8,450,000, below the invoice value. The section does not spell out the comparison step in words, so treat this as a reading of the definition, not a stated formula. Separately from section 114C, the advance tax under section 231B still applies, and if Sana is not in the active taxpayers' list it is increased under the Tenth Schedule. ### What if the car costs less than Rs. 7 million? Section 114C does not stop anyone, eligible or not, from buying a car at or below the threshold. The purchase still attracts section 231B advance tax, at the higher Tenth Schedule rate for a person not in the active taxpayers' list. ### Common mistakes - **Reading the statement as a clean chit on income.** Section 114C(3) says the sources of investment and expenditure statement and sufficient resources are not to be construed as nature and source of income for section 111. Unexplained income can still be examined under section 111. - **Assuming the restriction is already live.** Section 114C(5) makes the start date depend on a Federal Government notification, which may also change the thresholds. - **Measuring an imported car at its customs value alone.** The Fifteenth Schedule adds all applicable taxes, duties, levies and charges. ### What to check in the official text Read section 114C in full and serial number 1 of the Fifteenth Schedule. Then look for the Federal Government's notification under section 114C(5) in the official Gazette. That notification sets the date and any change to the Rs. 7 million threshold, and it is not part of this corpus. The web portal procedure for the sources of investment and expenditure statement is also outside this corpus. ### Frequently asked #### Is a non-filer automatically an ineligible person? Not necessarily. Section 114C(4)(a)(ii) makes a person eligible if they file a sources of investment and expenditure statement on the Board's web portal declaring sufficient resources for that particular purchase, even without a return for the preceding year. #### How is the Rs. 7 million measured for an imported car? The Fifteenth Schedule uses the import value as assessed by the Customs Authority inclusive of all applicable taxes, duties, levies and charges. For a locally manufactured car it uses the invoice value. The restriction bites only when that value exceeds seven million rupees. #### Is the restriction in force now? Section 114C(5) says the restrictions come into force on a date the Federal Government appoints by notification in the official Gazette, with power to reduce or enhance the thresholds. No such notification is held in this corpus, so this page cannot confirm the date or whether the threshold has been changed. ### Citations - [Income Tax Ordinance, 2001, section 114C (Restriction on economic transactions by certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114c-restriction-on-economic-transactions-by-certain-persons), as amended to 2026-06-30: "any application, by any ineligible person, for booking, purchase or registration of a motor vehicle of the value exceeding the threshold given in Fifteenth Schedule, shall not be accepted or processed by any manufacturer of a motor vehicle or vehicle registering authority of Excise and Taxation" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114C (Restriction on economic transactions by certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114c-restriction-on-economic-transactions-by-certain-persons), as amended to 2026-06-30: "All or any of the restrictions or limitations imposed on the ineligible person under this section shall come into force on such date as the Federal Government may, by notification in official Gazette, appoint" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Fifteenth Schedule (Threshold for Economic Transactions), S. No. 1, transaction reference 114C(1)(a)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Does the transfer tax go down as the car gets older, and when does it stop? Source: https://qanoondigest.com/faq/vehicle-owners/car-transfer-tax-older-vehicles Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Division VII of Part IV of the First Schedule reduces the section 231B transfer tax by ten percent each year from the date of first registration, and the proviso to section 231B(2) stops collection on transfers made after five years from that date. For ex-Armed Forces and ex-diplomatic cars, section 231B(6) fixes a different starting date. **Applies to:** People selling or buying a used car, jeep or similar vehicle whose ownership or registration is being transferred at an Excise and Taxation office in Pakistan. The advance income tax collected when a car changes hands gets smaller as the car ages and disappears once the car is more than five years past its first registration. The rules sit in section 231B of the Income Tax Ordinance, 2001 and in Division VII of Part IV of the First Schedule, as amended to 30 June 2026. They apply to transfers made in tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? **Section 231B(2)** requires every motor vehicle registering authority of the Excise and Taxation Department to collect advance tax "at the time of transfer of registration or ownership" of a motor vehicle, at the rates in Division VII. Its proviso then says no advance tax is collected "on transfer of vehicles after five years from the date of first registration in Pakistan." **Division VII, clause (2)** sets the transfer amounts by engine capacity: | Engine capacity | Tax on transfer (Rs.) | |---|---| | Up to 850cc | Nil (shown as "-") | | 851cc to 1000cc | 5,000 | | 1001cc to 1300cc | 7,500 | | 1301cc to 1600cc | 12,500 | | 1601cc to 1800cc | 18,750 | | 1801cc to 2000cc | 25,000 | | 2001cc to 2500cc | 37,500 | | 2501cc to 3000cc | 50,000 | | Above 3000cc | 62,500 | Where engine capacity does not apply and the vehicle's value is Rs. five million or more, the first proviso to clause (2) sets the tax at Rs. twenty thousand. The second proviso says "the rate of tax to be collected under this clause shall be reduced by ten percent each year from the date of first registration in Pakistan." **Section 231B(6)** defines "date of first registration" for the whole section: - (a) for a vehicle acquired from the Armed Forces of Pakistan, the date the broad arrow number was issued; - (b) for a vehicle acquired from a foreign diplomat or a diplomatic mission in Pakistan, the date of registration by the Ministry of Foreign Affairs; - (d) in all other cases, the date of first registration by the Excise and Taxation Department. Clause (c), which covered unregistered vehicles acquired from the Federal or a Provincial Government, was omitted by the Finance Act, 2026. ### How does the reduction work year by year? The Ordinance says "ten percent each year" but does not say whether each year's cut is ten percent of the original amount or ten percent of the previous year's figure, or whether a "year" means a completed year. The table below uses one plain reading: ten percent of the original amount for each completed year since first registration. It is shown for illustration, not as a settled method. | Completed years since first registration | Share of Division VII amount | 1001cc to 1300cc | 1601cc to 1800cc | 2001cc to 2500cc | |---|---|---|---|---| | Less than 1 | 100% | Rs. 7,500 | Rs. 18,750 | Rs. 37,500 | | 1 | 90% | Rs. 6,750 | Rs. 16,875 | Rs. 33,750 | | 2 | 80% | Rs. 6,000 | Rs. 15,000 | Rs. 30,000 | | 3 | 70% | Rs. 5,250 | Rs. 13,125 | Rs. 26,250 | | 4 | 60% | Rs. 4,500 | Rs. 11,250 | Rs. 22,500 | | More than 5 | Not collected | Nil | Nil | Nil | If the reduction is instead applied to the previous year's figure, the 1001cc to 1300cc amounts would run Rs. 7,500, Rs. 6,750, Rs. 6,075, Rs. 5,467.50 and Rs. 4,920.75. The gap between the two readings is small but real, and the law does not choose between them. It also leaves open how a transfer between the fourth and fifth anniversaries is treated, so the table stops at four completed years. ### Worked example (illustrative figures) **Case 1: ordinary used car.** Bilal in Multan sells a 1300cc car first registered with Excise and Taxation on 15 March 2023. The transfer is recorded on 10 October 2026, three completed years later. Both parties are on the active taxpayers' list. 1. Division VII amount for 1001cc to 1300cc: Rs. 7,500. 2. Reduction on the reading above: 3 years x 10% = 30%. 3. Rs. 7,500 x 30% = Rs. 2,250. 4. Tax on transfer: Rs. 7,500 - Rs. 2,250 = **Rs. 5,250**. **Case 2: ex-Army jeep.** Sana in Rawalpindi buys a jeep auctioned by the Armed Forces. Its broad arrow number was issued on 1 January 2019. She registers it with Excise and Taxation for the first time in August 2026. Under section 231B(6)(a) the date of first registration is 1 January 2019, which is more than five years before both the registration and any later transfer. The proviso to section 231B(1), read with section 231B(6), rules out registration tax, and the proviso to section 231B(2) rules out transfer tax. ### What if the person is not on the active taxpayers' list? The first proviso to rule 1 of the Tenth Schedule increases the tax collected under section 231B "by two hundred percent of the rate specified in First Schedule" for persons not on the active taxpayers' list. That is three times the Division VII amount. In Case 1, Rs. 5,250 x 3 = Rs. 15,750, if the reduced amount is the rate being increased. The Ordinance does not say in so many words in which order the reduction and the increase apply. Section 231B(2) also does not name whether the buyer or the seller is the person from whom the tax is collected, so it does not say whose list status decides the increase. ### Common mistakes - **Counting from the date of purchase.** The reduction and the five-year limit run from the date of first registration, not from when the current owner bought the car. - **Using the ordinary registration date for an ex-Army or ex-embassy vehicle.** Section 231B(6)(a) and (b) move the start date back to the broad arrow number or Ministry of Foreign Affairs registration. - **Assuming the five-year stop covers every vehicle tax.** It only stops the section 231B transfer tax. The advance tax collected with the annual token under section 234 has its own, separate time limits. - **Relying on the old Government-vehicle rule.** Clause (c) of section 231B(6) no longer exists after the Finance Act, 2026, although the proviso to section 231B(1) still mentions clauses (a), (b) and (c). ### What to check in the official text Read section 231B, especially the proviso to sub-section (2) and sub-section (6), clause (2) of Division VII of Part IV of the First Schedule with both provisos, and rule 1 of the Tenth Schedule. Check the date of first registration shown on the registration book, or the broad arrow or Ministry of Foreign Affairs record for ex-Armed Forces and ex-diplomatic vehicles. The provincial transfer fee charged by Excise and Taxation is a separate provincial levy outside this corpus. ### Frequently asked #### After how many years is no transfer tax collected on a car? The proviso to section 231B(2) says no advance tax is collected on transfer after five years from the date of first registration in Pakistan. A car first registered more than five years before the transfer date pays no section 231B transfer tax. #### How much does the transfer tax fall each year? The second proviso to clause (2) of Division VII says the rate is reduced by ten percent each year from the date of first registration. The Ordinance does not spell out whether the ten percent is taken from the original amount each year or from the previous year's reduced amount. #### What counts as the date of first registration for a car bought from the Army or an embassy? Section 231B(6) uses the date the broad arrow number was issued for a vehicle acquired from the Armed Forces of Pakistan, and the date of registration by the Ministry of Foreign Affairs for a vehicle acquired from a foreign diplomat or diplomatic mission. In all other cases it is the date of first registration by the Excise and Taxation Department. ### Citations - [Income Tax Ordinance, 2001, section 231B (Advance tax on motor vehicles)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#231b-advance-tax-on-motor-vehicles), as amended to 2026-06-30: "Provided that no collection of advance tax under this sub- section shall be made on transfer of vehicles after five years from the date of first registration in Pakistan." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division VII, clause (2) (rates under sub-section (2) of section 231B and the ten percent yearly reduction)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1, first proviso (section 231B tax increased by two hundred percent for persons not on the active taxpayers' list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 234 (Tax on motor vehicles)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#234-tax-on-motor-vehicles), as amended to 2026-06-30: "In respect of motor cars used for more than ten years in Pakistan, no advance tax shall be collected after a period of ten years." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is there extra tax on a new car sold on 'own money' before it is registered? Source: https://qanoondigest.com/faq/vehicle-owners/own-money-premium-car-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 231B(2A) requires the Excise and Taxation registering authority to collect tax at registration if a locally manufactured vehicle was sold before registration by the person who bought it from the manufacturer. Division VII clause (3) fixes it at Rs. 100,000, Rs. 200,000 or Rs. 400,000 by engine capacity. **Applies to:** People who buy an unregistered, locally manufactured car from its original buyer (an own money or premium purchase), and original buyers who sell before registering, in tax year 2027. "Own money" is the extra amount a buyer pays to get a new car quickly from someone who booked it earlier. The Income Tax Ordinance, 2001 does not use that phrase, but section 231B(2A) targets exactly this sale: a new, locally made vehicle sold on by its first buyer before it is registered. This page uses the Ordinance as amended to 30 June 2026, so the amounts are those for tax year 2027. ### What does the law say? Section 231B(2A) requires every motor vehicle registration authority of the Excise and Taxation Department to collect tax at the time of registration, at the rates in Division VII of Part IV of the First Schedule, if the locally manufactured motor vehicle has been sold prior to registration by the person who originally purchased it from the local manufacturer. The rates are in clause (3) of Division VII, which applies to sub-section (2A): | Engine capacity | Tax | |---|---| | Up to 1000cc | Rs. 100,000 | | 1001cc to 2000cc | Rs. 200,000 | | 2001cc and above | Rs. 400,000 | Unlike clause (1), which is a percentage of value, clause (3) is a fixed rupee amount for each band. The price of the car and the size of the premium do not change it. ### How does it work in practice? Three conditions in section 231B(2A) must all be met: 1. The vehicle is **locally manufactured**. 2. It was **sold prior to registration**. 3. The seller is **the person who originally purchased it from the local manufacturer**. When they are met, the tax is collected at registration, so in practice it is collected from the person presenting the car for registration, usually the second buyer. Section 231B(5) says advance tax collected under the section is adjustable, which means it counts towards income tax for the year when a return is filed. The original buyer is not refunded the tax the manufacturer collected from them under section 231B(3). That amount remains their own adjustable advance tax under section 231B(5). ### Worked example (illustrative figures) Nadia in Rawalpindi booked a locally assembled 1,298cc car. When it was delivered, she sold it unregistered to Usman in Faisalabad for her invoice price plus Rs. 450,000. Usman appears in the active taxpayers' list. 1. The car is locally manufactured, sold before registration, by the original buyer. Section 231B(2A) applies. 2. Engine band in clause (3): 1001cc to 2000cc, so the tax is Rs. 200,000. 3. The Rs. 450,000 premium plays no part in the calculation. 4. At registration the Excise and Taxation registering authority collects Rs. 200,000 under section 231B(2A). If Usman did not appear in the active taxpayers' list, the first proviso to rule 1 of the Tenth Schedule says tax "under section 231B" is increased by two hundred percent of the First Schedule rate. The proviso does not exclude sub-section (2A). On its words, Rs. 200,000 increased by 200% of itself would be Rs. 600,000. ### What if the second buyer is also asked for the registration tax under section 231B(1)? This is a question the text does not settle clearly. Section 231B(1) applies to every registration of a motor vehicle at the clause (1) percentage rates. Section 231B(4) switches off sub-section (1) only where the tax under sub-section (3) was collected "from the same person in respect of the same vehicle". In an own money sale, the manufacturer collected tax from Nadia, not from Usman. Section 231B(2A) does not say whether it replaces the sub-section (1) collection for the second buyer or sits on top of it. This page does not resolve that point. Anyone in this position should read sub-sections (1), (2A) and (4) together in the official text. ### What if the car was imported? Section 231B(2A) is limited to a "locally manufactured motor vehicle". Imported vehicles are dealt with through section 148 at import and section 231B(4); see the imported car page. ### Common mistakes - **Thinking the tax is a percentage of the premium.** Clause (3) is a fixed amount per engine band. - **Using the clause (1) bands.** Clause (1) has nine bands from 850cc upwards; clause (3) has only three: up to 1000cc, 1001cc to 2000cc, and 2001cc and above. - **Registering in the original buyer's name to avoid it.** The condition is a sale before registration by the original buyer. Whether a later transfer is then taxed is a separate matter under section 231B(2) and clause (2) of Division VII. - **Assuming the premium itself is taxed here.** Section 231B(2A) taxes the registration event. Whether the original buyer's gain is taxable income is a separate question this page does not address. ### What to check in the official text Read section 231B(1), (2A), (4) and (5), and the Table in clause (3) of Division VII of Part IV of the First Schedule. Sub-section (2A) was inserted by the Finance Act, 2021, and the clause (3) Table was substituted by the Finance (Supplementary) Act, 2022; footnotes in the official PDF show the lower amounts it replaced, which no longer apply. Check the first proviso to rule 1 of the Tenth Schedule for the position of a person not in the active taxpayers' list. ### Frequently asked #### How much is the own money tax on a 1,300cc car? Clause (3) of Division VII sets Rs. 200,000 for engine capacity from 1001cc to 2000cc. A 1,300cc car falls in that band. #### Does the tax depend on the premium I paid? No. The clause (3) table is a fixed rupee amount by engine capacity. It does not refer to the price or to the premium paid to the original buyer. #### Does this apply to an imported car? Section 231B(2A) is limited to a locally manufactured motor vehicle sold before registration by the person who originally bought it from the local manufacturer. It does not mention imported vehicles. ### Citations - [Income Tax Ordinance, 2001, section 231B (Advance tax on motor vehicles)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#231b-advance-tax-on-motor-vehicles), as amended to 2026-06-30: "collect tax at the rates specified in Division VII of Part IV of the First Schedule, if the locally manufactured motor vehicle has been sold prior to registration by the person who originally purchased it from the local manufacturer." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division VII (Advance Tax on Purchase, Registration and Transfer of Motor Vehicles), clause (3), Table](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division VII, clause (1), Table and provisos](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1, first proviso (section 231B for persons not in the active taxpayers' list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Gari transfer par tax kitna lagta hai? How much tax is collected when a used car is transferred into my name? Source: https://qanoondigest.com/faq/vehicle-owners/used-car-transfer-withholding-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 231B(2), the Excise and Taxation registering authority collects advance tax when a car's registration or ownership is transferred. Division VII clause (2) sets fixed amounts from nil up to 850cc to Rs. 62,500 above 3000cc, reduced ten percent each year from first registration. Nothing is collected after five years, and non-filers pay three times. **Applies to:** Buyers and sellers of used cars, jeeps, SUVs and similar vehicles whose registration or ownership is transferred at the Excise and Taxation Department in tax year 2027. When a used car changes hands and the registration is moved into the buyer's name, the Excise and Taxation office collects income tax in advance as well as its own provincial fees. This page covers only the federal income tax part, under the Income Tax Ordinance, 2001 as amended to 30 June 2026, which applies to tax year 2027. ### What does the law say? Section 231B(2) requires every motor vehicle registering authority of the Excise and Taxation Department to collect advance tax at the time of transfer of registration or ownership of a motor vehicle, at the rates in Division VII of Part IV of the First Schedule. The proviso to section 231B(2) stops the collection once five years have passed from the date of first registration in Pakistan. Clause (2) of Division VII sets a fixed rupee amount by engine capacity: | Engine capacity | Tax on transfer | |---|---| | Up to 850cc | Nil | | 851cc to 1000cc | Rs. 5,000 | | 1001cc to 1300cc | Rs. 7,500 | | 1301cc to 1600cc | Rs. 12,500 | | 1601cc to 1800cc | Rs. 18,750 | | 1801cc to 2000cc | Rs. 25,000 | | 2001cc to 2500cc | Rs. 37,500 | | 2501cc to 3000cc | Rs. 50,000 | | Above 3000cc | Rs. 62,500 | Two provisos follow the table. The first says that where engine capacity is not applicable and the value of the vehicle is Rs. 5 million or more, the tax is Rs. 20,000. The second says the tax under clause (2) is reduced by ten percent each year from the date of first registration in Pakistan. Unlike the new-car rates in clause (1), these amounts do not depend on the price the buyer pays. ### How does it work in practice? The registering authority collects the tax at the transfer, so the amount is paid before the transfer is recorded. Section 231B(5) makes it adjustable advance tax, and the same sub-section excludes the Federal, Provincial and Local Governments, foreign diplomats and diplomatic missions. Section 231B(7) sets which vehicles are covered: cars, caravan automobiles, jeeps, limousines, pickups, SUVs, trucks, vans, wagons and other automobiles, but not vehicles used for public transportation, carriage of goods or agriculture machinery, rickshaws and motorcycle rickshaws, or any vehicle up to 200cc. ### Who pays: the buyer or the seller? The Ordinance does not say. Section 231B(3), for a sale by a manufacturer, expressly collects from "the person to whom such sale is made". Section 231B(2) names only the collector and the moment of collection, with no words about which party the tax is taken from. Section 231B(5) says the tax is adjustable but does not say against whose liability. In a private sale, who bears the cost is left to the parties, and this page does not supply a rule the text does not contain. ### Worked example (illustrative figures) Kamran in Faisalabad is buying a used 1,000cc car. Both he and the seller appear in the active taxpayers' list. 1. Band: 851cc to 1000cc, table amount Rs. 5,000. 2. The ten percent yearly reduction in the second proviso then applies according to how long ago the car was first registered. The proviso does not spell out whether each year's ten percent is taken from the original Rs. 5,000 or from the reduced figure, so check the working with the registering authority. 3. If the car was first registered six years ago, nothing is collected under section 231B(2), because the five-year limit in the proviso has passed. Now take a 1,800cc car first registered in the current year, with the person from whom tax is collected not in the active taxpayers' list: 1. Band: 1601cc to 1800cc, table amount Rs. 18,750, before any yearly reduction. 2. Tenth Schedule increase of two hundred percent: Rs. 18,750 x 3 = Rs. 56,250. ### What if the person is not on the active taxpayers' list? The first proviso to rule 1 of the Tenth Schedule increases tax under section 231B by two hundred percent of the First Schedule rate for a person not appearing in the active taxpayers' list. On transfer that means three times the table amount: for example Rs. 7,500 becomes Rs. 22,500 for a 1,300cc car, and Rs. 12,500 becomes Rs. 37,500 for a 1,600cc car. Because section 231B(2) does not say whose status matters, the text does not settle whether the buyer's or the seller's list status decides the uplift. ### Common mistakes - **Confusing this with the provincial transfer fee.** The Excise office also charges provincial transfer fees and motor vehicle tax. Those are provincial levies outside this corpus. - **Applying the new-car percentages to a used car.** A transfer uses the fixed amounts in clause (2), not the percentage table in clause (1). - **Paying on an old car.** After five years from first registration in Pakistan, the proviso to section 231B(2) means no transfer advance tax is collected. ### What to check in the official text Read section 231B(2), (5), (6) and (7), and clause (2) of Division VII of Part IV of the First Schedule with both provisos. Clause (c) of section 231B(6), about unregistered vehicles bought from a government, was omitted by the Finance Act, 2026, so the remaining clauses define the date of first registration. For older cars, the related page on transfer tax for older vehicles looks at the yearly reduction in more detail. ### Frequently asked #### Does the buyer or the seller pay the transfer advance tax? Section 231B(2) says the registering authority shall collect the tax at the time of transfer, but unlike sub-section (3) it does not say from whom. The Ordinance leaves that open, so who bears it in a private sale is not settled by this text. #### Is there transfer advance tax on an 800cc car? No. The table in Division VII clause (2) shows no amount against 'upto 850cc', so nothing is collected for a car in that band. #### What about a car registered more than five years ago? The proviso to section 231B(2) says no advance tax is collected on transfer after five years from the date of first registration in Pakistan. Section 231B(6) explains how that date is fixed for vehicles from the Armed Forces or diplomatic sources. ### Citations - [Income Tax Ordinance, 2001, section 231B (Advance tax on motor vehicles)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#231b-advance-tax-on-motor-vehicles), as amended to 2026-06-30: "Provided that no collection of advance tax under this sub- section shall be made on transfer of vehicles after five years from the date of first registration in Pakistan." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division VII (Advance Tax on Purchase, Registration and Transfer of Motor Vehicles), clause (2), Table and provisos](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1, first proviso (section 231B for persons not in the active taxpayers' list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is the advance tax I paid on buying a car adjustable against my income tax, and can I get it refunded? Source: https://qanoondigest.com/faq/vehicle-owners/car-advance-tax-adjustable-or-refund Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 231B(5) says the advance tax collected on a car is adjustable. Section 168 treats it as tax paid and gives a credit against tax due for the tax year in which it was collected. If the credit is more than the tax due, section 168(5) sends the excess to a refund under section 170. **Applies to:** Individuals, associations of persons and companies who paid advance tax under section 231B when buying, registering, leasing or transferring a motor vehicle in Pakistan. The income tax collected when you buy or register a car is not a separate charge that is simply lost. It is advance tax: a payment towards your income tax for the year, which you claim as a credit in your return. Where your income tax for the year is lower than the credit, the Ordinance provides a refund route. This page follows the Income Tax Ordinance, 2001 as amended to 30 June 2026, so the rates shown apply in tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? **Section 231B** requires advance tax to be collected at several points: by the Excise and Taxation registering authority at first registration (sub-section (1)), on transfer (sub-section (2)), on registration of a car resold before registration (sub-section (2A)), by the manufacturer at the time of sale (sub-section (3)), and by a leasing company or bank when leasing to a person not on the active taxpayers' list (sub-section (1A)). Sub-section (5) then says "The advance tax collected under this section shall be adjustable". The same sub-section's proviso takes the Federal, Provincial and Local Governments, foreign diplomats and diplomatic missions out of the section altogether. **Section 168** explains what "adjustable" means in practice. Section 168(1)(b) treats tax collected under Chapter XII, where section 231B sits, as "tax paid by the person from whom the tax was collected". Section 168(2) allows that person a tax credit against the tax due on their taxable income "for the tax year in which the tax was collected". Section 168(3) lists final taxes that get no credit, and section 231B is not on that list. **Section 168(5)** says a credit, or part of one, that cannot be set against the year's tax "shall be refunded to the taxpayer in accordance with section 170." **Section 170** lets a taxpayer who has paid more than the amount properly chargeable apply to the Commissioner for a refund. The application must be in the prescribed form, verified in the prescribed manner, and made within three years of the later of the assessment order for that tax year or the date the tax was paid. The Commissioner must pass a written order within sixty days of the application, after giving the taxpayer an opportunity of being heard. ### How does it work in practice? The credit is claimed in the return for the tax year in which the tax was collected, which is the year of the sale invoice or registration, not the year you booked the car. The credit is set against your total tax for that year, whatever the source of income. For a company, the same rule applies: the tax collected from the company is credited against the company's tax due for that year. The credit belongs to the person from whom the tax was collected. If a car is bought in one family member's name, the credit is that person's, not the relative who paid. ### Worked example (illustrative figures) Rashid runs a small tailoring shop in Faisalabad and is on the active taxpayers' list. In September 2026 he buys a new locally assembled 1000cc car. The invoice value, inclusive of all duties and taxes, is Rs. 3,200,000. His taxable income for tax year 2027 is Rs. 540,000. 1. Division VII, clause (1), row 851cc to 1000cc: 1% of the value. 2. Advance tax collected: Rs. 3,200,000 x 1% = **Rs. 32,000**. 3. Tax on Rs. 540,000 under clause (1) of Division I of Part I (taxable income not exceeding Rs. 600,000): 0%, so tax due is Rs. 0. 4. Credit under section 168(2): Rs. 32,000. Tax due: Rs. 0. 5. Unused credit: Rs. 32,000 - Rs. 0 = **Rs. 32,000**, which section 168(5) directs to a refund under section 170. If Rashid's tax due for the year had been Rs. 50,000, the Rs. 32,000 credit would reduce it to Rs. 18,000 and there would be no refund. ### What if I was charged the higher rate for persons not on the list? Rule 1 of the Tenth Schedule increases the section 231B tax for persons not on the active taxpayers' list. Rule 4(3) of the Tenth Schedule says that where returns have been filed before a provisional assessment, or within forty-five days of one, "the tax deducted or collected under rule 1 shall be adjustable against the tax payable in the return filed for the relevant tax year." The higher amount can therefore be credited when the return is filed in time under that rule. ### Common mistakes - **Treating the car tax as final.** Section 231B(5) makes it adjustable, and section 168(3) does not list it as final. - **Claiming it in the wrong year.** Section 168(2) ties the credit to the tax year of collection. - **Assuming a refund is automatic.** Section 170 sets out an application to the Commissioner with a three-year time limit. - **Forgetting the source question.** Claiming the credit does not answer how the car was paid for. The wealth statement and source of funds questions are separate. ### What to check in the official text Read section 231B(5), section 168(1), (2), (3) and (5), and section 170(1) to (4). Check the Division VII clause that matches how the tax was collected, since clause (1) covers sale and first registration and clause (2) covers transfer. The collection receipt or registration record should show the tax in the claimant's own name. FBR portal steps for filing the refund claim are outside this corpus. ### Frequently asked #### Can I adjust the tax paid on buying a car in my income tax return? Yes. Section 231B(5) makes it adjustable, and section 168(2) allows it as a credit against the tax due on your taxable income for the tax year in which it was collected. The credit belongs to the person from whom the tax was collected. #### Can I get a refund of car advance tax if my income is below the taxable limit? Section 168(5) says a credit that cannot be used against tax due for the year is refunded in accordance with section 170. Section 170 requires an application to the Commissioner, made in the prescribed form within three years of the later of the assessment order or the date the tax was paid. #### Is car advance tax a final tax? No. Section 231B calls it adjustable, and it is not among the final taxes listed in section 168(3) for which no credit is allowed. ### Citations - [Income Tax Ordinance, 2001, section 231B (Advance tax on motor vehicles)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#231b-advance-tax-on-motor-vehicles), as amended to 2026-06-30: "The advance tax collected under this section shall be adjustable" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 170 (Refunds)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#170-refunds), as amended to 2026-06-30: "A taxpayer who has paid tax in excess of the amount which the taxpayer is properly chargeable under this Ordinance may apply to the Commissioner for a refund of the excess." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division VII, clause (1) (rates under sub-sections (1) and (3) of section 231B)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1) (rates of tax for individuals and associations of persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 4(3) (tax collected under rule 1 adjustable where returns are filed)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is advance tax collected when I buy from the manufacturer and again when I register the car? Source: https://qanoondigest.com/faq/vehicle-owners/car-booking-tax-and-registration-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Normally only once. Section 231B(3) makes the manufacturer collect advance tax when it sells a motor car or jeep, and section 231B(4) says the registration collection under section 231B(1) does not apply if you produce evidence that the manufacturer collected that tax from you for the same vehicle. **Applies to:** People buying a new, locally manufactured car or jeep directly from the manufacturer or its dealer and registering it in their own name during tax year 2027. Buyers of new cars often see income tax on the manufacturer's invoice and then worry that the Excise and Taxation office will charge it again at registration. Section 231B of the Income Tax Ordinance, 2001, as amended to 30 June 2026, answers this directly. The rates on this page are those for tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? Section 231B contains two collection points for the same tax. - **At sale.** Section 231B(3) requires every manufacturer of a motor vehicle to collect advance tax, at the time of sale of a motor car or jeep, at the rate in Division VII of Part IV of the First Schedule, from the person to whom the sale is made. - **At registration.** Section 231B(1) requires every motor vehicle registering authority of the Excise and Taxation Department to collect advance tax at the time of registration of a motor vehicle, at the rates in the same Division VII. Section 231B(4) then links the two. Sub-section (1) does not apply if a person produces evidence that tax under sub-section (3) was collected from the same person in respect of the same vehicle, for a locally manufactured vehicle. The same relief exists for an imported vehicle where tax under section 148 was collected at import. So the Ordinance does not intend the same buyer to pay twice on the same car. The switch that turns off the second collection is evidence. ### How does it work in practice? Both collection points use clause (1) of Division VII, which sets a percentage of the vehicle's value by engine capacity: | Engine capacity | Rate of tax | |---|---| | Up to 850cc | 0.5% of the value | | 851cc to 1000cc | 1% of the value | | 1001cc to 1300cc | 1.5% of the value | | 1301cc to 1600cc | 2% of the value | | 1601cc to 1800cc | 3% of the value | | 1801cc to 2000cc | 5% of the value | | 2001cc to 2500cc | 7% of the value | | 2501cc to 3000cc | 9% of the value | | Above 3000cc | 12% of the value | For a locally manufactured or assembled car, the first proviso to clause (1) makes the value the invoice value inclusive of all duties and taxes. The sequence for a buyer is: 1. The manufacturer collects the tax at the time of sale under section 231B(3) and it appears on the sale documents. 2. At registration, the buyer produces evidence of that collection. 3. Under section 231B(4), the registering authority does not collect again under section 231B(1). 4. Under section 231B(5), the tax already paid is adjustable against the buyer's income tax for the year. Section 231B(4) does not say what form the evidence must take. It only requires that the person "produces evidence". This page does not describe the Excise office's documents or procedure, which are outside this corpus. ### Worked example (illustrative figures) Bilal in Karachi buys a locally assembled 1,496cc sedan. The invoice value inclusive of all duties and taxes is Rs. 6,500,000. He appears in the active taxpayers' list. 1. Engine band: 1301cc to 1600cc, so the rate is 2%. 2. Tax at sale under section 231B(3): Rs. 6,500,000 x 2% = Rs. 130,000. 3. At registration in Karachi he produces evidence that the Rs. 130,000 was collected from him for this car. Section 231B(4) applies, so the registration collection under section 231B(1) is nil. 4. Total advance tax under section 231B on this car: Rs. 130,000, adjustable under section 231B(5). If Bilal did not appear in the active taxpayers' list, the first proviso to rule 1 of the Tenth Schedule increases tax under section 231B by two hundred percent of the First Schedule rate. The 2% rate plus 200% of 2% gives 6%, so the manufacturer would collect Rs. 6,500,000 x 6% = Rs. 390,000. ### What if I cannot produce the evidence at registration? Section 231B(4) is worded as a condition: sub-section (1) does not apply "if a person produces evidence". Read on its own terms, without that evidence the registering authority's duty under section 231B(1) stays in place. Both amounts would then be advance tax under the same section, and section 231B(5) makes advance tax collected under the section adjustable. The Ordinance does not set out a separate procedure for reversing a second collection, and this page does not supply one. ### What if the vehicle is not a car or jeep? Section 231B(3) applies to the manufacturer's sale of a "motor car or jeep". A locally made pickup, van or wagon sold for private use falls within the wider definition of motor vehicle in section 231B(7), but the manufacturer's duty in sub-section (3) is limited to cars and jeeps. For such vehicles the collection point in the text is registration under section 231B(1). ### What if the first buyer sells the car before registering it? Section 231B(4) only helps where tax was collected from the same person for the same vehicle. A person who buys the car from the original buyer before registration is not that person. Section 231B(2A) adds a separate fixed tax at registration in that situation, covered on the own money page linked below. ### Common mistakes - **Assuming the Excise office will know tax was paid.** Section 231B(4) puts the burden on the person to produce evidence. - **Registering in a relative's name.** The relief requires collection "from the same person". If the invoice is in one name and registration in another, section 231B(4) as worded does not cover the second person. - **Treating the invoice amount as a fee.** It is adjustable advance income tax under section 231B(5), not a sales tax or a provincial registration charge. ### What to check in the official text Read section 231B(1), (3), (4) and (5) together, and the Table in clause (1) of Division VII of Part IV of the First Schedule with its first proviso on value. Check the first proviso to rule 1 of the Tenth Schedule for the rate applying to a person not in the active taxpayers' list. Provincial registration fees and motor vehicle tax charged by the Excise and Taxation Department are provincial levies and are not covered here. ### Frequently asked #### Does the manufacturer and the Excise office each take the full tax? Not if the relief in section 231B(4) is used. Once you produce evidence that the manufacturer collected tax under section 231B(3) from you for the same vehicle, the registering authority's collection under section 231B(1) does not apply. #### What if the car is registered in someone else's name? Section 231B(4) only works where the tax was collected from the same person in respect of the same vehicle. If a different person registers the car, the relief as worded does not cover them. #### Is the tax the manufacturer collects a final tax? No. Section 231B(5) says advance tax collected under the section is adjustable, so it counts towards the buyer's income tax for the year when a return is filed. ### Citations - [Income Tax Ordinance, 2001, section 231B (Advance tax on motor vehicles)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#231b-advance-tax-on-motor-vehicles), as amended to 2026-06-30: "Sub-section (1) shall not apply if a person produces evidence that tax under sub-section (3) in case of a locally manufactured vehicle or tax under section 148 in the case of imported vehicle was collected from the same person in respect of the same vehicle." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division VII (Advance Tax on Purchase, Registration and Transfer of Motor Vehicles), clause (1), Table and provisos](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1, first proviso (section 231B for persons not in the active taxpayers' list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is the tax paid by transporters under s.234 their final tax on transport income? Source: https://qanoondigest.com/faq/vehicle-owners/transporter-section-234-final-or-adjustable Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No. Section 234(5) now says advance tax collected under the section is adjustable. The Finance Act, 2013 replaced the old wording that made it the final tax on goods transport income. Under section 168 the tax is a credit against the tax worked out on actual transport income in the return, and unused credit is refundable. **Applies to:** Owners of goods transport and passenger transport vehicles who pay advance tax with their motor vehicle tax and earn income from plying or hiring out those vehicles. ### What does the law say? Section 234(5) of the Income Tax Ordinance, 2001, as amended to 30 June 2026, has one sentence: "Advance tax collected under this section shall be adjustable." That covers everything collected with the token under Division III of Part IV of the First Schedule, including the per-kilogram tax on goods vehicles and the per-seat tax on passenger vehicles. It was not always so. Before the Finance Act, 2013, section 234(5) read: "Where tax is collected from any person being the owner of goods transport vehicle, the tax so collected shall be the final tax on the income of such person from plying, or hiring out, of such vehicle." The 2013 Act substituted that text with the adjustable rule. It also omitted section 234(5) from the list of final taxes in section 168(3), where it had been clause (i). ### What is the difference between final and adjustable? Two sections of the Ordinance show the difference. **Section 169** applies where a tax is a final tax. Its effect, among other things, is that the income "shall not be chargeable to tax under any head of income in computing the taxable income of the person", and no deduction is allowed for expenditure incurred in earning it. Section 169(1)(b) lists the provisions that are final taxes. Section 234 is not among them in the current text. **Section 168** applies to adjustable tax. Under section 168(1)(b), tax collected under Chapter XII (which contains section 234) is "treated as tax paid by the person from whom the tax was collected". Section 168(2) gives that person a tax credit in computing the tax due on taxable income "for the tax year in which the tax was collected". Section 168(3) denies credit only for the final taxes it lists, and section 234 is not in that list. Section 168(5) says a credit that cannot be used in the year is refunded. So for a transporter today, the income from carrying goods or passengers is worked out and taxed in the return like other income, and the section 234 tax paid with the token is subtracted from the tax due. ### How does it work in practice? 1. Transport income for the tax year is computed in the return under the ordinary rules, with allowable expenses. 2. Tax is worked out on total taxable income at the rates that apply to the person. 3. Section 234 tax collected in that tax year is claimed as a credit under section 168(2). 4. If tax due is higher, the difference is payable. If the credit is higher, section 168(5) provides for a refund. ### Worked example (illustrative figures) Bilal owns two trucks in Faisalabad and is on the Active Taxpayers' List. In tax year 2027: - Truck A, registered laden weight 12,000 kg: 12,000 x Rs. 2.50 = Rs. 30,000 collected with the token. - Truck B, registered laden weight 9,000 kg: 9,000 x Rs. 2.50 = Rs. 22,500 collected with the token. - Total section 234 tax collected: Rs. 30,000 + Rs. 22,500 = **Rs. 52,500**. Suppose (an invented figure for illustration) that the tax on Bilal's taxable income for the year, computed in his return, comes to Rs. 140,000. - Tax due: Rs. 140,000 - Less section 234 credit: Rs. 52,500 - **Balance payable: Rs. 87,500** Under the pre-2013 wording, the Rs. 52,500 would have been the final tax on his goods transport income. Under the current text it is only a payment on account. Now suppose instead that a poor year leaves the tax on his taxable income at Rs. 40,000. The credit of Rs. 52,500 exceeds it by Rs. 12,500, and section 168(5) provides that the unused Rs. 12,500 is refunded. ### What if I pay the tax in instalments? Section 234(2) allows the advance tax to be collected in instalments or a lump sum in the same way as the motor vehicle tax. Section 168(2) ties the credit to the tax year in which the tax was collected, so each instalment counts in the tax year it was paid. ### What if the vehicle is registered in someone else's name? Section 168(1)(b) gives the credit to "the person from whom the tax was collected". The Ordinance does not deal separately with a vehicle registered in one person's name but run by another, so the text does not settle who claims the credit in that case. ### Common mistakes - **Relying on the pre-2013 final-tax rule.** It has been gone since the Finance Act, 2013. - **Leaving transport income out of the return.** Because the tax is not final, section 169 does not take the income out of the computation. - **Forgetting to claim the credit.** Section 168 gives the credit, but only if it is claimed for the right tax year. Section 164 requires the return to attach the payment receipts; see the related page on proof. ### What to check in the official text Read section 234(5) with its footnote on the 2013 substitution, section 168(1) to (5), and the list in section 169(1)(b). Rates are in Division III of Part IV of the First Schedule in the official PDF. ### Frequently asked #### When did section 234 tax stop being final for transporters? The Finance Act, 2013 substituted section 234(5). The old text said tax collected from the owner of a goods transport vehicle was the final tax on income from plying or hiring out that vehicle. The same Act removed section 234(5) from the final-tax list in section 168(3). #### Do I still need to declare transport income in my return? Yes, on the current text. Because section 234 tax is adjustable and is not listed in section 169, the income is not taken out of the normal computation. The tax paid with the token is then credited against the tax due. #### What happens if my section 234 tax is more than my income tax? Section 168(5) says a tax credit that cannot be used for the year is refunded to the taxpayer. The refund process itself is governed by other sections not covered on this page. ### Citations - [Income Tax Ordinance, 2001, section 234 (Tax on motor vehicles)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#234-tax-on-motor-vehicles), as amended to 2026-06-30: "Advance tax collected under this section shall be adjustable." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "shall be treated as tax paid by the person from whom the tax was collected or deducted." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "the income shall not be chargeable to tax under any head of income in computing the taxable income of the person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 164 (Certificate of collection or deduction of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#164-certificate-of-collection-or-deduction-of-tax), as amended to 2026-06-30: "A person required to furnish a return of taxable income for a tax year shall attach to the return" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division III (Tax on Motor Vehicles)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much more advance tax does a non-filer pay than a filer when buying or transferring a car? Source: https://qanoondigest.com/faq/vehicle-owners/non-filer-car-tax-vs-filer Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 100BA and rule 1 of the Tenth Schedule, a person not on the active taxpayers' list pays section 231B car tax increased by two hundred percent, which is three times the First Schedule rate. Other collections, including the section 234 tax taken with motor vehicle tax, are increased by one hundred percent, which doubles them. **Applies to:** Individuals and businesses whose names do not appear in the active taxpayers' list and who buy, register or transfer a car, or pay motor vehicle tax, in tax year 2027. Buying a car costs noticeably more in advance income tax for someone who is not in the active taxpayers' list. The Ordinance sets no separate "non-filer" rate table. It takes the ordinary rate in the First Schedule and increases it under the Tenth Schedule. This page uses the Income Tax Ordinance, 2001 as amended to 30 June 2026, so the figures apply to tax year 2027. ### What does the law say? Section 100BA says that collection or deduction of advance tax for a person not appearing in the active taxpayers' list is determined in accordance with the Tenth Schedule, and that the Tenth Schedule has effect notwithstanding anything to the contrary in the Ordinance. Rule 1 of the Tenth Schedule sets two different increases: - **General rule.** Where tax is to be deducted or collected from a person not in the list, the rate is increased by hundred percent of the rate specified in the Ordinance. That doubles it. - **Cars under section 231B.** The first proviso says tax collected under section 231B is increased by two hundred percent of the rate specified in the First Schedule. That makes it three times the ordinary rate. Section 231B covers the collection at sale by the manufacturer, at first registration, at registration of a car resold before registration, and at transfer of registration or ownership. Section 234 covers advance tax collected with provincial motor vehicle tax, often called token tax, and falls under the general one hundred percent rule. ### How do the rates compare? **New car at sale or registration (section 231B(1) and (3), Division VII clause (1))** | Engine capacity | On the list | Not on the list (x3) | |---|---|---| | Up to 850cc | 0.5% of value | 1.5% of value | | 851cc to 1000cc | 1% | 3% | | 1001cc to 1300cc | 1.5% | 4.5% | | 1301cc to 1600cc | 2% | 6% | | 1601cc to 1800cc | 3% | 9% | | 1801cc to 2000cc | 5% | 15% | | 2001cc to 2500cc | 7% | 21% | | 2501cc to 3000cc | 9% | 27% | | Above 3000cc | 12% | 36% | **Transfer of a registered car (section 231B(2), Division VII clause (2))**, before the yearly reduction in that clause: | Engine capacity | On the list | Not on the list (x3) | |---|---|---| | Up to 850cc | Nil | Nil | | 851cc to 1000cc | Rs. 5,000 | Rs. 15,000 | | 1001cc to 1300cc | Rs. 7,500 | Rs. 22,500 | | 1301cc to 1600cc | Rs. 12,500 | Rs. 37,500 | | 1601cc to 1800cc | Rs. 18,750 | Rs. 56,250 | | 1801cc to 2000cc | Rs. 25,000 | Rs. 75,000 | | 2001cc to 2500cc | Rs. 37,500 | Rs. 112,500 | | 2501cc to 3000cc | Rs. 50,000 | Rs. 150,000 | | Above 3000cc | Rs. 62,500 | Rs. 187,500 | **Annual collection with motor vehicle tax (section 234, Division III clause (3))** | Engine capacity | On the list | Not on the list (x2) | |---|---|---| | Up to 1000cc | Rs. 800 | Rs. 1,600 | | 1001cc to 1199cc | Rs. 1,500 | Rs. 3,000 | | 1200cc to 1299cc | Rs. 1,750 | Rs. 3,500 | | 1300cc to 1499cc | Rs. 2,500 | Rs. 5,000 | | 1500cc to 1599cc | Rs. 3,750 | Rs. 7,500 | | 1600cc to 1999cc | Rs. 4,500 | Rs. 9,000 | | 2000cc and above | Rs. 10,000 | Rs. 20,000 | Where motor vehicle tax is collected in lump sum, clause (4) of Division III sets amounts from Rs. 10,000 (up to 1000cc) to Rs. 120,000 (2000cc and above), and the same doubling applies. ### Worked example (illustrative figures) Bilal in Karachi buys a locally assembled 1,500cc car with an invoice value of Rs. 6,500,000, inclusive of all duties and taxes. He is not in the active taxpayers' list. 1. Band: 1301cc to 1600cc, ordinary rate 2%. 2. Tax if he were on the list: Rs. 6,500,000 x 2% = Rs. 130,000. 3. Tenth Schedule increase of two hundred percent: 2% + 4% = 6%. 4. Tax collected from Bilal: Rs. 6,500,000 x 6% = Rs. 390,000. 5. Extra cost of not being on the list: Rs. 390,000 - Rs. 130,000 = Rs. 260,000. When he later pays annual motor vehicle tax, the section 234 amount for a 1,500cc car is Rs. 3,750 on the list, doubled to Rs. 7,500 for him. ### What happens to the extra tax? Section 231B(5) and section 234(5) both make the tax adjustable. Rule 3 of the Tenth Schedule adds a consequence: if tax was collected under rule 1 and the person does not file a return for that tax year by the due date, the Commissioner makes a provisional assessment, imputing income from the tax collected and treating it as concealed income for section 111(1)(d). Under rule 4, that provisional assessment abates if the returns and wealth statement for the relevant and preceding tax year are filed within forty-five days of receiving it, and rule 4(3) makes the tax collected under rule 1 adjustable against the tax payable in the return. ### What if the buyer was not required to file a return? Rule 2 of the Tenth Schedule lets the person collecting the tax notify the Commissioner electronically, before collecting, that the buyer was not required to file a return under section 114. The Commissioner has thirty days to accept or reject; silence for thirty days counts as acceptance. ### Common mistakes - **Assuming every vehicle tax is doubled.** Section 231B collections are tripled by the specific proviso. Only other collections, such as section 234, follow the general doubling. - **Treating "filer" as enough.** The test in the Tenth Schedule is whether the name appears in the active taxpayers' list, not whether a return was ever filed. - **Assuming leasing follows the same table.** Section 231B(1A) separately sets 4% of the vehicle value when a bank or leasing company leases a vehicle to a person not in the list. The Tenth Schedule proviso refers to the rate "specified in First Schedule", and the text does not say whether it also applies to the rate written into section 231B(1A). ### What to check in the official text Read section 100BA, rules 1 to 4 of the Tenth Schedule, section 231B, section 234, clauses (1) to (3) of Division VII and clauses (3) and (4) of Division III of Part IV of the First Schedule. Check the Second Schedule for any clause that switches off section 100BA and rule 1 for a particular class of person, since several exist and this page does not list them. ### Frequently asked #### Is a non-filer's car tax double or triple? For section 231B, which covers purchase, registration and transfer, the first proviso to rule 1 of the Tenth Schedule increases the First Schedule rate by two hundred percent, so it is three times. For other collections such as section 234, the general rule is an increase of one hundred percent, so it is twice. #### Does the extra tax come back if I file a return later? Rule 4(3) of the Tenth Schedule says that where returns are filed, the tax collected under rule 1 is adjustable against the tax payable in the return for the relevant tax year. Section 231B(5) also makes car advance tax adjustable. The Ordinance does not promise that the full uplift will be refunded; that depends on the tax payable in the return. #### What if I am on the list but filed my return late? Section 100BA still refers to persons on the list who did not file by the due date, but rule 1A of the Tenth Schedule, which set rates for them, was omitted by the Finance Act, 2026. Rule 1 speaks only of persons not appearing in the list, so the text does not clearly apply the car uplift to late filers who are on it. ### Citations - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "The provisions of the Tenth Schedule shall have effect notwithstanding anything to the contrary contained in this Ordinance." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rules 1, 3 and 4 (Rules for persons not appearing in the active taxpayers' list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 231B (Advance tax on motor vehicles)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#231b-advance-tax-on-motor-vehicles), as amended to 2026-06-30: "The advance tax collected under this section shall be adjustable" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division VII (Advance Tax on Purchase, Registration and Transfer of Motor Vehicles), clauses (1), (2) and (3)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 234 (Tax on motor vehicles)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#234-tax-on-motor-vehicles), as amended to 2026-06-30: "In respect of motor cars used for more than ten years in Pakistan, no advance tax shall be collected after a period of ten years." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division III (Tax on Motor Vehicles), clauses (3) and (4)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much income tax do van, wagon, coaster and bus owners pay per seat with their token? Source: https://qanoondigest.com/faq/vehicle-owners/passenger-transport-per-seat-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 234 and Division III of Part IV of the First Schedule, passenger vehicles plying for hire pay a yearly amount per registered seat: Rs. 200 to Rs. 1,000 per seat without air conditioning and Rs. 375 to Rs. 1,500 with it, by seating capacity. Vehicles of ten or more seats stop paying ten years after their year of make. **Applies to:** Owners of vans, wagons, coasters, minibuses and buses registered to carry passengers for hire in Pakistan, who pay motor vehicle tax to a provincial Excise and Taxation office. ### What does the law say? Section 234 of the Income Tax Ordinance, 2001 requires the person collecting motor vehicle tax to collect advance income tax at the same time, at the rates in Division III of Part IV of the First Schedule. Clause (2) of Division III covers "passenger transport vehicles plying for hire" and sets these rates, in rupees per seat per annum. They are the rates in the text amended to 30 June 2026 and apply in tax year 2027: | Registered seating capacity | Non air-conditioned (Rs. per seat per annum) | Air-conditioned (Rs. per seat per annum) | |---|---|---| | 4 or more persons but less than 10 | 200 | 375 | | 10 or more persons but less than 20 | 500 | 750 | | 20 persons or more | 1,000 | 1,500 | Section 234(3) adds a time limit: for a passenger transport vehicle with registered seating capacity of ten or more persons, advance tax is not collected "after a period of ten years from the first day of July of the year of make of the vehicle". ### How does it work in practice? The owner multiplies the registered seats by the rate for the vehicle's band and air-conditioning status. The whole vehicle falls into one band based on its total capacity; the table does not charge the first nine seats at one rate and the rest at another. The tax is paid through the Excise and Taxation office along with the token. Under section 234(2), if the motor vehicle tax is paid in instalments or as a lump sum, the advance tax may be collected the same way. The token itself, and how the province schedules it, are provincial matters outside this corpus. Section 234(5) makes the tax adjustable. The owner can claim it as a credit in the income tax return rather than treating it as the last word on the tax due on fares. ### Worked example (illustrative figures) Shahid runs a Rawalpindi to Murree service and is on the Active Taxpayers' List. The vehicles and years are invented; the rates are from clause (2). 1. **Air-conditioned coaster, 26 registered seats, made in 2020.** Band: 20 persons or more, air-conditioned. 26 x Rs. 1,500 = **Rs. 39,000** per annum. 2. **Non air-conditioned wagon, 14 registered seats, made in 2019.** Band: 10 or more but less than 20, non air-conditioned. 14 x Rs. 500 = **Rs. 7,000** per annum. 3. **Air-conditioned van, 7 registered seats, plying for hire.** Band: 4 or more but less than 10, air-conditioned. 7 x Rs. 375 = **Rs. 2,625** per annum. Total for the year: Rs. 39,000 + Rs. 7,000 + Rs. 2,625 = **Rs. 48,625**. If Shahid also ran a 30-seat bus made in 2015, section 234(3) would stop collection ten years from 1 July 2015, that is from 1 July 2025. No advance tax would be collected on that bus in tax year 2027. ### What if the owner is not on the Active Taxpayers' List? Section 100BA sends collection from persons not on the Active Taxpayers' List to the Tenth Schedule. Rule 1 increases the rate "by hundred percent". Rule 10, clause (ha) excluded section 234 tax on goods and passenger transport vehicles, but only for the period from the Tax Laws (Second Amendment) Ordinance, 2022 to 30 June 2023. On the text, that exclusion has run out, so the doubled rate appears to apply now: the 26-seat coaster above would carry Rs. 78,000 instead of Rs. 39,000. ### What if the van has fewer than ten seats and is old? The ten-year limit in section 234(3) applies only to vehicles of ten or more seats. Section 234(2A) separately stops advance tax on "motor cars used for more than ten years in Pakistan". The Ordinance does not say whether a van or car with fewer than ten seats plying for hire counts as a "motor car" for that rule, so the text leaves this point open. ### Common mistakes - **Using the older, higher rates.** Before the Tax Laws (Second Amendment) Ordinance, 2022, the table ran from Rs. 500 to Rs. 2,500 per seat non air-conditioned and Rs. 1,000 to Rs. 4,000 air-conditioned. That Ordinance substituted the lower table shown above, and the Tax Laws (Amendment) Act, 2023 enacted the same substitution. - **Counting ten years from registration.** For passenger vehicles of ten or more seats, section 234(3) counts from 1 July of the year of make. It is goods vehicles under 8,120 kg that count from first registration. - **Relying on old reduced rates.** A Second Schedule clause that once cut the rate to Rs. 250 per seat was omitted by the Finance Act, 2015. - **Assuming vehicles under four seats are covered by the table.** The first band starts at 4 persons. The table does not deal with smaller capacities. ### What to check in the official text Read section 234(1) to (5) and clause (2) of Division III of Part IV of the First Schedule in the official PDF, since our site copy of the Ordinance does not reproduce the schedule tables. The Ordinance does not define "air conditioned" for this table. If the owner is not on the Active Taxpayers' List, read rules 1 and 10 of the Tenth Schedule. ### Frequently asked #### Is the per-seat rate charged every year? Yes. The table in clause (2) of Division III states the rates as rupees per seat per annum. Section 234(2) lets the tax be collected in instalments or as a lump sum in the same way as the motor vehicle tax. #### When does a coaster or bus stop paying this tax? Section 234(3) says that for a passenger transport vehicle with a registered seating capacity of ten or more, advance tax is not collected after ten years from the first day of July of the year of make. The ten years run from the year of make, not from the date of registration. #### Does the driver's seat count? The table works on registered seating capacity. The Ordinance does not say whether the driver's seat is included, so the seating capacity shown on the registration record is the figure the text points to. ### Citations - [Income Tax Ordinance, 2001, section 234 (Tax on motor vehicles)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#234-tax-on-motor-vehicles), as amended to 2026-06-30: "In respect of a passenger transport vehicle with registered seating capacity of ten or more persons, advance tax shall not be collected after a period" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division III (Tax on Motor Vehicles), clause (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "shall be determined in accordance with the rules in the Tenth Schedule." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 and rule 10, clause (ha)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How do I get proof of the advance tax paid on my car registration or transfer to claim it in my return? Source: https://qanoondigest.com/faq/vehicle-owners/vehicle-tax-certificate-proof Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 164 requires the Excise office or other collector to give you copies of the Computerized Payment Receipt (CPR) and a certificate of the tax collected at the time of collection, and your return must attach the CPR. Rule 42 of the Income Tax Rules lets you ask the issuer for a duplicate if the certificate is lost. **Applies to:** Vehicle owners who paid advance income tax on registration, transfer, purchase, lease or the annual token and want to claim it as a credit in their income tax return. ### What does the law say? Three provisions of the Income Tax Ordinance, 2001, as amended to 30 June 2026, and one rule of the Income Tax Rules, 2002 govern proof of vehicle advance tax. **Section 164(1)** applies to every person collecting tax under Chapter XII of the Ordinance. The vehicle taxes (section 231B on purchase, registration, transfer and leasing, and section 234 with the token) are in Chapter XII. At the time of collection, the collector must give the person from whom tax was collected copies of the Computerized Payment Receipt (CPR) "or any other equivalent document along with a certificate setting out the amount of tax collected". A proviso substitutes a SWAPS Payment Receipt (SPR) where the collector has been notified as a SWAPS agent. **Section 164(2)** turns to the taxpayer: a person required to file a return for a tax year "shall attach to the return" copies of the CPR or SPR on which the certificate is based, for tax collected in that year. **Section 168** is what the proof is for. Tax collected under Chapter XII is "treated as tax paid by the person from whom the tax was collected", and section 168(2) gives that person a credit against tax on taxable income for the tax year in which it was collected. **Rule 42 of the Income Tax Rules, 2002** (as amended to 24 November 2023) sets the certificate procedure. A person collecting tax under Chapter XII must issue a certificate in the prescribed form "within fifteen days after the end of the financial year", or within seven days of a request made earlier in the year. If the certificate is lost, stolen or destroyed, the recipient "may request, in writing, to the issuer of the certificate to issue a duplicate", and the issuer shall comply and mark it "duplicate". ### How does it work in practice? For a car, the collector is usually the Excise and Taxation registering authority (sections 231B(1), (2) and (2A) and section 234), the manufacturer (section 231B(3)) or the bank or leasing company (section 231B(1A)). Each is a person collecting tax under Chapter XII, so each carries the section 164 duty toward the person who paid. Collectors also report. Section 165(1) requires every person collecting tax under Chapter XII to file quarterly statements setting out the name, CNIC or NTN and address of each person from whom tax was collected, and the total collected from that person. That is the collector's own reporting duty; the Ordinance does not say that it replaces the taxpayer's duty under section 164(2) to attach the CPR. ### Worked example (illustrative figures) Ahmed, a pharmacist in Peshawar, bought a used car in October 2026 (tax year 2027). All amounts below are invented. 1. **Transfer of ownership.** The Excise office collects advance tax under section 231B(2). He receives a CPR copy and a certificate for Rs. 7,500. 2. **Token.** In January 2027 he pays the motor vehicle tax and, with it, section 234 advance tax. He receives a second CPR and certificate for Rs. 2,000. 3. **Filing.** In his return for tax year 2027 he claims Rs. 7,500 + Rs. 2,000 = **Rs. 9,500** as a section 168 credit and attaches both CPR copies as section 164(2) requires. Suppose Ahmed had lost the transfer certificate. Under rule 42(3) he writes to the issuer, here the Excise office that collected the tax, asking for a duplicate. Rule 42(4) requires the issuer to issue one, clearly marked "duplicate". ### What if the tax was collected from someone else? The credit and the certificate belong to the person the tax was collected from. If a car was registered or transferred in a spouse's or parent's name, section 168(1)(b) treats the tax as paid by that person. The Ordinance text does not provide a way to move the credit to whoever supplied the money. ### What if the collector never gave me a certificate? Section 164(1) makes issuing it a duty of the collector at the time of collection, and rule 42(2) requires a certificate within seven days of a request made before the year ends. What happens after a refusal, and any provincial Excise procedures, are not set out in the provisions covered here. ### Common mistakes - **Treating the certificate alone as enough.** An earlier text of section 164(2) said the certificate was "sufficient evidence" for section 168. Those words have been omitted, and the current text asks for the CPR or SPR copies to be attached. - **Claiming in the wrong year.** Section 168(2) links the credit to the tax year of collection, not the year the car was bought or the return was filed. - **Asking FBR for the duplicate.** Rule 42(3) directs the request to the issuer of the certificate, meaning the collector. ### What to check in the official text Read section 164(1) and (2), section 164A on SWAPS agents, section 165(1), and section 168(1) and (2). Read rule 42 and the certificate form in Part VII of the Second Schedule to the Income Tax Rules, 2002. Rule 42's fifteen-day timing sits alongside section 164(1)'s "at the time of collection" wording, and the rules in our corpus are amended only to 24 November 2023. Whether an Excise department has been notified as a SWAPS agent is outside this corpus. ### Frequently asked #### What does the collector have to give me when I pay vehicle advance tax? Section 164(1) requires anyone collecting tax under Chapter XII, which includes sections 231B and 234, to give the payer copies of the Computerized Payment Receipt or an equivalent document, along with a certificate showing the amount collected. The section says this is done at the time of collection. #### I lost the certificate. Can I get another? Rule 42(3) of the Income Tax Rules, 2002 lets the recipient of a lost, stolen or destroyed certificate ask the issuer in writing for a duplicate. Rule 42(4) says the issuer shall comply and mark it duplicate. #### Can I claim tax paid on a car registered in my father's name? Section 168(1)(b) treats the tax as paid by the person from whom it was collected, and section 164 makes the certificate out to that person. The Ordinance does not provide for passing the credit to someone else, such as a family member who paid the money. ### Citations - [Income Tax Ordinance, 2001, section 164 (Certificate of collection or deduction of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#164-certificate-of-collection-or-deduction-of-tax), as amended to 2026-06-30: "A person required to furnish a return of taxable income for a tax year shall attach to the return" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "shall be treated as tax paid by the person from whom the tax was collected or deducted." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 165 (Statements)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#165-statements), as amended to 2026-06-30: "the total amount of tax collected from a person under Division II of this Part" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, Income Tax Rules, 2002, rule 42 (Certificate of collection or deduction of tax)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24), as amended to 2023-11-24 Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf --- ## Is advance tax charged on registering an imported or reconditioned car if tax was already paid at import? Source: https://qanoondigest.com/faq/vehicle-owners/imported-car-registration-advance-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Not for the importer. Section 231B(4) says the registration collection under section 231B(1) does not apply if a person produces evidence that tax under section 148 was collected from the same person for the same imported vehicle. A buyer who did not import the car is not that person, so the relief as worded does not cover them. **Applies to:** People registering a new or used (reconditioned) imported car, jeep or SUV in Pakistan during tax year 2027, whether they imported it themselves or bought it from an importer or showroom. An imported car can meet income tax at two points: at the port, when Customs collects advance tax under section 148, and at the Excise and Taxation office, when the car is first registered under section 231B(1). Section 231B(4) of the Income Tax Ordinance, 2001, as amended to 30 June 2026, decides whether both apply. The rates discussed here are those for tax year 2027. ### What does the law say? Section 148(1) requires the Collector of Customs to collect advance tax from every importer of goods on the value of the goods, at the rate in Part II of the First Schedule. Section 148(5) says it is collected in the same manner and at the same time as customs duty. Section 231B(1) separately requires the registering authority of the Excise and Taxation Department to collect advance tax when a motor vehicle is registered, at the rates in Division VII of Part IV of the First Schedule. Section 231B(4) links the two. Sub-section (1) does not apply if a person produces evidence that tax under section 148 was collected from the same person in respect of the same imported vehicle. The sub-section draws no distinction between a new and a used imported car, so it reads the same for a reconditioned vehicle. ### How is the registration tax worked out when it does apply? The rate is a percentage of value by engine capacity, from clause (1) of Division VII: | Engine capacity | Rate of tax | |---|---| | Up to 850cc | 0.5% of the value | | 851cc to 1000cc | 1% of the value | | 1001cc to 1300cc | 1.5% of the value | | 1301cc to 1600cc | 2% of the value | | 1601cc to 1800cc | 3% of the value | | 1801cc to 2000cc | 5% of the value | | 2001cc to 2500cc | 7% of the value | | 2501cc to 3000cc | 9% of the value | | Above 3000cc | 12% of the value | For a vehicle imported into Pakistan, the first proviso to clause (1) makes the value the import value assessed by the Customs authorities, increased by customs duty, federal excise duty and sales tax payable at import stage. It is not the price paid to a showroom. Where engine capacity is not applicable and the value is Rs. 5 million or more, the second proviso sets 3% of the import value increased by customs duty, sales tax and federal excise duty. ### Worked example (illustrative figures) **Case 1: the importer registers.** Sana in Islamabad imports a used 1,798cc SUV in her own name. Customs assesses the import value at Rs. 4,000,000, and customs duty, federal excise duty and sales tax at import come to Rs. 3,500,000. Tax under section 148 is collected from her at import. 1. At registration she produces evidence that section 148 tax was collected from her for this vehicle. 2. Section 231B(4) applies, so the registration collection under section 231B(1) is nil. **Case 2: a showroom buyer registers.** Kamran in Lahore buys an identical SUV that a Lahore showroom imported in its own name. Section 148 tax was collected from the showroom, not from Kamran. He appears in the active taxpayers' list. 1. Section 231B(4) does not apply, because the tax was not collected from the same person. 2. Value under the first proviso: Rs. 4,000,000 + Rs. 3,500,000 = Rs. 7,500,000. 3. Engine band: 1601cc to 1800cc, so the rate is 3%. 4. Tax under section 231B(1): Rs. 7,500,000 x 3% = Rs. 225,000. If Kamran did not appear in the active taxpayers' list, the first proviso to rule 1 of the Tenth Schedule increases tax under section 231B by two hundred percent of the First Schedule rate. The 3% rate becomes 9%, and Rs. 7,500,000 x 9% = Rs. 675,000. ### What if the car was imported under a gift or baggage scheme? This page does not cover the customs schemes under which personal vehicles are brought into Pakistan, or any SRO that governs them; those are outside this corpus. For income tax, the test in section 231B(4) stays the same: was tax under section 148 collected from the person now registering, for this vehicle? If a car is imported in one family member's name and registered in another's, the text does not treat them as the same person. ### Is section 148 tax treated the same way as section 231B tax? Not in the wording. Section 231B(5) says tax collected under section 231B is adjustable. Section 148(7) describes tax collected under section 148 as minimum tax on the income of the importer arising from the imports, with an exception for an industrial undertaking importing for its own use. The Ordinance does not spell out how that description applies to a private individual importing one car for personal use, and this page does not resolve it. The section 148 rates for vehicles depend on the Part II rates and the Twelfth Schedule classification, which this page does not reproduce. ### Common mistakes - **Using the showroom price as the value.** Division VII uses the Customs-assessed import value plus import-stage duties and taxes for an imported vehicle. - **Relying on someone else's import documents.** Section 231B(4) requires collection from the same person. - **Assuming a used car is outside section 231B.** The five-year cut-off in the proviso to section 231B(1) runs from the "date of first registration" defined in section 231B(6). For a vehicle not previously registered by the Excise and Taxation Department, clause (d) points to that first registration, so a car imported used is not excused merely by its age. ### What to check in the official text Read section 231B(1), (4), (5) and (6), section 148(1), (5) and (7), and clause (1) of Division VII of Part IV of the First Schedule with both provisos. Customs valuation rules, import schemes for personal vehicles and provincial registration charges are outside this corpus. ### Frequently asked #### I imported the car myself. Do I pay advance tax again at registration? Section 231B(4) says sub-section (1) does not apply if you produce evidence that tax under section 148 was collected from you for the same vehicle. Without that evidence the section 231B(1) duty stays in place. #### I bought an imported car from a showroom. Does the importer's tax count for me? Section 231B(4) requires the section 148 tax to have been collected from the same person. If the showroom or another importer paid it, the registering authority's collection under section 231B(1) is not switched off for you by that sub-section. #### What value is used for an imported car? The first proviso to Division VII clause (1) uses the import value assessed by Customs, increased by customs duty, federal excise duty and sales tax payable at import stage. ### Citations - [Income Tax Ordinance, 2001, section 231B (Advance tax on motor vehicles)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#231b-advance-tax-on-motor-vehicles), as amended to 2026-06-30: "Sub-section (1) shall not apply if a person produces evidence that tax under sub-section (3) in case of a locally manufactured vehicle or tax under section 148 in the case of imported vehicle was collected from the same person in respect of the same vehicle." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 148 (Imports)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#148-imports), as amended to 2026-06-30: "The Collector of Customs shall collect advance tax from every importer of goods on the value of the goods at the rate specified in Part II of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division VII (Advance Tax on Purchase, Registration and Transfer of Motor Vehicles), clause (1), Table and provisos](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1, first proviso (section 231B for persons not in the active taxpayers' list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much s.234 income tax is collected with the token for my car, for a filer and a non-filer, yearly or as a lump sum? Source: https://qanoondigest.com/faq/vehicle-owners/section-234-token-tax-rates Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Division III of Part IV of the First Schedule sets the section 234 amount by engine capacity: Rs. 800 to Rs. 10,000 a year, or Rs. 10,000 to Rs. 120,000 where the token is paid as a lump sum. Rule 1 of the Tenth Schedule, applied through section 100BA, doubles these amounts for owners not on the active taxpayers' list. **Applies to:** Owners of private cars, jeeps and similar motor vehicles in Pakistan paying their token (motor vehicle tax) yearly or as a lump sum in tax year 2027. The income tax collected with a car's token depends on three things: engine capacity, whether the token is paid yearly or as a lump sum, and whether the owner is on the active taxpayers' list. The amounts below come from Division III of Part IV of the First Schedule to the Income Tax Ordinance, 2001, as amended to 30 June 2026. They apply to tokens paid in tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? **Section 234(1)** requires any person collecting motor vehicle tax to collect advance tax at the Division III rates. **Section 234(2)** says that if the motor vehicle tax is collected in instalments or lump sum, "the advance tax may also be collected in instalments" or lump sum in like manner. **Division III, clause (3)** sets the amount for "other motor vehicles", meaning vehicles other than the goods and passenger transport vehicles covered by clauses (1) and (2). **Clause (4)** applies "where the motor vehicle tax is collected in lump sum". **Section 100BA** says the collection of advance tax from a person not on the active taxpayers' list "shall be determined in accordance with the rules in the Tenth Schedule". **Rule 1 of the Tenth Schedule** says the rate for such persons "shall be increased by hundred percent of the rate specified in" the Ordinance. The only special proviso for vehicles in rule 1 is the two hundred percent increase for section 231B, which does not cover section 234. ### How much is collected? | Engine capacity | Yearly, on the list (clause 3) | Yearly, not on the list | Lump sum, on the list (clause 4) | Lump sum, not on the list | |---|---|---|---|---| | Up to 1000cc | Rs. 800 | Rs. 1,600 | Rs. 10,000 | Rs. 20,000 | | 1001cc to 1199cc | Rs. 1,500 | Rs. 3,000 | Rs. 18,000 | Rs. 36,000 | | 1200cc to 1299cc | Rs. 1,750 | Rs. 3,500 | Rs. 20,000 | Rs. 40,000 | | 1300cc to 1499cc | Rs. 2,500 | Rs. 5,000 | Rs. 30,000 | Rs. 60,000 | | 1500cc to 1599cc | Rs. 3,750 | Rs. 7,500 | Rs. 45,000 | Rs. 90,000 | | 1600cc to 1999cc | Rs. 4,500 | Rs. 9,000 | Rs. 60,000 | Rs. 120,000 | | 2000cc and above | Rs. 10,000 | Rs. 20,000 | Rs. 120,000 | Rs. 240,000 | The "on the list" columns are copied from clauses (3) and (4). The "not on the list" columns apply the hundred percent increase in rule 1 of the Tenth Schedule, which doubles each amount. Cars up to 1000cc are not exempt. Clause (3) has a row for them at Rs. 800 a year. Clause (4) does not say how many years a lump-sum payment covers. That depends on the provincial motor vehicle tax arrangement, which is outside this corpus. ### Worked example (illustrative figures) **Case 1: yearly token, owner on the list.** Usman in Peshawar owns a 1500cc car and is on the active taxpayers' list. He pays the yearly token in September 2026. 1. Clause (3), row 1500cc to 1599cc: Rs. 3,750. 2. Section 234 tax collected: **Rs. 3,750**, adjustable in his tax year 2027 return. **Case 2: lump sum, owner not on the list.** Farah in Karachi buys a new 1000cc car and pays the token in lump sum. She is not on the active taxpayers' list. 1. Clause (4), row up to 1000cc: Rs. 10,000. 2. Rule 1 of the Tenth Schedule adds hundred percent: Rs. 10,000 x 100% = Rs. 10,000. 3. Section 234 tax collected: Rs. 10,000 + Rs. 10,000 = **Rs. 20,000**. If Farah files her return for tax year 2027 in time for rule 4(3) of the Tenth Schedule, the tax collected under rule 1 is adjustable against the tax payable in that return. ### What if I am paying token arrears for past years? Section 234 does not deal with arrears separately. The advance tax is collected "at the time of" collecting the motor vehicle tax, at the Division III rates in force. Rule 1 of the Tenth Schedule applies to persons not on the active taxpayers' list, but neither it nor section 234 says whether the owner's list status on the payment date or in the year the arrear relates to decides the rate. The Ordinance leaves that open. ### What if the car is more than ten years old? Section 234(2A) says no advance tax is collected on motor cars used for more than ten years in Pakistan after a period of ten years. That limit is covered on the linked page about when the token income tax stops. ### Common mistakes - **Looking for a non-filer column in Division III.** The Finance Act, 2019 removed it. The increase now comes from the Tenth Schedule. - **Tripling instead of doubling.** The two hundred percent increase in rule 1 is for section 231B only. For section 234 the general hundred percent increase applies. - **Assuming a lump sum is final.** Section 234(5) makes the tax adjustable however it is collected. ### What to check in the official text Read section 234, section 100BA, clauses (3) and (4) of Division III of Part IV of the First Schedule, and rules 1 and 4 of the Tenth Schedule. Section 100BA also mentions persons on the list who file late, but the Tenth Schedule rule that set rates for them, rule 1A, was omitted by the Finance Act, 2026. Confirm your status on the active taxpayers' list on the day you pay. Provincial motor vehicle tax rates are outside this corpus. ### Frequently asked #### How much section 234 tax is collected on a 1000cc car? Clause (3) of Division III sets Rs. 800 a year for cars up to 1000cc, and clause (4) sets Rs. 10,000 where the motor vehicle tax is collected in lump sum. For an owner not on the active taxpayers' list, rule 1 of the Tenth Schedule doubles these to Rs. 1,600 and Rs. 20,000. #### Is there still a separate non-filer column in the token tax table? No. The Finance Act, 2019 replaced the filer and non-filer columns with a single amount. The higher amount for persons not on the active taxpayers' list now comes from rule 1 of the Tenth Schedule, which increases the rate by hundred percent. #### Which date's filer status applies when I pay token arrears for past years? The Ordinance does not say. Rule 1 of the Tenth Schedule applies to tax collected from persons not on the active taxpayers' list, but neither section 234 nor the Tenth Schedule states whether list status on the payment date or in the year the arrear relates to decides the rate. ### Citations - [Income Tax Ordinance, 2001, section 234 (Tax on motor vehicles)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#234-tax-on-motor-vehicles), as amended to 2026-06-30: "the advance tax may also be collected in instalments" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division III (Tax on Motor Vehicles), clauses (3) and (4)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "shall be determined in accordance with the rules in the Tenth Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (rate increased by hundred percent for persons not on the active taxpayers' list) and rule 4(3)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 231B (Advance tax on motor vehicles)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#231b-advance-tax-on-motor-vehicles), as amended to 2026-06-30: "The advance tax collected under this section shall be adjustable" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do I pay vehicle advance tax on a motorcycle, rickshaw or commercial vehicle? Source: https://qanoondigest.com/faq/vehicle-owners/motorcycle-rickshaw-vehicle-tax-exclusions Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Not under section 231B for most of them. Section 231B(7) excludes vehicles used for public transportation, carriage of goods and agriculture machinery, rickshaws and motorcycle rickshaws, and any vehicle up to 200cc. Commercial goods and passenger vehicles still pay section 234 advance tax at Division III rates by laden weight or seats. **Applies to:** Owners and buyers of motorcycles, rickshaws, trucks, pickups used for goods, vans, buses and coaches in Pakistan during tax year 2027. Two sections of the Income Tax Ordinance, 2001 collect advance tax on vehicles. Section 231B collects it on registration, transfer and purchase. Section 234 collects it alongside the provincial motor vehicle tax (the "token"). They do not cover exactly the same vehicles. This page uses the Ordinance as amended to 30 June 2026, so the rates are those for tax year 2027. ### What does the law say? Section 231B(7) defines "motor vehicle" for section 231B. It includes a car, caravan automobile, jeep, limousine, pickup, sports utility vehicle, truck, van, wagon and any other automobile, excluding: 1. a motor vehicle used for public transportation, carriage of goods and agriculture machinery; 2. a rickshaw or a motorcycle rickshaw; and 3. any other motor vehicle having engine capacity up to 200cc. A vehicle in any of these three groups is outside section 231B. No advance tax is collected under that section at registration, at transfer or at sale by the manufacturer. Section 234 works differently. Section 234(1) requires any person collecting motor vehicle tax to also collect advance tax at the rates in Division III of Part IV of the First Schedule. Section 234(6) says that, for sub-sections (1) and (2), "motor vehicle" includes the vehicles specified in section 231B(7). Division III has its own rates for goods transport and passenger transport vehicles, so the exclusion in section 231B(7) does not remove commercial vehicles from section 234. ### What does section 234 charge on commercial vehicles? **Goods transport vehicles.** Clause (1) of Division III charges two rupees and fifty paisa per kilogram of the laden weight. Clause (1A) says that for goods transport vehicles with laden weight of 8,120 kilograms or more, advance tax after ten years from first registration in Pakistan is collected at Rs. 1,200 per annum. Section 234(4) says that for a goods transport vehicle with registered laden weight of less than 8,120 kilograms, advance tax is not collected after ten years from first registration in Pakistan. **Passenger transport vehicles plying for hire.** Clause (2) of Division III sets rates per seat per annum by registered seating capacity: | Registered seating capacity | Non air conditioned (Rs. per seat per annum) | Air conditioned (Rs. per seat per annum) | |---|---|---| | 4 or more but less than 10 persons | 200 | 375 | | 10 or more but less than 20 persons | 500 | 750 | | 20 persons or more | 1,000 | 1,500 | Section 234(3) says that for a passenger transport vehicle with registered seating capacity of ten or more, advance tax is not collected after ten years from the first day of July of the year of make. Section 234(2) allows the advance tax to be collected in instalments or lump sum, in the same way as the motor vehicle tax. Section 234(5) makes it adjustable. ### Worked example (illustrative figures) **Truck.** Rafiq in Multan owns a goods truck with a registered laden weight of 12,000 kilograms, first registered six years ago. 1. Clause (1) rate: Rs. 2.50 per kilogram of laden weight. 2. Tax: 12,000 x Rs. 2.50 = Rs. 30,000, collected with the motor vehicle tax. 3. Because the truck is used for carriage of goods, no section 231B tax applied when it was registered. **Coach.** Sajid in Peshawar runs an air conditioned coach with 45 registered seats, plying for hire. 1. Clause (2) band: 20 persons or more, air conditioned, Rs. 1,500 per seat per annum. 2. Tax: 45 x Rs. 1,500 = Rs. 67,500 per annum. **Motorcycle.** Ali in Hyderabad registers a new 125cc motorcycle. It is up to 200cc, so section 231B(7)(iii) takes it outside section 231B and nothing is collected under that section. ### What if the owner is not in the active taxpayers' list? Rule 1 of the Tenth Schedule increases the rate of tax collected from a person not in the active taxpayers' list by one hundred percent of the rate in the Ordinance, unless rule 10 excludes the section. Rule 10(ha) excluded section 234 tax on goods transport and passenger transport vehicles only for the period ending 30 June 2023. For tax year 2027 that exclusion period has passed, so on the text the general rule 1 increase applies. ### What about a motorcycle above 200cc, or section 234 on a bike or rickshaw? The text leaves gaps here, and this page does not fill them. - The 200cc exclusion in section 231B(7)(iii) covers vehicles "up to 200cc". The definition does not say whether a motorcycle above 200cc is an "automobile" within it. - Section 234(6) uses the word "include" for the vehicles in section 231B(7). It does not expressly exclude motorcycles or rickshaws from section 234, and Division III does not mention them. ### Common mistakes - **Treating a pickup as always exempt.** Section 231B(7) lists pickups and trucks as included. The exclusion depends on use: a vehicle "used for" carriage of goods or public transportation. - **Assuming commercial means untaxed.** Goods and passenger vehicles leave section 231B but pay section 234 at Division III rates. - **Treating section 234 tax as final.** Section 234(5) makes it adjustable. ### What to check in the official text Read section 231B(7), section 234(1) to (6), and clauses (1), (1A) and (2) of Division III of Part IV of the First Schedule. Check rule 1 and rule 10 of the Tenth Schedule for persons not in the active taxpayers' list. The provincial motor vehicle tax itself, and provincial registration fees, are outside this corpus. ### Frequently asked #### Is advance tax collected when I register a 125cc motorcycle? Not under section 231B. Clause (iii) of section 231B(7) excludes any motor vehicle having engine capacity up to 200cc from the definition used for that section. #### Does a truck owner pay any vehicle advance tax? Yes, under section 234. A vehicle used for carriage of goods is outside section 231B, but clause (1) of Division III charges two rupees and fifty paisa per kilogram of laden weight on goods transport vehicles, collected with motor vehicle tax. #### Is the section 234 tax on a bus final? No. Section 234(5) says advance tax collected under the section is adjustable, so it counts towards the owner's income tax for the year. ### Citations - [Income Tax Ordinance, 2001, section 231B (Advance tax on motor vehicles)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#231b-advance-tax-on-motor-vehicles), as amended to 2026-06-30: "motor vehicle includes car, caravan automobiles, jeep, limousine, pickup, sports utility vehicle, trucks, vans, wagon and any other automobile excluding-" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 234 (Tax on motor vehicles)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#234-tax-on-motor-vehicles), as amended to 2026-06-30: "For the purpose of sub-sections (1) and (2) “motor vehicle” shall include the vehicles specified in sub-section (7) of section 231B." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division III (Tax on Motor Vehicles), clauses (1), (1A) and (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 and rule 10(ha) (persons not in the active taxpayers' list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Does the income tax collected with my token ever stop, for example after ten years? Source: https://qanoondigest.com/faq/vehicle-owners/when-token-income-tax-stops Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, for most vehicles. Section 234 stops the advance tax after ten years for motor cars used in Pakistan, for passenger vehicles of ten or more seats counted from 1 July of the year of make, and for goods vehicles under 8,120 kg counted from first registration. Goods vehicles of 8,120 kg or more instead pay Rs. 1,200 a year. **Applies to:** Owners of older cars, buses, coasters, vans and trucks in Pakistan who pay the token (motor vehicle tax) and want to know whether the section 234 income tax still applies. The advance income tax collected with a vehicle's token does not run forever. Section 234 of the Income Tax Ordinance, 2001, as amended to 30 June 2026, sets three separate ten-year limits, each counted from a different date, and one reduced amount for heavy goods vehicles. The rules below apply to tokens paid in tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? Section 234 has three time limits: - **Section 234(2A), motor cars.** "In respect of motor cars used for more than ten years in Pakistan, no advance tax shall be collected after a period of ten years." - **Section 234(3), passenger transport vehicles.** For a passenger transport vehicle with registered seating capacity of ten or more persons, advance tax is not collected after ten years "from the first day of July of the year of make of the vehicle". - **Section 234(4), lighter goods vehicles.** For a goods transport vehicle with registered laden weight of less than 8,120 kilograms, advance tax "shall not be collected after a period of ten years from the date of first registration of vehicle in Pakistan." Heavier goods vehicles are handled in the rate schedule instead. **Clause (1A) of Division III** says that for goods transport vehicles with laden weight of 8,120 kilograms or more, advance tax after ten years from first registration "shall be collected at the rate of twelve hundred rupees per annum". ### How does it work in practice? | Vehicle | Rate before the limit (Division III) | Ten years counted from | After ten years | |---|---|---|---| | Motor car | Clause (3): Rs. 800 to Rs. 10,000 a year by engine capacity | Not stated in section 234(2A) | Not collected | | Passenger vehicle, 10 or more seats | Clause (2): Rs. 500 to Rs. 1,500 per seat per annum | 1 July of the year of make | Not collected | | Goods vehicle under 8,120 kg | Clause (1): Rs. 2.50 per kg of laden weight | Date of first registration in Pakistan | Not collected | | Goods vehicle 8,120 kg or more | Clause (1): Rs. 2.50 per kg of laden weight | Date of first registration in Pakistan | Rs. 1,200 per annum | Clause (1) of Division III states the goods vehicle amount as two rupees and fifty paisa per kilogram of laden weight without naming a period. ### Worked example (illustrative figures) **Case 1: coaster.** Tariq runs a 26-seat air-conditioned coaster between Sialkot and Lahore. Its year of make is 2015. 1. Clause (2), row 20 persons or more, air conditioned: Rs. 1,500 per seat per annum. 2. Before the limit: 26 x Rs. 1,500 = Rs. 39,000 a year. 3. Ten years from 1 July 2015 ends on 1 July 2025. 4. Token paid in October 2026: section 234(3) applies, so **no advance tax**. **Case 2: heavy truck.** Imran owns a truck with registered laden weight of 12,000 kg, first registered in March 2014. 1. Clause (1): 12,000 x Rs. 2.50 = Rs. 30,000 before the ten-year point. 2. Ten years from first registration ended in March 2024. 3. From then on, clause (1A) applies: **Rs. 1,200 per annum**. **Case 3: lighter truck.** A pickup-based goods vehicle with registered laden weight of 3,000 kg, first registered in 2012, is more than ten years past first registration. Section 234(4) applies, so **no advance tax** is collected. ### What if my car is just over ten years old? Section 234(2A) does not say whether the ten years run from manufacture, import, first registration or first use in Pakistan. It says "used for more than ten years in Pakistan", unlike sub-sections (3) and (4), which each name a starting date. The Ordinance does not resolve this, so the starting date for a car is not settled by section 234 alone. ### What about vans and passenger vehicles with fewer than ten seats? Section 234(3) covers passenger vehicles of ten or more seats only. Clause (2) of Division III also taxes passenger vehicles plying for hire with 4 to 9 seats, at Rs. 200 non air conditioned or Rs. 375 air conditioned per seat per annum. Section 234 gives no separate time limit for those vehicles. Whether section 234(2A) covers one depends on whether it is a "motor car", a term the section does not define. The same question arises for jeeps and sports utility vehicles taxed under clause (3). ### Common mistakes - **Assuming every vehicle stops at ten years.** Goods vehicles of 8,120 kg or more keep paying Rs. 1,200 a year under clause (1A). - **Counting a bus from its registration date.** Section 234(3) counts from 1 July of the year of make. - **Mixing up the token and transfer limits.** The five-year limit in section 231B applies to transfer tax, not to the section 234 token tax. ### What to check in the official text Read section 234(2A), (3) and (4), and clauses (1), (1A), (2) and (3) of Division III of Part IV of the First Schedule. Check the registration book for the year of make, date of first registration, seating capacity and registered laden weight, since each limit turns on one of these. Provincial motor vehicle tax, which may continue after the federal advance tax stops, is outside this corpus. ### Frequently asked #### Do I pay section 234 income tax on a car older than ten years? Section 234(2A) says that for motor cars used for more than ten years in Pakistan, no advance tax is collected after a period of ten years. The sub-section does not say from which date the ten years are counted. #### When does the token income tax stop for a bus or coaster? Section 234(3) stops it for passenger transport vehicles with registered seating capacity of ten or more, after ten years from the first day of July of the year of make of the vehicle. #### Do heavy trucks keep paying section 234 tax after ten years? Yes, at a lower amount. Clause (1A) of Division III collects Rs. 1,200 a year after ten years from first registration for goods transport vehicles with laden weight of 8,120 kg or more. Lighter goods vehicles stop paying after ten years under section 234(4). ### Citations - [Income Tax Ordinance, 2001, section 234 (Tax on motor vehicles)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#234-tax-on-motor-vehicles), as amended to 2026-06-30: "In respect of motor cars used for more than ten years in Pakistan, no advance tax shall be collected after a period of ten years." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division III (Tax on Motor Vehicles), clauses (1), (1A), (2) and (3)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 231B (Advance tax on motor vehicles)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#231b-advance-tax-on-motor-vehicles), as amended to 2026-06-30: "Provided that no collection of advance tax under this sub- section shall be made on transfer of vehicles after five years from the date of first registration in Pakistan." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Why is there income tax in my car's token tax, and can I claim it in my return? Source: https://qanoondigest.com/faq/vehicle-owners/income-tax-in-car-token-section-234 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 234 of the Income Tax Ordinance requires any person collecting motor vehicle tax to collect federal advance income tax at the same time, at the Division III rates. Section 234(5) makes that tax adjustable, so section 168 lets the owner claim it as a credit in the return for the year it was collected. **Applies to:** Owners of cars, jeeps and other motor vehicles in Pakistan who pay the annual or lump-sum token (motor vehicle tax) and see an income tax amount on the same receipt. The income tax figure on your car token receipt is federal advance income tax under section 234 of the Income Tax Ordinance, 2001. It is collected alongside the provincial motor vehicle tax but belongs to a different law. Because it is adjustable, it counts towards your income tax for the year. This page follows the Ordinance as amended to 30 June 2026, so the amounts apply in tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? **Section 234(1)** says any person "at the time of" collecting motor vehicle tax "shall also collect advance tax at the rates specified in Division III of Part IV of the First Schedule." The duty follows the act of collecting motor vehicle tax. The section does not name a particular department. **Section 234(2)** says that if the motor vehicle tax is collected in instalments or lump sum, the advance tax may also be collected in instalments or lump sum "in like manner". That is why the income tax appears on both a yearly token and a lump-sum token. **Section 234(5)** says "Advance tax collected under this section shall be adjustable." Before the Finance Act, 2013 this sub-section made the tax final for owners of goods transport vehicles. The current text makes it adjustable without that limit. **Section 234(6)** says that for sub-sections (1) and (2), "motor vehicle" shall include the vehicles listed in section 231B(7). Section 231B(7) lists car, caravan automobiles, jeep, limousine, pickup, sports utility vehicle, trucks, vans, wagon and any other automobile. It then excludes public transport, goods carriage and agricultural machinery vehicles, rickshaws and motorcycle rickshaws, and vehicles up to 200cc. Section 234(6) uses the word "include", and Division III separately sets rates for goods transport and passenger transport vehicles, so those vehicles remain within section 234 through Division III itself. The Ordinance does not say whether the exclusions in section 231B(7) carry across into section 234. **Section 168** gives the credit. Tax collected under Chapter XII, where section 234 sits, is treated as tax paid by the person from whom it was collected. Section 168(2) allows that person a credit against the tax due for the tax year in which it was collected. Sub-section (5) of section 234 used to appear in section 168(3), the list of final taxes with no credit, but that entry was omitted by the Finance Act, 2013. ### How does it work in practice? For a car, clause (3) of Division III sets a yearly amount by engine capacity, and clause (4) sets the amount where the motor vehicle tax is collected as a lump sum. For example, a car of 1300cc to 1499cc carries Rs. 2,500 a year, or Rs. 30,000 where the motor vehicle tax is collected in lump sum. The full rate table, and the higher amount for owners not on the active taxpayers' list, is on the linked rates page. The credit belongs to the person from whom the tax was collected, which in practice is the registered owner paying the token. Keep the token receipt, since it is the record of the amount collected. ### Worked example (illustrative figures) Hina is a school administrator in Lahore who also earns rent from a small shop. She is on the active taxpayers' list and owns a 1300cc car. In August 2026 she pays the yearly token. 1. Division III, clause (3), row 1300cc to 1499cc: Rs. 2,500. 2. Section 234 advance tax on the token receipt: **Rs. 2,500**. 3. Suppose her total income tax for tax year 2027 works out to Rs. 95,000, and Rs. 80,000 of other adjustable tax has already been collected or deducted from her during the year. 4. Balance before the token credit: Rs. 95,000 - Rs. 80,000 = Rs. 15,000. 5. Section 168 credit for the token tax: Rs. 2,500. 6. Balance payable with her return: Rs. 15,000 - Rs. 2,500 = **Rs. 12,500**. ### What if I pay several years of token at once? Section 234(2) allows the advance tax to follow the motor vehicle tax into instalments or lump sum. Section 168(2) ties the credit to the tax year in which the tax was collected, so the whole amount collected on the payment date is credited in that year's return. The Ordinance does not provide for spreading it across the years the token covers. ### Common mistakes - **Treating the whole receipt as income tax.** Only the section 234 amount is federal income tax. The motor vehicle tax itself is provincial and is not credited in the income tax return. - **Thinking the token income tax is final.** Section 234(5) makes it adjustable, and the old final-tax entry in section 168(3) has been omitted. - **Assuming a small car pays nothing.** Clause (3) of Division III has a row for cars up to 1000cc at Rs. 800 a year. ### What to check in the official text Read section 234 in full, section 231B(7), section 168(1), (2) and (3), and clauses (3) and (4) of Division III of Part IV of the First Schedule. Provincial motor vehicle tax rates, and how each province prints the token receipt, are outside this corpus. ### Frequently asked #### Who collects the section 234 income tax on my car? Section 234(1) puts the duty on any person who collects motor vehicle tax: that person must also collect advance tax at the rates in Division III of Part IV of the First Schedule. The section does not name a particular office; it follows whoever collects the motor vehicle tax. #### Can I claim the income tax paid with my car token in my return? Yes. Section 234(5) says the advance tax collected under the section is adjustable. Section 168(2) gives a credit for it against the tax due for the tax year in which it was collected. #### Is the token income tax the same as the provincial token tax? No. The motor vehicle tax is a provincial levy and is outside this corpus. The section 234 amount is federal advance income tax collected alongside it, at rates set in the Income Tax Ordinance. ### Citations - [Income Tax Ordinance, 2001, section 234 (Tax on motor vehicles)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#234-tax-on-motor-vehicles), as amended to 2026-06-30: "Advance tax collected under this section shall be adjustable." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 231B (Advance tax on motor vehicles)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#231b-advance-tax-on-motor-vehicles), as amended to 2026-06-30: "motor vehicle includes car, caravan automobiles, jeep, limousine, pickup, sports utility vehicle, trucks, vans, wagon and any other automobile excluding-" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division III (Tax on Motor Vehicles), clauses (3) and (4)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- # Savers and investors Tax on bank profit, national savings, dividends, shares and mutual funds. ## How much more tax is deducted on bank and National Savings profit if I am not on the Active Taxpayers List? Source: https://qanoondigest.com/faq/investors-savers/bank-profit-tax-for-non-filers Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer The rate is doubled. Section 100BA applies the Tenth Schedule, and rule 1 increases the section 151 rate by one hundred percent for persons not on the Active Taxpayers List. Bank profit taxed at 20% for a filer is deducted at 40%, and National Savings profit taxed at 15% is deducted at 30%. **Applies to:** Individuals and other depositors who do not appear on the Active Taxpayers List and earn profit on bank deposits, National Savings accounts or certificates, or similar debt, in tax year 2027. ### What does the law say? Three pieces of the Income Tax Ordinance, 2001 decide the higher rate. 1. **Section 151** requires the payer to deduct tax on yield or profit from National Savings accounts and certificates, Post Office Savings Accounts, bank and financial institution deposits, Government securities and certain bonds and instruments, at the rate in Division IA of Part III of the First Schedule. 2. **Section 100BA** says the deduction of advance tax, and the computation of income and tax, for a person not appearing on the Active Taxpayers List is determined under the rules in the Tenth Schedule. Section 100BA(2) gives the Tenth Schedule effect "notwithstanding anything to the contrary contained in this Ordinance." 3. **Rule 1 of the Tenth Schedule** says that where tax is to be deducted or collected from persons not on the list, the rate "shall be increased by hundred percent of the rate specified in" the Ordinance. ### What are the rates side by side? Division IA sets the base rates. Rule 1 doubles each one for a person not on the Active Taxpayers List. | Payment under section 151 | Division IA clause | On the list | Not on the list | |---|---|---|---| | Profit from a bank or financial institution on an account or deposit | (a) | 20% | 40% | | Profit on Government securities paid to a person other than an individual | (b) | 20% | 40% | | National Savings, Post Office Savings, Government securities paid to an individual, and other cases | (c) | 15% | 30% | These rates apply for tax year 2027, as the Ordinance stands amended to 30 June 2026. ### What happened to the old 35% rate? Until the Finance Act, 2025, the table in rule 1 of the Tenth Schedule had a separate entry for section 151, on yield or profit on debt, at 35%. The Finance Act, 2025 omitted that serial number. With no specific entry left for section 151, the general one hundred percent increase in rule 1 applies. For bank profit, read with the 20% rate in Division IA, that produces 40%, which is higher than the old 35%. ### Worked example (illustrative figures) Two brothers in Faisalabad each earn the same profit in tax year 2027. Imran appears on the Active Taxpayers List. Kamran does not. Neither has Zakat deducted. **Bank term deposit profit of Rs. 400,000** 1. Imran: 20% x Rs. 400,000 = Rs. 80,000 deducted. 2. Kamran: 40% x Rs. 400,000 = Rs. 160,000 deducted. 3. Difference: Rs. 160,000 - Rs. 80,000 = Rs. 80,000. **National Savings certificate profit of Rs. 300,000** 1. Imran: 15% x Rs. 300,000 = Rs. 45,000 deducted. 2. Kamran: 30% x Rs. 300,000 = Rs. 90,000 deducted. 3. Difference: Rs. 90,000 - Rs. 45,000 = Rs. 45,000. On total profit of Rs. 700,000, Imran has Rs. 125,000 deducted and Kamran has Rs. 250,000 deducted. ### Is the extra tax lost for good? Not necessarily. For an individual, section 7B charges tax on profit on debt from the payers listed in section 151(1)(a) to (d), and for profit within section 7B that tax is final. Section 169(4) then says that where a final tax has a hundred percent higher rate under the Tenth Schedule, "the final tax shall be the tax rate prescribed in the First Schedule". The excess collected under the Tenth Schedule "shall be adjustable in case the return is filed before finalization of assessment as provided in rule 4 of the Tenth Schedule." Rule 4(3) of the Tenth Schedule says that where returns are filed before a provisional assessment, or within the time rule 4(2) allows, the tax deducted under rule 1 is adjustable against the tax payable in the return for that year. If no return is filed by the due date, rule 3 lets the Commissioner make a provisional assessment that imputes income from the tax deducted. ### What if I am on the list but file late? Section 100BA(1) refers both to persons not on the Active Taxpayers List and to persons on it who have not filed their return by the due date. A separate rule 1A, which set rates for the second group, was omitted by the Finance Act, 2026. Rule 1 as it now reads speaks of "persons not appearing in the active taxpayers’ list". The Ordinance text does not separately say how rule 1 applies to someone on the list who files late, and this page does not decide it. ### Common mistakes - **Using 35% for bank profit.** That fixed entry was omitted by the Finance Act, 2025. The doubled Division IA rate applies instead. - **Assuming National Savings profit is doubled to 40%.** It starts from the 15% rate in clause (c) of Division IA, so the doubled rate is 30%. - **Assuming the extra deduction is automatically final.** Section 169(4) treats the First Schedule rate as the final tax and makes the excess adjustable when a return is filed in time. ### What to check in the official text Read sections 100BA, 151, 7B and 169(4), rules 1, 3 and 4 of the Tenth Schedule, and Division IA of Part III of the First Schedule in the source PDF, since our site copy does not reproduce the schedules as tables. How a person gets onto the Active Taxpayers List is regulated as the Board prescribes, and the list itself is not part of this corpus. ### Frequently asked #### What rate does a bank deduct from a non-filer's profit in tax year 2027? Division IA sets 20% on profit paid by a banking company or financial institution. Rule 1 of the Tenth Schedule increases that rate by one hundred percent for a person not on the Active Taxpayers List, which gives 40%. #### Is there still a fixed 35% rate for non-filers on profit on debt? No. The Tenth Schedule table used to carry an entry for section 151 at 35% on yield or profit on debt. The Finance Act, 2025 omitted that entry, so the general one hundred percent increase in rule 1 now applies. #### Can a non-filer get the extra tax back? Section 169(4) says that where the tax is a final tax and the Tenth Schedule prescribes a hundred percent higher rate, the final tax is the First Schedule rate. The excess is adjustable if the return is filed before the assessment is finalised under rule 4 of the Tenth Schedule. ### Citations - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "(2) The provisions of the Tenth Schedule shall have effect notwithstanding anything to the contrary contained in this Ordinance." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1, and rules 3 and 4](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "the rate of tax required to be deducted or collected, as the case may be, shall be increased by hundred percent of the rate specified in" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 151 (Profit on debt)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#151-profit-on-debt), as amended to 2026-06-30: "a person pays yield on an account, deposit or a certificate under the National Savings Scheme or Post Office Savings Account" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IA (Profit on Debt), clauses (a) to (c)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "(a) 20% of the yield or profit paid by a banking company or financial institution on an account or deposit maintained with such company or institution;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "Where the tax collected or deducted is final tax under any provision of this Ordinance and hundred percent higher tax rate has been prescribed for the said tax under the Tenth Schedule, the final tax shall be the tax rate prescribed in the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 7B (Tax on profit on debt)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#7b-tax-on-profit-on-debt), as amended to 2026-06-30: "on every person, other than a company, who receives a profit on debt from any person mentioned in clauses (a) to (d)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What must the withholding tax certificate from my bank show, and why do I need it? Source: https://qanoondigest.com/faq/investors-savers/bank-withholding-tax-certificate Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 164 requires the bank, when it deducts tax from your profit, to give you copies of the Computerized Payment Receipt and a certificate showing the tax deducted. Rule 42 sets the form: gross amount, tax, section and deposit details. Section 168 treats that tax as paid by you, and section 164(2) requires the CPR copies with your return. **Applies to:** Savers and investors whose bank, National Savings or other payer deducts income tax from profit or dividends, and who file a return. When a bank deducts income tax from the profit on your savings account or term deposit, the law requires it to give you proof of that deduction. That proof, a certificate plus copies of the Computerized Payment Receipt (CPR), is what links the tax the bank took to your own tax record. The provisions below are from the Income Tax Ordinance, 2001 as amended to 30 June 2026 and the Income Tax Rules, 2002 as amended to 24 November 2023. ### What does the law say? Section 164(1) applies to every person deducting tax from a payment under Division III of Part V of Chapter X, which includes a bank deducting under section 151 and a company deducting under section 150. The deductor "shall, at the time of collection or deduction of the tax, furnish" to you: - copies of the Computerized Payment Receipt (CPR) or an equivalent document, and - a certificate setting out the amount of tax deducted and other prescribed particulars. A proviso adds that where the deductor is notified as a SWAPS agent, the SWAPS Payment Receipt (SPR) replaces the CPR. Section 164(2) then says a person who must furnish a return "shall attach to the return" copies of the CPR or SPR on the basis of which the certificate was given, for tax deducted in that year. ### What must the certificate show? Rule 42 of the Income Tax Rules prescribes the form, which is set out in Part VII of the Second Schedule to the Rules. The form asks for: | Part of the form | What it records | |---|---| | Header | Serial number, original or duplicate, date of issue | | Tax | Amount of tax deducted, in figures and in words | | You | Full name and address, NTN (if any) and CNIC for an individual | | When | Date of deduction, or the period from and to | | Why | Section of the Ordinance and the nature of the payment | | Base | Gross amount on which tax was deducted, in figures and words | | Deposit | Date of deposit, SBP, NBP or Treasury, branch and city, amount, challan or treasury number | | Issuer | Name, address and NTN of the bank or office, with signature, name, designation, date and seal | The Part VII list of sections shows 151(1)(b) for profit on a bank account or deposit, 151(1)(a) for National Savings schemes, 151(1)(c) for Government securities and 150 for dividends. That list was substituted in 2007, and the form still refers to a challan while section 164 now speaks of a CPR. The Rules in this corpus are current only to 24 November 2023. ### When should I receive it? The two texts give different timings. Section 164(1) says the certificate and CPR copies are furnished "at the time of collection or deduction". Rule 42(1) says the certificate is issued "within fifteen days after the end of the financial year", and rule 42(2) says that if you ask during the year, it must be issued within seven days of your request. Rule 42(3) to (5) let you ask for a duplicate if the original is lost, stolen or destroyed; it must be marked "duplicate". ### Why do I need it? Section 168 explains what the deducted tax counts for: - Section 168(1)(a) treats the tax deducted as income you derived. Your income is the gross profit, not the net amount credited. - Section 168(1)(b) treats the tax as "tax paid by the person from whom the tax was collected or deducted". - Section 168(2) allows you a tax credit for that tax against the tax due for the tax year in which it was deducted, subject to section 168(3), which lists final taxes for which no credit is allowed. - Section 168(5) says a credit that cannot be used in the year is refunded under section 170. Whether the tax on your bank profit is a final tax or a minimum tax is a separate question, covered on the related pages. Either way, the certificate and CPR are your evidence of the amount deducted and of its deposit. ### Worked example (illustrative figures) Saima, a pharmacist in Multan, earns Rs. 180,000 of profit on her savings account in tax year 2027. Division IA of Part III of the First Schedule sets 20% for profit paid by a banking company on an account or deposit. - Gross profit: Rs. 180,000 - Tax deducted: Rs. 180,000 x 20% = Rs. 36,000 - Credited to her account: Rs. 180,000 - Rs. 36,000 = Rs. 144,000 Her certificate should show Rs. 36,000 as tax, Rs. 180,000 as the gross amount, section 151(1)(b) as the section, and the deposit details. In her return, section 168(1)(a) means the profit is Rs. 180,000, not Rs. 144,000, and she attaches the CPR copies under section 164(2). ### What if the bank charges a fee against the tax? Section 168(6) says "no amount shall be deducted on account of service charges from the tax withheld or collected by any person under the provisions of this Ordinance." Under section 168(7), a person who does deduct such a charge must pay that amount to the Federal Government. ### Common mistakes - **Reporting the net credit as income.** Section 168(1)(a) makes the tax part of your income. - **Filing without the CPR copies.** Section 164(2) requires them to be attached to the return. - **Not checking the section and gross amount.** The Part VII form requires both, and they are what connect the deduction to the right income in your return. ### What to check in the official text Read sections 164 and 168 of the Ordinance, and rule 42 and Part VII of the Second Schedule of the Income Tax Rules, 2002, in the official PDFs. The Rules we hold are current to 24 November 2023, so check whether the certificate form has been revised since, and whether your bank is notified as a SWAPS agent issuing SPRs. ### Frequently asked #### What should a bank's tax deduction certificate show? The form in Part VII of the Second Schedule to the Income Tax Rules asks for the tax amount in figures and words, your name, CNIC and NTN if any, the date or period of deduction, the section, the gross amount, and the deposit details with challan number, signed by the bank. #### When must the bank give the certificate? Section 164(1) says at the time of deduction, together with copies of the CPR. Rule 42 separately says within fifteen days after the end of the financial year, or within seven days if you ask for it during the year. #### Can the bank take a service charge out of the tax it deducted? No. Section 168(6) says no amount shall be deducted on account of service charges from tax withheld, and section 168(7) makes a person who does so liable to pay that amount to the Federal Government. ### Citations - [Income Tax Ordinance, 2001, section 164 (Certificate of collection or deduction of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#164-certificate-of-collection-or-deduction-of-tax), as amended to 2026-06-30: "shall, at the time of collection or deduction of the tax, furnish to the person from whom the tax has been collected" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "shall be treated as tax paid by the person from whom the tax was collected or deducted." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 151 (Profit on debt)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#151-profit-on-debt), as amended to 2026-06-30: "the payer of the profit shall deduct tax at the rate specified in Division IA of Part III of the First Schedule from the gross amount of the yield or profit paid" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, Rule 42 (Certificate of collection or deduction of tax)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24), as amended to 2023-11-24: "shall issue a certificate to the person from whom tax has been collected or deducted, in the form as set out in Part VII of the Second Schedule to these rules, within fifteen days after the end of the financial year" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Rules, 2002, Second Schedule, Part VII (Certificate of Collection or Deduction of Tax)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24), as amended to 2023-11-24 Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IA (Profit on Debt)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much capital gains tax is deducted when I redeem mutual fund units? Source: https://qanoondigest.com/faq/investors-savers/mutual-fund-redemption-capital-gains-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer A proviso in Division VII of the First Schedule requires a mutual fund, collective investment scheme or REIT scheme to charge and deduct capital gains tax when you redeem. For tax year 2027, individuals pay 15% on stock and other funds, and companies pay 15% on stock funds and 25% on other funds. Units bought on or before 30 June 2024 and held over six years are not taxed. **Applies to:** Individuals, associations of persons and companies who redeem units of a mutual fund, collective investment scheme or REIT scheme in Pakistan. ### What does the law say? **Section 37A(1)** of the Income Tax Ordinance, 2001 charges capital gains on disposal of securities at the rates in **Division VII of Part I of the First Schedule**, and section 37A(4) treats those gains as a separate block of income. Division VII, as amended to 30 June 2026, contains a proviso written specifically for funds. It says a mutual fund, a collective investment scheme or a REIT scheme shall "charge and deduct" capital gains tax, on redemption of securities as prescribed, at these rates. The words "charge and" were inserted by the Finance Act, 2026. | Category | Stock funds | Other funds | |---|---|---| | Individual and association of persons | 15% | 15% | | Company | 15% | 25% | Two more provisos follow: - Where a stock fund's dividend receipts are less than its capital gains, the rate of deduction is 15%. - No capital gains tax is deducted "if the holding period of the security acquired on or before 30th day of June 2024 is more than six years". An Explanation limits these provisos to mutual funds, collective investment schemes and REIT schemes. ### How does it work in practice? **The fund deducts, NCCPL checks.** Section 100B(1) routes capital gains on listed securities through the Eighth Schedule. Rule 1(1A) of that Schedule says gains on units of open ended mutual funds are computed and determined under the Schedule and the tax is collected and deposited by NCCPL, while the redemption provisos of Division VII "shall continue to apply". Rule 13N(3A) of the Income Tax Rules, 2002 (our copy is amended to 24 November 2023) has the asset management company determine, compute and collect the tax and deposit it with NCCPL within ten working days of the month end. Under rule 13N(3B), NCCPL verifies the figure and works out a net liability or refund for each investor. A small cumulative refund of up to Rs. 1,000 is carried forward month to month, and all refunds are paid at year end. **No brokerage adjustment.** The 0.5% deduction for brokerage and fees in rule 13N(8) expressly does not apply to units of open ended mutual funds. **The fund's own tax is separate.** Section 100B(2) lists a mutual fund among the persons to whom section 100B(1) does not apply, and section 100B(3) says NCCPL computes the fund's gains while the fund deposits its tax under other provisions. That concerns the fund as a taxpayer, not the tax deducted from you on redemption. ### Worked example (illustrative figures) **Individual in a stock fund.** Hina, a doctor in Karachi, bought 10,000 units of an equity fund on 1 October 2025 at Rs. 80 each and redeems all of them on 15 January 2027 at Rs. 95 each. 1. Redemption value: 10,000 x Rs. 95 = Rs. 950,000. 2. Cost: 10,000 x Rs. 80 = Rs. 800,000. 3. Gain: Rs. 950,000 - Rs. 800,000 = **Rs. 150,000**. 4. Tax at 15%: 15% x Rs. 150,000 = **Rs. 22,500**. 5. Amount paid out before any fund charges: Rs. 950,000 - Rs. 22,500 = **Rs. 927,500**. **Company in an income fund.** A Sialkot sports goods company redeems units of a money market fund with a gain of Rs. 400,000. As a company in a fund other than a stock fund, it bears 25%: 25% x Rs. 400,000 = **Rs. 100,000**. **Long-held units.** Rashid bought units on 1 March 2018 and redeems them on 1 September 2026, a holding period of about eight and a half years. The units were acquired before 30 June 2024 and held for more than six years, so the proviso says no capital gains tax is deducted. ### What if I am not on the Active Taxpayers' List? The redemption table in Division VII does not set separate rates for persons outside the Active Taxpayers' List. Rule 1 of the Tenth Schedule increases by one hundred percent any rate of deduction under the Ordinance for persons not on the list, and rule 13N(5A) of the Rules says rates are applied according to filer status. The text does not say in terms how the Tenth Schedule interacts with the mutual fund proviso, so this page does not state a non-filer rate for redemptions. ### What if I bought the units after 30 June 2024? The six-year exemption is tied to securities acquired on or before 30 June 2024. For later purchases the Division VII text gives no holding-period exemption for fund redemptions, so the 15% or 25% rate applies however long you hold. ### Common mistakes - **Expecting the share-trading holding-period scale to apply.** Fund redemptions have their own rate table in the Division VII proviso. - **Assuming the six-year rule covers all units.** It covers only securities acquired on or before 30 June 2024. - **Expecting a 0.5% brokerage adjustment.** Rule 13N(8) excludes mutual fund units. - **Confusing the fund's exclusion from section 100B(1) with your own tax.** Your redemption tax is still charged and deducted by the fund. ### What to check in the official text Read the provisos at the end of Division VII of Part I of the First Schedule and the Explanation that follows them, rule 1(1A) of the Eighth Schedule, and section 100B. Rule 1(1A) refers to the "second and third proviso" of Division VII, but Division VII has since been rewritten and its provisos renumbered, so read them in the official PDF. Rule 13N of the Income Tax Rules, 2002 in our copy is current only to 24 November 2023. ### Frequently asked #### Who deducts the tax when I redeem units? The Division VII proviso puts the duty on the mutual fund, collective investment scheme or REIT scheme, which must charge and deduct the tax on redemption. Rule 13N(3A) of the Income Tax Rules, 2002 says asset management companies compute and collect it and deposit it with NCCPL within ten working days of the month end. #### Is there any tax if I held the units for a long time? The last proviso says no capital gains tax is deducted if the holding period of a security acquired on or before 30 June 2024 is more than six years. The text gives no equivalent exemption for units acquired from 1 July 2024 onward. #### Is the rate different for a stock fund? For tax year 2027 the table sets 15% for stock funds for both individuals and companies. A further proviso sets 15% where a stock fund's dividend receipts are less than its capital gains, so on the current text that proviso gives the same figure. ### Citations - [Income Tax Ordinance, 2001, section 37A (Capital gain on disposal of securities)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#37a-capital-gain-on-disposal-of-securities), as amended to 2026-06-30: "Gain under this section shall be treated as a separate block of income." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division VII (Capital Gains on Disposal of Securities), proviso on redemption by a mutual fund, collective investment scheme or REIT scheme](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Eighth Schedule, rule 1(1A) (units of open ended mutual funds)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100B (Special provision relating to capital gain tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100b-special-provision-relating-to-capital-gain-tax), as amended to 2026-06-30: "shall be computed, determined, collected and deposited in accordance with the rules laid down in the Eighth Schedule." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 13N (Special procedures for computation of capital gains and collection of tax)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#13n-special-procedures-for-computation-of-capital-gains-and-collection-of-tax), as amended to 2023-11-24: "Asset Management Companies and PMEX shall continue to determine, compute and collect Capital gains tax on open ended mutual funds and future commodity contracts respectively" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (Rate of deduction or collection of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What is the capital gains tax on shares sold on the Pakistan Stock Exchange? (Share bechne par kitna tax lagta hai?) Source: https://qanoondigest.com/faq/investors-savers/capital-gains-tax-on-listed-shares Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 37A taxes the gain on selling public company shares at the Division VII rates in the First Schedule. The gain is sale consideration minus cost, taxed as a separate block. For shares bought on or after 1 July 2024, the rate is 15% if you are on the Active Taxpayers' List on both the purchase and sale dates. **Applies to:** Individuals, associations of persons and companies (other than banking and insurance companies) who sell listed shares and other securities through the Pakistan Stock Exchange. Selling shares at a profit on the Pakistan Stock Exchange creates a capital gain that is taxed under its own section of the Income Tax Ordinance, 2001. The rules below are from the Ordinance as amended to 30 June 2026 and apply to disposals in tax year 2027 (1 July 2026 to 30 June 2027). **Roman Urdu mein:** share bechne par jo munafa hota hai us par section 37A ke tehat tax lagta hai. 1 July 2024 ya us ke baad khareede gaye shares par, agar aap dono tareekhon par Active Taxpayers' List mein hain, to rate 15% hai. ### What does the law say? Section 37A(1) says capital gain "from disposal of securities" is chargeable "at the rates specified in Division VII of Part I of the First Schedule". Four other parts of the section shape the charge: - **The formula.** Section 37A(1A) computes the gain as A minus B, where "'A' is the consideration received by the person on disposal of the security" and "'B' is the cost of acquisition of the security." - **A separate block.** Section 37A(4): "Gain under this section shall be treated as a separate block of income." It is not added to salary, business or rental income. - **What counts as a security.** Section 37A(3) defines "security" to include a "share of a public company, voucher of Pakistan Telecommunication Corporation, Modaraba Certificate, an instrument of redeemable capital", debt securities, units of exchange traded funds and derivative products. Sub-section (3B) says shares count if the company "is a public company at the time of disposal". - **Holding period.** Section 37A(2) reckons the holding period from the date of acquisition to the date of disposal. ### What is the rate for shares bought on or after 1 July 2024? Division VII has two rate columns. Column (4) covers securities acquired on or after 1 July 2024. It sets: | Seller | Rate on gain | |---|---| | On the Active Taxpayers' List on the date of acquisition **and** the date of disposal | 15% | | Individual or AOP not on the list on both dates | Division I rates, and "not less than 15% in any case" | | Company not on the list on both dates | Division II rate | | Future commodity contracts on Pakistan Mercantile Exchange | 5% | Shares bought before 1 July 2024 are taxed under column (3) and the provisos, which depend on when you bought and how long you held. That table is on the holding-period page. ### How does it work in practice? Section 100B says capital gains on listed securities and the tax on them, subject to section 37A, "shall be computed, determined, collected and deposited in accordance with the rules laid down in the Eighth Schedule." For most retail investors this is handled through the National Clearing Company of Pakistan Limited (NCCPL), which the Ordinance names in section 37A. The mechanics are covered on the NCCPL page. Section 37A does not apply in two share cases named in its second proviso. Shares of a listed company sold "otherwise than through registered stock exchange" and not settled through NCCPL, and shares disposed of through an initial public offer unless details are given to NCCPL, fall under section 37 instead. The first proviso excludes banking companies and insurance companies from section 37A altogether. ### Worked example (illustrative figures) Bilal, a software developer in Karachi, is on the Active Taxpayers' List throughout. - 10 August 2025: buys 1,000 shares at Rs. 250. Cost of acquisition (B) = Rs. 250,000. - 5 March 2027: sells all 1,000 shares at Rs. 320. Consideration (A) = Rs. 320,000. - Gain = A minus B = Rs. 320,000 minus Rs. 250,000 = Rs. 70,000. - The shares were bought after 1 July 2024, so column (4) applies: Rs. 70,000 x 15% = **Rs. 10,500**. In the same tax year Bilal sells another company's shares at a loss of Rs. 20,000. Section 37A(5) lets that loss be set off against his gain from other securities: Rs. 70,000 minus Rs. 20,000 = Rs. 50,000, and Rs. 50,000 x 15% = **Rs. 7,500**. ### What if I make a loss overall? Section 37A(5) allows a loss on securities to be set off "only against the gain of the person from any other securities chargeable to tax under this section". Under its proviso, an unabsorbed loss from tax year 2019 onwards may be carried forward, but only against future securities gains and for no more than three tax years. The set-off page covers this in detail. ### Common mistakes - **Taxing the full sale price.** Tax falls on A minus B, the gain, not on the consideration received. - **Adding the gain to salary.** Section 37A(4) keeps it as a separate block. - **Assuming 15% on every share.** The flat 15% in column (4) is only for securities acquired on or after 1 July 2024 and only for persons on the list on both dates. - **Setting off share losses against business income.** Section 37A(5) confines them to securities gains. ### What to check in the official text Read section 37A, section 100B and Division VII of Part I of the First Schedule in the official PDF. The Division VII table in the consolidated PDF is laid out in columns that are hard to follow, so read columns (3) and (4) carefully. Division I and Division II rates, and the Eighth Schedule computation rules, are separate parts of the First and Eighth Schedules. ### Frequently asked #### Share bechne par kitna tax lagta hai? Agar shares 1 July 2024 ya us ke baad khareede gaye aur aap khareed aur farokht dono tareekhon par Active Taxpayers' List mein hain, to Division VII ke mutabiq gain par 15% tax hai. Purane shares par rate khareed ki tareekh aur holding period par munhasir hai. #### How is the capital gain on shares calculated? Section 37A(1A) uses the formula A minus B, where A is the consideration received on disposal and B is the cost of acquisition. Tax applies to that gain, not to the full sale price. #### Is the gain on shares added to my salary for tax? No. Section 37A(4) treats the gain as a separate block of income. It is taxed at the Division VII rate on its own rather than being stacked on top of salary or business income. ### Citations - [Income Tax Ordinance, 2001, section 37A (Capital gain on disposal of securities)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#37a-capital-gain-on-disposal-of-securities), as amended to 2026-06-30: "Gain under this section shall be treated as a separate block of income." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division VII (Capital Gains on Disposal of Securities), Table, column (4) and provisos](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100B (Special provision relating to capital gain tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100b-special-provision-relating-to-capital-gain-tax), as amended to 2026-06-30: "shall be computed, determined, collected and deposited in accordance with the rules laid down in the Eighth Schedule." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is capital gains tax on shares higher if I am not on the Active Taxpayers List? Source: https://qanoondigest.com/faq/investors-savers/capital-gains-tax-shares-non-filers Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer It can be. Division VII sets 15% only for persons on the Active Taxpayers' List on both the acquisition and disposal dates of securities bought on or after 1 July 2024. Individuals and associations of persons not on the list on both dates are taxed at Division I rates, and the rate cannot be less than 15%. **Applies to:** Individuals, associations of persons and companies selling shares under section 37A who were not on the Active Taxpayers' List on the date they bought or the date they sold. Whether you appear on the Active Taxpayers' List (ATL) can change the tax on your share gains, but only for shares bought on or after 1 July 2024. The rules are in Division VII of Part I of the First Schedule to the Income Tax Ordinance, 2001, as amended to 30 June 2026, and apply to disposals in tax year 2027. ### What does the law say? Section 37A charges the gain on disposal of securities at the Division VII rates. Column (4) of the Division VII table, for securities acquired on or after 1 July 2024, sets two routes: - **15%** for persons appearing on the Active Taxpayers' List on the date of acquisition and the date of disposal of the securities. - **The rate specified in Division I for individuals and associations of persons, and Division II for companies**, for persons not appearing on the list on the date of acquisition and date of disposal. A proviso inside column (4) adds that for individuals and associations of persons not on the list, "the rate of tax shall not be less than 15% in any case." Section 100BA separately says that tax for a person not appearing on the active taxpayers' list, and for persons on the list who have not filed their return by the due date, "shall be determined in accordance with the rules in the Tenth Schedule." ### How does it work in practice? | Your status | Shares bought on or after 1 July 2024 | |---|---| | On the ATL on the purchase date and the sale date | 15% flat | | Individual or AOP not on the ATL on both dates | Division I rates, minimum 15% | | Company not on the ATL on both dates | Division II rate | The flat 15% is the lowest outcome for an individual. A person off the list pays at least 15%, and more if the Division I rate that applies is higher. The ATL test uses two dates, so someone who joins the list after buying shares does not meet the 15% wording for that lot, even if they are on the list when they sell. ### How are Division I rates applied to a share gain? The law leaves this unclear. Section 37A(4) says the gain "shall be treated as a separate block of income", and column (4) points to "the rate specified in Division I". Division I is a slab table for taxable income. The text in this corpus does not say whether the slabs are applied to the share gain alone or to the gain together with other income. This page does not resolve that, and gives no computed Division I figure. ### Worked example (illustrative figures) Kamran, a trader in Gujranwala, buys shares on 2 September 2024 and sells them on 10 February 2027 for a gain of Rs. 400,000. **If he was on the ATL on both dates:** - Rs. 400,000 x 15% = **Rs. 60,000**. **If he was not on the ATL on 2 September 2024, or on 10 February 2027:** - The rate is the Division I rate, but never below 15%. - Minimum tax: Rs. 400,000 x 15% = **Rs. 60,000**. - The actual figure is Rs. 60,000 or more, depending on how the Division I rate works out for him. The same two dates decide the outcome for each lot, so Kamran could have one lot at 15% and another lot under the Division I route. ### What about shares bought before 1 July 2024? Column (3), for securities acquired from 1 July 2022 to 30 June 2024, and the first proviso, for earlier purchases, do not make any distinction based on the list. The Tenth Schedule is the separate question. Rule 1 says that where tax is "deducted or collected" from a person not on the list, the rate "shall be increased by hundred percent". Rule 10 lists taxes to which the Schedule does not apply. Its sub-rule (y), which excluded "tax collected under section 37A on disposal of securities acquired on and from 1st day of July, 2025", was omitted by the Finance Act, 2026. The corpus does not state how rule 1 now interacts with the Division VII rates for any purchase date, and this page does not settle it. ### Common mistakes - **Assuming 15% for everyone.** Column (4) gives the flat 15% only to persons on the list on both dates. - **Checking the list only on the sale date.** The acquisition date counts equally. - **Treating 15% as the non-filer maximum.** For individuals and AOPs off the list, 15% is the floor, not the ceiling. - **Forgetting late filers.** Section 100BA extends the Tenth Schedule regime to persons on the list who have not filed their return by the due date. ### What to check in the official text Read section 37A, section 100BA, column (4) of the Division VII table and its proviso, and rules 1 and 10 of the Tenth Schedule in the official PDF. Confirm your ATL status on both the purchase and sale dates for each lot. The Division I and Division II rate tables are separate parts of the First Schedule, and how the NCCPL applies them is governed by the Eighth Schedule. ### Frequently asked #### What CGT rate applies to a non-filer selling shares bought after 1 July 2024? Column (4) of the Division VII table applies the Division I rates to individuals and associations of persons not on the Active Taxpayers' List on the acquisition and disposal dates, with a floor: the rate 'shall not be less than 15% in any case'. Companies in that position are taxed at the Division II rate. #### Do I need to be on the ATL on both dates to get 15%? Yes. The 15% in column (4) is for persons appearing on the Active Taxpayers' List on the date of acquisition and the date of disposal. Being on the list on only one of those dates does not meet that wording. #### Does being off the ATL change the rate on shares bought before July 2024? Column (3) and the first proviso, which cover earlier purchases, do not distinguish between persons on and off the list. Whether rule 1 of the Tenth Schedule raises those rates is not settled by the text in this corpus. ### Citations - [Income Tax Ordinance, 2001, First Schedule, Part I, Division VII (Capital Gains on Disposal of Securities), Table, column (4) and its proviso](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 37A (Capital gain on disposal of securities)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#37a-capital-gain-on-disposal-of-securities), as amended to 2026-06-30: "Gain under this section shall be treated as a separate block of income." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "shall be determined in accordance with the rules in the Tenth Schedule." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 and rule 10 (sub-rule (y) omitted by the Finance Act, 2026)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much tax is deducted on dividends if I am not on the Active Taxpayers List? Source: https://qanoondigest.com/faq/investors-savers/dividend-tax-for-non-filers Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Rule 1 of the Tenth Schedule increases the section 150 rate by one hundred percent for a person not on the Active Taxpayers List, so most dividends are deducted at 30% instead of 15%. Section 169(4) keeps the final tax at the First Schedule rate, and the excess is adjustable if a return is filed before the assessment is finalised. **Applies to:** Resident individual shareholders who do not appear on the Active Taxpayers List when a dividend is paid. A shareholder who is not on the Active Taxpayers List (ATL) has tax deducted from dividends at double the normal rate. The law then limits the final tax to the normal rate, but only if the shareholder files a return in time. The rules below are from the Income Tax Ordinance, 2001 as amended to 30 June 2026 and apply to dividends paid in tax year 2027. ### What does the law say? Section 150 makes every person paying a dividend deduct tax from the gross amount at the rate in Division I of Part III of the First Schedule. Section 100BA(1) says the deduction of tax, and the computation of income and tax, for a person not appearing on the active taxpayers' list "shall be determined in accordance with the rules in the Tenth Schedule". Section 100BA(2) gives the Tenth Schedule effect "notwithstanding anything to the contrary contained in this Ordinance". Rule 1 of the Tenth Schedule then provides that where tax is to be deducted from a person not on the ATL, "the rate of tax required to be deducted or collected, as the case may be, shall be increased by hundred percent of the rate specified in this Ordinance." Rule 10 lists sections to which the Schedule does not apply, and section 150 is not among them. ### What are the resulting rates? Applying rule 1 to each clause of Division I: | Clause | Dividend | Normal rate | Rate if not on the ATL | |---|---|---|---| | (a) | Qualifying IPP pass-through dividend | 7.5% | 15% | | (b) | REIT and all other cases | 15% | 30% | | (ba) | Mutual fund, debt and equity components | 25% and 15% | 50% and 30% | | (c) | From a REIT Special Purpose Vehicle to a non-REIT recipient | 35% | 70% | | (d) | From a company with no tax payable due to exemption, losses or credits | 25% | 50% | These figures are the arithmetic of rule 1, which adds one hundred percent of the Division I rate. The Ordinance does not print a separate non-filer column for dividends. ### Is the doubled tax the final tax? No, not necessarily. Tax on dividends is a final tax, as the related page on final tax explains. Section 169(4) then deals with final taxes that the Tenth Schedule has doubled: "the final tax shall be the tax rate prescribed in the First Schedule and the excess tax collected under the Tenth Schedule specified for persons not appearing in the active taxpayers' list shall be adjustable in case the return is filed before finalization of assessment as provided in rule 4 of the Tenth Schedule." The Tenth Schedule sets out that process: - **Rule 3.** If tax was deducted under rule 1 and the person does not file a return by the due date, the Commissioner makes a provisional assessment within sixty days, imputing income from the tax deducted. - **Rule 4(1).** The provisional assessment becomes final forty-five days after it is served. - **Rule 4(2).** It abates if the returns and wealth statements for that year and the preceding year are filed within forty-five days of receiving it. - **Rule 4(3).** Where returns were filed before the provisional assessment, or under rule 4(2), the rule 1 tax "shall be adjustable against the tax payable in the return filed for the relevant tax year." ### Worked example (illustrative figures) Rehana, a homemaker in Hyderabad, is not on the ATL when a fertiliser company pays her a gross dividend of Rs. 400,000 in tax year 2027. The company paid tax on its own income, so clause (b) applies. 1. Normal rate: 15%. 2. Rule 1 increase: 15% + (100% x 15%) = 30%. 3. Tax deducted: Rs. 400,000 x 30% = **Rs. 120,000**. She receives Rs. 280,000. 4. Final tax under section 169(4) at the First Schedule rate: Rs. 400,000 x 15% = Rs. 60,000. 5. Excess: Rs. 120,000 - Rs. 60,000 = **Rs. 60,000**, adjustable if she files her return before the assessment is finalised under rule 4. If she had been on the ATL, only Rs. 60,000 would have been deducted in the first place. ### What if I live abroad? Clause (111A) of Part IV of the Second Schedule says the provisions of section 100BA and rule 1 of the Tenth Schedule "shall not apply to the extent of payment of dividend to non-resident persons." A non-resident shareholder is therefore not subject to the doubling on dividends. The ordinary rate for non-residents is outside this page. ### What about someone on the ATL who filed late? Section 100BA(1) also refers to persons on the ATL who have not filed by the due date. Rule 1A, which set rates for that group, was omitted by the Finance Act, 2026, and rule 1 as printed speaks only of persons "not appearing in the active taxpayers' list". ### Common mistakes - **Treating the 30% as the dividend tax rate.** Section 169(4) sets the final tax at the First Schedule rate. - **Assuming the excess comes back automatically.** Section 169(4) and rule 4(3) make it adjustable against tax in a return filed in time. - **Doubling the rate for a non-resident.** Clause (111A) excludes dividends paid to non-residents. ### What to check in the official text Read sections 100BA, 150 and 169(4), rules 1, 3, 4 and 10 of the Tenth Schedule, Division I of Part III of the First Schedule and clause (111A) of Part IV of the Second Schedule in the official PDF. Whether you appear on the ATL on the payment date is a matter of FBR's published list, which is outside this corpus. ### Frequently asked #### What rate is deducted from a dividend if I am not on the Active Taxpayers List? Twice the normal rate. Rule 1 of the Tenth Schedule increases the Division I rate by one hundred percent, so a 15% dividend is deducted at 30% and a 25% dividend at 50%. #### Is the extra tax lost for good? Section 169(4) says the final tax is the First Schedule rate and the excess is adjustable if the return is filed before finalisation of assessment under rule 4 of the Tenth Schedule. If no return is filed, rule 3 allows a provisional assessment instead. #### Does the doubled rate apply to overseas shareholders? Clause (111A) of Part IV of the Second Schedule says section 100BA and rule 1 of the Tenth Schedule do not apply to the extent of payment of dividend to non-resident persons. ### Citations - [Income Tax Ordinance, 2001, section 150 (Dividends)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#150-dividends), as amended to 2026-06-30: "shall deduct tax from the gross amount of the dividend paid" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "The provisions of the Tenth Schedule shall have effect notwithstanding anything to the contrary contained in this Ordinance." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (Rate of deduction or collection of tax) and rules 3 and 4](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "the final tax shall be the tax rate prescribed in the First Schedule and the excess tax collected under the Tenth Schedule specified for persons not appearing in the active taxpayers’ list shall be adjustable" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division I (Advance Tax on Dividend)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clause (111A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What is the tax rate on dividends in tax year 2027, and why do some companies' dividends get a different rate? Source: https://qanoondigest.com/faq/investors-savers/dividend-tax-rate-tax-year-2027 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer For tax year 2027, section 150 makes the paying company deduct 15% from most dividends, and section 5 charges the shareholder the same rates. Qualifying IPP pass-through dividends bear 7.5%. A company with no tax payable because of exemption, carried-forward losses or tax credits passes on dividends taxed at 25%. REIT dividends are 15%. **Applies to:** Individual shareholders in Pakistani companies, REITs and mutual funds who receive cash dividends. A cash dividend from a Pakistani company is taxed before it reaches your bank account. The company deducts the tax, and for most individual shareholders that deduction is the full tax on the dividend. The rates below are from the Income Tax Ordinance, 2001 as amended to 30 June 2026, so they apply to dividends received in tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? Two provisions work together. Section 5 imposes a tax on every person who receives a dividend from a company, at the rate in Division III of Part I of the First Schedule, computed on the gross dividend. Section 150 makes every person paying a dividend deduct tax "from the gross amount of the dividend paid" at the rate in Division I of Part III. Both Divisions set the same rates: | Clause | Dividend | Rate | |---|---|---| | (a) | Paid by an Independent Power Producer, where the dividend is a pass through item under an Implementation, Power Purchase or Energy Purchase Agreement and is required to be reimbursed by CPPA-G or its predecessor or successor | 7.5% | | (b) | Real Estate Investment Trust, and all cases not covered by (a), (ba), (c) and (d) | 15% | | (ba) | Mutual funds, depending on the fund's income from debt securities and from equities | 25% and 15% | | (c) | From a Special Purpose Vehicle under the REIT Regulations, 2015 | 0% to a REIT scheme, 35% to others | | (d) | From a company with no tax payable because of exempt income, carried-forward business losses or tax credits | 25% | For an ordinary listed or unlisted company that pays its own tax, clause (b) applies and the rate is **15%**. ### Why do some companies' dividends get a different rate? The rate follows the source of the dividend, not the shareholder's income. **Clause (d), 25%.** A dividend is usually paid out of profit that has already borne company tax. Clause (d) applies "in case of a person receiving dividend from a company where no tax payable by such company, due to exemption of income or carry forward of business losses under Part VIII of Chapter III or claim of tax credits under Part X of Chapter III". The higher shareholder rate applies because the profit was not taxed in the company's hands. The clause does not say how to treat a company that paid some tax, but less than normal, after partial loss set-off or credits. **Clause (a), 7.5%.** This lower rate is limited to Independent Power Producer dividends that are a pass through item under the named agreements and that CPPA-G must reimburse. Holding shares in a power company does not by itself bring a dividend under clause (a). **Clause (c), REIT special purpose vehicles.** A dividend from an SPV is 0% when a REIT scheme receives it and 35% for any other recipient. **Clause (ba), mutual funds.** A fund's dividend is split: the part matching income from debt securities is taxed at 25%, and the part matching equities at 15%. Where the recipient is a corporate entity, the debt component is taxed at 29%. The mutual fund page covers this in detail. ### How does it work in practice? The paying company deducts on the gross dividend when it pays. You receive the net amount. Section 8 makes the section 5 tax a final tax, so the dividend is not added to your salary or business income and no expense is deducted from it. The tax deducted at source discharges your liability to the extent it was deducted. ### Worked example (illustrative figures) Bilal, a textile trader in Faisalabad on the active taxpayers' list, receives three cash dividends in tax year 2027: **1. A cement company that paid tax on its profits.** Gross dividend Rs. 300,000, clause (b). - Rs. 300,000 x 15% = **Rs. 45,000**; he receives Rs. 255,000. **2. A company with no tax payable because brought-forward losses absorbed its income.** Gross dividend Rs. 100,000, clause (d). - Rs. 100,000 x 25% = **Rs. 25,000**; he receives Rs. 75,000. **3. A qualifying IPP pass-through dividend.** Gross dividend Rs. 200,000, clause (a). - Rs. 200,000 x 7.5% = **Rs. 15,000**; he receives Rs. 185,000. Total gross dividends: Rs. 600,000. Total tax: Rs. 45,000 + Rs. 25,000 + Rs. 15,000 = **Rs. 85,000**. ### What if I am not on the active taxpayers' list? Rule 1 of the Tenth Schedule increases the deduction rate by 100% of the normal rate for a person not appearing in the active taxpayers' list, so 15% becomes 30%. The non-filer page sets out every category and how the excess is adjusted. ### Common mistakes - **Assuming every dividend is 15%.** Clauses (a), (ba), (c) and (d) set different rates. - **Blaming your own tax status for a 25% deduction.** Clause (d) turns on the paying company's tax position. - **Computing tax on the net dividend.** Section 5(2) and section 150 both use the gross amount. - **Adding the dividend to your slab income.** Section 8 keeps it out of your other income. ### What to check in the official text Read sections 5, 8 and 150, and Division III of Part I and Division I of Part III of the First Schedule, in the official PDF. If a company deducted 25%, check its annual report or dividend notice for the reason. For a power company, confirm whether the dividend is a pass through item reimbursed by CPPA-G before relying on clause (a). ### Frequently asked #### What is the normal tax rate on dividends in tax year 2027? 15% of the gross dividend, under clause (b) of Division III of Part I and Division I of Part III of the First Schedule. The paying company deducts it under section 150 when it pays the dividend. #### Why did one company deduct 25% from my dividend? Clause (d) sets 25% where the paying company had no tax payable because of exemption of income, carried-forward business losses or tax credits. The higher rate depends on the company's tax position, not yours. #### Are dividends from a REIT taxed differently? A Real Estate Investment Trust dividend falls under clause (b) at 15%. A dividend from a Special Purpose Vehicle under the REIT Regulations, 2015 is 0% when received by a REIT scheme and 35% when received by anyone else, under clause (c). ### Citations - [Income Tax Ordinance, 2001, section 150 (Dividends)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#150-dividends), as amended to 2026-06-30: "shall deduct tax from the gross amount of the dividend paid" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 5 (Tax on dividends)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#5-tax-on-dividends), as amended to 2026-06-30: "shall be computed by applying the relevant rate of tax to the gross amount of the dividend." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division I (Advance Tax on Dividend), clauses (a), (b), (ba), (c) and (d)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division III (Rate of Dividend Tax), clauses (a), (b), (ba), (c) and (d)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 8 (General provisions relating to taxes imposed under sections 5, 5A, 5AA, 6, 6A, 7, 7A, 7B and 7G)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#8-general-provisions-relating-to-taxes-imposed-under-sections-5-5a-5aa-6-6a-7-7a-7b-and-7g), as amended to 2026-06-30: "shall be a final tax on the amount in respect of which the tax is imposed and-" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (Rate of deduction or collection of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How does NCCPL calculate and collect capital gains tax on my shares? Source: https://qanoondigest.com/faq/investors-savers/nccpl-capital-gains-tax-calculation Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 100B of the Income Tax Ordinance requires capital gains on listed securities to be computed, collected and deposited under the Eighth Schedule, and NCCPL does that work. It applies the section 37A(1A) formula, sale consideration minus cost of acquisition, at Division VII rates. Listed shares sold off the exchange and not settled through NCCPL fall under section 37 instead. **Applies to:** Individuals and other investors who buy and sell listed shares through a broker on the Pakistan Stock Exchange. ### What does the law say? **Section 100B(1)** of the Income Tax Ordinance, 2001 says capital gains on disposal of listed securities, and the tax on them, "subject to section 37A", are to be computed, determined, collected and deposited under the rules in the **Eighth Schedule**. The same sub-section adds that this includes the super tax charged on high earning persons. Rule 1(1) of the Eighth Schedule then names who does the work: the tax is "collected and deposited on behalf of taxpayers by NCCPL". Rule 1(2) requires NCCPL to run an automated system for this, and rule 1(3) requires the Central Depository Company to give NCCPL the information it needs. The gain itself is worked out under **section 37A(1A)**: > Gain = A - B, where A is the consideration received on disposal of the security and B is the cost of acquisition of the security. Rule 1(7) of the Eighth Schedule says the gain is taxed at the rates in **Division VII of Part I of the First Schedule**, and section 37A(4) treats it as a separate block of income, so it is not added to your salary or business income. ### How does it work in practice? The detailed mechanics sit in **rule 13N of the Income Tax Rules, 2002** (our copy is amended to 24 November 2023): - **Which shares are sold first.** Gains and losses are computed on a first in, first out (FIFO) basis across all shares you hold under your UIN. Shares bought and sold on the same trading day are averaged instead. - **Costs.** For a client's market-based trade, NCCPL deducts 0.5 percent from the sale consideration and adds 0.5 percent to the cost of acquisition "in lieu of brokerage, commission, transaction fee, levy, Laga" and similar expenses. Financing cost is deducted if you used NCCPL's leveraged products. - **Monthly collection.** NCCPL collects tax monthly through your broker (the clearing member) on net gains, after setting off losses, so that at each month end it holds the estimated tax for the year so far. - **Filer status.** The rate is taken from Division VII according to your status on the Active Taxpayers' List at the time of the transaction, and NCCPL adjusts the liability to your status at the end of the tax year. - **Certificate.** Rule 1(4) of the Eighth Schedule requires NCCPL to issue an annual certificate of gains and tax, and a shorter-period certificate on your request. Rule 13N(15) sets the time as 45 days after the financial year ends. Rule 3 of the Eighth Schedule switches off the ordinary withholding and advance tax provisions in Parts IV and V of Chapter X for gains taxed under the Schedule. The Division VII rates for tax year 2027 depend on when you bought the shares: | Shares acquired | Rate on the gain | |---|---| | On or after 1 July 2024 | 15% if you are on the Active Taxpayers' List on both the acquisition and disposal dates. Otherwise the Division I rates for individuals and AOPs (not less than 15%) or Division II for companies | | 1 July 2022 to 30 June 2024 | From 15% (held up to one year) down to 0% (held more than six years), by holding period | | 1 July 2013 to 30 June 2022 | 12.5% | | Before 1 July 2013 | 0% | Future commodity contracts on the Pakistan Mercantile Exchange are taxed at 5%. ### Worked example (illustrative figures) Sana, a teacher in Lahore, is on the Active Taxpayers' List throughout. On 15 August 2024 she bought 2,000 shares of a listed cement company at Rs. 150 each, and on 10 February 2027 she sold all of them at Rs. 190 each. 1. **Sale consideration:** 2,000 x Rs. 190 = Rs. 380,000. Less 0.5% (Rs. 1,900) under rule 13N(8) = **Rs. 378,100**. 2. **Cost of acquisition:** 2,000 x Rs. 150 = Rs. 300,000. Plus 0.5% (Rs. 1,500) = **Rs. 301,500**. 3. **Gain under section 37A(1A):** Rs. 378,100 - Rs. 301,500 = **Rs. 76,600**. 4. **Rate:** acquired after 1 July 2024 and on the list on both dates, so 15%. 5. **Tax NCCPL collects:** 15% x Rs. 76,600 = **Rs. 11,490**, which appears on her annual NCCPL certificate for tax year 2027. This leaves out the super tax that section 100B(1) also brings into NCCPL's calculation, because whether it applies depends on her total income and its rates are not covered here. ### What if I sell listed shares off the exchange? The second proviso to **section 37A(1)** says section 37A does not apply to a disposal of listed shares made otherwise than through a registered stock exchange and not settled through NCCPL, or to a disposal through an initial public offer during listing unless its details are given to NCCPL. For those, section 37 applies. **Section 37(2)** uses the same kind of formula (consideration minus cost), but the gain falls under the ordinary head "Capital Gains" rather than the separate section 37A block. Section 37(6) to (10) also apply to shares of a company: the buyer deducts advance adjustable tax at 10% of the fair market value of the shares, and the seller must give the Commissioner a statement within thirty days of the disposal. The text does not carve listed shares out of these sub-sections, so check it for a private share transfer. ### What if I am a bank, insurer or mutual fund? Section 100B(2) takes a mutual fund, a banking company and an insurance company taxed under the Fourth Schedule out of section 100B(1). Under section 100B(3), NCCPL still computes their gains under section 37A, but they deposit the tax themselves. ### Common mistakes - **Treating the certificate as optional.** Rule 1(5) of the Eighth Schedule requires it to be filed with the return. - **Expecting actual brokerage to be deducted.** Rule 13N(8) uses a flat 0.5% instead. - **Assuming the holding-period table applies to every purchase.** For shares bought on or after 1 July 2024, Division VII sets a single 15% rate for persons on the Active Taxpayers' List. - **Assuming an off-market transfer is covered by NCCPL.** The section 37A proviso sends it to section 37. - **Relying on the opt-out.** Rule 5 of the Eighth Schedule, which let a person opt out of NCCPL computation with the Commissioner's approval, was omitted by the Finance Act, 2026. ### What to check in the official text Read section 100B, section 37A(1), (1A), (4) and (5), and the Eighth Schedule rules 1, 3 and 4A. The rate table in Division VII of Part I of the First Schedule prints as a complex multi-column table, so confirm the column that matches your acquisition date in the official PDF. Rule 13N of the Income Tax Rules, 2002 in our copy is current only to 24 November 2023 and still refers to the opt-out that the Finance Act, 2026 removed, so later SROs may have changed it. ### Frequently asked #### Do I have to file the NCCPL certificate with my return? Yes. Rule 1(5) of the Eighth Schedule says every taxpayer shall file the NCCPL annual certificate along with the return of income. The same rule makes that certificate conclusive evidence of the income taxed under the Schedule. #### Does NCCPL deduct my actual brokerage from the gain? No. Rule 13N(8) of the Income Tax Rules, 2002 has NCCPL deduct 0.5 percent from the sale consideration and add 0.5 percent to the cost for a client's market-based trade, in lieu of brokerage, commission, fees and similar costs. Our copy of the Rules is amended to 24 November 2023. #### What if I think NCCPL got my gain wrong? Rule 13N(12) lets a person who is not satisfied with NCCPL's computation re-compute the gain and lodge a refund claim with the Commissioner after filing the return of income. The refund is then dealt with under Part VI of Chapter X of the Ordinance. ### Citations - [Income Tax Ordinance, 2001, section 100B (Special provision relating to capital gain tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100b-special-provision-relating-to-capital-gain-tax), as amended to 2026-06-30: "shall be computed, determined, collected and deposited in accordance with the rules laid down in the Eighth Schedule." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 37A (Capital gain on disposal of securities)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#37a-capital-gain-on-disposal-of-securities), as amended to 2026-06-30: "the provisions of section 37 shall apply on such disposal of shares of a listed company or disposal of shares through initial public offer, accordingly." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 37 (Capital gains)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#37-capital-gains), as amended to 2026-06-30: "the gain arising on the disposal of a capital asset by a person shall be computed in accordance with the following formula" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Eighth Schedule, rule 1 (Manner and basis of computation of capital gains and tax thereon)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division VII (Capital Gains on Disposal of Securities)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 13N (Special procedures for computation of capital gains and collection of tax)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#13n-special-procedures-for-computation-of-capital-gains-and-collection-of-tax), as amended to 2023-11-24: "Capital gain or loss arising on the disposal of listed securities shall be computed on the basis of First In First Out (FIFO) inventory accounting method" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf --- ## Is the tax deducted on my dividend final, or is dividend added to my other income? Source: https://qanoondigest.com/faq/investors-savers/is-dividend-tax-final-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer The tax is final. Section 8 makes the section 5 tax on dividends a final tax: the dividend is not added to your salary or business income, no expense, allowance or loss reduces it, and no tax credit reduces the tax. Section 39(5) keeps it out of income from other sources, and tax deducted under section 150 discharges your liability. **Applies to:** Resident individuals who receive cash dividends from companies and also have salary, business or other income. For a resident individual, the tax deducted from a cash dividend is normally the end of the matter. The dividend sits in its own box: it is taxed at its own rate, it is not added to your salary or business income, and it does not change the slab rate on that other income. The provisions below are from the Income Tax Ordinance, 2001 as amended to 30 June 2026 and apply to tax year 2027. ### What does the law say? Section 5 imposes a tax on every person who receives a dividend from a company, at the rate in Division III of Part I of the First Schedule, computed on the gross dividend. For tax year 2027 that is 15% in most cases, with other rates for IPP, mutual fund, REIT SPV and no-tax-payable company dividends. Section 8(1) then says the tax imposed under section 5 "shall be a final tax on the amount in respect of which the tax is imposed" and spells out what that means: | Section 8(1) | Effect on your dividend | |---|---| | (a) | The amount is not chargeable to tax under any head of income in computing your taxable income | | (b) | No deduction is allowed for expenditure incurred in deriving it | | (c) | It is not reduced by any deductible allowance or the set off of any loss | | (d) | The tax is not reduced by any tax credit | | (e) | Your liability is discharged to the extent the tax was deducted at source under Division III of Part V of Chapter X | Section 150, which is in that Division, is the provision under which the paying company deducts the dividend tax. ### Why is dividend not income from other sources? Section 39(1)(a) lists "Dividend" among the items taxed under the head "Income from Other Sources". Section 39(5) removes it again: the section "shall not apply to any income received by a person in a tax year that is chargeable to tax under any other head of income or subject to tax under section 5, 5AA, 6, 7 or 7B." A dividend taxed under section 5 therefore does not enter the income from other sources computation, and expenses claimed against that head cannot be set against it. ### Worked example (illustrative figures) Nadia is a salaried accountant in Lahore on the active taxpayers' list. In tax year 2027 she earns a salary of Rs. 3,000,000 and receives a gross dividend of Rs. 250,000 from a bank that paid tax on its own profits. **Dividend.** - Rate under clause (b): 15% - Tax deducted: Rs. 250,000 x 15% = **Rs. 37,500** - Received: Rs. 250,000 - Rs. 37,500 = Rs. 212,500 - Under section 8(1)(e), her liability on the dividend is discharged by the Rs. 37,500 deducted. **Salary.** - Taxable income for the slab calculation: Rs. 3,000,000 only. The Rs. 250,000 dividend is not added, so the salary slab is the same as if she had received no dividend. **What she cannot do.** She paid Rs. 5,000 in brokerage account charges and lost money selling other shares during the year. Section 8(1)(b) and (c) mean neither amount reduces the Rs. 250,000 dividend. ### What if tax was short deducted? Section 8(1)(e) discharges the liability only "to the extent" tax was deducted at source. If a company deducted less than the rate in Division III, the part not deducted is not covered by that discharge. The Ordinance's recovery provisions for a withholding agent's failure to deduct are outside this page. ### What if I was not on the active taxpayers' list? The company deducts at double the rate under the Tenth Schedule. Section 169(4) says the final tax is still the First Schedule rate, and the excess "shall be adjustable in case the return is filed before finalization of assessment as provided in rule 4 of the Tenth Schedule." The dividend remains outside your other income either way. ### Do I still report the dividend? The Ordinance treats final-tax income as something that appears in a return. Section 169(3) provides that where all the income a person derives in a tax year is subject to final taxation under provisions including section 5, "an assessment shall be treated to have been made under section 120", with the return taken as the assessment order. Section 169(4) makes the non-filer adjustment depend on a return. Final taxation changes how the dividend is taxed, not whether it is disclosed. Who must file a return, and the layout of the return form, are outside this page. ### Common mistakes - **Adding the dividend to salary for the slab.** Section 8(1)(a) keeps it out of taxable income. - **Claiming a refund of dividend tax because your salary is below the taxable limit.** Section 8(1)(d) bars tax credits against it, and the tax is final regardless of your other income. - **Deducting expenses or share losses.** Section 8(1)(b) and (c) bar both. ### What to check in the official text Read sections 5, 8, 39, 150 and 169, and Division III of Part I of the First Schedule, in the official PDF. If you received a dividend in specie, a bonus issue or a mutual fund distribution, check the specific rules for that case, which are covered on separate pages. ### Frequently asked #### Is dividend income added to my salary for working out my tax slab? No. Section 8(1)(a) says an amount subject to final tax under section 5 is not chargeable under any head of income in computing taxable income, so the dividend does not move your salary into a higher slab. #### Can I deduct bank charges or a loss on shares from my dividend? No. Section 8(1)(b) and (c) bar any deduction for expenditure, any deductible allowance and any set off of loss against the dividend. #### Do I still show the dividend in my return? The Ordinance anticipates it. Section 169(3) treats a return as an assessment order where all income is subject to final tax under section 5, and section 169(4) lets a non-filer adjust excess dividend tax only through a return filed in time. ### Citations - [Income Tax Ordinance, 2001, section 8 (General provisions relating to taxes imposed under sections 5, 5A, 5AA, 6, 6A, 7, 7A, 7B and 7G)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#8-general-provisions-relating-to-taxes-imposed-under-sections-5-5a-5aa-6-6a-7-7a-7b-and-7g), as amended to 2026-06-30: "shall be a final tax on the amount in respect of which the tax is imposed and-" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 5 (Tax on dividends)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#5-tax-on-dividends), as amended to 2026-06-30: "shall be computed by applying the relevant rate of tax to the gross amount of the dividend." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 39 (Income from other sources)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#39-income-from-other-sources), as amended to 2026-06-30: "This section shall not apply to any income received by a person in a tax year that is chargeable to tax under any other head of income or subject to tax under section" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 150 (Dividends)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#150-dividends), as amended to 2026-06-30: "shall deduct tax from the gross amount of the dividend paid" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "the final tax shall be the tax rate prescribed in the First Schedule and the excess tax collected under the Tenth Schedule specified for persons not appearing in the active taxpayers’ list shall be adjustable" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division III (Rate of Dividend Tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is profit on National Savings certificates, including Defence Savings and Regular Income Certificates, taxable? Source: https://qanoondigest.com/faq/investors-savers/national-savings-certificates-profit-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 151(1)(a) requires tax to be deducted from yield on National Savings accounts and certificates. Division IA does not name National Savings in its 20% clauses, so the 15% rate for other cases applies. For individuals, section 7B charges the same 15% as a final tax, unless the profit exceeds five million rupees. **Applies to:** Individuals who hold National Savings certificates or accounts, including Defence Savings Certificates and Regular Income Certificates, or a Post Office Savings Account, in tax year 2027. ### What does the law say? Profit on National Savings is not exempt as a general rule. Several provisions of the Income Tax Ordinance, 2001 cover it. **Section 151(1)(a)** applies where "a person pays yield on an account, deposit or a certificate under the National Savings Scheme or Post Office Savings Account". The payer must deduct tax at the rate in Division IA of Part III of the First Schedule from the gross yield, reduced by any Zakat paid by the recipient at the time of payment. **Division IA** has three clauses. Clause (a) sets 20% for profit paid by a banking company or financial institution on an account or deposit with it. Clause (b) sets 20% for Government securities under section 151(1)(c) paid to a person other than an individual. Clause (c) sets "15% of the yield or profit in cases other than those mentioned in clauses (a) and (b)." National Savings yield under section 151(1)(a) is not named in clauses (a) or (b), so it falls in clause (c). **Section 7B** imposes tax on every person, other than a company, who receives profit on debt from a payer in section 151(1)(a) to (d). Clause (a) of section 151(1) is the National Savings clause, so section 7B reaches this profit. Division IIIA of Part I sets the section 7B rate with the same three clauses, and clause (c) is again 15%. **Section 8** makes tax under section 7B a final tax on the amount taxed. ### Does the law name Defence Savings or Regular Income Certificates? The current section 151(1)(a) speaks generally of "an account, deposit or a certificate under the National Savings Scheme". Before the Finance Act, 2003 substituted it, the clause referred to "a National Savings Deposit Certificate, including a Defence Savings Certificate". Section 39(4A) still names "National Savings Deposit Certificates including Defence Savings Certificate". Regular Income Certificates are not named anywhere in the Ordinance text. The Ordinance treats them by the general words of section 151(1)(a) if they are certificates under the National Savings Scheme; which products are part of that Scheme is decided outside this corpus. ### Worked example (illustrative figures) Nasreen, a retired nurse in Peshawar, is on the Active Taxpayers List. In tax year 2027 she receives Rs. 360,000 profit on National Savings certificates and has no Zakat deducted. 1. Rate under Division IA, clause (c): 15%. 2. Tax deducted: 15% x Rs. 360,000 = Rs. 54,000. 3. Profit received: Rs. 360,000 - Rs. 54,000 = Rs. 306,000. 4. Her profit on debt does not exceed five million rupees, so section 7B applies. The Rs. 54,000 is her final tax on that profit under section 8, and the profit is not added to her other taxable income. If the same profit had come from a bank term deposit, clause (a) would apply: 20% x Rs. 360,000 = Rs. 72,000. ### What if the certificates were bought before July 2001? Section 239(14) says "Any yield from National Saving Schemes of Directorate of National Savings where investment was made on or before 30th June, 2001" continues to remain exempt. The same sub-section covers income from a Mahana Amdani Account where the monthly instalment does not exceed one thousand rupees. The payer must not deduct tax under section 151 from such yield, and the holder does not need an exemption certificate. ### What if profit is paid late, in arrears? Section 39(4A) deals with profit on National Savings Deposit Certificates, including Defence Savings Certificates, paid in arrears. Where the arrears push the person into a higher rate than if the profit had been paid in the year it relates to, the person may elect by written notice to the Commissioner to be taxed at the earlier year's rate. Section 39(4B) says the election is made by the due date of the return for the year of receipt, or a later date the Commissioner allows in writing. ### What if my profit is above Rs. 5 million, or I am not on the list? Section 7B(3)(b) says the section does not apply to profit on debt that exceeds five million rupees. The deduction then becomes a minimum tax under section 151(3), and the profit is taxed under section 39 with your other income. For persons not on the Active Taxpayers List, the related page explains how the 15% rate is doubled to 30%. ### Common mistakes - **Believing all National Savings profit is tax free.** Only yield on investments made on or before 30 June 2001, and small Mahana Amdani Account income, keep the exemption under section 239(14). - **Applying the 20% bank rate.** National Savings yield falls in clause (c) of Division IA, which is 15%. - **Treating Behbood certificates the same way.** They have their own rules in the Second Schedule. ### What to check in the official text Read sections 7B, 8, 39(4A) and (4B), 151 and 239(14), and Division IA of Part III and Division IIIA of Part I of the First Schedule in the source PDF, since our site copy does not reproduce the schedules as tables. Profit rates, product terms and eligibility for particular National Savings certificates are set outside the Income Tax Ordinance and are not covered here. ### Frequently asked #### What rate is deducted on National Savings profit in tax year 2027? For a person on the Active Taxpayers List, 15%. Clause (c) of Division IA of Part III of the First Schedule sets 15% for yield or profit in cases other than bank deposits and Government securities paid to non-individuals, and National Savings falls in that residual clause. #### Are National Savings certificates bought before July 2001 still tax free? Section 239(14) says yield from National Saving Schemes where the investment was made on or before 30 June 2001 continues to remain exempt, and the payer shall not deduct tax under section 151 from it. Later investments are not covered by that saving clause. #### Are Behbood Savings Certificates taxed the same way? No. Clause (36A) of Part IV of the Second Schedule switches off the section 151(1)(a) deduction for Bahbood Savings Certificates, the Pensioner's Benefit Account and the Shuhada Family Welfare Account, and a separate 5% cap applies. The related page on Behbood certificates covers them. ### Citations - [Income Tax Ordinance, 2001, section 151 (Profit on debt)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#151-profit-on-debt), as amended to 2026-06-30: "a person pays yield on an account, deposit or a certificate under the National Savings Scheme or Post Office Savings Account" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IA (Profit on Debt), clause (c), and Part I, Division IIIA (Rate for Profit on Debt), clause (c)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "(c) 15% of the yield or profit in cases other than those mentioned in clauses" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 7B (Tax on profit on debt)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#7b-tax-on-profit-on-debt), as amended to 2026-06-30: "on every person, other than a company, who receives a profit on debt from any person mentioned in clauses (a) to (d)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 8 (General provisions relating to taxes imposed under sections 5, 5A, 5AA, 6, 6A, 7, 7A, 7B and 7G)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#8-general-provisions-relating-to-taxes-imposed-under-sections-5-5a-5aa-6-6a-7-7a-7b-and-7g), as amended to 2026-06-30: "shall be a final tax on the amount in respect of which the tax is imposed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 239 (Savings)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#239-savings), as amended to 2026-06-30: "Any yield from National Saving Schemes of Directorate of National Savings where investment was made on or before 30th June, 2001" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 39 (Income from other sources)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#39-income-from-other-sources), as amended to 2026-06-30: "any profit on debt derived from investment in National Savings Deposit Certificates including Defence Savings Certificate paid to a person in arrears" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is the tax deducted on my bank profit final, and what changes if my profit is above Rs. 5 million? Source: https://qanoondigest.com/faq/investors-savers/is-bank-profit-tax-final-or-minimum Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Up to five million rupees it is final. Section 7B taxes an individual's profit on debt separately and section 8 makes that tax final. Section 7B(3) stops applying to profit that exceeds five million rupees, and section 151(3) then treats the deduction as a minimum tax, with the profit taxed under section 39 at normal rates. **Applies to:** Individuals and other non-company savers who earn profit on bank deposits, National Savings or Government securities in tax year 2027 and need to know how to treat it in their return. ### What does the law say? The answer depends on whether section 7B applies to your profit. **Section 7B(1)** imposes tax at the Division IIIA rate "on every person, other than a company, who receives a profit on debt" from a payer listed in clauses (a) to (d) of section 151(1): National Savings and Post Office Savings, banks and financial institutions, Government securities, and certain bonds and instruments. Section 7B(2) applies the rate to the gross profit. **Section 8(1)** says tax imposed under section 7B "shall be a final tax on the amount in respect of which the tax is imposed". The amount is not chargeable under any head of income, no expenditure is deductible against it, it is not reduced by any deductible allowance or loss, and the tax is not reduced by any tax credit. **Section 7B(3)** says the section "shall not apply to a profit on debt that" is exempt from tax, or "exceeds five million Rupees." **Section 151(3)** says tax deductible under section 151 is a minimum tax on the profit on debt, except where the taxpayer is a company or the profit on debt is taxable under section 7B. ### How does it work in practice? | Profit on debt of an individual | Section 7B | How the profit is taxed | Status of the section 151 deduction | |---|---|---|---| | Up to Rs. 5,000,000 | Applies | Separately, at the Division IIIA rate on gross profit | Covers the final tax under sections 7B and 8 | | More than Rs. 5,000,000 | Does not apply | Included under "Income from Other Sources" in section 39(1)(c) and taxed with other income at Division I rates | Minimum tax under section 151(3), credited under section 168 | Section 39(5) confirms the split: the "Income from Other Sources" head does not apply to income that is subject to tax under section 7B. The rates in Division IIIA and in Division IA match: 20% for profit from a bank or financial institution, and 15% for National Savings profit, Government securities paid to an individual and other cases. So where section 7B applies, the amount the bank deducts is normally the full tax. ### Worked example (illustrative figures) Both cases are for tax year 2027, for a person on the Active Taxpayers List with no other income and no Zakat deducted. **Case 1: profit of Rs. 3,000,000.** Tariq, a retired engineer in Islamabad, earns Rs. 3,000,000 on bank term deposits. 1. Section 7B applies because the profit does not exceed five million rupees. 2. Tax: 20% x Rs. 3,000,000 = Rs. 600,000, deducted by the bank. 3. Under section 8 this is final. The profit is not added to his taxable income. **Case 2: profit of Rs. 6,000,000.** Farzana, a homemaker in Karachi, earns Rs. 6,000,000 on bank deposits. 1. Section 7B does not apply because the profit exceeds five million rupees. 2. Bank deduction under section 151: 20% x Rs. 6,000,000 = Rs. 1,200,000. This is a minimum tax. 3. The profit is income under section 39(1)(c). Division I, clause (1), for taxable income above Rs. 5,600,000: Rs. 1,610,000 + 45% x (Rs. 6,000,000 - Rs. 5,600,000) = Rs. 1,610,000 + Rs. 180,000 = Rs. 1,790,000. 4. Credit for tax deducted under section 168: Rs. 1,790,000 - Rs. 1,200,000 = Rs. 590,000 still payable with the return. The Division I figure here assumes no other income and no deductible allowances. Taxable income above Rs. 10 million can attract further charges that this example does not reach. ### What if my profit comes from several banks? Section 7B(3)(b) refers to "a profit on debt that" exceeds five million rupees. It does not say whether the five million is measured per account, per bank or across all profit for the tax year. The text is silent on that point, and this page does not resolve it. ### What if tax was not deducted, or was deducted at the wrong rate? Where section 7B applies, the tax is still charged on the gross profit at the Division IIIA rate, whether or not the bank deducted it correctly. Where the profit exceeds five million rupees, the deduction is a credit against the tax on your taxable income under section 168, and any shortfall is paid with the return. ### Common mistakes - **Assuming bank profit is always final.** Since the Finance Act, 2019, section 151(3) calls the deduction a "minimum" tax, and section 7B only gives final treatment up to five million rupees. - **Using the old thirty-six million threshold.** The Finance Act, 2021 substituted "five" for "thirty six" in section 7B(3)(b). - **Adding profit taxed under section 7B to slab income.** Section 8(1)(a) says that amount is not chargeable under any head of income. ### What to check in the official text Read sections 7B, 8, 39, 151 and 168, and the Division I and Division IIIA tables in Part I of the First Schedule in the source PDF, which our site copy does not reproduce as tables. ### Frequently asked #### Do I need to add bank profit to my taxable income? Not if the profit falls within section 7B. Section 8(1)(a) says an amount taxed under section 7B is not chargeable to tax under any head of income in computing taxable income. If the profit exceeds five million rupees, section 7B does not apply and the profit is taxed under the head Income from Other Sources. #### What happens to the tax already deducted when profit is above Rs. 5 million? Section 151(3) makes the deduction a minimum tax where the profit is not taxable under section 7B. Section 168 allows the tax deducted as a credit in computing the tax due on taxable income for the year in which it was deducted. #### Can I claim expenses or set off losses against bank profit taxed under section 7B? No. Section 8 says no deduction is allowed for expenditure incurred in deriving the amount, it is not reduced by any deductible allowance or set off of any loss, and the tax is not reduced by tax credits. ### Citations - [Income Tax Ordinance, 2001, section 7B (Tax on profit on debt)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#7b-tax-on-profit-on-debt), as amended to 2026-06-30: "The tax imposed under sub-section (1) on a person, other than a company, who receives a profit on debt shall be computed by applying the relevant rate of tax to the gross amount of the profit on debt." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 8 (General provisions relating to taxes imposed under sections 5, 5A, 5AA, 6, 6A, 7, 7A, 7B and 7G)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#8-general-provisions-relating-to-taxes-imposed-under-sections-5-5a-5aa-6-6a-7-7a-7b-and-7g), as amended to 2026-06-30: "such amount shall not be chargeable to tax under any head of income in computing the taxable income of the person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 151 (Profit on debt)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#151-profit-on-debt), as amended to 2026-06-30: "(b) profit on debt is taxable under section 7B." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 39 (Income from other sources)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#39-income-from-other-sources), as amended to 2026-06-30: "(c) profit on debt;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1) (rates for individuals other than salaried individuals), with Division IIIA and Part III Division IA](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can I set off a loss on shares against gains or carry it forward? Source: https://qanoondigest.com/faq/investors-savers/set-off-loss-on-shares Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, within limits. Section 37A(5) lets a loss on disposal of securities be set off only against gains on other securities taxed under section 37A. A loss from tax year 2019 onward that is not absorbed carries forward for up to three tax years, again only against securities gains. It cannot reduce salary, business or other income. **Applies to:** Individuals and other investors who made a loss selling listed shares or other securities taxed under section 37A. ### What does the law say? **Section 37A(5)** of the Income Tax Ordinance, 2001 opens with "Notwithstanding anything contained in this Ordinance", so it overrides the general loss rules. It says that where a person sustains a loss on disposal of securities in a tax year, the loss is set off only against the person's gain from any other securities chargeable to tax under section 37A. The main rule then says no loss is carried forward. A proviso, added by the Finance Supplementary (Second Amendment) Act, 2019, softens that for losses from **tax year 2019 onward**: the part not set off in the year is carried forward to the following tax year, set off only against securities gains taxed under section 37A, and cannot be carried forward to more than **three tax years** immediately after the year the loss was first computed. "Securities" here means what section 37A(3) lists: shares of a public company, PTC vouchers, modaraba certificates, instruments of redeemable capital, debt securities, units of exchange traded funds and derivative products. ### How does it work in practice? For listed shares, NCCPL does the set-off. Rule 13N of the Income Tax Rules, 2002 (our copy is amended to 24 November 2023) sets out the steps: - **Same year.** Rule 13N(6): a loss on listed securities determined by NCCPL in a financial year is set off against gains on securities in that same year. - **Carry forward.** Rule 13N(7) repeats the three-year limit for losses from tax year 2019 onward. - **Conditions and order.** Rule 13N(7A) says NCCPL sets off carried forward losses only for a taxpayer whose name appears on the Active Taxpayers' List for the tax year the loss relates to. The adjustment is made monthly, oldest loss first, and NCCPL keeps a year-wise balance so it can track when each loss expires. - **Monthly tax.** Rule 13N(10) says NCCPL's monthly collection is worked out after adjusting losses, including losses carried forward. ### Worked example (illustrative figures) Bilal runs a mobile phone shop in Faisalabad and trades listed shares on the side. He is on the Active Taxpayers' List every year, and all his shares were bought after 1 July 2024, so Division VII taxes his gains at 15%. | Tax year | Gains on shares | Losses on shares | Loss brought forward used | Taxable gain | Tax at 15% | Loss left to carry forward | |---|---|---|---|---|---|---| | 2026 | Rs. 120,000 | Rs. 320,000 | nil | nil | nil | Rs. 200,000 | | 2027 | Rs. 150,000 | nil | Rs. 150,000 | nil | nil | Rs. 50,000 | | 2028 | Rs. 90,000 | nil | Rs. 50,000 | Rs. 40,000 | Rs. 6,000 | nil | Step by step: 1. **Tax year 2026:** Rs. 120,000 - Rs. 320,000 = a net loss of **Rs. 200,000**, carried forward. 2. **Tax year 2027:** gain of Rs. 150,000 is fully absorbed. Rs. 200,000 - Rs. 150,000 = **Rs. 50,000** still to carry forward. 3. **Tax year 2028:** Rs. 90,000 - Rs. 50,000 = **Rs. 40,000** taxable. 15% x Rs. 40,000 = **Rs. 6,000**. If Bilal had made no gains in 2027 to 2029, the 2026 loss could not be used after tax year 2029, the third tax year after 2026. ### What if my losses and gains are taxed at different rates? Division VII sets different rates depending on when shares were acquired (for example 12.5% for shares bought from 1 July 2013 to 30 June 2022, and a holding-period scale for shares bought from 1 July 2022 to 30 June 2024). Section 37A(5) does not say which rate band a loss is matched against first. Rule 13N applies the first in, first out method, but neither text settles this point in words, so this page does not resolve it. ### What if the loss is from an off-market sale? The second proviso to section 37A(1) sends disposals of listed shares made outside a registered stock exchange and not settled through NCCPL to section 37. A loss on such a sale is a capital loss under the ordinary rules. **Section 59** says a capital loss cannot be set off against income under any other head, is carried forward against later capital gains, and can go forward for up to **six** tax years, with the earliest loss used first. That six-year rule does not apply to section 37A losses, because section 37A(5) overrides it. ### What if my loss is from before tax year 2019? The proviso covers only losses sustained in tax year 2019 and onward. For earlier years, the main rule of section 37A(5) applies: no loss is carried forward. ### Common mistakes - **Using a share loss against salary or business income.** Section 37A(5) limits set-off to securities gains. - **Applying the six-year capital loss rule.** That is section 59; securities losses under section 37A get three years. - **Dropping off the Active Taxpayers' List.** Under rule 13N(7A), NCCPL carries losses forward only for a taxpayer on the list for the year of the loss. - **Assuming a loss on an off-market transfer sits in the NCCPL pool.** Those disposals fall under section 37 and section 59. ### What to check in the official text Read section 37A(3), (4) and (5) with its proviso, and section 59. For how NCCPL applies the rules, read rule 13N(6) to (10) of the Income Tax Rules, 2002, including the illustration that rule 13N(7A)(e) points to. Our copy of the Rules is amended only to 24 November 2023, so check for later SROs. ### Frequently asked #### Can a loss on shares reduce the tax on my salary? No. Section 37A(5) allows a securities loss to be set off only against gains from other securities taxed under section 37A, and section 37A(4) treats those gains as a separate block of income. Salary, business and rental income are untouched by it. #### How long can I carry forward a loss on shares? For a loss from tax year 2019 onward, the proviso to section 37A(5) allows carry forward to the following tax years, but not to more than three tax years immediately after the year the loss was first computed. Any part still unused after that lapses. #### Does NCCPL carry my loss forward automatically? Rule 13N(7A) of the Income Tax Rules, 2002 has NCCPL adjust carried forward losses monthly on a first in, first out basis, but only for a taxpayer on the Active Taxpayers' List for the tax year the loss relates to. That condition comes from the Rules (our copy is amended to 24 November 2023), not from section 37A itself. ### Citations - [Income Tax Ordinance, 2001, section 37A (Capital gain on disposal of securities)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#37a-capital-gain-on-disposal-of-securities), as amended to 2026-06-30: "shall be carried forward to the following tax year and set off only against the gain of the person from disposal of securities chargeable to tax under this section, but no such loss shall be carried forward to more than three tax years immediately succeeding the tax year for which the loss was first computed." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 59 (Carry forward of capital losses)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#59-carry-forward-of-capital-losses), as amended to 2026-06-30: "the loss shall not be set off against the person’s income, if any, chargeable under any other head of income for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 37 (Capital gains)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#37-capital-gains), as amended to 2026-06-30: "a gain arising on the disposal of a capital asset by a person in a tax year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 13N (Special procedures for computation of capital gains and collection of tax)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#13n-special-procedures-for-computation-of-capital-gains-and-collection-of-tax), as amended to 2023-11-24: "only in respect of a taxpayer whose name appear or appeared in the Active Tax Payers List [ATL] pertaining to the tax year to which such loss pertains" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division VII (Capital Gains on Disposal of Securities)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Does capital gains tax on shares depend on how long I held them or when I bought them? Source: https://qanoondigest.com/faq/investors-savers/share-capital-gains-holding-period-rates Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Both can matter. Under Division VII, shares bought before 1 July 2013 carry 0% and those bought from 1 July 2013 to 30 June 2022 carry 12.5%. For purchases from 1 July 2022 to 30 June 2024, the rate falls from 15% to 0% as the holding period grows. Later purchases pay a flat rate regardless of holding period. **Applies to:** Investors selling shares and other securities under section 37A in tax year 2027, particularly those holding shares bought before 1 July 2024. For shares sold in tax year 2027, the capital gains tax rate depends first on when the shares were bought, and for one group of purchases also on how long they were held. The rates are in Division VII of Part I of the First Schedule to the Income Tax Ordinance, 2001, as amended to 30 June 2026, and are charged through section 37A. ### What does the law say? Section 37A(1) charges capital gain on disposal of securities "at the rates specified in Division VII of Part I of the First Schedule". Section 37A(2) says the holding period "shall be reckoned from the date of acquisition ... to the date of disposal". The Division VII table, substituted by the Finance Act, 2024, has two rate columns. Column (3) applies to securities acquired between 1 July 2022 and 30 June 2024, both dates inclusive. Column (4) applies to securities acquired on or after 1 July 2024. A proviso then deals with older purchases. ### What are the rates for each purchase date? | Date of acquisition | Rate on the gain | |---|---| | Before 1 July 2013 | 0% (first proviso, clause (ii)) | | 1 July 2013 to 30 June 2022 | 12.5% (first proviso, clause (i)) | | 1 July 2022 to 30 June 2024 | By holding period, see next table (column 3) | | On or after 1 July 2024 | 15% if on the Active Taxpayers' List on the dates of acquisition and disposal; otherwise Division I or II rates (column 4) | For securities acquired between 1 July 2022 and 30 June 2024, column (3) sets: | S. No. | Holding period | Rate | |---|---|---| | 1 | Does not exceed one year | 15% | | 2 | Exceeds one year but does not exceed two years | 12.5% | | 3 | Exceeds two years but does not exceed three years | 10% | | 4 | Exceeds three years but does not exceed four years | 7.5% | | 5 | Exceeds four years but does not exceed five years | 5% | | 6 | Exceeds five years but does not exceed six years | 2.5% | | 7 | Exceeds six years | 0% | S. No. 8, future commodity contracts entered into by members of Pakistan Mercantile Exchange, carries 5% in both columns, and the first proviso's 12.5% and 0% rules do not apply to it. ### How does it work in practice? You need two dates for each lot of shares: the acquisition date and the disposal date. The acquisition date places the lot in one of the four rows of the first table. Only for the 1 July 2022 to 30 June 2024 group does the gap between the dates change the rate. If you bought the same company's shares on different dates, each lot can fall into a different row. Column (4) does not reduce with time, so a lot bought in August 2024 attracts the same rate whether it is sold after one month or five years. Two further provisos matter for some investors. The rate for companies on debt securities is the Division II rate, not the table rate. Mutual funds, collective investment schemes and REIT schemes deduct tax on redemption at separate rates set in another proviso, covered on the mutual fund redemption page. ### Worked example (illustrative figures) Sana, a doctor in Islamabad, is on the Active Taxpayers' List throughout. She sells three lots on 15 October 2026, each giving a gain of Rs. 160,000 (bought for Rs. 200,000, sold for Rs. 360,000). **Lot A, bought 1 September 2022.** The holding period to 15 October 2026 is just over four years, so it "exceeds four years but does not exceed five years": S. No. 5, 5%. - Rs. 160,000 x 5% = **Rs. 8,000**. **Lot B, bought 1 August 2024.** Column (4) applies, 15%. - Rs. 160,000 x 15% = **Rs. 24,000**. **Lot C, bought 20 March 2015.** Clause (i) of the first proviso applies, 12.5%. - Rs. 160,000 x 12.5% = **Rs. 20,000**. Had any lot been bought before 1 July 2013, its gain would carry 0%. ### What if a sale falls exactly on an anniversary? The bands use "does not exceed" and "exceeds". A holding of exactly one year "does not exceed one year" and stays at 15%. Section 37A(2) says only that the period runs from acquisition to disposal. It does not say how to count days or treat settlement dates, and this page does not settle that. The Eighth Schedule computation by NCCPL is where such points are applied in practice. ### Common mistakes - **Assuming all long-held shares are tax free.** The 0% after six years is only in column (3), for purchases from 1 July 2022 to 30 June 2024. Shares bought from 1 July 2013 to 30 June 2022 stay at 12.5% however long they are held. - **Expecting a holding-period discount on post-July 2024 purchases.** Column (4) has none. - **Using the sale date alone.** The purchase date decides which row or column applies. - **Treating each lot the same.** Different purchase dates can carry different rates in the same sale. ### What to check in the official text Read section 37A and Division VII of Part I of the First Schedule in the official PDF, including all provisos after the table. The table in the consolidated PDF is printed in narrow columns, so check which column each rate sits in. Keep your own purchase records for each lot, since the acquisition date drives the rate. ### Frequently asked #### What is the capital gains tax on shares bought before July 2013? Clause (ii) of the first proviso to the Division VII table sets 0% on the gain where the securities were acquired before 1 July 2013. This does not apply to future commodity contracts at S. No. 8. #### Do shares bought after 1 July 2024 get a lower rate if held longer? No. Column (4) of the Division VII table sets one rate for securities acquired on or after 1 July 2024: 15% for persons on the Active Taxpayers' List on both dates, whatever the holding period. #### How is the holding period counted? Section 37A(2) reckons it from the date of acquisition to the date of disposal. The table then places the holding period in bands such as 'does not exceed one year' or 'exceeds one year but does not exceed two years'. ### Citations - [Income Tax Ordinance, 2001, section 37A (Capital gain on disposal of securities)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#37a-capital-gain-on-disposal-of-securities), as amended to 2026-06-30: "The holding period of a security, for the purposes of this section, shall be reckoned from the date of acquisition (whether before, on or after the thirtieth day of June, 2010) to the date of disposal of such security falling after the thirtieth day of June, 2010." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division VII (Capital Gains on Disposal of Securities), Table, columns (3) and (4), and first proviso clauses (i) and (ii)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much tax does the bank deduct on my savings or term deposit profit in tax year 2027? Source: https://qanoondigest.com/faq/investors-savers/bank-profit-tax-rate-tax-year-2027 Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer The bank deducts 20% of the profit. Section 151 makes a banking company or financial institution deduct tax at the Division IA rate, which is 20% on profit from an account or deposit kept with it. Section 7B charges individuals the same 20% under Division IIIA, and the rate does not change with the type of account. **Applies to:** Individuals and other non-company depositors who earn profit on savings, term or fixed deposit accounts with a bank or financial institution in tax year 2027 and who appear on the Active Taxpayers List. ### What does the law say? Two provisions of the Income Tax Ordinance, 2001 work together on bank profit. **Section 151** is the collection rule. Where "a banking company or financial institution pays any profit on a debt, being an account or deposit maintained with the company or institution", the payer must deduct tax at the rate in Division IA of Part III of the First Schedule. The deduction is taken at the time the profit is paid. **Division IA** sets three rates for tax deducted under section 151: | Clause | Payment | Rate | |---|---|---| | (a) | Yield or profit paid by a banking company or financial institution on an account or deposit maintained with it | 20% | | (b) | Yield or profit on Government securities under section 151(1)(c) paid to any person other than an individual | 20% | | (c) | Yield or profit in cases other than (a) and (b) | 15% | **Section 7B** is the charging rule for people who are not companies. It imposes tax at the rate in Division IIIA of Part I of the First Schedule on every person, other than a company, who receives profit on debt from a payer listed in section 151(1)(a) to (d). Division IIIA uses the same three clauses and the same rates: 20% for bank and financial institution profit, 20% for Government securities paid to non-individuals, and 15% in other cases. Section 7B(2) applies the rate to the gross amount of the profit. The Ordinance used here is amended to 30 June 2026, so these are the rates for tax year 2027, which covers profit paid from 1 July 2026 to 30 June 2027. ### Does the type of account change the rate? No. Clause (a) covers profit on "an account or deposit maintained with such company or institution". It does not separate savings accounts, term deposits or fixed deposits. If the profit comes from a bank or financial institution on money you keep with it, the rate in both Division IA and Division IIIA is 20%. Whether a particular institution is a "banking company" or "financial institution", and whether a particular product pays "profit on debt", turns on definitions elsewhere in the Ordinance. This page does not work through those definitions for individual products. ### How does it work in practice? The bank works out the profit for the period, subtracts any Zakat it deducts from you under the Zakat and Ushr Ordinance, 1980, and deducts 20% of what remains. Section 151 says the base is "the gross amount of the yield or profit paid as reduced by the amount of Zakat". The net profit is then credited to your account. For an individual whose profit falls within section 7B, section 8 makes that tax "a final tax on the amount in respect of which the tax is imposed". The profit is not added to other income and taxed again at slab rates. Section 7B(3) switches this treatment off for profit that is exempt or that exceeds five million rupees, which is explained on the related page about final and minimum tax. ### Worked example (illustrative figures) Sana, a school teacher in Lahore, appears on the Active Taxpayers List. In tax year 2027 her one-year term deposit earns profit of Rs. 500,000 and her savings account earns Rs. 60,000. No Zakat is deducted. 1. Term deposit: 20% x Rs. 500,000 = Rs. 100,000 deducted. She receives Rs. 400,000. 2. Savings account: 20% x Rs. 60,000 = Rs. 12,000 deducted. She receives Rs. 48,000. 3. Total tax deducted: Rs. 100,000 + Rs. 12,000 = Rs. 112,000 on total profit of Rs. 560,000. Now suppose the bank had also deducted Zakat of Rs. 12,500 from the term deposit profit. 1. Base for tax: Rs. 500,000 - Rs. 12,500 = Rs. 487,500. 2. Tax: 20% x Rs. 487,500 = Rs. 97,500. ### What if I am not on the Active Taxpayers List? Section 100BA says the deduction of advance tax for a person not appearing on the Active Taxpayers List is determined under the rules in the Tenth Schedule. Rule 1 of that Schedule increases the rate by one hundred percent, so the 20% bank rate becomes 40%. The related page on non-filers works through this. ### What if the profit is from National Savings or Government securities? Profit on National Savings accounts and certificates falls under section 151(1)(a), not under the bank clause. Neither clause (a) nor clause (b) of Division IA names it, so it takes the 15% rate in clause (c). Profit on Government securities paid to an individual also falls in clause (c) at 15%, because clause (b) applies only to persons other than individuals. ### Common mistakes - **Assuming the old 15% still applies.** The Finance Act, 2025 substituted Division IA and Division IIIA. The single 15% rate was replaced by the three-clause structure with 20% for banks. - **Expecting a lower rate on a savings account than on a term deposit.** Clause (a) applies to any account or deposit maintained with the bank. - **Treating the deduction as a charge on the whole profit before Zakat.** Section 151 reduces the base by Zakat paid by the recipient at the time the profit is paid. ### What to check in the official text Read section 151(1) and (3), section 7B, section 8 and section 100BA, then Division IA of Part III and Division IIIA of Part I of the First Schedule in the source PDF, because our site copy does not reproduce the schedules as tables. Profit rates offered by banks, and any State Bank of Pakistan rules on how banks calculate profit, are outside this corpus. ### Frequently asked #### Is the tax rate on a fixed deposit different from a savings account? No. Clause (a) of Division IA of Part III of the First Schedule sets 20% on profit paid by a banking company or financial institution on an account or deposit maintained with it. The clause does not distinguish between savings, current, term or fixed deposit accounts. #### What was the rate before the Finance Act, 2025? Before the Finance Act, 2025 substituted Division IA, the rate to be deducted under section 151 was a single 15% of the yield or profit. Division IIIA, the section 7B rate, was also 15% before the same Act. #### Is the tax calculated on the profit before or after Zakat? Section 151 says the tax is deducted from the gross yield or profit as reduced by any Zakat paid by the recipient under the Zakat and Ushr Ordinance, 1980 at the time the profit is paid. So where the bank deducts Zakat, the 20% applies to the profit left after Zakat. ### Citations - [Income Tax Ordinance, 2001, section 151 (Profit on debt)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#151-profit-on-debt), as amended to 2026-06-30: "the payer of the profit shall deduct tax at the rate specified in Division IA of Part III of the First Schedule from the gross amount of the yield or profit paid as reduced by the amount of Zakat" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IA (Profit on Debt), clauses (a) to (c)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "(a) 20% of the yield or profit paid by a banking company or financial institution on an account or deposit maintained with such company or institution;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 7B (Tax on profit on debt)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#7b-tax-on-profit-on-debt), as amended to 2026-06-30: "a tax shall be imposed, at the rate specified in Division IIIA of Part I of the First Schedule, on every person, other than a company, who receives a profit on debt" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division IIIA (Rate for Profit on Debt), clause (a)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "The rate of tax for profit on debt imposed under section 7B shall be -" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 8 (General provisions relating to taxes imposed under sections 5, 5A, 5AA, 6, 6A, 7, 7A, 7B and 7G)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#8-general-provisions-relating-to-taxes-imposed-under-sections-5-5a-5aa-6-6a-7-7a-7b-and-7g), as amended to 2026-06-30: "shall be a final tax on the amount in respect of which the tax is imposed" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "shall be determined in accordance with the rules in the Tenth Schedule." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What tax applies to profit on Behbood Savings Certificates and the Shuhada Family Welfare Account? Source: https://qanoondigest.com/faq/investors-savers/behbood-savings-certificate-profit-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer The tax is capped at 5% of the profit. Clause (6) of Part III of the Second Schedule says tax under section 39(1)(c) on this profit shall not exceed 5%, and clause (36A) of Part IV says the section 151(1)(a) deduction does not apply. The profit is taxed at normal rates in the return, up to that cap. **Applies to:** Individuals, including widows, elderly savers and families of shuhada, who earn profit on Bahbood Savings Certificates or a Shuhada Family Welfare Account in tax year 2027. ### What does the law say? Behbood profit is taxed, but under its own rules in the Second Schedule to the Income Tax Ordinance, 2001. The Ordinance spells the certificate "Bahbood". 1. **Section 39(1)(c)** lists "profit on debt" under the head "Income from Other Sources". Profit on these certificates and accounts is profit on debt. 2. **Clause (6) of Part III of the Second Schedule** says the tax payable under section 39(1)(c) "in respect of any amount paid as yield or profit on investment in Bahbood Savings Certificate or Pensioners Benefit Account and Shuhada Family Welfare Account shall not exceed 5% of such profit." 3. **Clause (36A) of Part IV of the Second Schedule** says section 151(1)(a) "shall not apply" to yield or profit on Bahbood Savings Certificates, the Pensioner's Benefit Account and the Shuhada Family Welfare Account. Section 151(1)(a) is the rule that otherwise makes a payer deduct tax when it "pays yield on an account, deposit or a certificate under the National Savings Scheme". 4. **Clause (103) of Part IV** says section 7B "shall not apply" to yield or profit on Bahbood Savings Certificates or the Pensioner's Benefit Account, provided tax on it is paid at the rates in Division I of Part I of the First Schedule, subject to clause (6) of Part III. The Pensioners' Benefit Account shares these rules. It is covered in our pensioners and senior citizens section, so this page concentrates on Bahbood Savings Certificates and the Shuhada Family Welfare Account. ### How does it work in practice? Nothing is deducted when the profit is paid, because clause (36A) switches off section 151(1)(a). The profit is not taxed separately at the 15% National Savings rate under section 7B, because clause (103) switches section 7B off for Bahbood certificates. Instead, the profit is taxed as income from other sources at the Division I slab rates, and the result cannot be more than 5% of the profit. For tax year 2027, clause (1) of Division I sets these rates for an individual whose salary is not more than seventy-five per cent of taxable income: | Taxable income | Rate of tax | |---|---| | Up to Rs. 600,000 | 0% | | Rs. 600,000 to Rs. 1,200,000 | 15% of the amount exceeding Rs. 600,000 | | Rs. 1,200,000 to Rs. 1,600,000 | Rs. 90,000 + 20% of the amount exceeding Rs. 1,200,000 | | Rs. 1,600,000 to Rs. 3,200,000 | Rs. 170,000 + 30% of the amount exceeding Rs. 1,600,000 | | Rs. 3,200,000 to Rs. 5,600,000 | Rs. 650,000 + 40% of the amount exceeding Rs. 3,200,000 | | Above Rs. 5,600,000 | Rs. 1,610,000 + 45% of the amount exceeding Rs. 5,600,000 | The cap was 10% until the Finance Act, 2022 substituted 5%, according to the footnote to clause (6). ### Worked example (illustrative figures) Each case assumes the profit is the person's only income for tax year 2027. **Case 1.** Shamim, a widow in Multan, earns Rs. 1,100,000 profit on Bahbood Savings Certificates. 1. Division I tax: 15% x (Rs. 1,100,000 - Rs. 600,000) = 15% x Rs. 500,000 = Rs. 75,000. 2. Clause (6) cap: 5% x Rs. 1,100,000 = Rs. 55,000. 3. Tax payable: the lower figure, **Rs. 55,000**. **Case 2.** The family of a shaheed in Kohat earns Rs. 650,000 profit on a Shuhada Family Welfare Account, held by his mother. 1. Division I tax: 15% x (Rs. 650,000 - Rs. 600,000) = 15% x Rs. 50,000 = Rs. 7,500. 2. Clause (6) cap: 5% x Rs. 650,000 = Rs. 32,500. 3. Tax payable: **Rs. 7,500**, because the slab tax is already below the cap. **Case 3.** Abdul Rasheed, aged 72, in Quetta, earns Rs. 2,000,000 on Bahbood Savings Certificates. 1. Division I tax: Rs. 170,000 + 30% x (Rs. 2,000,000 - Rs. 1,600,000) = Rs. 170,000 + Rs. 120,000 = Rs. 290,000. 2. Clause (6) cap: 5% x Rs. 2,000,000 = Rs. 100,000. 3. Tax payable: **Rs. 100,000**. ### What if I have other income too? The profit is then added to your other taxable income, and the slab tax is worked out on the total. Clause (6) caps the tax on the profit at 5% of the profit, but the Ordinance does not set out a method for splitting the total slab tax between the profit and the other income. This page does not supply one. ### Is the Shuhada Family Welfare Account outside section 7B too? Clauses (6) and (36A) name the Shuhada Family Welfare Account. Clause (103), which takes profit out of section 7B, names only Bahbood Savings Certificates and the Pensioner's Benefit Account. The text does not explain the difference, and this page does not decide whether section 7B reaches the Shuhada account. ### Common mistakes - **Treating 5% as a flat rate.** It is a ceiling. In Case 2 the slab tax is lower and applies. - **Assuming the 15% National Savings rate applies.** Clause (36A) removes the deduction and clause (103) removes section 7B for Bahbood certificates. - **Leaving the profit out of the return.** With no deduction at source and no section 7B, the tax is worked out in the return. ### What to check in the official text Read clause (6) of Part III and clauses (36A) and (103) of Part IV of the Second Schedule, sections 7B, 39 and 151, and the Division I tables of the First Schedule in the source PDF, which our site copy does not reproduce as tables. Who may invest in Bahbood Savings Certificates or open a Shuhada Family Welfare Account, and the profit rates paid, are set by National Savings rules outside this corpus. ### Frequently asked #### Is tax deducted when Behbood profit is paid? No. Clause (36A) of Part IV of the Second Schedule says section 151(1)(a) does not apply to yield or profit on Bahbood Savings Certificates, the Pensioner's Benefit Account and the Shuhada Family Welfare Account. The tax is worked out in the investor's return instead. #### Is the tax always 5% of the profit? No. Clause (6) of Part III of the Second Schedule says the tax payable on this profit shall not exceed 5%. It is a ceiling. Where the normal slab tax on the profit is lower, the lower figure is the tax. #### Does the 5% cap apply to the Shuhada Family Welfare Account? Yes. Clause (6) of Part III names the Shuhada Family Welfare Account alongside Bahbood Savings Certificates and the Pensioners Benefit Account, and clause (36A) of Part IV names it too. ### Citations - [Income Tax Ordinance, 2001, Second Schedule, Part III, clause (6)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "in respect of any amount paid as yield or profit on investment in Bahbood Savings Certificate or Pensioners Benefit Account" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clauses (36A) and (103)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "The provisions of clause (a) of sub-section (1) of section 151 shall not apply in respect of any amount paid as yield or profit on investment in Bahbood Savings Certificate or Pensioner’s Benefit Account" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 39 (Income from other sources)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#39-income-from-other-sources), as amended to 2026-06-30: "(c) profit on debt;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 151 (Profit on debt)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#151-profit-on-debt), as amended to 2026-06-30: "a person pays yield on an account, deposit or a certificate under the National Savings Scheme or Post Office Savings Account" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 7B (Tax on profit on debt)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#7b-tax-on-profit-on-debt), as amended to 2026-06-30: "on every person, other than a company, who receives a profit on debt from any person mentioned in clauses (a) to (d)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division I, clause (1) (rates for individuals other than salaried individuals)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Are bonus shares taxed in Pakistan, even though no cash is received? Source: https://qanoondigest.com/faq/investors-savers/tax-on-bonus-shares-pakistan Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 236Z deems the issue of bonus shares to be the shareholder's income. The company withholds ten percent of the bonus shares and releases them only after collecting tax equal to ten percent of the value of all the bonus shares. If the shareholder does not pay, the company may sell them. The tax is final under section 236Z(7). **Applies to:** Shareholders of listed and unlisted companies who are allotted bonus shares, and the companies that issue them. Bonus shares are taxed in Pakistan even though no cash changes hands. Section 236Z of the Income Tax Ordinance, 2001, as amended to 30 June 2026, treats the issue itself as income and makes the issuing company collect the tax before it hands over the full allotment. ### What does the law say? Section 236Z was inserted by the Finance Act, 2023. Its seven sub-sections work together: 1. **Withholding of shares.** Sub-section (1): every company "issuing bonus shares to the shareholders of the company, shall withhold ten percent of the bonus shares to be issued." 2. **Tax to be collected.** Sub-section (2): the withheld shares are issued only once the company collects "tax equal to ten percent of the value of the bonus shares issued to the shareholder including bonus share withheld". For a listed company the value is the "day-end price on the first day of closure of books". For other companies it is "the value as prescribed". 3. **Company deposits first.** Sub-section (3): the company deposits the tax within fifteen days of closure of books, "whether or not tax has been collected". 4. **Recovery.** Sub-section (4): the company may recover the deposited tax from the shareholder before issuing the bonus shares. 5. **Sale if unpaid.** Sub-section (5): if the shareholder neither pays nor collects the bonus shares within fifteen days of issue, the company "may proceed to dispose of its bonus shares to the extent it has paid tax on its behalf". 6. **Deemed income.** Sub-section (6): "Issuance of bonus shares shall be deemed to be the income of the shareholder". 7. **Final tax.** Sub-section (7): "Tax paid under this section shall be final tax on the income of the shareholder of the company arising from issuing of bonus shares." Section 39(1)(lb), also inserted by the Finance Act, 2023, lists "income arising to the shareholder of a company, from the issuance of bonus shares" under the head Income from Other Sources. ### How does it work in practice? The company deals with the tax through the bonus issue itself. It sets aside one tenth of each shareholder's bonus shares, pays the tax to the government within fifteen days of book closure, and then asks the shareholder to reimburse it. Once the shareholder pays, the withheld shares are released. If the shareholder does not respond within fifteen days of the issue, the company may sell enough of the withheld shares to cover the tax it paid. Because the tax equals ten percent of the value of all the bonus shares, and ten percent of the shares are withheld, the withheld shares are worth roughly the amount of tax due at the valuation price. Their market value on the day the company sells them may be different. ### Worked example (illustrative figures) Imran, a pharmacist in Multan, holds 1,000 shares of a listed company. The company announces a 20% bonus issue. The day-end price on the first day of closure of books is Rs. 150. - Bonus shares allotted: 1,000 x 20% = 200 shares. - Value of the bonus shares, including those withheld: 200 x Rs. 150 = Rs. 30,000. - Tax under section 236Z(2): Rs. 30,000 x 10% = **Rs. 3,000**. - Shares withheld under section 236Z(1): 200 x 10% = 20 shares, valued at 20 x Rs. 150 = Rs. 3,000. Imran receives 180 bonus shares straight away. If he pays Rs. 3,000 to the company, the remaining 20 shares are released. If he neither pays nor collects them within fifteen days of the issue, the company may sell the 20 withheld shares to recover the Rs. 3,000 it has already deposited. ### Is the tax final, or do I pay again in my return? It is final. Section 169(1)(b) lists "sub-section (7) of section 236Z" among the provisions whose tax is final. Where section 169 applies, "the income shall not be chargeable to tax under any head of income in computing the taxable income of the person", no expenditure is deductible against it, and the tax is not reduced by any tax credit. The bonus shares are not added to your salary or business income. ### What if the company is not listed? Section 236Z(2) values bonus shares of an unlisted company at "the value as prescribed". The Income Tax Rules, 2002 held in this corpus are amended only to 24 November 2023. They contain rule 231G on valuing bonus shares of a company not quoted on a stock exchange, but that rule is framed for section 236N, which has since been omitted. The corpus does not show whether rule 231G, or a newer rule, now applies to section 236Z. Check the current rules before relying on a value. ### Common mistakes - **Thinking no tax applies because no cash was received.** Section 236Z(6) deems the issue to be income. - **Assuming the old 5% rate.** Former section 236M withheld five percent for listed companies. It was omitted by the Finance Act, 2018. Section 236Z now uses ten percent. - **Confusing bonus shares with dividends.** Cash dividends are taxed under sections 5 and 150. Bonus shares have their own regime in section 236Z, and the words covering bonus shares were removed from section 150 by the Finance Act, 2002. - **Ignoring the fifteen-day window.** After fifteen days from issue, the company may sell withheld shares under sub-section (5). ### What to check in the official text Read section 236Z in full, section 169(1)(b) and section 39(1)(lb) in the official PDF. For an unlisted company, check which valuation rule is currently prescribed. The cost of bonus shares for any later capital gains calculation is a separate question not answered by section 236Z. ### Frequently asked #### How much tax is charged on bonus shares? Section 236Z(2) sets tax equal to ten percent of the value of the bonus shares issued to the shareholder, including the shares withheld. For a listed company the value is the day-end price on the first day of closure of books. #### What happens if I do not pay the tax on my bonus shares? Under section 236Z(5), if the shareholder neither pays the tax nor collects the bonus shares within fifteen days of their issue, the company may dispose of the bonus shares to the extent it has paid tax on the shareholder's behalf. #### Do I have to show bonus shares as income in my tax return? Section 236Z(7) makes the tax a final tax on the income from the issue of bonus shares. Section 169 then keeps that income out of every head of income when taxable income is computed. ### Citations - [Income Tax Ordinance, 2001, section 236Z (Bonus shares issued by companies)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236z-bonus-shares-issued-by-companies), as amended to 2026-06-30: "every company, issuing bonus shares to the shareholders of the company, shall withhold ten percent of the bonus shares to be issued." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "the income shall not be chargeable to tax under any head of income in computing the taxable income of the person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 39 (Income from other sources)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#39-income-from-other-sources), as amended to 2026-06-30: "income arising to the shareholder of a company, from the issuance of bonus shares" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Who pays tax on cash withdrawal from a bank, above what amount, and do filers or ATM withdrawals count? Source: https://qanoondigest.com/faq/investors-savers/cash-withdrawal-tax-non-filers Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Only people not on the Active Taxpayers List pay it. Section 231AB makes the bank deduct 0.8% when a person's cash withdrawals in one day add up to more than Rs. 50,000. People on the list are outside the section. The tax is advance and adjustable, so section 168 credits it against the year's tax. **Applies to:** Bank account holders in Pakistan who withdraw cash, especially people whose names are not on the Active Taxpayers List, for tax year 2027. ### What does the law say? Section 231AB of the Income Tax Ordinance, 2001 requires every banking company to deduct "advance adjustable tax" at 0.8% of the cash withdrawal from a person whose name is not appearing in the Active Taxpayers List. The deduction applies to "the sum total of the payments for cash withdrawal in a day, exceeding fifty thousand rupees". An Explanation at the end of the section settles one question directly: the Rs. 50,000 is the aggregate of cash withdrawals in a single day. It is not a per-transaction limit. Three facts follow from the text: | Point | What section 231AB says | |---|---| | Who pays | Only a person not appearing in the Active Taxpayers List | | Trigger | Total cash withdrawals in one day exceeding Rs. 50,000 | | Rate | 0.8% of the cash withdrawal | | Nature | Advance adjustable tax | The Ordinance used here is amended to 30 June 2026, so these are the rules for tax year 2027 (1 July 2026 to 30 June 2027). Section 231AB was inserted by the Finance Act, 2023 at 0.6%. The Finance Act, 2025 substituted 0.8%. ### Do filers pay tax on cash withdrawal? No, not under section 231AB. The section is limited in its own words to a person whose name is not appearing in the Active Taxpayers List. If your name is on the list, section 231AB does not apply to your withdrawals. The older section 231A, "Cash withdrawal from a bank", was omitted by the Finance Act, 2021. The footnote in the consolidated Ordinance shows that at the time it was omitted, its rate under Division VI of Part IV of the First Schedule was 0.6% for the person whose name was not appearing in the Active Taxpayers List. So the current section is not a replacement of a tax that every account holder paid immediately before 2021. The footnote history before that point is not traced on this page. ### Do ATM withdrawals count? Section 231AB does not mention ATMs, cheques, counters or any other channel. It uses the words "cash withdrawal" and "payments for cash withdrawal" without defining them further. The Ordinance text in this corpus therefore does not say whether an ATM withdrawal is treated differently from a counter withdrawal, and this page does not answer that question. Any bank practice on this point, or any instruction from the Federal Board of Revenue or the State Bank of Pakistan, is outside this corpus. ### How does it work in practice? The bank adds up the cash you withdraw in a day. Once the total goes past Rs. 50,000, it deducts 0.8%. Section 231AB applies the rate to "the sum total of the payments", with Rs. 50,000 working as the trigger. The section does not describe taxing only the part above Rs. 50,000. Because the deduction is advance adjustable tax, it is not the end of the matter. Section 168(1)(b) treats tax deducted under Chapter XII, where section 231AB sits, as tax paid by the person from whom it was deducted. Section 168(2) then allows a tax credit for that tax against the tax due on taxable income for the same tax year. Under section 168(5), a credit that cannot be used in the year is refunded under section 170. ### Worked example (illustrative figures) Bilal runs a small cloth shop in Multan. His name is not on the Active Taxpayers List. The amounts below are invented; the 0.8% rate and the Rs. 50,000 daily trigger come from section 231AB. **Monday.** He withdraws Rs. 30,000 in the morning and Rs. 45,000 in the evening. 1. Daily total: Rs. 30,000 + Rs. 45,000 = Rs. 75,000. 2. Rs. 75,000 is more than Rs. 50,000, so the section applies. 3. Tax: 0.8% x Rs. 75,000 = Rs. 600. **Tuesday.** He withdraws exactly Rs. 50,000. The total does not exceed Rs. 50,000, so no tax is deducted under section 231AB. **Wednesday.** He withdraws Rs. 200,000 once. 1. Tax: 0.8% x Rs. 200,000 = Rs. 1,600. Total deducted over the three days: Rs. 600 + Rs. 1,600 = Rs. 2,200. If Bilal files his return for tax year 2027, section 168 lets him claim Rs. 2,200 as a credit against the tax due on his taxable income for that year. ### What if the rate is doubled because I am a non-filer? It is not. Section 100BA says the collection or deduction of advance tax from a person not on the Active Taxpayers List is determined under the Tenth Schedule, and rule 1 of that Schedule normally increases withholding rates by one hundred percent. Rule 10, however, lists deductions to which the Tenth Schedule does not apply, and clause (ga) of that list is "tax deducted under section 231AB". The rate stays at the 0.8% written in the section. ### What if I withdraw from two different banks on the same day? The Explanation to section 231AB speaks of "aggregate cash withdrawals in a single day" and obliges "every banking company" to deduct. It does not say whether withdrawals at two separate banks are added together. The old section 231A had a wider Explanation that expressly covered "aggregate withdrawals from all the bank accounts in a single day"; section 231AB does not repeat the words "from all the bank accounts". The law in this corpus does not resolve how two banks would combine their figures. ### Common mistakes - **Thinking every account holder pays.** Section 231AB covers only people not on the Active Taxpayers List. - **Treating Rs. 50,000 as a per-withdrawal limit.** The Explanation makes it a daily total. - **Expecting a doubled non-filer rate.** Rule 10(ga) of the Tenth Schedule excludes section 231AB. - **Treating the deduction as lost money.** It is advance adjustable tax, and section 168 gives a credit for it in a return. ### What to check in the official text Read section 231AB in full, the footnote to section 231A showing the omitted section, sections 100BA and 168, and rule 10 of the Tenth Schedule in the source PDF. Whether your name appears on the Active Taxpayers List on the day of withdrawal is a fact the Federal Board of Revenue publishes; the list itself is outside this corpus. ### Frequently asked #### Does a filer pay tax on cash withdrawal? Not under section 231AB. The section applies only to a person whose name is not appearing in the Active Taxpayers List. The earlier cash withdrawal section, 231A, was omitted by the Finance Act, 2021. #### Is the Rs. 50,000 limit per withdrawal or per day? Per day. The Explanation to section 231AB says the Rs. 50,000 is the aggregate of cash withdrawals in a single day, so several smaller withdrawals on the same day are added together. #### Is the rate doubled for non-filers under the Tenth Schedule? No. Rule 10 of the Tenth Schedule lists tax deducted under section 231AB among the deductions to which the Schedule does not apply. The rate stays at the 0.8% written in section 231AB. #### Can I get the cash withdrawal tax back? Section 231AB calls it advance adjustable tax. Section 168 treats it as tax paid and gives a credit against the tax due for the year it was deducted, and any credit that cannot be used is refunded under section 170, as section 168(5) states. ### Citations - [Income Tax Ordinance, 2001, section 231AB (Advance tax on cash withdrawal)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#231ab-advance-tax-on-cash-withdrawal), as amended to 2026-06-30: "person whose name is not appearing in the active taxpayers’ list on the sum total of the payments for cash withdrawal in a day, exceeding fifty thousand rupees. Explanation. - For removal of doubt, it is clarified that the said fifty thousand rupees shall be aggregate cash withdrawals in a single day." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "shall be determined in accordance with the rules in the Tenth Schedule." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 10, clause (ga)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30: "(ga) tax deducted under section 231AB;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much advance tax is charged on international debit and credit card transactions? Source: https://qanoondigest.com/faq/investors-savers/tax-on-international-card-transactions Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer For tax year 2027 the bank collects 0.5% of the gross amount remitted abroad. Section 236Y applies this Division XXVII rate to credit, debit and prepaid card transactions with a person outside Pakistan. For people not on the Active Taxpayers List, rule 1 of the Tenth Schedule doubles it to 1%. The tax is adjustable. **Applies to:** Holders of Pakistani credit, debit or prepaid cards who pay merchants or other persons outside Pakistan in tax year 2027. ### What does the law say? Section 236Y of the Income Tax Ordinance, 2001 requires every banking company to collect advance tax "at the time of transfer of any sum remitted outside Pakistan" on behalf of any person who has completed a credit card, debit card or prepaid card transaction with a person outside Pakistan. The rate is the one in Division XXVII of Part IV of the First Schedule. Section 236Y(2) adds that the advance tax collected "shall be adjustable". Division XXVII, headed "Advance tax on amount remitted abroad through credit, debit or prepaid cards", sets the rate at 0.5% of the gross amount remitted abroad. The Ordinance used here is amended to 30 June 2026, so 0.5% is the rate for tax year 2027 (1 July 2026 to 30 June 2027). ### How has the rate changed? The footnotes to Division XXVII and the Finance Acts in this corpus show the history: | Change | Rate | |---|---| | Section 236Y and Division XXVII inserted by the Finance Act, 2022 | 1% | | Finance Act, 2023 substituted "5%" for "1%" | 5% | | Finance Act, 2026, section 5, clause (44)(c)(iii) substituted "0.5%" for "5%" | 0.5% | Anyone comparing a card statement from tax year 2026 with one from tax year 2027 will see the drop from 5% to 0.5%. ### What if I am not on the Active Taxpayers List? Section 100BA says the collection of advance tax from a person not appearing in the Active Taxpayers List is determined under the Tenth Schedule. Rule 1 of that Schedule says the rate of tax required to be collected from such a person "shall be increased by hundred percent of the rate specified in" the Ordinance. Rule 10 of the Tenth Schedule lists the collections and deductions to which the Schedule does not apply. Section 236Y is not in that list. On the text of rule 1, the 0.5% rate therefore becomes 1% for a cardholder whose name is not on the Active Taxpayers List. ### How does it work in practice? The tax is collected by the bank that issued the card, at the time it transfers the money abroad for the transaction. The base is "the gross amount remitted abroad". The cardholder does not pay it separately to the Federal Board of Revenue. Because section 236Y(2) makes the tax adjustable, section 168 applies. Section 168(1)(b) treats tax collected under Chapter XII, where section 236Y sits, as tax paid by the person from whom it was collected. Section 168(2) gives a credit for it against the tax due on taxable income for the tax year in which it was collected. A credit that cannot be used in that year is refunded under section 170, as section 168(5) states. ### Worked example (illustrative figures) Ayesha is a graphic designer in Karachi. In tax year 2027 she pays foreign merchants with her debit card for design software subscriptions totalling Rs. 40,000 and an online course of Rs. 160,000. The amounts are invented; the rates are from Division XXVII and rule 1 of the Tenth Schedule. **If her name is on the Active Taxpayers List:** 1. Gross amount remitted abroad: Rs. 40,000 + Rs. 160,000 = Rs. 200,000. 2. Tax: 0.5% x Rs. 200,000 = Rs. 1,000. **If her name is not on the Active Taxpayers List:** 1. Rate: 0.5% increased by one hundred percent = 1%. 2. Tax: 1% x Rs. 200,000 = Rs. 2,000. In either case, when she files her return for tax year 2027, section 168 lets her claim the amount collected as a credit against the tax due on her taxable income for that year. ### What if the payment is in rupees to a foreign website, or a refund comes back? Section 236Y is framed around a card transaction "with a person outside Pakistan" and a "sum remitted outside Pakistan". It does not define when a payment counts as remitted abroad, and it does not deal with refunds or reversals of card transactions. The corpus does not answer these cases, and this page does not guess at how banks handle them. State Bank of Pakistan rules on card transactions are outside this corpus. ### Common mistakes - **Using the old 5% rate.** The Finance Act, 2026 cut it to 0.5% for tax year 2027. - **Assuming only credit cards are covered.** Section 236Y names credit, debit and prepaid cards. - **Forgetting the non-ATL increase.** Rule 1 of the Tenth Schedule doubles the rate, and section 236Y is not excluded by rule 10. - **Treating the tax as a charge that cannot be recovered.** It is adjustable, and section 168 credits it in the return. ### What to check in the official text Read section 236Y, Division XXVII of Part IV of the First Schedule and rules 1 and 10 of the Tenth Schedule in the source PDF, since our site copy does not reproduce the schedules as tables. Section 5 of the Finance Act, 2026 contains the change to 0.5%. The card issuer's statement is the record of how much was collected; the bank's certificate format is outside this corpus. ### Frequently asked #### Is the rate different for credit cards and debit cards? No. Section 236Y covers a credit card, debit card or prepaid card transaction with a person outside Pakistan, and Division XXVII sets one rate for all of them: 0.5% of the gross amount remitted abroad for tax year 2027. #### What was the rate before the Finance Act, 2026? It was 5%. The Finance Act, 2023 substituted 5% for the original 1%, and the Finance Act, 2026 substituted 0.5% for 5%. The 0.5% rate applies from tax year 2027. #### Is the tax a final cost? No. Section 236Y(2) says the advance tax collected under the section is adjustable. Section 168 treats it as tax paid and allows a credit for it against the tax due for the year it was collected. ### Citations - [Income Tax Ordinance, 2001, section 236Y (Advance tax on persons remitting amounts abroad through credit or debit or prepaid cards)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236y-advance-tax-on-persons-remitting-amounts-abroad-through-credit-or-debit-or-prepaid-cards), as amended to 2026-06-30: "Every banking company shall collect advance tax, at the time of transfer of any sum remitted outside Pakistan, on behalf of any person who has completed a credit card or debit card or prepaid card transaction with a person outside Pakistan at the rate specified in Division XXVII of Part IV of the First Schedule." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XXVII (Advance tax on amount remitted abroad through credit, debit or prepaid cards)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Finance Act, 2026, Section 5, clause (44)(c)(iii), amending Division XXVII of Part IV of the First Schedule to the Income Tax Ordinance, 2001](https://qanoondigest.com/acts/finance-act/finance-act-2026), as amended to 2026: "in Division XXVII, for the expression “5%”, the expression “0.5%” shall be substituted" Official source: https://download1.fbr.gov.pk/Docs/20266291261044366FinanceAct2026.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (Rate of deduction or collection of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "shall be determined in accordance with the rules in the Tenth Schedule." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How much tax is deducted on mutual fund and money market fund dividends? Source: https://qanoondigest.com/faq/investors-savers/mutual-fund-dividend-tax-rate Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 150 and clause (ba) of Division I of Part III of the First Schedule, a mutual fund dividend is taxed at 25% on the part derived from debt securities and 15% on the part derived from equities. Where a company receives the dividend, the debt-derived part is taxed at 29%. Section 8 makes this a final tax. **Applies to:** Individuals, associations of persons and companies holding units of mutual funds, including income, money market and stock funds, that pay dividends in tax year 2027. A dividend from a mutual fund is not taxed at one flat rate. The Income Tax Ordinance, 2001, as amended to 30 June 2026, splits it by where the fund's income came from: debt securities or equities. This page covers the rates for dividends paid in tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? Section 150 requires every person paying a dividend to deduct tax "from the gross amount of the dividend paid" at the rate in Division I of Part III of the First Schedule. For mutual funds, clause (ba) of that Division reads: > "25% and 15%, in case of mutual funds, contingent upon proportional income derived from average annual investments in debt securities and equities respectively" Its proviso adds that "where the corporate entity is recipient of the dividend, the component derived from the debt securities shall be taxed at the rate of twenty-nine percent." Section 5 charges the same dividend in the unit holder's hands at the rate in Division III of Part I of the First Schedule. Division III has an identical clause (ba), so the rate deducted by the fund matches the rate charged on the unit holder. | Recipient | Debt-derived component | Equity-derived component | |---|---|---| | Individual or association of persons | 25% | 15% | | Company (corporate entity) | 29% | 15% | ### How does it work in practice? The fund deducts the tax when it pays the dividend, on the gross amount. The deduction depends on the fund's own mix of income from debt securities and equities. Clause (ba) ties the split to "proportional income derived from average annual investments". The Ordinance text does not set out a formula for measuring that proportion, and this page does not supply one. The fund works out the split, and its dividend notice or tax certificate is where a unit holder would see it. Clause (ba) does not use labels such as "money market fund", "income fund" or "stock fund". What matters is the source of the income. A fund that holds only debt securities, such as treasury bills or term finance certificates, would have its dividend taxed wholly at the debt rate. A fund that earns mainly from shares would have most of its dividend taxed at 15%. Section 8 makes tax imposed under section 5 "a final tax on the amount in respect of which the tax is imposed". The dividend is not added to your other income, no expense is deductible against it, and no loss or tax credit reduces it. ### Worked example (illustrative figures) **An individual in an income fund.** Ayesha, a school teacher in Lahore, receives a dividend of Rs. 200,000 from a fund whose income for the year came 80% from debt securities and 20% from equities. - Debt component: Rs. 200,000 x 80% = Rs. 160,000. Tax at 25% = Rs. 40,000. - Equity component: Rs. 200,000 x 20% = Rs. 40,000. Tax at 15% = Rs. 6,000. - Total tax deducted: Rs. 40,000 + Rs. 6,000 = **Rs. 46,000**. Ayesha receives Rs. 154,000. **A company in the same fund.** A Faisalabad textile company receives Rs. 1,000,000 from the same fund. - Debt component: Rs. 800,000 x 29% = Rs. 232,000. - Equity component: Rs. 200,000 x 15% = Rs. 30,000. - Total tax deducted: **Rs. 262,000**. **An individual in an equity-heavy fund.** A fund with income 10% from debt and 90% from equities pays Ayesha Rs. 200,000. - Rs. 20,000 x 25% = Rs. 5,000, plus Rs. 180,000 x 15% = Rs. 27,000. - Total: **Rs. 32,000**. ### What if I am not on the active taxpayers' list? Rule 1 of the Tenth Schedule says that where tax is deducted from a person not appearing in the active taxpayers' list, the rate "shall be increased by hundred percent of the rate specified" in the Ordinance. On that wording, a 15% rate would become 30% and a 25% rate would become 50%. The dividend page for non-filers covers this rule in more detail. ### What if I redeem my units instead of receiving a dividend? A dividend and a redemption are taxed under different provisions. The gain on redeeming units falls under section 37A and the mutual fund proviso in Division VII of Part I of the First Schedule, which has its own rates. The redemption page explains those. ### How did this rule change? Footnotes in the consolidated text show that clause (ba) was inserted by the Finance Act, 2025. Before that, clause (b) as it stood after the Finance Act, 2024 taxed mutual fund dividends at 15%, with a proviso that funds "deriving fifty percent or more income from profit on debt" were taxed at 25%. The present rule replaced that all-or-nothing test with a proportional split. ### Common mistakes - **Applying 15% to every fund dividend.** Clause (b) now covers REITs and residual cases. Mutual funds fall under clause (ba), which charges 25% on the debt-derived share. - **Assuming the fund's name decides the rate.** The clause looks at income from debt securities and equities, not the fund's category label. - **Using 25% for a company.** The proviso to clause (ba) sets 29% on the debt component when the recipient is a corporate entity. - **Adding the dividend to taxable income in the return.** Section 8 keeps it outside every head of income. ### What to check in the official text Read section 150, sections 5 and 8, clause (ba) in both Division I of Part III and Division III of Part I of the First Schedule, and rule 1 of the Tenth Schedule in the official PDF. Check the fund's statement for the debt and equity split it applied, since the Ordinance does not itself state how that proportion is measured. ### Frequently asked #### What is the tax rate on mutual fund dividends for tax year 2027? Clause (ba) sets 25% on the part of the dividend derived from debt securities and 15% on the part derived from equities. The split depends on the fund's proportional income from its average annual investments in each. #### Is a money market fund dividend taxed at 25%? Clause (ba) does not name fund categories such as money market or income funds. It taxes the debt-derived component at 25% and the equity-derived component at 15%, so a fund whose income comes wholly from debt securities would have its dividend taxed wholly at 25%. #### Do companies pay a different rate on mutual fund dividends? Yes. The proviso to clause (ba) says that where a corporate entity receives the dividend, the component derived from debt securities is taxed at 29%. The equity-derived component stays at 15%. ### Citations - [Income Tax Ordinance, 2001, section 150 (Dividends)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#150-dividends), as amended to 2026-06-30: "shall deduct tax from the gross amount of the dividend paid" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division I (Advance Tax on Dividend), clause (ba)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 5 (Tax on dividends)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#5-tax-on-dividends), as amended to 2026-06-30: "a tax shall be imposed, at the rate specified in Division III of Part I of the First Schedule, on every person who receives a dividend from a" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division III (Rate of Dividend Tax), clause (ba)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 8 (General provisions relating to taxes imposed under sections 5, 5A, 5AA, 6, 6A, 7, 7A, 7B and 7G)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#8-general-provisions-relating-to-taxes-imposed-under-sections-5-5a-5aa-6-6a-7-7a-7b-and-7g), as amended to 2026-06-30: "shall be a final tax on the amount in respect of which the tax is imposed and-" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 (Rate of deduction or collection of tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is profit on T-bills, PIBs and Sukuk taxable for individuals? Source: https://qanoondigest.com/faq/investors-savers/tax-on-t-bills-pibs-sukuk Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 151 makes the Government deduct 15% from profit on T-bills and PIBs paid to an individual, and section 7B charges the same rate as a final tax where the profit does not exceed Rs. 5 million. Sukuk returns taxed under section 5AA bear 10% or 12.5%, and section 151A takes 20% of a gain on disposal. **Applies to:** Individuals who hold treasury bills, Pakistan Investment Bonds or sukuk directly or through a bank's investor portfolio account. Profit on treasury bills, Pakistan Investment Bonds and sukuk is taxable income for an individual in Pakistan, and in most cases the tax is taken before the money reaches you. The rates below come from the Income Tax Ordinance, 2001 as amended to 30 June 2026, so they apply to profit received in tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say about T-bills and PIBs? Section 151(1)(c) covers the case where "the Federal Government, a Provincial Government or a Local Government" pays profit on a security it has issued. The payer must deduct tax from the gross profit at the rate in Division IA of Part III of the First Schedule. That Division reads: | Clause | Payment | Rate | |---|---|---| | (a) | Profit paid by a banking company or financial institution on an account or deposit | 20% | | (b) | Profit on Government securities under section 151(1)(c) paid to any person other than an individual | 20% | | (c) | All other cases | 15% | An individual holding T-bills or PIBs is outside clause (b), so the deduction is **15%**. The Ordinance's definition of profit on a debt includes any "profit, yield, interest, discount, premium", so the discount you earn on a T-bill counts as profit even though no coupon is paid. Section 151(1) also says the deduction is made on the gross profit "as reduced by the amount of Zakat, if any, paid by the recipient" under the Zakat and Ushr Ordinance, 1980. ### Is the 15% the final tax? Section 7B charges every person other than a company who receives profit on debt from a payer listed in section 151(1)(a) to (d), at the rate in Division IIIA of Part I. That Division repeats the same three clauses, so an individual's rate on Government securities is again 15%. Section 8 makes a section 7B tax "a final tax": the profit is kept out of your other income, and no expense or loss is set against it. Section 7B(3)(b) switches the section off for profit on debt that "exceeds five million Rupees". In that case section 151(3) makes the tax deducted a **minimum** tax rather than a final one. The section does not say whether the Rs. 5 million is measured per payment or across the year, and this page does not settle that point. ### How is a sukuk return taxed? Sukuk are taxed separately. Section 151(1A) requires "every special purpose vehicle or a company" paying a return on sukuk to deduct tax at the rate in Division IB of Part III. Section 5AA charges the holder at Division IIIB of Part I, and section 8 makes that tax final. The rates are: | Sukuk holder | Rate | |---|---| | Company | 25% | | Individual or AOP, return more than one million | 12.5% | | Individual or AOP, return less than one million | 10% | Two gaps are worth knowing. The Division does not say which rate applies to a return of exactly one million. And the heading of Division IIIB refers only to returns "received from a special purpose vehicle", while section 5AA covers a special purpose vehicle "or a company". ### What about a gain when I sell before maturity? Section 151A, inserted by the Finance Act, 2025, applies when a debt security, "including government securities", is disposed of. The custodian, which includes a bank maintaining your Investor Portfolio Securities (IPS) account, must deduct tax at the Division IIIAA rate on the gross capital gain. The Finance Act, 2026 raised that rate from 15% to **20%**. The gain is consideration received minus cost of acquisition. The section does not apply to a disposal made through a registered stock exchange and settled through NCCPL. Section 151A does not itself say whether this deduction is final or adjustable. ### Worked example (illustrative figures) Farhan, a school teacher in Rawalpindi on the active taxpayers' list, has these investments in tax year 2027: **1. T-bill discount.** He buys 12-month T-bills with a face value of Rs. 2,000,000 for Rs. 1,780,000. - Profit (discount): Rs. 2,000,000 - Rs. 1,780,000 = Rs. 220,000 - Tax at 15%: Rs. 220,000 x 15% = **Rs. 33,000** **2. PIB coupon.** He receives Rs. 150,000 of profit on PIBs. - Tax at 15%: Rs. 150,000 x 15% = **Rs. 22,500** **3. Sukuk return from a company.** He receives Rs. 600,000, which is less than one million. - Tax at 10%: Rs. 600,000 x 10% = **Rs. 60,000** **4. Early sale of a PIB through his bank's IPS account.** Cost Rs. 1,000,000, sale proceeds Rs. 1,080,000. - Gain: Rs. 1,080,000 - Rs. 1,000,000 = Rs. 80,000 - Deduction at 20%: Rs. 80,000 x 20% = **Rs. 16,000** Total tax taken at source: Rs. 33,000 + Rs. 22,500 + Rs. 60,000 + Rs. 16,000 = **Rs. 131,500**. ### What if I am not on the active taxpayers' list? Rule 1 of the Tenth Schedule increases any deduction rate "by hundred percent of the rate specified" in the Ordinance for a person not appearing in the active taxpayers' list. On Farhan's figures, the T-bill deduction would become 30% (Rs. 66,000) and the sukuk deduction 20% (Rs. 120,000). How the excess over the normal rate is treated is covered on the non-filer pages linked below. ### Common mistakes - **Applying 20% to an individual's T-bill profit.** Clause (b) of Division IA limits 20% to persons other than individuals. - **Treating the T-bill discount as a capital gain.** The definition of profit on a debt includes discount, so it is taxed under section 151. - **Assuming sukuk follow the T-bill rate.** Sukuk returns have their own rates under Division IB. - **Forgetting the disposal tax.** Section 151A applies to government securities sold through a custodian before maturity. ### What to check in the official text Read sections 151, 151A, 5AA, 7B and 8, and Divisions IA, IB and IIIAA of Part III and Divisions IIIA and IIIB of Part I of the First Schedule in the official PDF. Check whether your sukuk return is paid by a special purpose vehicle or a company, and whether your disposal is settled through NCCPL, since both decide which provision applies. ### Frequently asked #### What rate is deducted from T-bill and PIB profit paid to an individual in tax year 2027? 15%. Division IA of Part III of the First Schedule sets 20% on Government securities only for persons other than individuals, so an individual falls under clause (c) at 15% of the gross profit. #### Is the tax on sukuk returns the same as on T-bills? No. Section 151(1A) and Division IB set 12.5% for an individual whose return is more than one million and 10% where it is less than one million. Section 5AA charges the same rates and section 8 makes that tax final. #### Is tax deducted when I sell a PIB before maturity? Section 151A requires the custodian that keeps your investor portfolio account to deduct 20% of the gross capital gain at the time of disposal. It does not apply to a disposal made through a registered stock exchange and settled through NCCPL. ### Citations - [Income Tax Ordinance, 2001, section 151 (Profit on debt)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#151-profit-on-debt), as amended to 2026-06-30: "the payer of the profit shall deduct tax at the rate specified in Division IA of Part III of the First Schedule from the gross amount of the yield or profit paid" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 7B (Tax on profit on debt)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#7b-tax-on-profit-on-debt), as amended to 2026-06-30: "a tax shall be imposed, at the rate specified in Division IIIA of Part I of the First Schedule, on every person, other than a company, who receives a profit on debt" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 5AA (Tax on return on investments in sukuks)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#5aa-tax-on-return-on-investments-in-sukuks), as amended to 2026-06-30: "shall be computed by applying the relevant rate of tax to the gross amount of the return on investment in sukuks." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 151A (Gain arising on disposal of certain debt securities)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#151a-gain-arising-on-disposal-of-certain-debt-securities), as amended to 2026-06-30: "deduct tax at the rate specified in Division IIIAA of Part III of the First Schedule on the gross amount of capital gain arising to such holder" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 8 (General provisions relating to taxes imposed under sections 5, 5A, 5AA, 6, 6A, 7, 7A, 7B and 7G)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#8-general-provisions-relating-to-taxes-imposed-under-sections-5-5a-5aa-6-6a-7-7a-7b-and-7g), as amended to 2026-06-30: "shall be a final tax on the amount in respect of which the tax is imposed and-" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IA (Profit on Debt), Division IB (Return on Investment in Sukuks) and Division IIIAA; Part I, Divisions IIIA and IIIB; Tenth Schedule, rule 1](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- # Overseas Pakistanis Residency, tax on income from abroad, remittances and property back home. ## Does 236K tax apply when I buy a plot in a government housing scheme for overseas Pakistanis? Source: https://qanoondigest.com/faq/overseas-pakistanis/overseas-pakistanis-housing-scheme-236k-exemption Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No, if the scheme and payment qualify. Section 236K(4) says nothing in section 236K applies to a scheme introduced by the Federal Government, a Provincial Government or an authority established under a Federal or Provincial law for expatriate Pakistanis. Its proviso requires payment in foreign exchange remitted from outside Pakistan through normal banking channels. Private schemes are not named. **Applies to:** Overseas Pakistanis buying a plot, house or flat in a housing scheme set up for expatriate Pakistanis by a government or a statutory authority. Section 236K of the Income Tax Ordinance, 2001 collects advance tax from every buyer of immovable property, with one exclusion written for overseas Pakistanis. Sub-section (4) takes government and statutory authority schemes for expatriates out of the section entirely, on a payment condition. This page reads the Ordinance as amended to 30 June 2026, which governs purchases in tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? Section 236K(4) reads: "Nothing contained in this section shall apply to a scheme introduced by the Federal Government, or Provincial Government or an Authority established under a Federal or Provincial law for expatriate Pakistanis". A proviso, added by the Finance Act, 2015, follows: "Provided that the mode of payment by the expatriate Pakistanis in the said scheme or schemes shall be in the foreign exchange remitted from outside Pakistan through normal banking channels." Because the sub-section says "nothing contained in this section" applies, it switches off all of section 236K for the scheme, including collection at registration under sub-section (1) and collection with instalments under sub-section (3). ### What has to be true for the exclusion to apply? | Test in section 236K(4) | What the words require | |---|---| | Who introduced the scheme | The Federal Government, a Provincial Government, or an authority established under a Federal or Provincial law | | Who the scheme is for | Expatriate Pakistanis | | How the expatriate pays | Foreign exchange remitted from outside Pakistan through normal banking channels | The Ordinance does not define "expatriate Pakistanis" in this sub-section, and it does not list which schemes qualify. Whether a particular scheme was introduced by a qualifying body for expatriates is a question of fact about that scheme. ### Does it cover private housing schemes? The text names only governments and authorities established under Federal or Provincial law. It says nothing about private developers. The Explanation to section 236K(1) goes the other way for private projects: it says the person responsible for registering, recording or attesting a transfer includes the person doing so for housing societies, co-operative societies, public and private real estate projects registered or governed under any law, joint ventures and private commercial concerns. So a private society's "overseas block" is inside section 236K on the words of the section, unless some other provision excludes it. ### Worked example (illustrative figures) Asad works in Doha. He books a 1 kanal plot worth Rs. 18,000,000 in two different schemes. **Scheme A:** launched by an authority set up under a Provincial law, for expatriate Pakistanis. Asad pays every instalment by bank transfer from Qatar. 1. Introduced by an authority established under a Provincial law: yes. 2. For expatriate Pakistanis: yes. 3. Paid in foreign exchange remitted through normal banking channels: yes. 4. Section 236K tax: nil, because section 236K(4) says nothing in the section applies. **Scheme B:** the overseas block of a private housing society in Lahore. 1. Section 236K(4) does not name private schemes. 2. Division XVIII of Part IV of the First Schedule sets the rate at 1.25% of fair market value for tax year 2027. 3. Tax collected: Rs. 18,000,000 x 1.25% = **Rs. 225,000**, assuming Rs. 18,000,000 is the fair market value. ### What if part of the payment was made from Pakistan? The proviso says the mode of payment "shall be in the foreign exchange remitted from outside Pakistan through normal banking channels". It does not say what happens where only some instalments meet that condition. This page does not resolve that point. ### What about the tax when the plot is later sold? Section 236K(4) concerns the buyer's advance tax under section 236K. It says nothing about section 236C, which is collected from a seller, or about capital gains tax on a later sale. Those are separate provisions. ### Common mistakes - **Treating every "overseas" scheme as exempt.** The exclusion depends on who introduced the scheme, not on its marketing name. - **Paying from rupee savings in Pakistan.** The proviso requires foreign exchange remitted from outside Pakistan through normal banking channels. - **Assuming the exclusion follows the plot on resale.** The sub-section applies to the scheme and the expatriate's payment in it; it does not speak to later transfers. ### What to check in the official text Read section 236K(1) with its Explanation, section 236K(3) and (4) with the proviso, and Division XVIII of Part IV of the First Schedule in the official PDF. The law establishing the authority behind a particular scheme, and the scheme's own terms, are outside this corpus. Provincial stamp duty and registration fees are provincial levies and are not covered here. ### Frequently asked #### Which housing schemes does section 236K(4) cover? A scheme for expatriate Pakistanis introduced by the Federal Government, a Provincial Government, or an authority established under a Federal or Provincial law. The sub-section does not name any particular scheme, and a list of qualifying schemes is not part of the Ordinance. #### Is a private housing society's overseas block covered? Section 236K(4) does not name private developers or private societies. The Explanation to section 236K(1) expressly brings private real estate projects and private commercial concerns within the section, so a private scheme is inside 236K unless another provision takes it out. #### Can I pay in rupees from my Pakistani account and still be covered? The proviso to section 236K(4) requires the expatriate's payment in the scheme to be in foreign exchange remitted from outside Pakistan through normal banking channels. A payment from rupee funds already in Pakistan does not match those words. ### Citations - [Income Tax Ordinance, 2001, section 236K (Advance tax on purchase or transfer of immovable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236k-advance-tax-on-purchase-or-transfer-of-immovable-property), as amended to 2026-06-30: "Nothing contained in this section shall apply to a scheme introduced by the Federal Government, or Provincial Government or an Authority established under a Federal or Provincial law for expatriate Pakistanis" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 236K(4), proviso (payment in foreign exchange remitted through normal banking channels)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XVIII (Advance tax on purchase of immovable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do I pay the non-ATL rate of 236K tax when I buy property in Pakistan as an overseas Pakistani with a NICOP or POC? Source: https://qanoondigest.com/faq/overseas-pakistanis/236k-tax-buying-property-nicop-poc-holder Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer No, if you are a non-resident individual holding a NICOP or POC. Clause (111AC) of Part IV of the Second Schedule says section 100BA and rule 1 of the Tenth Schedule do not apply to you on 236C and 236K transactions. You pay the ordinary Division XVIII rate, 1.25% of fair market value in tax year 2027. **Applies to:** Non-resident individuals holding a NICOP or a Pakistan Origin Card who buy immovable property in Pakistan and do not appear in the active taxpayers' list. A buyer who is not on the active taxpayers' list normally pays a far higher rate of advance tax under section 236K of the Income Tax Ordinance, 2001. A special clause in the Second Schedule takes non-resident NICOP and POC holders out of that higher rate. This page reads the law as amended to 30 June 2026, which governs transfers in tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? Four provisions work together: 1. **Section 236K(1)** requires the person registering, recording or attesting a property transfer to collect advance tax from the purchaser "at the rate specified in Division XVIII of Part IV of the First Schedule". 2. **Division XVIII** of Part IV of the First Schedule sets that rate at 1.25% of the fair market value of the immovable property. 3. **Section 100BA** says tax collection for a person not appearing in the active taxpayers' list "shall be determined in accordance with the rules in the Tenth Schedule". The second proviso to rule 1 of the Tenth Schedule sets higher banded rates for 236K. 4. **Clause (111AC) of Part IV of the Second Schedule** says section 100BA and rule 1 of the Tenth Schedule "shall not apply to non-resident individual holding Pakistan Origin Card (POC) or National ID Card for Overseas Pakistanis (NICOP) in respect of transactions on which tax is collectible under section 236C and 236K of the Ordinance". Put together: for a non-resident NICOP or POC holder, the Tenth Schedule rates are switched off, and section 236K falls back to the Division XVIII rate. ### How big is the difference? | Fair market value | Division XVIII rate (ATL, or clause (111AC) applies) | Tenth Schedule rate (not on ATL) | |---|---|---| | Up to Rs. 50 million | 1.25% | 10.5% | | Above Rs. 50 million up to Rs. 100 million | 1.25% | 14.5% | | Above Rs. 100 million | 1.25% | 18.5% | ### Worked example (illustrative figures) Tariq lives and works in Toronto, holds a NICOP, spent 40 days in Pakistan in tax year 2027, and is not on the active taxpayers' list. He buys a house in Islamabad with a fair market value of Rs. 36,000,000. 1. Is he non-resident? At 40 days he does not meet the 183-day test in section 82(a). The other tests in section 82 also have to be checked for his facts. 2. Does clause (111AC) apply? He is a non-resident individual holding a NICOP, and the transaction is one on which tax is collectible under section 236K. On those facts, yes. 3. Rate: Division XVIII, 1.25%. 4. Tax: Rs. 36,000,000 x 1.25% = **Rs. 450,000**. Without clause (111AC), the Tenth Schedule rate for a value up to Rs. 50 million would be 10.5%: Rs. 36,000,000 x 10.5% = Rs. 3,780,000. ### What if I only hold a CNIC? Clause (111AC) names two documents: the Pakistan Origin Card and the National ID Card for Overseas Pakistanis. It does not name the Computerized National ID Card. On the words of the clause, a non-resident who holds only a CNIC is not covered by it. A separate clause, (111AB), says section 100BA and rule 1 of the Tenth Schedule do not apply to a Foreign Currency Value Account, Foreign Currency Business Value Account, Non-Resident Rupee Value Account or Non-Resident Rupee Business Value Account with authorised banks in Pakistan. A footnote records that the Finance Act, 2026 replaced wording that named non-resident POC, NICOP or CNIC holders maintaining such accounts. The clause as it now reads does not say in terms whether it reaches a 236K collection on property paid for from one of these accounts. This page does not resolve that. ### What if I become resident? Clause (111AC) applies only to a "non-resident individual". Section 82 treats an individual as resident for a tax year if, among other tests, they are present in Pakistan for 183 days or more in that year, or, being a citizen, are not present in any other country for more than 182 days during the tax year or are not a resident taxpayer of any other country. A NICOP holder who is resident in the year of purchase is outside clause (111AC). ### Common mistakes - **Assuming every overseas Pakistani is covered.** The clause names POC and NICOP holders who are non-resident, not CNIC-only holders. - **Assuming the clause removes 236K altogether.** It removes only the non-ATL uplift. Division XVIII still applies at 1.25%. - **Applying the old banded ATL rates.** The Finance Act, 2026 replaced the 1.5%, 2% and 2.5% bands with a flat 1.25% from 1 July 2026. - **Forgetting the seller's side.** Clause (111AC) also covers 236C, which is collected from a seller. That is a separate tax. ### What to check in the official text Read section 236K, Division XVIII of Part IV of the First Schedule, section 100BA, rule 1 of the Tenth Schedule, section 82, and clauses (111AB) and (111AC) of Part IV of the Second Schedule in the official PDF. The Ordinance does not say what document the registering authority will accept as proof of non-resident status; that is an administrative matter outside this corpus. Provincial stamp duty and registration fees are separate provincial levies and are not covered here. ### Frequently asked #### What 236K rate does a non-resident NICOP holder pay in tax year 2027? Clause (111AC) switches off section 100BA and rule 1 of the Tenth Schedule for the 236K transaction, so the ordinary Division XVIII rate applies. That rate is 1.25% of the fair market value of the property for transfers in tax year 2027. #### What would a non-ATL buyer pay without clause (111AC)? The second proviso to rule 1 of the Tenth Schedule sets 236K at 10.5% where the fair market value does not exceed Rs. 50 million, 14.5% above Rs. 50 million up to Rs. 100 million, and 18.5% above Rs. 100 million, for persons not in the active taxpayers' list. #### Does clause (111AC) cover an overseas Pakistani who holds only a CNIC? The clause names non-resident individuals holding a Pakistan Origin Card or a National ID Card for Overseas Pakistanis. It does not name the Computerized National ID Card, so a CNIC-only holder is not within its words. #### Does it help a NICOP holder who lives in Pakistan? No. Clause (111AC) is limited to a non-resident individual. Residence is decided each tax year under section 82, which treats an individual present in Pakistan for 183 days or more in the tax year as resident, among other tests. ### Citations - [Income Tax Ordinance, 2001, section 236K (Advance tax on purchase or transfer of immovable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236k-advance-tax-on-purchase-or-transfer-of-immovable-property), as amended to 2026-06-30: "shall collect from the purchaser or transferee advance tax at the rate specified in Division XVIII of Part IV of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XVIII (Advance tax on purchase of immovable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "shall be determined in accordance with the rules in the Tenth Schedule." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1, second proviso (236K rates for persons not appearing in the active taxpayers' list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clauses (111AB) and (111AC)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 82 (Resident individual)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#82-resident-individual), as amended to 2026-06-30: "is present in Pakistan for a period of, or periods amounting in aggregate to, one hundred and" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can I be stopped from travelling abroad because I am not a filer? Source: https://qanoondigest.com/faq/overseas-pakistanis/non-filer-travel-ban-nicop-holders Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Possibly, but not if you hold a NICOP. Section 114B(2)(d) of the Income Tax Ordinance lets an FBR income tax general order restrict foreign travel for a citizen who must file but is not on the active taxpayers' list. It excludes NICOP holders, minors, students and Hajj or Umrah travellers, and applies only after an unanswered section 114(4) notice. **Applies to:** Pakistani citizens, including overseas Pakistanis visiting home on a CNIC or NICOP, who are not on the active taxpayers' list. ### What does the law say? Section 114B of the Income Tax Ordinance, 2001 gives the Federal Board of Revenue power to issue an **income tax general order** against people "who are not appearing on active taxpayers' list but are liable to file return under the provisions of the Ordinance." Section 181A is the provision that lets the Board institute that list. Under section 114B(2), a general order may bring any or all of these consequences for the people named in it: | Clause | Consequence | |---|---| | (a) | disabling of mobile phones or mobile phone SIMs | | (b) | discontinuance of electricity connection | | (c) | discontinuance of gas connection | | (d) | restriction on foreign travel from the country for a citizen of Pakistan | Clause (d) was added by the Finance Act, 2024, according to the footnote in the official text. ### Who is excluded from the travel restriction? Clause (d) carries its own list of exclusions. It does not apply to: - persons holding a **National Identity Card for Overseas Pakistanis (NICOP)**; - minors; - students; - persons proceeding abroad for **Hajj or Umrah**; and - "such other classes of persons as notified by the Board." The restriction is also written for "a citizen of Pakistan". The clause says nothing further about people who travel on a foreign passport. This corpus does not hold any Board notification adding further excluded classes, so this page cannot say whether any exist. ### When can someone be put on a general order? Section 114B(4) sets three conditions, all of which must be met: 1. a notice under section 114(4) has been issued; 2. the date for complying with that notice has passed; and 3. the person has not filed the return. A section 114(4) notice asks a person who, in the Commissioner's opinion, must file a return but has not done so, to file within thirty days or such other period as the notice specifies. Under section 114(5) the notice can cover one or more of the last five completed tax years, or the last ten where the person has not filed for any of the last five. A further proviso removes that time limit where the Commissioner records that a non-filer has foreign income or owns foreign assets. ### Who is "liable to file" in the first place? A general order can only name people who are liable to file under the Ordinance. Section 114(1) lists who must file. It includes, for example, every person other than a company whose taxable income exceeds the amount not chargeable to tax, and every person whose income is subject to final taxation. Whether an overseas Pakistani is liable turns on residence and on Pakistan-source income, which the related pages explain. ### Worked example (illustrative scenario) Three members of the Qureshi family are not on the active taxpayers' list, and each has received and ignored a section 114(4) notice. - **Adnan** works in Riyadh and holds a NICOP. Clause (d) excludes NICOP holders, so the travel restriction cannot apply to him. The text of clauses (a) to (c) contains no NICOP exclusion. - **Farah** lives in Multan, holds only a CNIC and runs a boutique. If she is liable to file and the three conditions in section 114B(4) are met, a general order may restrict her foreign travel, unless she falls in another excluded class. - **Hamza**, 16, is a minor. Clause (d) excludes minors in any case. ### Does a general order stop other action? No. Section 114B(5) says action under the section "shall not preclude any other action provided under the provisions of the Ordinance." Being named in a general order does not replace the other consequences the Ordinance attaches to not filing a return. ### Common mistakes - **Assuming every overseas Pakistani is protected.** The exclusion is for NICOP holders. A citizen abroad who travels on a CNIC only is not named in the exclusion. - **Assuming a restriction can come without notice.** Section 114B(4) requires an ignored section 114(4) notice first. - **Assuming filing automatically restores travel.** Section 114B(3) speaks only of phones, SIMs, electricity and gas. ### What to check in the official text Read sections 114, 114B and 181A of the Income Tax Ordinance, 2001 as amended to 30 June 2026. Whether a general order has actually been issued, who is named in it, and any Board notification adding excluded classes, are published separately and are not in this corpus. Immigration procedures at the airport are also outside this site's scope. ### Frequently asked #### Does the travel restriction apply to NICOP holders? No. Section 114B(2)(d) expressly excludes persons holding a National Identity Card for Overseas Pakistanis (NICOP) from the foreign travel restriction. The other consequences listed in section 114B(2), such as disabling SIMs or cutting utility connections, carry no such exclusion in the text. #### Can my name go on a general order without any warning? No. Section 114B(4) requires that a notice under section 114(4) has been issued, the compliance date has passed and the person has still not filed the return. Only then can the person be included. #### If I file my return, is the travel restriction lifted? Section 114B(3) lets the Board or Commissioner order restoration of mobile phones, SIMs, electricity and gas where the return has been filed or the person was not liable to file. The subsection does not mention the travel restriction, and the Ordinance does not say how that restriction is lifted. ### Citations - [Income Tax Ordinance, 2001, section 114B (Powers to enforce filing of returns)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114b-powers-to-enforce-filing-of-returns), as amended to 2026-06-30: "restriction on foreign travel from the country for a citizen of Pakistan, excluding persons holding National Identity Card for Overseas Pakistanis (NICOP), minors, students, persons proceeding abroad for Hajj or Umrah and such other classes of persons as notified by the Board." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "the Commissioner may, by notice in writing, require any person who, in the Commissioner’s opinion, is required to file a return of income under this section for a tax year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 181A (Active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181a-active-taxpayers-list), as amended to 2026-06-30: "The Board shall have the power to institute active taxpayers’ list." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## I am a Pakistani citizen working abroad. Can Pakistan still treat me as a tax resident? Source: https://qanoondigest.com/faq/overseas-pakistanis/citizen-abroad-still-pakistan-tax-resident Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, in some cases. Section 82(d) treats a citizen as resident if they are not present in any other country for more than 182 days in the tax year, or are not a resident taxpayer of any other country. Section 82(c) makes government staff posted abroad resident. Citizenship alone is not the test. **Applies to:** Pakistani citizens working abroad, including Gulf workers, dual nationals, seafarers and people moving between countries, and federal or provincial government staff posted abroad. ### What does the law say? **Section 82** of the Income Tax Ordinance, 2001 has three live tests for a resident individual. A person meeting any one of them is resident for the tax year: | Clause | Who it catches | |---|---| | (a) | Anyone present in Pakistan for 183 days or more in the tax year | | (c) | An employee or official of the Federal Government or a Provincial Government posted abroad in the tax year | | (d) | A citizen of Pakistan who "is not present in any other country for more than one hundred and eighty-two days during the tax year or who is not a resident taxpayer of any other country" | Clause (d) was inserted by the Finance Act, 2022. It is the one that can reach a citizen who spends most of the year outside Pakistan. ### How does clause (d) work? Clause (d) has two limbs joined by "or". On the wording, a citizen is resident if **either** limb is met: 1. **Presence limb.** The citizen was not present in any other country for more than 182 days during the tax year. A citizen who spent, say, 200 days in the UAE fails this limb and is not caught by it. A citizen who spent 150 days in one country and 150 in another is not present in "any other country" for more than 182 days, so on the plain words this limb catches them. The Ordinance does not say whether days in different foreign countries are added together, or how days abroad are to be counted. 2. **Tax residence limb.** The citizen "is not a resident taxpayer of any other country". The Ordinance does not define this phrase. It does not say what evidence shows foreign tax residence, or how the phrase applies where the other country has no personal income tax. Because the limbs are alternatives, a Gulf worker who spends 330 days in Dubai clears the presence limb but may still face the question of whether they are a "resident taxpayer" of the UAE. The text does not answer that, and this page does not resolve it. ### What about government staff posted abroad? Clause (c) is simpler. A federal or provincial government employee or official posted abroad in the tax year is resident, whatever the day count. **Section 101(1)(b)** adds that salary paid by or on behalf of the Federal Government, a Provincial Government or a Local Government in Pakistan is Pakistan-source income "wherever the employment is exercised". The clause does not extend to employees of private Pakistani companies posted abroad. ### Does being resident make my foreign salary taxable? It brings it into the calculation. **Section 11(5)** computes a resident's income from both Pakistan-source and foreign-source amounts, while section 11(6) limits a non-resident to Pakistan-source amounts. So residence is what decides whether your foreign salary is looked at at all. Being looked at is not the same as being taxed. **Section 102(1)** exempts foreign-source salary of a resident individual if the individual "has paid foreign income tax in respect of the salary", and section 102(2) treats that tax as paid where the employer withheld it and paid it to the tax authority of the country where the work was done. **Rule 15** of the Income Tax Rules, 2002 sets the conditions for a foreign levy to count as a foreign income tax: it must be a compulsory tax, and substantially equivalent to Pakistani income tax. Tax on wages withheld as a final tax on salary is listed as substantially equivalent. For a resident whose foreign salary bore no foreign income tax, section 102 gives no exemption, and the salary is part of foreign-source income under section 11(5). ### Worked example (illustrative figures) 1. **Farhan, driver in Abu Dhabi.** Pakistani citizen, 320 days in the UAE in tax year 2027, 45 days in Pakistan. Clause (a): 45 is below 183, not resident. Clause (d) presence limb: he was in the UAE for more than 182 days, so not caught. Clause (d) tax residence limb: whether he is a "resident taxpayer" of the UAE is the open question the text does not answer. 2. **Hina, dual national in Canada.** Pakistani and Canadian citizen, 300 days in Canada, files Canadian returns as a resident. Clause (a): no. Clause (d): more than 182 days in Canada and a resident taxpayer there, so neither limb catches her. On the text she is non-resident. 3. **Asif, marine engineer.** Pakistani citizen, spends the year on ships and in ports, with no more than 90 days in any one country and 60 days in Pakistan. Clause (a): no. Clause (d) presence limb: not present in any other country for more than 182 days, so on the wording he is resident. 4. **Nadia, Commercial Attaché in Beijing.** Federal government official posted abroad. Clause (c) makes her resident, and section 101(1)(b) makes her government salary Pakistan-source. ### Common mistakes - **Treating citizenship as residence.** Clause (d) adds conditions; a passport alone is not the test. - **Counting only Pakistani days.** For a citizen, days in Pakistan answer clause (a) only. - **Assuming a private employer posting counts under clause (c).** Clause (c) names federal and provincial government staff. - **Assuming residence always means extra tax.** Section 102 exempts foreign salary where foreign income tax was paid on it. ### What to check in the official text Read section 82 with its footnotes, section 11(5) and (6), section 101(1) and section 102, and rule 15 of the Income Tax Rules, 2002. The meaning of "resident taxpayer of any other country" is not defined in the Ordinance, and any tax treaty between Pakistan and the other country is outside this corpus. ### Frequently asked #### Does having a Pakistani passport make me a tax resident? No. Citizenship is only the starting point for clause (d) of section 82. A citizen is resident under that clause only if they were not present in any other country for more than 182 days in the tax year, or are not a resident taxpayer of any other country. #### I work in a Gulf country with no income tax. Am I a resident taxpayer there? The Ordinance does not define 'resident taxpayer of any other country', so the text does not settle how that phrase applies in a country without a personal income tax. This page does not resolve that point; it is the part of clause (d) to check with the Commissioner or the official text before relying on non-resident status. #### I am a Foreign Office employee posted in Brussels. Am I resident? Yes. Section 82(c) makes an employee or official of the Federal Government or a Provincial Government posted abroad in the tax year a resident individual. Section 101(1)(b) also treats salary paid by those governments as Pakistan-source income wherever the employment is exercised. ### Citations - [Income Tax Ordinance, 2001, section 82 (Resident individual)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#82-resident-individual), as amended to 2026-06-30: "being a citizen of Pakistan is not present in any other country for more than one hundred and eighty-two days during the tax year or who is not a resident taxpayer of any other country." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 101 (Geographical source of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#101-geographical-source-of-income), as amended to 2026-06-30: "is received from any employment exercised in Pakistan, wherever paid; or" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 11 (Heads of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#11-heads-of-income), as amended to 2026-06-30: "The income of a resident person under a head of income shall be computed by taking into account amounts that are Pakistan-source income and amounts that are foreign-source income." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 102 (Foreign source salary of resident individuals)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#102-foreign-source-salary-of-resident-individuals), as amended to 2026-06-30: "Any foreign-source salary received by a resident individual shall be exempt from tax if the individual has paid foreign income tax in respect of the salary." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 15 (Foreign income tax)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#15-foreign-income-tax), as amended to 2023-11-24: "A foreign levy is a foreign income tax if the following conditions are satisfied, namely:-" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf --- ## Can FBR question the source of money remitted into Pakistan, and is there a yearly limit on the protection? Source: https://qanoondigest.com/faq/overseas-pakistanis/fbr-question-source-of-foreign-remittance Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, above a limit. Section 111(1) lets the Commissioner tax money whose source is not adequately explained. Section 111(4) removes that power for foreign exchange remitted through normal banking channels up to five million rupees in a tax year, encashed into rupees by a scheduled bank, when the bank's certificate is produced. **Applies to:** Overseas Pakistanis who remit money home, and people in Pakistan who receive foreign remittances and get a notice asking them to explain the source. FBR can ask anyone to explain where money came from, including money that arrived from abroad. Section 111 of the Income Tax Ordinance, 2001 is the provision that lets it do so, and sub-section (4) of the same section gives banked foreign remittances a protected amount each tax year. This page reads the section as amended to 30 June 2026, which governs tax year 2027 (1 July 2026 to 30 June 2027). ### What does section 111(1) allow FBR to do? Section 111(1) applies where an amount is credited in a person's books, a person has made an investment or owns money or a valuable article, a person has incurred expenditure, or a person has concealed income. If the person "offers no explanation about the nature and source" of the amount, or the explanation is not, in the Commissioner's opinion, satisfactory, clause (a) says the amount "shall be included in the person’s income chargeable to tax under the head “Income from Other Sources” to the extent it is not adequately explained". Three words in that text matter to a person with remittances: - **Explanation.** The rule bites only where the source is unexplained or the explanation is not accepted. - **Commissioner's opinion.** The judgment on whether an explanation is satisfactory is the Commissioner's. - **Extent.** Only the unexplained part is added, not the whole amount. ### What does section 111(4) protect? Section 111(4) says sub-section (1) does not apply to foreign exchange that meets four conditions together: | Condition in section 111(4) | What it means in plain words | |---|---| | Remitted from outside Pakistan | The money came from abroad | | Through normal banking channels | Sent through the banking system, or a channel the Explanation deems equivalent | | Not exceeding five million rupees in a tax year | The protected amount is capped per tax year | | Encashed into rupees by a scheduled bank, with the bank's certificate produced | The bank converted it to rupees and certifies that it did | The Explanation to section 111(4) adds that remittance "through money service bureaus, exchange companies or money transfer operators" is deemed to be foreign exchange remitted through normal banking channels. ### What does the law say about amounts above the limit? The Ordinance does not say that the excess over five million rupees is taxable. It says only that section 111(4) does not reach it. Money above the limit therefore sits under the ordinary section 111(1) rule: it is added to income only to the extent the person does not explain its nature and source to the Commissioner's satisfaction. The footnotes in the consolidated text show that sub-section (4) has been substituted more than once. The version replaced by the Finance Act, 2004 had no amount limit at all. The current text sets the limit at "five million Rupees in a tax year". ### Which tax year is the amount included in? Section 111(2) sets the timing. An amount relating to money or assets situated in Pakistan, or Pakistan-source concealed income, is included in the tax year to which it relates. An amount relating to assets or expenditure outside Pakistan, or foreign-source concealed income, is included in the tax year immediately before the year in which the Commissioner discovers it. Section 111(2A) says the year of discovery is the year the Commissioner issues a notice asking for an explanation. ### Worked example (illustrative figures) Sana works in Manchester and remits to her own bank account in Lahore through her UK bank. In tax year 2027 the scheduled bank encashes the following into rupees: 1. August 2026: Rs. 2,400,000 2. January 2027: Rs. 1,900,000 3. May 2027: Rs. 1,500,000 Total for the tax year: Rs. 2,400,000 + Rs. 1,900,000 + Rs. 1,500,000 = Rs. 5,800,000. - Protected by section 111(4), with the bank certificate: Rs. 5,000,000. - Not covered by section 111(4): Rs. 5,800,000 - Rs. 5,000,000 = Rs. 800,000. The Rs. 800,000 is not taxed for that reason alone. If the Commissioner asks for the source under section 111(1), Sana can explain it, for example with her foreign salary records. Only an amount she does not adequately explain would be added to her income. ### What if the money was kept in foreign currency? Section 111(4) speaks of foreign exchange that is "en-cashed into rupees by a scheduled bank". The text does not say how the sub-section applies to foreign currency that stays in a foreign currency account and is never converted into rupees. This page does not answer that point; the words of the sub-section are the place to start. ### What if the money came in cash or through an informal hawala? Cash carried in, or money paid through a channel that is not a banking channel and not one of the operators named in the Explanation, does not meet the "normal banking channels" condition. Section 111(4) then gives no protection, and the ordinary section 111(1) test applies. ### Common mistakes - **Treating Rs. 5 million as a tax-free allowance.** Section 111(4) only removes the unexplained-income rule. It does not exempt income under any other head. - **Assuming the excess is taxed automatically.** Section 111(1) adds only what is not adequately explained. - **Forgetting the certificate.** The protection is stated to apply where the bank's certificate is produced. - **Counting by calendar year.** The limit is per tax year, which runs 1 July to 30 June. ### What to check in the official text Read section 111(1), (2), (2A), (4) and the Explanation to sub-section (4) in the official PDF of the Ordinance amended to 30 June 2026. Section 111(5) allows the Board to make rules for the section; any such rules, and the form of the bank's encashment certificate, are outside this corpus. Foreign exchange regulations of the State Bank of Pakistan are also not covered here. ### Frequently asked #### Is there a yearly cap on the remittance protection? Yes. Section 111(4) covers foreign exchange remitted through normal banking channels not exceeding five million rupees in a tax year. The tax year under the Ordinance runs from 1 July to 30 June, so tax year 2027 is 1 July 2026 to 30 June 2027. #### Does money sent through an exchange company or transfer app count? The Explanation to section 111(4) deems remittance through money service bureaus, exchange companies or money transfer operators to be foreign exchange remitted through normal banking channels. Whether a particular app is one of these is not something the Ordinance lists. #### Is remittance above Rs. 5 million automatically taxed? No. Section 111(4) simply stops covering the excess. The excess stays within section 111(1), which only adds an amount to income to the extent the person does not explain its nature and source to the Commissioner's satisfaction. ### Citations - [Income Tax Ordinance, 2001, section 111 (Unexplained income or assets)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#111-unexplained-income-or-assets), as amended to 2026-06-30: "Sub-section (1) does not apply to any amount of foreign exchange remitted from outside Pakistan through normal banking channels not exceeding five million Rupees in a tax year that is en-cashed into rupees by a scheduled bank and a certificate from such bank is produced to that effect." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Section 111(4), Explanation (money service bureaus, exchange companies and money transfer operators)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can I get an NTN with a NICOP or a Pakistan Origin Card? Source: https://qanoondigest.com/faq/overseas-pakistanis/ntn-registration-with-nicop-or-poc Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 181 requires every taxpayer to register, and section 181(4) makes the CNIC the National Tax Number for individuals who hold one. The Ordinance names no equivalent for a NICOP or Pakistan Origin Card. The Income Tax Rules held here accept a NICOP or passport number for e-enrolment, and clause (114A) excuses many FCVA and NRVA holders from registering. **Applies to:** Overseas Pakistanis holding a NICOP, and foreign nationals of Pakistani origin holding a Pakistan Origin Card, who need or want to register with FBR. Registration with FBR is governed by section 181 of the Income Tax Ordinance, 2001, and the detail sits in Chapter XIII of the Income Tax Rules, 2002. The Ordinance ties the National Tax Number to the CNIC and is silent on the NICOP and the Pakistan Origin Card (POC). The Rules held in this corpus mention the NICOP, but not the POC. This page reads the Ordinance as amended to 30 June 2026 and the Rules as amended to 24 November 2023. ### What does the law say? Section 181(1) says every taxpayer "shall apply in the prescribed form and in the prescribed manner for registration". Section 181(2) lets the Commissioner register a taxpayer where the facts require it. Section 181(3) leaves the registration scheme to rules notified by the Board. Section 181(4) then adds one specific rule for individuals: from tax year 2015 onwards, an individual who holds a CNIC issued by NADRA uses that CNIC as the National Tax Number. The sub-section names only the CNIC. It says nothing about a NICOP or a POC. The Rules fill part of the gap: | Provision | What it says | |---|---| | Rule 80(4) | The Commissioner may register an individual who failed to file a return "on the basis of CNIC or NICOP", after a hearing, if satisfied the income is taxable. | | Rule 80A | Individuals required to e-file must submit the e-enrolment form through the Board's online system. | | Rule 80B(1)(a) | An individual e-enrolling must give the "number of CNIC,NICOP or Passport", along with a cell number, e-mail, nationality, address and accounting period. | So the Rules accept a NICOP or a passport as the identity number for e-enrolment. They do not say that the NICOP number itself becomes the NTN, in the way section 181(4) says of the CNIC. ### Does FBR already hold my NICOP or POC details? Section 175A(1)(a) requires NADRA to give the Board real-time access to information on the "National Identity Card, Pakistan Origin Card, Overseas Identity Card, Alien Registration Card" and other particulars in the Citizen Database. Section 175A(4) says this information is used only for tax purposes and kept confidential. That is a data-sharing rule. It does not register anyone and does not create an NTN. It only means FBR's systems can match your identity card data. ### Do I need to register at all? Many account holders abroad do not. Clause (114A) of Part IV of the Second Schedule says section 181 and clause (ae) of section 114(1) do not apply to a person maintaining a Foreign Currency Value Account (FCVA), Foreign Currency Business Value Account (FCBVA), Non-Resident Rupee Value Account (NRVA) or Non-Resident Rupee Business Value Account (NRBVA) with an authorised bank in Pakistan. Section 114(1)(ae) is the rule that requires a return from "every person whose income for the year is subject to final taxation". The clause stops applying if the person has Pakistan-source taxable income other than: - (a) profit on debt on the FCVA, FCBVA, NRVA or NRBVA; - (b) profit on debt on Government of Pakistan securities bought from the proceeds of those accounts; - (c) capital gain on disposal of immovable property acquired from the proceeds of an FCVA or NRVA; - (d) capital gain on PSX securities and mutual fund units bought from those accounts; - (e) dividends from PSX securities and mutual funds bought from those accounts. Rent from a house in Pakistan, a Pakistani salary or business income would take a person outside the clause. ### Worked example (illustrative figures) Consider three people: 1. **Imran, NICOP holder in Riyadh.** He holds an NRVA and has bought PIBs through it. His only Pakistan-source income is profit on the account and on the PIBs. Clause (114A) applies, so section 181 does not require him to register. 2. **Sana, NICOP holder in Manchester.** She also has an NRVA, but she rents out a flat in Lahore. Rent is not on the clause (114A) list, so the clause does not apply to her. Section 181(1) requires her to apply for registration. Under rule 80B(1)(a) she can give her NICOP number when e-enrolling. 3. **Daniel, POC holder in Toronto.** He has no CNIC or NICOP. He earns rent from a shop in Karachi. Section 181(1) requires him to register. Section 181(4) does not apply because he has no CNIC. The 2023 Rules list a passport number as an accepted identity number. Neither the Ordinance nor that edition of the Rules mentions the POC number for this purpose. ### What if I also hold a CNIC? If you hold a CNIC, section 181(4) applies directly: the CNIC is your NTN. The Ordinance does not address a person who holds both a CNIC and a NICOP, or how FBR links the two. ### Common mistakes - **Assuming a NICOP number is an NTN because a CNIC is.** Section 181(4) speaks only of the CNIC. The Rules accept a NICOP for e-enrolment, which is a different statement. - **Registering only because of an NRVA or FCVA.** Clause (114A) switches off section 181 for these account holders unless they have other Pakistan-source taxable income. - **Reading section 175A as automatic registration.** It gives FBR access to NADRA data. It does not register you. ### What to check in the official text Read section 181 and clause (114A) in full, including the proviso that lists the permitted income. Read rules 80, 80A and 80B in the Income Tax Rules, 2002. The Rules edition in this corpus is amended to 24 November 2023; check whether a later SRO has changed the list of accepted identity documents, including any reference to the Pakistan Origin Card. The FBR portal steps for e-enrolment are outside this corpus. ### Frequently asked #### Does my NICOP number become my NTN in the same way a CNIC does? Section 181(4) of the Ordinance says only that a CNIC issued by NADRA is used as the National Tax Number for individuals from tax year 2015. It does not mention a NICOP or a Pakistan Origin Card, so the Ordinance itself does not answer whether those numbers serve as an NTN. #### Which identity documents do the Income Tax Rules accept for registration? In the Rules as amended to 24 November 2023, rule 80B(1)(a) asks an individual e-enrolling to provide the number of a CNIC, NICOP or passport. Rule 80(4) lets the Commissioner register an individual on the basis of a CNIC or NICOP. That edition does not mention the Pakistan Origin Card. #### I only have an NRVA and a few PIBs bought through it. Do I need to register at all? Clause (114A) of Part IV of the Second Schedule says section 181 and section 114(1)(ae) do not apply to a person maintaining an FCVA, FCBVA, NRVA or NRBVA. The relief is lost if you have any other Pakistan-source taxable income outside the five kinds the clause lists. ### Citations - [Income Tax Ordinance, 2001, section 181 (Taxpayer’s registration)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#181-taxpayer-s-registration), as amended to 2026-06-30: "From tax year 2015 and onwards, in case of individuals having Computerized National Identity Card (CNIC) issued by the National Database and Registration Authority, CNIC shall be used as National Tax Number." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 175A (Real-time access to information and databases)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#175a-real-time-access-to-information-and-databases), as amended to 2026-06-30: "the National Database and Registration Authority with respect to information pertaining to National Identity Card, Pakistan Origin Card, Overseas Identity Card, Alien Registration Card, and other particulars contained in the Citizen Database." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clause (114A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "every person whose income for the year is subject to final taxation under any provision of this Ordinance;" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 80 (Registration)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#80-registration), as amended to 2023-11-24: "shall be registered by the Commissioner having jurisdiction on the basis of CNIC or NICOP when he is satisfied after providing opportunity to be heard that the income of the individual is taxable and is required to file return of income." Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Rules, 2002, Income Tax Rules, 2002, rule 80B(1)(a) (Requirement of e-enrolment)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24), as amended to 2023-11-24 Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf --- ## What happens if customs seizes my cash, gold or baggage at a Pakistani airport, and how do I get it back? Source: https://qanoondigest.com/faq/overseas-pakistanis/customs-seized-cash-gold-baggage-airport Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under the Customs Act, 1969, seized goods must be returned if no show-cause notice issues within two months, extendable by two months (section 168). An officer then decides the case under section 179, may offer a fine instead of confiscation under section 181, and you can appeal within thirty days under section 193 or forty-five days to the Tribunal. **Applies to:** Passengers, including overseas Pakistanis, whose currency, gold, jewellery or other baggage is detained or seized by customs at a Pakistani airport, seaport or land border. ### Why can customs seize cash, gold or baggage? Customs can seize goods that are liable to confiscation under the Customs Act, 1969, and undeclared or concealed items in baggage often are. Two rules in section 139 lead there. - **Section 139(2)**: a passenger who makes a false declaration or fails to declare baggage "shall be guilty of an offence under this Act." - **Section 139(3)**: a person who tries to bring into or take out of Pakistan "currency, gold, precious metals or stones, in any form, through concealment in baggage or circumventing customs controls" at airports, seaports or land border stations "shall be guilty of an offence of smuggling within the meaning of clause (s) of section 2." Section 2(s) defines "smuggle". Its list of goods includes "gold bullion, silver bullion, platinum, palladium, radium, precious stones, antiques, currency", and manufactures of gold or silver above five hundred thousand rupees in value. ### What penalties apply? Section 156(1) links each offence to a punishment in a Table. The official PDF prints two relevant entries: clause 70 for failing to declare baggage, and clause 8(iii) for smuggled currency, gold, silver, platinum or precious stones. As printed in the official PDF, clause 70 provides: | Undeclared item | Penalty (goods or currency also liable to confiscation) | |---|---| | Goods other than currency, gold, silver, platinum and precious stones | not exceeding three times the value of the goods | | Currency above the permissible limit by up to US$ 10,000 | not exceeding the value of the excess amount | | Currency above the limit by US$ 10,001 to 20,000 | not exceeding two times the value of the excess amount | | Currency above the limit by US$ 20,001 to 50,000 | not exceeding three times the value of the currency, and up to two years' imprisonment on conviction by a Special Judge | | Gold up to 15 tola, or equivalent in silver or platinum | not exceeding the value of the goods | | Gold from 16 to 30 tola | not exceeding two times the value | | Gold from 31 to 50 tola | not exceeding three times the value, and up to one year's imprisonment on conviction by a Special Judge | Higher bands carry larger multiples and longer prison terms. For currency above the limit by more than US$ 200,000, the penalty rises to ten times, with imprisonment up to fourteen years. The Act does not set the "permissible limit" for currency itself, and the instrument that does is not in this corpus. Clause 8(iii) has its own bands for smuggling, starting with a penalty not exceeding the value of the goods and up to two years' imprisonment where the value is up to US$ 10,000. The Table in the official PDF is badly laid out, so read it there before relying on any band. ### What happens after seizure? 1. **Seizure.** Section 168(1) lets the appropriate officer seize goods liable to confiscation. 2. **Show-cause notice.** Section 180 bars confiscation or a penalty unless you are told the grounds in writing, allowed to make a written representation and given a hearing in person or through a counsel or authorised agent. Under section 168(2), if no such notice is given within two months of seizure, the goods must be returned to you. The Collector may extend that period by up to two months for recorded reasons. A second proviso says the time limit does not apply to goods specified under the first proviso to section 181. 3. **Adjudication.** Section 179(1) assigns cases by the duty and taxes involved: Superintendent or Principal Appraiser up to one hundred thousand rupees, Deputy Collector up to two million, Additional Collector up to five million, Collector with no limit. Section 179(2) lets the Board vary this. Under section 179(3), cases are decided within ninety days of the show-cause notice. Where the smuggling definition in section 2(s) is invoked, or the goods are lying at an airport, seaport or dry port, the limit is forty-five days, extendable by fifteen. 4. **Order.** The officer may confiscate, impose a penalty, or both. ### Can I pay a fine and get the goods back? Section 181 lets the officer who orders confiscation give the owner an option to pay a fine "in lieu of the confiscation of the goods", in an amount the officer thinks fit. The Explanation to section 181 makes the fine additional to duty, charges and any penalty. The Board may, by order, name goods for which the option is not given, and may fix the fine for certain goods. Those Board orders are not in this corpus. ### How do I appeal? - **Order by an officer below Additional Collector:** section 193(1) allows an appeal to the Collector (Appeals) within thirty days of the order being communicated. A late appeal can be admitted for sufficient cause. Section 193(3) sets a fee of one thousand rupees. - **Order by an Additional Collector or Collector under section 179:** section 194A allows an appeal to the Customs Appellate Tribunal within forty-five days. For a person other than a company, the fee is five thousand rupees. ### Worked example (illustrative figures) Imran flies from Doha to Karachi with 20 tola of gold jewellery in his hand luggage. He does not declare it. The value is invented at Rs. 6,000,000. 1. Customs seizes the jewellery under section 168(1). 2. It falls in the 16 to 30 tola band of clause 70. The penalty cannot exceed two times the value: 2 x Rs. 6,000,000 = Rs. 12,000,000. The officer can impose less, but not more. 3. The show-cause notice must issue within two months of seizure, or four months if the Collector extends the period. 4. The adjudicating officer confiscates the jewellery, then offers under section 181 to release it on payment of a fine, plus any duty and the penalty imposed. 5. The order is passed by a Deputy Collector, so Imran has thirty days to appeal to the Collector (Appeals). Had the gold been sewn into a jacket lining, section 139(3) could treat it as smuggling instead. Which Table entry applies is for the adjudicating officer, and this page does not decide it. ### Common mistakes - **Waiting for the goods to come back on their own.** Return under section 168(2) happens only when no show-cause notice issues in time. - **Treating the section 181 fine as the whole cost.** Duty, charges and any penalty are added. - **Missing the thirty-day limit.** Time under section 193 runs from the date the order is communicated. ### What to check in the official text Read sections 2(s), 139, 156 with its Table, 168, 179, 180, 181, 193 and 194A of the Customs Act, 1969 as amended to 30 June 2025. The currency limit for travellers, Board orders under section 181 and the baggage rules are separate instruments not held in this corpus. ### Frequently asked #### How long can customs keep my seized gold or cash without charging me? Section 168(2) says seized goods must be returned if no show-cause notice under section 180 is given within two months of seizure. The Collector may extend this by up to two months for recorded reasons. The limit does not apply to goods the Board has specified under the first proviso to section 181. #### Can I pay to get confiscated items back? Section 181 lets the officer who orders confiscation give the owner an option to pay a fine instead, of an amount the officer thinks fit. The fine is in addition to duty, charges and any penalty. The Board can specify goods for which no such option is given. #### Where do I appeal against a customs order on my baggage? If the order was passed by an officer below Additional Collector, section 193 allows an appeal to the Collector (Appeals) within thirty days, with a fee of one thousand rupees. An order by an Additional Collector or above under section 179 goes to the Appellate Tribunal under section 194A within forty-five days. ### Citations - [Customs Act, 1969, section 139 (Declaration by passenger or crew of baggage), Section 139(3), read with section 2(s)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#139-declaration-by-passenger-or-crew-of-baggage), as amended to 2025-06-30: "he shall be guilty of an offence of smuggling within the meaning of clause (s) of section 2." Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 156 (Punishment for offences), Section 156(1), Table, clauses 8(iii) and 70](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#156-punishment-for-offences), as amended to 2025-06-30: "Whoever commits any offence described in column 1 of the Table below shall, in addition to and not in derogation of any punishment to which he may be liable under any other law, be liable to the punishment mentioned against that offence in column 2 thereof" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 168 (Seizure of things liable to confiscation)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#168-seizure-of-things-liable-to-confiscation), as amended to 2025-06-30: "no show cause notice in respect thereof is given under section 180 within two months of the seizure of the goods, the goods shall be returned to the person from whose possession they were seized" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 179 (Power of adjudication), Sections 179 and 180](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#179-power-of-adjudication), as amended to 2025-06-30: "in cases involving confiscation of goods or recovery of duty and other taxes not levied, short levied or erroneously refunded, imposition of penalty or any other contravention under this Act or the rules made thereunder" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 181 (Option to pay fine in lieu of confiscated goods)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#181-option-to-pay-fine-in-lieu-of-confiscated-goods), as amended to 2025-06-30: "the officer passing the order may give the owner of the goods an option to pay in lieu of the confiscation of the goods such fine as the officer thinks fit" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 193 (Appeals to Collector (Appeals)), Sections 193 and 194A](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#193-appeals-to-collector-appeals), as amended to 2025-06-30: "may prefer appeal to the Collector (Appeals) within thirty days of the date of communication to him of such decision or order" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf --- ## I live and work abroad. Do I still have to file an income tax return in Pakistan? Source: https://qanoondigest.com/faq/overseas-pakistanis/overseas-pakistani-income-tax-return-required Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Living abroad does not by itself remove the duty. Section 114 still requires a return if you have taxable Pakistan-source income above the tax-free amount, hold an NTN, or own a car above 1000cc. Section 115 excuses a non-resident only for property ownership, and clause (114A) helps FCVA and NRVA holders with no other Pakistani income. **Applies to:** Pakistani citizens and NICOP or POC holders who live and work outside Pakistan and are non-resident for the tax year. ### What does the law say? The Income Tax Ordinance, 2001 does not have a general rule that people living abroad are excused from filing. Instead, **section 114(1)** lists who must file, and most of that list applies to any "person", resident or not. Three other provisions then narrow the position for an overseas Pakistani: - **Section 11(6)** says a non-resident's income under each head is computed using "only amounts that are Pakistan-source income". Your salary in Riyadh or Toronto is therefore not part of your Pakistani taxable income while you are non-resident. - **Section 115(3)(d)** says a non-resident person is not required to file "solely by reason" of the property triggers in section 114(1)(b). - **Clause (114A) of Part IV of the Second Schedule** switches off two specific provisions, section 114(1)(ae) and the taxpayer registration requirement, for people maintaining an FCVA, FCBVA, NRVA or NRBVA with authorised banks in Pakistan, as long as their Pakistani income is limited to the kinds the clause lists. ### Which triggers in section 114 can still catch someone living abroad? | Trigger in section 114(1) | Applies to a non-resident? | |---|---| | (ab) taxable income above the amount not chargeable to tax | Yes, measured on Pakistan-source income only (section 11(6)) | | (ae) income subject to final taxation | Yes, unless clause (114A) applies | | (b)(i) charged to tax in either of the two preceding tax years | Yes | | (b)(ii) claims a loss carried forward | Yes | | (b)(iii) to (v) owns land of 500 square yards or more, or a flat, in the areas listed | No, excused by section 115(3)(d) | | (b)(vi) owns a motor vehicle above 1000 CC | Yes. Section 115(3) covers this sub-clause only for a widow, an orphan below 25 or a disabled person | | (b)(vii) has obtained a National Tax Number | Yes, section 115(3) does not mention it | | (b)(ix) and (x) chamber or professional body membership, foreign income and assets statement | These apply only to a "resident person" | The rate tables that set the amount "not chargeable to tax" are in Part I of the First Schedule. Which table applies depends on whether your income is mostly salary, so read the schedule for your case rather than relying on one figure. ### How does it work in practice? The first question is whether you are non-resident for the tax year. That turns on section 82, which is covered on our page about the 183-day test and on the page about citizens working abroad. If you are resident, section 11(5) brings your foreign income into the calculation and the analysis below does not hold. If you are non-resident, work through the table. Many overseas workers find that the NTN trigger is the one that bites: section 114(1)(b)(vii) requires anyone who "has obtained National Tax Number" to file, and nothing in section 115 lifts that for non-residents. The same is true of a car above 1000 CC registered in your name. Property is different. The section 115(3)(d) carve-out covers the property sub-clauses, but only where property is the sole reason. Rent earned from that property is income, not ownership, so a rented-out house can still lead to a filing duty through the income triggers in clause (ab) or (ae). ### Worked example (illustrative figures) Three people, all non-resident for tax year 2027 (1 July 2026 to 30 June 2027): 1. **Bilal, electrician in Sharjah.** Owns a 5-marla house in Sialkot, lived in by his parents, no rent. No NTN, no car in Pakistan. His only trigger would be property ownership, which section 115(3)(d) excuses. On the text, no return is required. 2. **Sana, nurse in Manchester.** Registered for an NTN in 2021 before she moved. No Pakistani income. Section 114(1)(b)(vii) still lists her as a person who has obtained an NTN, so the text requires a return even if it shows nil Pakistani income. 3. **Usman, engineer in Doha.** Holds an NRVA and earns profit on it, and bought shares on the Pakistan Stock Exchange from NRVA proceeds. No NTN. Clause (114A) switches off section 114(1)(ae) and the taxpayer registration requirement for him, because the profit on his account and any dividends or gains on those shares fall within items (a), (d) and (e) of the clause's proviso. ### What if I also have other Pakistani income? Clause (114A) stops applying if you have Pakistan-source taxable income outside its list. The list covers profit on the accounts, profit on Government of Pakistan securities bought from their proceeds, capital gain on immovable property bought from FCVA or NRVA proceeds, and gains and dividends on listed securities and mutual funds bought from those proceeds. Rent from a Pakistani property, for example, is not on the list. ### What if I do not file when I should? Section 114(4) lets the Commissioner issue a notice requiring a return. After that notice goes unanswered, section 114B allows the Board to include the person in an income tax general order, with consequences including disabling mobile SIMs and cutting utilities. The foreign travel restriction in section 114B(2)(d) expressly excludes NICOP holders. ### Common mistakes - **Thinking foreign residence cancels an NTN-based duty.** Section 115(3) does not refer to sub-clause (vii). - **Treating clause (114A) as a blanket exemption.** It switches off only section 114(1)(ae) and the taxpayer registration requirement, and only for account holders whose Pakistani income stays within its list. - **Adding foreign salary to the Pakistani return while non-resident.** Section 11(6) limits a non-resident's income to Pakistan-source amounts. - **Assuming the property carve-out covers rent.** Section 115(3)(d) is about ownership, not income from the property. ### What to check in the official text Read section 114(1) in full, including the omitted and renumbered clauses, and section 115(3) for the exact sub-clauses it covers. Read clause (114A) of Part IV of the Second Schedule, which was substituted by the Finance Act, 2026, so older descriptions of it may not match. Confirm your residence status under section 82 before relying on any of this. ### Frequently asked #### I own a plot in Lahore but live in Dubai. Does that alone make me file? No. Section 115(3)(d) says a non-resident person is not required to file solely because of owning immovable property under section 114(1)(b)(iii) to (v). If you have other triggers, such as an NTN or taxable Pakistani income, those still apply. #### I have an NTN from before I moved abroad. Do I still have to file? Section 114(1)(b)(vii) lists any person who has obtained a National Tax Number, and section 115(3) does not excuse non-residents from that trigger. On the text, holding an NTN keeps the filing duty alive whether or not you now live in Pakistan. #### My only Pakistani income is profit on my Roshan Digital NRVA. Must I file? Clause (114A) of Part IV of the Second Schedule switches off section 114(1)(ae) and the taxpayer registration requirement for FCVA, FCBVA, NRVA and NRBVA holders, provided their only Pakistan-source taxable income is of the kinds it lists, which include profit on those accounts. Other triggers in section 114, such as an NTN, are not switched off by that clause. ### Citations - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "every person (other than a company) whose taxable income for the year exceeds the maximum amount that is not chargeable to tax under this Ordinance for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 115 (Persons not required to furnish a return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#115-persons-not-required-to-furnish-a-return-of-income), as amended to 2026-06-30: "in the case of ownership of immovable property, a non-resident person." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 11 (Heads of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#11-heads-of-income), as amended to 2026-06-30: "The income of a non-resident person under a head of income shall be computed by taking into account only amounts that are Pakistan-source income." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 82 (Resident individual)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#82-resident-individual), as amended to 2026-06-30: "being a citizen of Pakistan is not present in any other country for more than one hundred and eighty-two days during the tax year or who is not a resident taxpayer of any other country." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clause (114A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114B (Powers to enforce filing of returns)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114b-powers-to-enforce-filing-of-returns), as amended to 2026-06-30: "restriction on foreign travel from the country for a citizen of Pakistan, excluding persons holding National Identity Card for Overseas Pakistanis (NICOP), minors, students, persons proceeding abroad for Hajj or Umrah" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## I pay tax abroad on income that Pakistan also taxes, such as a foreign pension or Pakistani rent. Do I pay tax twice? Source: https://qanoondigest.com/faq/overseas-pakistanis/double-taxation-foreign-tax-credit-pakistan Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Not in full, if you are resident in Pakistan. Section 103 of the Income Tax Ordinance gives a resident a credit for foreign income tax paid, limited to the Pakistan tax on that income at your average rate, and section 102 exempts foreign salary taxed abroad. A non-resident gets no section 103 credit on Pakistan-source income such as rent. **Applies to:** Pakistani citizens with income taxed in two countries, including returnees with foreign pensions and overseas Pakistanis who earn rent or a pension from Pakistan. ### What does the law say? Whether you pay tax twice depends first on whether you are resident in Pakistan for the tax year, because the Income Tax Ordinance, 2001 taxes residents and non-residents on different income. - **Section 11(5)** computes a resident's income from both Pakistan-source and foreign-source amounts. - **Section 11(6)** says a non-resident's income "shall be computed by taking into account only amounts that are Pakistan-source income." - **Section 101** decides where income comes from. Under section 101(9), rent from immovable property in Pakistan is Pakistan-source. Under section 101(11), a pension or annuity is Pakistan-source "if it is paid by a resident or borne by a permanent establishment in Pakistan of a non-resident person." A pension paid by a foreign employer or foreign scheme is therefore foreign-source under section 101(16). The Ordinance then gives three kinds of relief to residents who are also taxed abroad: 1. **Section 102** exempts foreign-source salary received by a resident individual "if the individual has paid foreign income tax in respect of the salary." Section 102(2) treats that tax as paid when the employer withheld it and paid it to the revenue authority of the country where the job was done. 2. **Section 103** gives a resident a foreign tax credit equal to "the lesser of" the foreign income tax paid and the Pakistan tax payable on that income. 3. **Section 107** lets the Federal Government make tax treaties, and section 107(2) gives a treaty and its implementing notification effect "notwithstanding anything contained in any law for the time being in force" so far as it provides relief from tax, among other things. ### How is the section 103 credit worked out? Section 103(2) finds the Pakistan tax on your foreign income by applying your **average rate of Pakistan income tax** to your **net foreign-source income**. Section 103(8) defines the average rate as the percentage that your Pakistan income tax, before this credit, is of your taxable income. Net foreign-source income is your foreign-source income charged to tax, less deductions that relate to earning it. Four further rules from section 103 matter in practice: - Where you have foreign income under more than one head, the credit is worked out separately for each head (section 103(3)). - Foreign withholding tax counts as foreign income tax (section 103(8)). - The foreign tax must be paid within two years after the end of the tax year in which the income was derived (section 103(7)). - Any part of the credit that cannot be used is not refunded, carried back or carried forward (section 103(6)). Section 4(3) applies the foreign tax credit first, before any other tax credit. ### Worked example (illustrative figures) Tariq returned to Lahore from Manchester several years ago and is resident in Pakistan for tax year 2027. He receives a pension from a UK scheme. The amounts below are invented. The method is the one in section 103. | Item | Amount | |---|---| | Taxable income, all sources | Rs. 4,000,000 | | of which net foreign-source income (UK pension) | Rs. 2,500,000 | | Pakistan tax before the section 103 credit (assumed) | Rs. 800,000 | | UK tax paid on the pension | Rs. 300,000 | 1. Average rate of Pakistan income tax: Rs. 800,000 / Rs. 4,000,000 = 20%. 2. Pakistan tax on the foreign income: 20% x Rs. 2,500,000 = Rs. 500,000. 3. Credit: the lesser of Rs. 300,000 (UK tax) and Rs. 500,000 = **Rs. 300,000**. 4. Pakistan tax payable: Rs. 800,000 - Rs. 300,000 = **Rs. 500,000**. Now suppose the UK tax had been Rs. 650,000. The credit is capped at Rs. 500,000, so Pakistan tax payable is Rs. 800,000 - Rs. 500,000 = Rs. 300,000. The remaining Rs. 150,000 of UK tax is not refunded or carried to another year under section 103(6). The Rs. 800,000 figure is assumed so the example stays on the credit. In a real return it comes from the rate tables in the First Schedule for the right tax year. ### What if I live abroad and earn rent or a pension from Pakistan? If you are not resident in Pakistan, section 11(6) still taxes your Pakistan-source income. Rent from a house in Islamabad is Pakistan-source under section 101(9). A pension paid by a Pakistani employer or a Pakistani government is Pakistan-source under section 101(11). Section 103 does not help, because it applies only to a "resident taxpayer" with foreign-source income. Relief for a non-resident, if any, comes from the country where you live, under its own law, or from a tax treaty under section 107. This corpus holds the power to make treaties, not the treaties themselves, so this page does not say what any particular treaty provides. ### What if my foreign salary was not taxed abroad? Section 102 exempts foreign salary only where foreign income tax has been paid on it. The text does not extend the exemption to salary on which no foreign tax was paid. Whether that salary is taxable in Pakistan then depends on whether you were resident for the year. The related pages on residence and foreign salary cover that question. ### Common mistakes - **Claiming the full foreign tax as a credit.** Section 103(1) caps the credit at the Pakistan tax on that income. - **Adding foreign income from different heads together.** Section 103(3) works the credit out head by head. - **Carrying unused credit forward.** Section 103(6) rules this out. - **Assuming a UK or Gulf pension is Pakistan-source because it is paid into a Pakistani bank.** Section 101(11) looks at who pays or bears the pension, not where the money lands. ### What to check in the official text Read sections 11, 101, 102, 103, 107 and 4(3) of the Income Tax Ordinance, 2001 as amended to 30 June 2026. If you rely on a tax treaty, read the treaty and its implementing notification from the Federal Government. Neither is in this corpus. The other country's tax law also decides how it treats your Pakistani income, and that is outside the scope of this site. ### Frequently asked #### How much foreign tax can I set off against my Pakistan tax? Section 103(1) allows the lesser of the foreign income tax paid and the Pakistan tax payable on that income. Section 103(2) works out the Pakistan tax by applying your average rate of Pakistan income tax for the year to your net foreign-source income. #### What happens to foreign tax that is more than the credit? Section 103(6) says any unused part of the credit shall not be refunded, carried back to the preceding tax year or carried forward to the following tax year. The excess foreign tax is simply not relieved in Pakistan. #### I live abroad and rent out a flat in Karachi. Does Pakistan give me credit for tax I pay abroad on that rent? Section 103 applies only to a resident taxpayer with foreign-source income. Rent from property in Pakistan is Pakistan-source under section 101(9), and section 11(6) taxes a non-resident on Pakistan-source income. Any relief for the double charge would come from the other country's law or a tax treaty, which this corpus does not hold. ### Citations - [Income Tax Ordinance, 2001, section 103 (Foreign tax credit)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#103-foreign-tax-credit), as amended to 2026-06-30: "Where a resident taxpayer derives foreign source income chargeable to tax under this Ordinance in respect of which the taxpayer has paid foreign income tax, the taxpayer shall be allowed a tax credit of an amount equal to the lesser of -" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 102 (Foreign source salary of resident individuals)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#102-foreign-source-salary-of-resident-individuals), as amended to 2026-06-30: "Any foreign-source salary received by a resident individual shall be exempt from tax if the individual has paid foreign income tax in respect of the salary." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 101 (Geographical source of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#101-geographical-source-of-income), as amended to 2026-06-30: "A pension or annuity shall be Pakistan-source income if it is paid by a resident or borne by a permanent establishment in Pakistan of a non-resident person." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 11 (Heads of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#11-heads-of-income), as amended to 2026-06-30: "The income of a non-resident person under a head of income shall be computed by taking into account only amounts that are Pakistan-source income." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 107 (Agreements for the avoidance of double taxation and prevention of fiscal evasion)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#107-agreements-for-the-avoidance-of-double-taxation-and-prevention-of-fiscal-evasion), as amended to 2026-06-30: "the agreement and the provisions made by notification for implementing the agreement shall, notwithstanding anything contained in any law for the time being in force, have effect in so far as they provide for" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 4 (Tax on taxable income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#4-tax-on-taxable-income), as amended to 2026-06-30: "any foreign tax credit allowed under section 103; then" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What can I bring in my baggage duty free when I visit Pakistan, and what must I declare? Source: https://qanoondigest.com/faq/overseas-pakistanis/duty-free-baggage-visiting-pakistan Law current to: 30 June 2025. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer You must declare your baggage under section 139 of the Customs Act, 1969. Section 141 lets the customs officer pass free of duty items that are bona fide for your own use or for gifts, but only within limits set by the baggage rules. Those rules and item-by-item allowances are not in this corpus, so this page cannot list them. **Applies to:** Overseas Pakistanis and other passengers arriving in Pakistan by air, sea or land with accompanied or unaccompanied baggage. ### What does the law say? Four sections of the Customs Act, 1969 deal with a passenger's baggage, and the Act as amended to 30 June 2025 is the latest edition in this corpus. - **Section 139** requires the owner of any baggage to make "a verbal or written declaration of its contents" to the customs officer, answer the officer's questions about it, and produce it for examination. Where the Customs Computerized System is operational, the proviso says declarations shall be electronic. - **Section 141** lets the officer "pass free of duty any article" in a passenger's baggage that the officer is satisfied is "bona fide meant for the use of such passenger or for making gift", subject to the limitations, conditions and restrictions in the rules. - **Section 140** fixes which rate of duty applies to dutiable baggage. - **Section 142** lets the officer, at your request, detain a truly declared dutiable, prohibited or restricted item so you can collect it when you leave Pakistan. Section 2 defines "baggage" to include unaccompanied baggage, but not motor vehicles. ### What counts as duty free? The Act itself gives only the test: the item must be bona fide for your own use or for giving as a gift, and the officer must be satisfied of that. The detailed limits, such as how many mobile phones, how much jewellery, which electronics, and what value of gifts, are set in baggage rules and notifications made under the Act. **Those instruments are not in this corpus**, so this page does not state any allowance, quantity or value. Schemes for bringing in a vehicle, whether as a gift or on transfer of residence, are also outside the corpus, and section 2 keeps vehicles out of "baggage" in any case. ### What must I declare? Section 139(1) applies to "the owner of any baggage", not only to people carrying dutiable goods. The duty is to declare the contents, answer questions about the baggage "and any article contained therein or carried with him", and produce the baggage for examination. Two consequences follow from getting this wrong: - **Section 139(2)**: a passenger who makes a false declaration or fails to declare "shall be guilty of an offence under this Act." - **Section 139(3)**: bringing in or taking out currency, gold, precious metals or stones "through concealment in baggage or circumventing customs controls" is smuggling within the Act's definition. Clause 70 of the Table under section 156(1), as printed in the official PDF, sets the penalty for failing to declare or making a false declaration. For goods other than currency, gold, silver, platinum and precious stones, the owner is liable to a penalty not exceeding three times the value of the goods, and the goods are liable to confiscation. Currency, gold and similar items have their own graded penalties, covered on the related page about seizures. ### Which rate of duty applies? Section 140 applies the rate in force on the date the section 139 declaration is made. For mishandled or unaccompanied baggage, the proviso applies the rate in force on the date a declaration for clearance is presented to the officer after the goods land. If duty rates change between your flight and the day you clear unaccompanied baggage, the later date governs. ### Worked example (illustrative scenario) Bilal, who works in Jeddah, flies into Lahore for his sister's wedding. 1. He declares his suitcase on arrival as section 139 requires, listing clothes, a few wrapped gifts for relatives and a drone he uses for his job. 2. The officer is satisfied the clothes are for his own use and the gifts are genuine gifts. Section 141 lets the officer pass them free of duty, within whatever limits the baggage rules set. 3. The drone is dutiable, and Bilal does not intend to use it in Pakistan. He has declared it truthfully, so under section 142 he can ask customs to detain it and return it to him when he leaves. The officer may do so if satisfied that it was not brought in for consumption in Pakistan. 4. His second suitcase is delayed and arrives two days later. Under the section 140 proviso, any duty on it is at the rate in force when he presents the declaration for clearing it. ### Common mistakes - **Not declaring because "it is only gifts".** Section 139 requires a declaration of contents whatever they are. - **Treating section 141 as automatic.** The officer must be satisfied, and the rules set limits. - **Relying on allowance figures from social media.** Allowances come from rules and notifications outside the Act, and they change. Check the current official version. - **Packing a vehicle into a "baggage" plan.** Section 2 excludes motor vehicles from baggage. ### What to check in the official text Read sections 2, 139 to 142 and clause 70 of the Table to section 156 of the Customs Act, 1969. The baggage rules, the current passenger allowances and any gift or transfer-of-residence scheme are issued separately as rules and notifications. They are not in this corpus, and the figures in them should be confirmed from the official source before travel. ### Frequently asked #### How many phones or how much gold can I bring duty free? The Customs Act does not set item-by-item allowances. Section 141 makes the duty-free pass subject to the limitations, conditions and restrictions in the rules, and those baggage rules and notifications are not in this corpus. This page does not give figures for them. #### Do I have to declare if I think everything is duty free? Section 139(1) requires the owner of any baggage to declare its contents, answer the officer's questions and produce the baggage for examination. A false declaration or a failure to declare is an offence under section 139(2). #### Can I bring a car as part of my baggage? No, not as baggage. Section 2 defines baggage to include unaccompanied baggage but not motor vehicles. Vehicle import schemes for overseas Pakistanis sit in separate rules and notifications that this corpus does not hold. ### Citations - [Customs Act, 1969, section 139 (Declaration by passenger or crew of baggage)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#139-declaration-by-passenger-or-crew-of-baggage), as amended to 2025-06-30: "make a verbal or written declaration of its contents in such manner as may be prescribed by rules to the appropriate officer" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 141 (Bona fide baggage exempt from duty)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#141-bona-fide-baggage-exempt-from-duty), as amended to 2025-06-30: "pass free of duty any article in the baggage of a passenger or a member of the crew in respect of which the said officer is satisfied that it is bona fide meant for the use of such passenger or for making gift." Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 140 (Determination of rate of duty in respect of baggage)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#140-determination-of-rate-of-duty-in-respect-of-baggage), as amended to 2025-06-30: "The rate of duty if any, applicable to baggage shall be the rate in force on the date on which a declaration is made in respect of such baggage under section 139" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 142 (Temporary detention of baggage)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#142-temporary-detention-of-baggage), as amended to 2025-06-30: "detain such article for the purpose of being returned to him on his leaving Pakistan." Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 2 (Definitions)](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#2-definitions), as amended to 2025-06-30: "“baggage” includes unaccompanied baggage but does not include motor vehicles;" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf - [Customs Act, 1969, section 156 (Punishment for offences), Section 156(1), Table, clause 70](https://qanoondigest.com/acts/customs-act-1969/customs-act-1969-2025-06-30#156-punishment-for-offences), as amended to 2025-06-30: "Whoever commits any offence described in column 1 of the Table below shall, in addition to and not in derogation of any punishment to which he may be liable under any other law, be liable to the punishment mentioned against that offence in column 2 thereof" Official source: https://download1.fbr.gov.pk/Docs/20258121285942396CustomsAct1969(June2025)-(12.8.25).pdf --- ## How many days can I stay in Pakistan before I count as a tax resident? Source: https://qanoondigest.com/faq/overseas-pakistanis/how-many-days-tax-resident-pakistan Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Under section 82(a) you become a resident individual if you are in Pakistan for 183 days or more in a tax year, counted in total across all visits. Rule 14 counts arrival and departure days as full days. The old 120-day test was omitted by the Finance Act, 2021, but citizens should also check section 82(d). **Applies to:** Pakistanis living abroad who visit Pakistan for long holidays or several trips a year, and anyone deciding whether they are resident for a tax year. ### What does the law say? **Section 82** of the Income Tax Ordinance, 2001 sets the tests for a resident individual. The day-count test is clause (a): an individual is resident for a tax year if present in Pakistan "for a period of, or periods amounting in aggregate to, one hundred and eighty-three days or more in the tax year". So 182 days leaves you below the line under this clause, and 183 days puts you over it. Two other clauses can make you resident without reaching 183 days: - **Clause (c):** an employee or official of the Federal Government or a Provincial Government posted abroad in the tax year. - **Clause (d):** a citizen of Pakistan who "is not present in any other country for more than one hundred and eighty-two days during the tax year or who is not a resident taxpayer of any other country". Clause (d) matters to every citizen reading this page. Counting your days in Pakistan answers only clause (a). Our separate page on citizens working abroad covers clause (d) in detail. ### How are the days counted? The tax year is the twelve months ending on 30 June (section 74), so tax year 2027 runs from 1 July 2026 to 30 June 2027. Days are counted inside that window only, not over a calendar year or a rolling twelve months. **Rule 14 of the Income Tax Rules, 2002** sets the counting method for section 82: - A part of a day in Pakistan counts as a whole day, including the day you arrive and the day you leave. - Public holidays, days of leave (including sick leave), days when your activity is interrupted by a strike, lock-out or supply delay, and holidays spent in Pakistan around any activity here all count as whole days. - A day or part of a day in Pakistan solely in transit between two places outside Pakistan does not count. ### What happened to the 120-day rule? Before 2021, section 82 had a clause (ab): a person present for 120 days or more in the tax year, who had also been in Pakistan for 365 days or more in the four preceding years, was resident. The footnotes in the consolidated text record that clause (ab) was inserted by the Finance Act, 2019 and omitted by the Finance Act, 2021. An even older 90-day test, clause (b), was omitted by the Finance Act, 2003. Neither applies to tax year 2027. ### Why does resident or non-resident status matter? **Section 81** makes you a resident person for the year if you are a resident individual under section 82, and a non-resident person otherwise. **Section 11** then decides what is taxed: | Status for the tax year | Income taken into account | |---|---| | Resident (section 11(5)) | Pakistan-source and foreign-source income | | Non-resident (section 11(6)) | Pakistan-source income only | Status is decided year by year. Being resident in tax year 2026 says nothing about tax year 2027. ### Worked example (illustrative figures) Kamran works in Jeddah and is a Pakistani citizen. In tax year 2027 he makes three trips to Karachi: 1. **Trip 1:** lands 20 July 2026, leaves 31 August 2026. Counting both the arrival and departure days, that is 12 days in July (20 to 31) plus 31 days in August = **43 days**. 2. **Trip 2:** lands 15 December 2026, leaves 14 February 2027. December 15 to 31 is 17 days, January is 31 days, February 1 to 14 is 14 days = **62 days**. 3. **Trip 3:** lands 1 May 2027, leaves 30 June 2027. May is 31 days, June is 30 days = **61 days**. Total: 43 + 62 + 61 = **166 days**. That is below 183, so clause (a) does not make him resident. He also changed planes in Lahore once for a single day between Jeddah and Kuala Lumpur, which rule 14(2)(c) excludes. Kamran is not finished. His days in Saudi Arabia for the year, and whether he is a resident taxpayer there, still have to be tested under clause (d) before he can treat himself as non-resident. If Kamran had stayed until 16 July 2027 instead of leaving on 30 June, the extra days would fall in tax year 2028 and would not change the tax year 2027 count. ### What if I work from Pakistan during a long visit? Rule 14(2)(b) counts days of leave and holidays in Pakistan as full days, so a long holiday counts the same as working days. Separately, if you work while here, section 101(1)(a) treats salary received from employment exercised in Pakistan as Pakistan-source income, wherever it is paid and whatever your residence status. That is covered on our pages about foreign salary and remote work. ### Common mistakes - **Counting only nights.** Rule 14(2)(a) counts part-days, so arrival and departure days are both included. - **Counting from January.** Section 74 fixes a July to June tax year. - **Relying on the 120-day rule.** It was omitted by the Finance Act, 2021. - **Stopping at the day count.** For citizens, clause (d) of section 82 can make you resident even below 183 days in Pakistan. ### What to check in the official text Read section 82 with its footnotes to see which clauses were omitted and when, and rule 14 of the Income Tax Rules, 2002. The Rules in this corpus are amended to 24 November 2023, so check for later amendments to rule 14 before relying on it. The Ordinance does not say which documents prove your days in Pakistan. ### Frequently asked #### Do the days have to be in one continuous stay? No. Section 82(a) counts a period of, or periods amounting in aggregate to, 183 days or more in the tax year. Several shorter visits within the same July to June year are added together. #### Does the day I land in Pakistan count? Yes. Rule 14(2)(a) of the Income Tax Rules, 2002 counts a part of a day as a whole day, including the day of arrival and the day of departure. A day spent in Pakistan only in transit between two places outside Pakistan does not count. #### Is there still a 120-day rule? No. Clause (ab) of section 82, which made a person resident at 120 days in the year combined with 365 days over the four preceding years, was omitted by the Finance Act, 2021. The consolidated text to 30 June 2026 shows it only as an omitted clause. ### Citations - [Income Tax Ordinance, 2001, section 82 (Resident individual)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#82-resident-individual), as amended to 2026-06-30: "being a citizen of Pakistan is not present in any other country for more than one hundred and eighty-two days during the tax year or who is not a resident taxpayer of any other country." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 81 (Resident and non-resident persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#81-resident-and-non-resident-persons), as amended to 2026-06-30: "a resident individual, resident company or resident association of persons for the year" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 11 (Heads of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#11-heads-of-income), as amended to 2026-06-30: "The income of a non-resident person under a head of income shall be computed by taking into account only amounts that are Pakistan-source income." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 74 (Tax year)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#74-tax-year), as amended to 2026-06-30: "the tax year shall be a period of twelve months ending on the 30th day of June" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 101 (Geographical source of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#101-geographical-source-of-income), as amended to 2026-06-30: "is received from any employment exercised in Pakistan, wherever paid; or" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 14 (Resident individual)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#14-resident-individual), as amended to 2023-11-24: "a part of a day that an individual is present in Pakistan (including the day of arrival in, and the day of departure from, Pakistan) counts as a whole day of such presence" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf --- ## I inherited property in Pakistan while living abroad. Is there tax on inheriting it or on selling it later? Source: https://qanoondigest.com/faq/overseas-pakistanis/inherited-property-pakistan-overseas-heir-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Inheriting produces no gain. Section 79(1)(b) says no gain arises on transmission to a beneficiary on death, including a family settlement after the death, and living abroad does not change that. Selling later is a normal disposal: section 37 taxes the gain, and section 236C collects 2.75% of the price at transfer. **Applies to:** Pakistanis and people of Pakistani origin living abroad who receive a house, plot or flat in Pakistan on a relative's death, and who may sell it later. Pakistan's Income Tax Ordinance, 2001 has no separate inheritance tax. The questions for an heir abroad are whether the transfer on death creates a taxable gain, and what happens when the property is later sold. The answers below follow the Ordinance as amended to 30 June 2026, and the rates are those for tax year 2027 (1 July 2026 to 30 June 2027). ### Is there tax when the property passes to me? No gain arises on the transfer itself. Two provisions work together. **Section 75(2)** says "The transmission of an asset by succession or under a will shall be treated as a disposal of the asset by the deceased at the time asset is transmitted." The Ordinance treats the deceased, not the heir, as the person disposing of the asset. **Section 79(1)(b)** says no gain or loss shall be taken to arise on a disposal "by reason of the transmission of the asset to an executor or beneficiary on the death of a person". The Finance Act, 2026 added an explanation that transmission of immovable property on death "shall also include the transmission of assets by reason of family settlement amongst the family members consequent upon death of the person". Where brothers and sisters settle among themselves who takes which property after a parent dies, that settlement is covered too. ### Does living abroad change the answer? Not for inheritance. Section 79(2) says sub-section (1) does not apply where the person acquiring the asset is non-resident at the time of acquisition, but only "in respect of disposal of an asset as mentioned in clauses (d), (e) and (f) of sub-section (1)". Those clauses deal with compulsory acquisition, company liquidation and dissolution of an association of persons. Transmission on death is clause (b), so an heir in London or Riyadh gets the same treatment as an heir in Peshawar. ### What happens when I sell the inherited property? The sale is an ordinary disposal of Pakistani property. Section 37(1A) charges the gain under the head capital gains at the Division VIII rates, and section 236C requires the registering authority to collect advance tax from the seller at the Division X rate, which is 2.75% of the gross consideration for tax year 2027. **Is the 236C tax final for an overseas heir?** A proviso to section 236C(1) makes the tax a final discharge in lieu of capital gains tax for a non-resident individual holding a POC, NICOP or CNIC "who had acquired the said immovable property through a Foreign Currency Value Account (FCVA) or NRP Rupee Value Account (NRVA)". An heir acquires by transmission, not by payment from those accounts. On a plain reading the proviso does not fit, and the text does not deal with inherited property specifically. The 236C tax then works as an adjustable payment under section 236C(2), and the capital gain is still to be worked out. **Which collection rate applies?** The Tenth Schedule raises the 236C rate to 11.5% for a seller not on the active taxpayers' list. Clause (111AC) of Part IV of the Second Schedule disapplies that increase for a non-resident individual holding a POC or NICOP on transactions taxed under section 236C. That clause does not depend on how the property was acquired, so it can apply to an inherited property. An heir with only a CNIC is not named in it. **What is my cost?** This is where the law is not settled. Section 76(8A), added by the Finance Act, 2026, says that where immovable property "is acquired by an individual through inheritance, the cost of such property in the hands of that individual shall be the fair market value" on transfer to the beneficiary. Section 79(3)(b) says that where clause (b) applies, the heir is treated as acquiring the asset "for a cost equal to the cost of the asset for the person disposing of the asset", which is the deceased's cost. The Ordinance does not say which one governs, and this page does not resolve it. ### Worked example (illustrative figures) Hina lives in Melbourne and holds a NICOP. Her father bought a house in Faisalabad in 2001 for Rs. 3,000,000. He died in September 2026 and the house was transferred to her in December 2026, when its value for stamp duty was Rs. 24,000,000. She sells it in May 2027 for Rs. 30,000,000. 1. On transmission to Hina: no gain under section 79(1)(b). 2. Tax collected under section 236C on the sale: Rs. 30,000,000 x 2.75% = Rs. 825,000. Because Hina is a non-resident NICOP holder, clause (111AC) keeps this at 2.75% even if she is not on the active taxpayers' list. 3. For comparison, a non-resident seller with only a CNIC who is not on the list: Rs. 30,000,000 x 11.5% = Rs. 3,450,000. 4. Gain, reading section 76(8A): Rs. 30,000,000 - Rs. 24,000,000 = Rs. 6,000,000. 5. Gain, reading section 79(3)(b): Rs. 30,000,000 - Rs. 3,000,000 = Rs. 27,000,000. The Division VIII rate on that gain depends on which column applies. Division VIII separates property acquired on or before 30 June 2024 from property acquired after it, and the Ordinance does not say whether an heir's acquisition date is the date of transfer to her or her father's purchase date. This example stops before applying a rate for that reason. Whatever the final figure, the Rs. 825,000 is credited against it under section 236C(2). ### What if the property is sold before it is transferred to the heirs? Section 79(1)(b) also covers transmission to an executor. A sale by an executor, or by all heirs jointly, is still a disposal of Pakistani property, and section 236C applies to the seller or transferor. How the gain is split between several heirs is not addressed in the provisions on this page. ### Common mistakes - **Treating inheritance as a sale by the heir.** Section 75(2) makes it a disposal by the deceased, and section 79(1)(b) removes any gain. - **Assuming non-residents lose the section 79 relief.** Section 79(2) limits it for non-residents only in clauses (d), (e) and (f). - **Assuming the overseas final-tax rule covers inherited property.** That proviso is written for property acquired through an FCVA or NRVA. - **Treating the cost question as settled.** Sections 76(8A) and 79(3)(b) give different answers. ### What to check in the official text Read section 75(2), section 79(1)(b) with its explanation, section 79(2) and (3), section 76(8A), section 37(1A), section 236C(1) and (2), Division X of Part IV and Division VIII of Part I of the First Schedule, rule 1 of the Tenth Schedule, and clause (111AC) of Part IV of the Second Schedule. Whether section 76(8A) applies to deaths before the Finance Act, 2026 took effect is not stated in the consolidated text. Succession certificates, mutation and provincial stamp duty are outside this corpus. ### Frequently asked #### Do I pay tax when my late mother's house in Pakistan passes to me while I live abroad? No gain arises on the transmission. Section 75(2) treats it as a disposal by the deceased, and section 79(1)(b) says no gain or loss arises on transmission to a beneficiary on death. Section 79(2) limits the rule for non-resident acquirers only in clauses (d), (e) and (f), and inheritance is clause (b). #### Is a family settlement among heirs after a death also free of gain? Yes. An explanation added to section 79(1)(b) by the Finance Act, 2026 says transmission of immovable property to a beneficiary on death includes transmission by family settlement among family members after the death. #### Is the 236C tax final when an overseas heir sells an inherited property? The final-tax proviso in section 236C(1) covers a non-resident seller who acquired the property through an FCVA or NRVA. An inherited property was not acquired that way, so on a plain reading the proviso does not fit, and the 236C tax is adjustable against the capital gains tax under section 37. ### Citations - [Income Tax Ordinance, 2001, section 79 (Non-recognition rules)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#79-non-recognition-rules), as amended to 2026-06-30: "shall also include the transmission of assets by reason of family settlement amongst the family members consequent upon death of the person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 75 (Disposal and acquisition of assets)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#75-disposal-and-acquisition-of-assets), as amended to 2026-06-30: "The transmission of an asset by succession or under a will shall be treated as a disposal of the asset by the deceased at the time asset is transmitted." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 76 (Cost)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#76-cost), as amended to 2026-06-30: "Where an immovable property is acquired by an individual through inheritance, the cost of such property in the hands of that individual shall be the fair market value" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 37 (Capital gains)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#37-capital-gains), as amended to 2026-06-30: "be chargeable to tax under the head capital gains at the rates specified in Division VIII of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236C (Advance Tax on sale or transfer of immovable Property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236c-advance-tax-on-sale-or-transfer-of-immovable-property), as amended to 2026-06-30: "shall collect from the seller or transferor advance tax at the rate specified in Division X of Part IV of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division X; Tenth Schedule, rule 1, Table, S. No. 2 (section 236C); Second Schedule, Part IV, clause (111AC)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## If I buy property through a Roshan Digital, FCVA or NRVA account, is the 236K tax final? Source: https://qanoondigest.com/faq/overseas-pakistanis/property-bought-through-fcva-nrva-final-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, if the conditions are met. Section 236K(2) makes the tax adjustable, but its proviso says that for a non-resident individual holding a POC, NICOP or CNIC who acquires the property through a Foreign Currency Value Account or NRP Rupee Value Account, the tax is a final discharge of tax liability. The law names these accounts, not Roshan Digital. **Applies to:** Non-resident Pakistanis holding a POC, NICOP or CNIC who pay for a plot, house or flat in Pakistan from an FCVA or NRVA with an authorised bank. Advance tax on buying property under section 236K of the Income Tax Ordinance, 2001 is normally an adjustable credit. For a non-resident who pays through a Foreign Currency Value Account or an NRP Rupee Value Account, a proviso turns it into a final discharge. This page reads the Ordinance as amended to 30 June 2026, which governs transfers in tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? Section 236K(1) requires the person registering, recording or attesting a transfer to collect advance tax from the purchaser at the Division XVIII rate. Section 236K(2) says the tax "shall be adjustable". A proviso, added by the Finance Act, 2021, then says that if the buyer or transferee is a non-resident individual holding a Pakistan Origin Card (POC), a National ID Card for Overseas Pakistanis (NICOP) or a Computerized National ID Card (CNIC) "who has acquired the said immovable property through a Foreign Currency Value Account (FCVA) or NRP Rupee Value Account (NRVA) maintained with authorized banks in Pakistan under the foreign exchange regulations issued by the State Bank of Pakistan, the tax collected under this section from such persons shall be final discharge of tax liability for such buyer or transferee." In the consolidated PDF the proviso is split across two pages, with unrelated text printed in between. The two parts read together as set out above. ### Adjustable or final: what is the difference? | Point | Normal 236K (adjustable) | Proviso buyer (final) | |---|---|---| | Who | Any buyer | Non-resident POC, NICOP or CNIC holder | | How paid | Any means | Property acquired through an FCVA or NRVA | | Rate in tax year 2027 | 1.25% of fair market value | 1.25% of fair market value | | Effect | Credit against the buyer's income tax for the year | "final discharge of tax liability" for the buyer | Section 169 sets out the general consequences where tax is final under the provisions it lists, such as that "there shall be no refund of the tax collected or deducted" unless it exceeds the amount chargeable. Section 169(1) as consolidated does not list section 236K. The 236K proviso uses its own words, "final discharge of tax liability", and the Ordinance does not spell out further how section 169 applies to it. ### Who is covered, and who is not? The proviso has three conditions: 1. **Non-resident individual.** Residence is tested each tax year under section 82. 2. **Holding a POC, NICOP or CNIC.** Unlike clause (111AC) of the Second Schedule, this proviso names the CNIC as well. 3. **Acquired through an FCVA or NRVA** maintained with an authorised bank under State Bank of Pakistan foreign exchange regulations. The Ordinance does not use the name "Roshan Digital". It names the account types. Whether a given bank product is an FCVA or NRVA is set by banking regulations that are not part of this corpus. ### Worked example (illustrative figures) Hina lives in Dubai, holds a CNIC, and is non-resident for tax year 2027. She pays for a flat in Karachi entirely from her NRVA. The fair market value is Rs. 24,000,000. 1. Rate under Division XVIII: 1.25%. 2. Tax collected: Rs. 24,000,000 x 1.25% = **Rs. 300,000**. 3. Because she is a non-resident CNIC holder who acquired the flat through an NRVA, the proviso to section 236K(2) makes the Rs. 300,000 a final discharge of tax liability for her as buyer. Had she paid from an ordinary rupee account instead, the proviso would not apply, and the Rs. 300,000 would be adjustable under section 236K(2). ### What about filing a return? Clause (114A) of Part IV of the Second Schedule says clause (ae) of section 114(1), which requires a return from every person whose income is subject to final taxation, and section 181 on registration, do not apply to a person maintaining an FCVA, FCBVA, NRVA or NRBVA with authorised banks. Its proviso withdraws that relief where the person has Pakistan-source taxable income other than items it lists. One listed item is "capital gain on disposal of immovable property acquired from proceeds of FCVA or NRVA". Rent from the flat is not in that list. ### Common mistakes - **Assuming final means no tax.** The 1.25% is still collected; the proviso changes what it discharges. - **Paying partly from another account.** The proviso requires the property to be acquired through an FCVA or NRVA. It does not say how a mixed payment is treated. - **Confusing this with the non-ATL relief.** Clause (111AC) of the Second Schedule deals with the non-ATL rate and names only POC and NICOP holders. - **Looking for "Roshan Digital" in the law.** The Ordinance uses the account names FCVA and NRVA. ### What to check in the official text Read section 236K(1) and (2) with its proviso, Division XVIII of Part IV of the First Schedule, section 169, and clause (114A) of Part IV of the Second Schedule in the official PDF. State Bank of Pakistan foreign exchange regulations defining these accounts are outside this corpus. Provincial stamp duty and registration fees are separate and are not covered here. ### Frequently asked #### Is the Roshan Digital Account named in the Income Tax Ordinance? No. The proviso to section 236K(2) names a Foreign Currency Value Account (FCVA) and an NRP Rupee Value Account (NRVA) maintained with authorised banks under State Bank of Pakistan foreign exchange regulations. Whether a particular bank product is one of those accounts is a banking question outside this corpus. #### What is the difference between adjustable and final 236K tax? Section 236K(2) makes the tax adjustable, meaning it counts as a credit against the buyer's income tax liability for the year. Under the proviso, for a qualifying non-resident buying through an FCVA or NRVA, the tax collected is instead a final discharge of tax liability for that buyer. #### Does a CNIC holder qualify for the final treatment? Yes, on the words of the proviso. It covers a non-resident individual holding a Pakistan Origin Card, a National ID Card for Overseas Pakistanis or a Computerized National ID Card, provided the property is acquired through an FCVA or NRVA. #### How much is the 236K tax in tax year 2027? Division XVIII of Part IV of the First Schedule sets 1.25% of the fair market value of the immovable property. The proviso changes whether the tax is final, not the rate. ### Citations - [Income Tax Ordinance, 2001, section 236K (Advance tax on purchase or transfer of immovable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236k-advance-tax-on-purchase-or-transfer-of-immovable-property), as amended to 2026-06-30: "who has acquired the said immovable property through a Foreign Currency Value Account (FCVA) or NRP Rupee Value Account (NRVA) maintained with authorized banks in Pakistan under the foreign exchange regulations issued by the State Bank of Pakistan, the tax collected under this section from such persons shall be final discharge of tax liability for such buyer or transferee." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division XVIII (Advance tax on purchase of immovable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "there shall be no refund of the tax collected or deducted" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clause (114A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## I am moving back to Pakistan for good. Is my foreign income taxed in the year I return? Source: https://qanoondigest.com/faq/overseas-pakistanis/returning-expatriate-foreign-income-exemption Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Not at first, if you qualify. Section 51(1) exempts foreign-source income of a citizen who was not resident in any of the four preceding tax years. The exemption covers the tax year in which you become resident under section 82 and the next tax year. After that, section 11(5) taxes a resident on foreign-source income too. **Applies to:** Pakistani citizens returning to live in Pakistan after working or living abroad, who still have income from outside Pakistan. A Pakistani citizen who comes home after at least four tax years as a non-resident gets two tax years in which foreign-source income is exempt. The rule is section 51(1) of the Income Tax Ordinance, 2001. Whether and when it starts depends on the residence test in section 82. This page reads the Ordinance as amended to 30 June 2026. A tax year runs from 1 July to 30 June, so tax year 2027 is 1 July 2026 to 30 June 2027. ### What does the law say? Section 51(1) says any foreign-source income derived by a citizen of Pakistan in a tax year, who was not a resident individual in any of the four tax years preceding the tax year in which the individual became a resident, "shall be exempt from tax under this Ordinance in the tax year in which the individual became a resident individual and in the following tax year". Three conditions come out of that text: 1. You are a citizen of Pakistan. 2. You were not resident in any of the four tax years before the year you became resident. 3. The income is foreign-source. The exemption then covers two tax years: the year you became resident and the next one. ### When do I become resident? Section 82 decides residence for each tax year as a whole. An individual is resident for a tax year if the individual: | Clause | Test | |---|---| | (a) | is present in Pakistan for 183 days or more in total in the tax year | | (c) | is a Federal or Provincial Government employee or official posted abroad in the tax year | | (d) | being a citizen, is not present in any other country for more than 182 days in the tax year, or is not a resident taxpayer of any other country | The Ordinance has no split-year rule. If you are resident for a tax year, you are resident for the whole of it, including the months before you arrived. Section 51(1) matters here, because without it foreign income earned abroad earlier in that tax year would fall into the computation. ### What happens after the two years? Section 11(5) computes a resident's income from both Pakistan-source and foreign-source amounts. Once the two exempt years end, foreign income such as rent from a flat abroad, profit on a foreign bank account or a foreign pension is included in your income under the relevant head. Separately, section 116A requires a resident individual with foreign income of at least USD 10,000 or foreign assets of at least USD 100,000 to furnish a foreign income and assets statement. Section 116A does not say that income exempt under section 51 is left out of the USD 10,000 test, and the foreign assets test applies in any case. The law is silent on how the two provisions interact. ### Worked example (illustrative figures) Bilal, a Pakistani citizen, worked in Dubai from 2019. He was non-resident in tax years 2023, 2024, 2025 and 2026. He moves back to Lahore on 1 August 2026 and stays. He keeps a flat in Dubai that earns rent equal to Rs. 2,400,000 a year, and starts a job in Lahore. 1. Tax year 2027 (1 July 2026 to 30 June 2027): he is in Pakistan well over 183 days, so he is resident under section 82(a). 2. Four preceding tax years (2023 to 2026): all non-resident, so the section 51(1) condition is met. 3. Tax years 2027 and 2028: the Dubai rent of Rs. 2,400,000 a year, and his July 2026 Dubai salary, are foreign-source income and exempt under section 51(1). 4. Tax year 2029 onwards: under section 11(5) the Dubai rent is included in his income. 5. His Lahore salary is Pakistan-source and is taxed from the start. Section 51 does not touch it. ### What if I spent a long spell in Pakistan before returning? Suppose Hina lived in Jeddah but spent 200 days in Pakistan in tax year 2025 caring for a parent. Under section 82(a) she was resident for tax year 2025. If she moves back in tax year 2027, the four preceding years are 2023 to 2026, and 2025 was a resident year. On the text of section 51(1), she does not qualify. Section 82(d) can also make a citizen resident without 183 days in Pakistan, for example where the citizen is not a resident taxpayer of any other country. A year of residence under clause (d) counts against the four-year condition in the same way. ### What about leaving Pakistan? Section 51(2) deals with the opposite move. Where a citizen leaves Pakistan during a tax year and remains abroad during that year, salary earned outside Pakistan in that year is exempt. ### Common mistakes - **Treating the exemption as covering all income.** It covers foreign-source income only. - **Counting calendar years.** Section 51 counts tax years, which run July to June. - **Assuming a year abroad is a non-resident year.** Section 82(d) can make a citizen resident even while living abroad. ### What to check in the official text Read sections 51, 82, 11 and 116A in full. The rules on what counts as foreign-source income, and any relief for foreign tax paid once the exemption ends, are in other parts of the Ordinance not covered on this page. ### Frequently asked #### How long does the returning expatriate exemption last? Section 51(1) covers two tax years: the tax year in which you become a resident individual and the following tax year. From the third tax year, section 11(5) brings your foreign-source income into the computation like any other resident's. #### I visited Pakistan for a long stay two years before moving back. Does that matter? It can. Section 51(1) requires that you were not a resident individual in any of the four tax years before the year you became resident. If that long stay made you resident for one of those years under section 82, for example 183 days or more in Pakistan, the condition is not met on the text. #### Is my new Pakistani salary also exempt? No. Section 51(1) exempts only foreign-source income. Salary from an employer in Pakistan, rent from Pakistani property and other Pakistan-source income are taxed in the normal way from the day you earn them. ### Citations - [Income Tax Ordinance, 2001, section 51 (Foreign-source income of returning expatriates)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#51-foreign-source-income-of-returning-expatriates), as amended to 2026-06-30: "shall be exempt from tax under this Ordinance in the tax year in which the individual became a resident individual and in the following tax year." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 82 (Resident individual)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#82-resident-individual), as amended to 2026-06-30: "being a citizen of Pakistan is not present in any other country for more than one hundred and eighty-two days during the tax year or who is not a resident taxpayer of any other country." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 11 (Heads of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#11-heads-of-income), as amended to 2026-06-30: "The income of a resident person under a head of income shall be computed by taking into account amounts that are Pakistan-source income and amounts that are foreign-source income." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 116A (Foreign income and assets statement)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#116a-foreign-income-and-assets-statement), as amended to 2026-06-30: "shall furnish a statement, hereinafter referred to as the foreign income and assets statement" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is the money I send home to my family taxable for them in Pakistan? Source: https://qanoondigest.com/faq/overseas-pakistanis/is-money-sent-home-to-family-taxable Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Generally no, if the sender is a relative and the money comes through a bank. Section 39(1)(la) taxes gifts as income but excludes gifts from a relative as defined in section 85(5). Section 111(4) also stops FBR treating up to Rs. 5 million a tax year of banked foreign remittance as unexplained income, if a bank certificate is produced. **Applies to:** Pakistanis working abroad who send money home, and the parents, spouses, children and other relatives in Pakistan who receive it. Money a Pakistani working abroad sends to family in Pakistan runs into two parts of the Income Tax Ordinance, 2001. Section 39 decides whether a gift counts as the recipient's income. Section 111 decides whether FBR can add money to someone's income because its source is not explained. This page reads both as they stand in the Ordinance amended to 30 June 2026, which governs tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say about gifts? Section 39(1) charges "Income from Other Sources" on income of every kind not covered by another head. Clause (la) of that sub-section adds, subject to sub-section (3), "any amount or fair market value of any property received without consideration or received as gift, other than gift received from" a relative as defined in sub-section (5) of section 85. So the starting rule is that a gift is income of the person who receives it. The exception is a gift from a relative. ### Who counts as a relative? Section 85(5) defines a "relative" of an individual as: - "an ancestor, a descendant of any of the grandparents, or an adopted child, of the individual, or of a spouse of the individual"; or - a spouse of the individual or of any person in the first group. That definition is wider than parents and children. Read as written, it covers: | Relationship to the sender | Why it is inside section 85(5) | |---|---| | Parents and grandparents | Ancestors of the individual | | Children and grandchildren | Descendants of the individual's grandparents | | Brothers, sisters, uncles, aunts, cousins, nephews, nieces | Descendants of the individual's grandparents | | Wife or husband | Spouse of the individual | | Parents-in-law, brothers-in-law, sisters-in-law | Ancestors or descendants of the grandparents of the spouse | | Spouses of any of the above | Spouse of a person in the first group | | Adopted child | Named expressly | A footnote in the consolidated text records that the Finance Act, 2021 replaced a narrower list ("grandparents, parents, spouse, brother, sister, son or a daughter") in clause (la) with this cross-reference to section 85(5). ### What about gifts and loans not sent through a bank? Section 39(3) is a separate rule. It says any amount received as a loan, advance, deposit for issuance of shares or gift by a person in a tax year from another person (not a banking company or financial institution) "otherwise than by a crossed cheque drawn on a bank or through a banking channel or through digital means" from a person holding a National Tax Number is treated as income from other sources for the year it is received. Section 39(4) excludes only advance payments for goods or services. Two points about sub-section (3) as written: - It contains no exception for relatives. The relative exclusion sits in clause (la), and clause (la) is itself stated to be "subject to sub-section (3)". - The words "from a person holding a National Tax Number" follow the list of payment methods. The text does not say in terms how this applies where the sender lives abroad and has no National Tax Number. This page does not resolve that point. What the text does make clear is that cash handed over in person sits outside the banking-channel wording of section 39(3). ### How does section 111(4) protect banked remittances? Section 111(1) lets the Commissioner add to a person's income any investment, money, valuable article or expenditure whose source the person does not explain satisfactorily. Section 111(4) switches that off for one kind of money: foreign exchange remitted from outside Pakistan through normal banking channels, not exceeding five million rupees in a tax year, that a scheduled bank has encashed into rupees, where the bank's certificate is produced. The Explanation to section 111(4) says remittances through money service bureaus, exchange companies or money transfer operators are deemed to be through normal banking channels. The sub-section does not limit the protection to money a person sends to themselves. Read as written, it covers a family member in Pakistan who receives the remittance, up to the stated amount in a tax year. ### Worked example (illustrative figures) Imran works in Riyadh. In tax year 2027 he sends his father in Sialkot Rs. 150,000 a month through a bank, and sends his cousin in Gujranwala Rs. 400,000 once through an exchange company, to help with a wedding. 1. Father: 12 x Rs. 150,000 = Rs. 1,800,000. A son is a descendant of the father's grandparents, so the gift is from a relative and falls outside section 39(1)(la). 2. Cousin: Rs. 400,000. A first cousin shares Imran's grandparents, so this is also a gift from a relative under section 85(5). 3. Section 111(4) for the father: Rs. 1,800,000 is below Rs. 5,000,000, so, with the bank's encashment certificate, section 111(1) does not apply to it. 4. Section 111(4) for the cousin: Rs. 400,000 through an exchange company is deemed banked under the Explanation, and is also below Rs. 5,000,000. If Imran had instead given his cousin Rs. 400,000 in cash on a visit, section 39(3) would be the provision to read, because the money did not come by crossed cheque, banking channel or digital means. ### What if the person receiving is not a relative? A friend, a former colleague or a fiancee who is not yet a spouse is outside section 85(5). A gift to such a person is inside section 39(1)(la) as income from other sources of the recipient, whatever channel it comes through. Section 111(4) does not change that, because it only stops section 111(1) from applying. It does not exempt the income under section 39. ### Common mistakes - **Assuming only parents and children count.** Since the Finance Act, 2021 the test is section 85(5), which reaches cousins, in-laws and their spouses. - **Treating section 111(4) as unlimited.** The protection stops at five million rupees in a tax year and needs the bank certificate. - **Assuming a relative's gift is safe in cash.** Section 39(3) is not qualified by the relative exception. - **Reading section 111(4) as a general exemption.** It removes the unexplained-income rule for that money. It does not say the money is exempt under any other provision. ### What to check in the official text Read section 39(1)(la), (3) and (4), section 85(5), and section 111(1) and (4) with its Explanation in the official PDF of the Ordinance amended to 30 June 2026. The encashment certificate is issued by the bank; its form is not part of this corpus. Where the recipient also files a wealth statement, the way the money is shown there is a separate question not covered on this page. ### Frequently asked #### Does my mother pay income tax on the money I send her every month? Section 39(1)(la) treats a gift as income from other sources, but it excludes a gift received from a relative as defined in section 85(5). A mother is an ancestor of her child, so a child is her relative under that definition, and a gift from the child falls outside clause (la). #### Is a gift to my cousin or my brother-in-law also covered? Section 85(5) defines a relative to include a descendant of any of the grandparents of the individual or of the individual's spouse, and the spouse of any such person. A first cousin is a descendant of a grandparent, and a sibling of your spouse is a descendant of your spouse's grandparents, so both fall inside the definition as written. #### What does section 111(4) protect, and is there a limit? Section 111(4) says section 111(1) does not apply to foreign exchange remitted from outside Pakistan through normal banking channels up to five million rupees in a tax year, where a scheduled bank has encashed it into rupees and its certificate is produced. Amounts above that figure are not covered by the sub-section. #### Does money sent through an exchange company count as a banking channel? Yes. The Explanation to section 111(4) says remittance through money service bureaus, exchange companies or money transfer operators is deemed to be foreign exchange remitted through normal banking channels for that sub-section. ### Citations - [Income Tax Ordinance, 2001, section 39 (Income from other sources)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#39-income-from-other-sources), as amended to 2026-06-30: "any amount or fair market value of any property received without consideration or received as gift, other than gift received from" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 85 (Associates)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#85-associates), as amended to 2026-06-30: "an ancestor, a descendant of any of the grandparents, or an adopted child, of the individual, or of a spouse of the individual" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 111 (Unexplained income or assets)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#111-unexplained-income-or-assets), as amended to 2026-06-30: "Sub-section (1) does not apply to any amount of foreign exchange remitted from outside Pakistan through normal banking channels not exceeding five million Rupees in a tax year that is en-cashed into rupees by a scheduled bank and a certificate from such bank is produced to that effect." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is the profit on my Roshan Digital Account or NRVA deposit taxable in Pakistan? Source: https://qanoondigest.com/faq/overseas-pakistanis/roshan-digital-nrva-profit-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Usually not. Clause (78) of Part I of the Second Schedule exempts profit on debt on non-residents' foreign currency accounts under State Bank schemes. Clause (79) exempts profit on an NRVA or NRBVA where every deposit comes from foreign exchange remitted into it. If a condition fails, section 152(2) applies, at 10% under clause (5A) of Part II. **Applies to:** Non-resident Pakistanis and other non-residents holding a foreign currency account, an NRVA or an NRBVA with a bank in Pakistan, including accounts opened through the Roshan Digital channel. Profit on an account opened by a non-resident under a State Bank of Pakistan scheme is, in most cases, exempt from income tax under the Second Schedule to the Income Tax Ordinance, 2001. The exemption depends on the type of account and, for rupee accounts, on where the money came from. This page reads the Ordinance as amended to 30 June 2026, so it describes tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? Two clauses in Part I of the Second Schedule do the work. **Clause (78)** exempts profit on debt derived from foreign currency accounts held with authorised banks in Pakistan, or certificates of investment issued by investment banks, under any foreign currency account scheme introduced by the State Bank of Pakistan. The exemption is for "non-resident individuals, non-resident association of persons and non-resident companies". **Clause (79)** exempts profit on debt from a rupee account with a scheduled bank held by a person maintaining a Non-Resident Pakistani Rupee Value Account (NRVA) or Non-Resident Business Value Account (NRBVA) under the State Bank scheme. It has one condition: the deposits must be "made exclusively from foreign exchange remitted into the said account". The Finance Act, 2026 rewrote clause (79). The earlier text limited it to a non-resident individual holding a POC, NICOP or CNIC. The current text refers to the account holder and the account type instead. The Ordinance does not use the name "Roshan Digital Account". It describes accounts by State Bank scheme. Whether a given account is an FCVA, NRVA or NRBVA is a banking question outside this corpus. ### What happens if the exemption does not apply? For a non-resident, profit on debt paid by a bank moves out of section 151. Section 151(2) says section 151 does not apply to profit on debt that is subject to section 152(2). Section 152(2) requires every person paying an amount to a non-resident to deduct tax at the rate in Division II of Part III of the First Schedule, which is 20% of the gross amount. Clause (5A) of Part II of the Second Schedule reduces that. For profit on debt payable to a non-resident with no permanent establishment in Pakistan, "other than those covered under clauses (78) and (79)", the rate is 10% of the gross amount. The proviso to clause (5A) makes the deduction a final tax only for investments in debt instruments and government securities made through a Special Rupee Convertible Account. It does not say the same for an NRVA or FCVA. For comparison, a resident's ordinary bank deposit falls under section 151(1)(b). Division IA of Part III of the First Schedule sets 20% of the profit paid by a banking company on an account or deposit. ### Does the non-filer rate apply? No. Clause (111AB) of Part IV of the Second Schedule says the special provisions for persons not on the Active Taxpayers List, including rule 1 of the Tenth Schedule, do not apply to a Foreign Currency Value Account (FCVA), Foreign Currency Business Value Account (FCBVA), NRVA or NRBVA with authorised banks under State Bank foreign exchange regulations. Rule 1 of the Tenth Schedule is the rule that increases withholding rates by one hundred percent for persons not on the Active Taxpayers List. So the account holder's filing status does not raise the deduction on these accounts. ### Worked example (illustrative figures) Two brothers in Dubai each hold an NRVA with a bank in Karachi. Each earns Rs. 500,000 of profit in tax year 2027. **Asad** funded his account only with remittances from his UAE salary. 1. Clause (79) condition met: deposits came exclusively from remitted foreign exchange. 2. Profit exempt. Tax deducted: Rs. 0. **Kamran** remitted money too, but also transferred Rs. 1,000,000 into the NRVA from a rupee account in Lahore. 1. Clause (79) condition not met, because not every deposit was remitted foreign exchange. 2. He is non-resident with no permanent establishment, so section 152(2) applies at the clause (5A) rate of 10%. 3. Tax deducted: 500,000 x 10% = Rs. 50,000. 4. Clause (111AB) means that figure is not doubled even though he is not on the Active Taxpayers List. ### What if I move back to Pakistan? Clause (78) is limited to non-residents. Clause (79) is tied to maintaining an NRVA or NRBVA under the State Bank scheme. The Ordinance does not say what happens to profit accrued in the year your residence status changes. Whether you are resident is decided separately for each tax year, which this page does not cover. ### Common mistakes - **Assuming every NRVA is automatically exempt.** Clause (79) has a funding condition. One local rupee deposit can defeat it. - **Applying the resident 20% bank rate to a non-resident.** Section 151(2) sends a non-resident's profit to section 152(2), and clause (5A) sets 10%. - **Expecting the Tenth Schedule increase.** Clause (111AB) switches it off for these accounts. ### What to check in the official text Read clauses (78) and (79) of Part I, clause (5A) of Part II and clause (111AB) of Part IV of the Second Schedule, and section 152 in full, including sub-section (3). The State Bank of Pakistan scheme documents that define the FCVA, NRVA and NRBVA, and the terms of any Roshan Digital product, are outside this corpus. ### Frequently asked #### Does the law mention the Roshan Digital Account by name? No. The Ordinance speaks of foreign currency accounts under State Bank of Pakistan schemes, and of the Non-Resident Rupee Value Account (NRVA) and Non-Resident Business Value Account (NRBVA). Whether your account is one of these depends on the State Bank scheme under which the bank opened it. #### I topped up my NRVA once from a rupee account in Pakistan. Does that matter? It can. Clause (79) exempts profit only where the deposits in the account are made exclusively from foreign exchange remitted into it. A local rupee deposit breaks that condition on the text, and the profit then falls under section 152(2), at 10% for a non-resident with no permanent establishment under clause (5A) of Part II. #### Will the bank deduct double tax because I am not on the Active Taxpayers List? Not on these accounts. Clause (111AB) of Part IV switches off rule 1 of the Tenth Schedule, which raises withholding rates for persons not on the Active Taxpayers List, for an FCVA, FCBVA, NRVA or NRBVA. ### Citations - [Income Tax Ordinance, 2001, Second Schedule, Part I, clauses (78) and (79)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 151 (Profit on debt)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#151-profit-on-debt), as amended to 2026-06-30: "This section shall not apply to any profit on debt that is subject to sub- section (2) of section 152." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 152 (Payments to non-residents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#152-payments-to-non-residents), as amended to 2026-06-30: "Subject to sub-section (3), every person paying an amount to a non-resident person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part II, clause (5A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clause (111AB)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division IA (Profit on Debt) and Division II (Payments to non-residents), paragraph (2)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is the salary I earn abroad taxable in Pakistan? Source: https://qanoondigest.com/faq/overseas-pakistanis/is-foreign-salary-taxable-in-pakistan Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Usually not. Section 11(6) taxes a non-resident only on Pakistan-source income, and section 101(1) treats salary for work done abroad as foreign-source unless a Pakistani government pays it. Section 51(2) exempts foreign salary in the year a citizen leaves, and section 102 exempts a resident's foreign salary taxed abroad. **Applies to:** Pakistanis employed outside Pakistan by foreign or Pakistani employers, including people who moved abroad during the tax year. ### What does the law say? Whether Pakistan taxes a salary earned abroad turns on two questions: where the salary comes from, and whether you are resident for the tax year. **Source.** Section 101(1) of the Income Tax Ordinance, 2001 makes salary Pakistan-source income only to the extent it: - is "received from any employment exercised in Pakistan, wherever paid", or - is paid by or on behalf of the Federal Government, a Provincial Government or a Local Government in Pakistan, wherever the employment is exercised. Section 101(16) then says anything that is not Pakistan-source is foreign-source. Salary from a Dubai hospital for nursing work in Dubai is foreign-source. **Residence.** Section 11(6) computes a non-resident's income using only Pakistan-source amounts. Section 11(5) brings a resident's foreign-source income in as well. Residence is decided under section 82: 183 days or more in Pakistan in the tax year, being posted abroad as federal or provincial government staff, or, for a citizen, not being present in any other country for more than 182 days or not being a resident taxpayer of any other country. ### How do the pieces fit together? | Your position for the tax year | Salary for work done abroad | |---|---| | Non-resident, private or foreign employer | Foreign-source, not taken into account (section 11(6)) | | Non-resident, paid by a Pakistani government | Pakistan-source under section 101(1)(b) | | Citizen who left Pakistan during the year and stayed abroad | Salary earned outside Pakistan in that year is exempt (section 51(2)) | | Resident, foreign income tax paid on the salary | Exempt under section 102(1) | | Resident, no foreign income tax paid | Taken into account under section 11(5); section 102 does not help | Section 102(2) explains when foreign tax counts as paid: where the employer withheld it from the salary and paid it to the revenue authority of the country in which the employment was exercised. ### Worked example (illustrative figures) Zubair, an accountant from Faisalabad, worked for a Pakistani firm until he left for Riyadh on 1 September 2026. From then until 30 June 2027 he worked for a Saudi company and did not return to Pakistan. 1. **Salary from 1 July to 31 August 2026.** Rs. 180,000 a month from the Faisalabad firm, Rs. 360,000 in total. This was for employment exercised in Pakistan, so it is Pakistan-source under section 101(1)(a) and remains taxable in tax year 2027. 2. **Salary from Riyadh, September 2026 to June 2027.** He is a citizen who left Pakistan during tax year 2027 and remained abroad for the rest of that year, so section 51(2) exempts the salary he earned outside Pakistan during that year. 3. **Residence check.** Counting 1 July to 1 September 2026, he was in Pakistan for 63 days, below the 183 of section 82(a). Whether section 82(d) makes him resident depends on his days in Saudi Arabia and his tax status there. Section 51(2) does not depend on that answer, because its text contains no residence condition. 4. **Tax year 2028.** Section 51(2) covers only the year he left. From 1 July 2027, his Saudi salary is outside Pakistani tax if he is non-resident (section 11(6)), and if he were resident it would need section 102 or would be taken into account. ### What if I move back to Pakistan? Section 51(1) gives a separate exemption to a returning citizen. If you were not a resident individual in any of the four tax years before the year you become resident, your foreign-source income is exempt in that year and the following tax year. Our page on returning expatriates covers this. ### What if my employer is Pakistani but I work abroad? Section 101(1)(a) looks at where the employment is exercised, not who pays. Our separate page on remote work for a Pakistani employer covers how employer withholding interacts with that rule. ### Common mistakes - **Assuming remittance makes salary taxable.** The source rule in section 101(1)(a) applies "wherever paid". - **Assuming a Pakistani passport makes foreign salary taxable.** Citizenship matters only through section 82(d) and section 51, and a resident still has section 102. - **Forgetting the government salary rule.** Salary paid by a Pakistani government is Pakistan-source under section 101(1)(b) wherever the work is done. - **Applying section 51(2) to the following year.** It covers only the tax year in which you left Pakistan. ### What to check in the official text Read section 101(1) and (16), section 11(5) and (6), section 51 and section 102. Section 102 depends on "foreign income tax", which rule 15 of the Income Tax Rules, 2002 defines. Tax treaties between Pakistan and other countries are outside this corpus. ### Frequently asked #### Does sending my salary home to Pakistan make it taxable? Section 101(1)(a) looks at where the employment is exercised, wherever the salary is paid. Salary for work done abroad does not become Pakistan-source income because it is remitted to a Pakistani bank account. Whether other rules apply to remittances is covered on our separate page about money sent home. #### I moved to Qatar in October. Is my salary there for the rest of the tax year taxable? Section 51(2) exempts salary a citizen earns outside Pakistan in a tax year in which they leave Pakistan and remain abroad for the rest of that year. Salary from your Pakistani job before you left is still Pakistan-source under section 101(1)(a). #### I am resident in Pakistan but paid in a country with no income tax. Is section 102 available? Section 102 exempts foreign salary only if foreign income tax was paid on it. If none was paid, the section does not apply, and as a resident your foreign-source salary is taken into account under section 11(5). ### Citations - [Income Tax Ordinance, 2001, section 11 (Heads of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#11-heads-of-income), as amended to 2026-06-30: "The income of a non-resident person under a head of income shall be computed by taking into account only amounts that are Pakistan-source income." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 101 (Geographical source of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#101-geographical-source-of-income), as amended to 2026-06-30: "An amount shall be foreign-source income to the extent to which it is not Pakistan-source income." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 51 (Foreign-source income of returning expatriates)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#51-foreign-source-income-of-returning-expatriates), as amended to 2026-06-30: "any income chargeable under the head “Salary” earned by him outside Pakistan during that year shall be exempt from tax under this Ordinance." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 102 (Foreign source salary of resident individuals)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#102-foreign-source-salary-of-resident-individuals), as amended to 2026-06-30: "Any foreign-source salary received by a resident individual shall be exempt from tax if the individual has paid foreign income tax in respect of the salary." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Rules, 2002, section 15 (Foreign income tax)](https://qanoondigest.com/rules/income-tax-rules-2002/income-tax-rules-2002-2023-11-24#15-foreign-income-tax), as amended to 2023-11-24: "A foreign levy is a foreign income tax if the following conditions are satisfied, namely:-" Official source: https://download1.fbr.gov.pk/Docs/2023112416114319348IncomeTaxRules2002AmendedUpto24.11.2023.pdf - [Income Tax Ordinance, 2001, section 82 (Resident individual)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#82-resident-individual), as amended to 2026-06-30: "being a citizen of Pakistan is not present in any other country for more than one hundred and eighty-two days during the tax year or who is not a resident taxpayer of any other country." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Do I have to declare my foreign bank accounts and property abroad in a Pakistani wealth statement? Source: https://qanoondigest.com/faq/overseas-pakistanis/declare-foreign-assets-wealth-statement Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, if you are a resident individual filing a return. Section 116 requires the wealth statement to show your assets including foreign assets and liabilities including foreign liabilities. Section 116A adds a separate foreign income and assets statement where foreign income is at least USD 10,000 or foreign assets at least USD 100,000. Section 111 can tax unexplained foreign assets. **Applies to:** Individuals who file an income tax return in Pakistan and own bank accounts, property or other assets outside Pakistan, including returning expatriates. A resident individual who files a return in Pakistan must show foreign assets and liabilities in the wealth statement. The Income Tax Ordinance, 2001 has said so expressly since the Finance Act, 2024 added the words "including foreign assets" to section 116. A second statement under section 116A applies above two dollar thresholds. This page reads the Ordinance as amended to 30 June 2026. ### What does the law say? **Section 116(2)** requires every resident taxpayer being an individual who files a return for a tax year to furnish a wealth statement and wealth reconciliation statement with that return. Members of an association of persons also file one with the association's return. **Section 116(1)** describes the contents. The statement gives the person's total "assets including foreign assets and liabilities including foreign liabilities", the same for a spouse (only if dependent), minor children and other dependents, assets including foreign assets transferred to others and the consideration, total expenditure, and the reconciliation of wealth. Section 116(1) also lets the Commissioner require any individual to furnish a wealth statement by written notice. **Section 116A(1)** adds a separate foreign income and assets statement for a resident individual who has either: | Test | Threshold in section 116A(1) | |---|---| | Foreign income | not less than ten thousand United States dollars | | Foreign assets | value not less than one hundred thousand United States dollars | That statement gives foreign assets and liabilities as on the last day of the tax year, foreign assets transferred during the year with the consideration, and particulars of foreign income and the expenditure wholly and necessarily incurred to earn it. Under section 116A(2), the Commissioner can issue a written notice, with recorded reasons, to anyone who should have filed it but did not. ### Why does residence matter? Section 11(5) computes a resident person's income from both Pakistan-source and foreign-source amounts. Section 11(6) limits a non-resident to Pakistan-source income only. The automatic duties in sections 116(2) and 116A(1) are both written for resident individuals. A non-resident who files a return is not named in either, although the Commissioner's notice power in section 116(1) covers any individual. ### What if a foreign asset is not declared? Section 111(1) applies where a person owns money, an investment or a valuable article and offers no explanation of its nature and source, or an explanation the Commissioner does not find satisfactory. The unexplained amount is added to income under the head Income from Other Sources. For assets outside Pakistan, section 111(2)(ii) includes the amount in the tax year immediately preceding the year in which the asset is discovered by the Commissioner. Section 111(2A) defines the year of discovery as the year in which the Commissioner issues a notice asking the person to explain the source. The Explanation to section 111(2) says that an explanation based on sources from the year the asset was actually acquired will not be rejected merely because those sources do not belong to the year of inclusion. ### Worked example (illustrative figures) Farah worked in Manchester for eight years and returned to Islamabad. She is resident for tax year 2027 and files a return. She owns a flat in Manchester worth USD 150,000 and a UK savings account. 1. Section 116(2): she files a wealth statement with her return. Under section 116(1)(a), the Manchester flat and the UK account are listed with her Pakistani assets. 2. Section 116A(1): her foreign assets of USD 150,000 are above the USD 100,000 threshold, so she also files the foreign income and assets statement, even if her foreign income is below USD 10,000. Now suppose she had left out a separate account in Dubai holding Rs. 8,000,000. In tax year 2029 the Commissioner issues a notice asking her to explain it. 1. Year of discovery under section 111(2A): tax year 2029. 2. Year of inclusion under section 111(2)(ii): the immediately preceding year, tax year 2028. 3. If she cannot satisfactorily explain the source, Rs. 8,000,000 is added to her tax year 2028 income under Income from Other Sources. ### Common mistakes - **Leaving foreign assets out because the income was earned abroad.** Section 116(1) asks for foreign assets whatever their source. - **Assuming the wealth statement replaces section 116A.** They are separate statements with separate triggers. - **Converting at a guessed rate.** Section 116A states its thresholds in US dollars. The Ordinance text read here does not state a conversion method; check the prescribed form. ### What to check in the official text Read sections 116 and 116A, including the prescribed forms referred to in both, and section 111 in full, including sub-section (4) on remittances. Penalties for not filing these statements are not covered on this page. The FBR return forms and portal steps are outside this corpus. ### Frequently asked #### I am non-resident but I file a return for my rent in Pakistan. Must I file a wealth statement? Section 116(2) places the automatic duty on every resident individual who files a return. The Ordinance does not extend that duty to non-residents by default, but section 116(1) lets the Commissioner require any individual, by written notice, to furnish a wealth statement that includes foreign assets and liabilities. #### Is the foreign income and assets statement the same as the wealth statement? No. Section 116A is a separate statement for resident individuals with foreign income of at least USD 10,000 or foreign assets worth at least USD 100,000. It asks for foreign assets and liabilities at the end of the tax year, foreign assets transferred during the year, and particulars of foreign income and related expenditure. #### What happens if FBR finds a foreign account I did not declare? If you cannot satisfactorily explain its source, section 111(1) adds its value to your income under Income from Other Sources. For assets outside Pakistan, section 111(2)(ii) and (2A) put that income in the tax year before the year in which the Commissioner issued the notice asking you to explain it. ### Citations - [Income Tax Ordinance, 2001, section 116 (Wealth statement)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#116-wealth-statement), as amended to 2026-06-30: "assets including foreign assets and liabilities including foreign liabilities" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 116A (Foreign income and assets statement)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#116a-foreign-income-and-assets-statement), as amended to 2026-06-30: "Every resident taxpayer being an individual having foreign income of not less than ten thousand United States dollars or having foreign assets with a value of not less than one hundred thousand United States dollars shall furnish a statement" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 111 (Unexplained income or assets)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#111-unexplained-income-or-assets), as amended to 2026-06-30: "in the tax year immediately preceding the tax year in which the investment, money, valuable article or expenditure is discovered by the Commissioner and is situated or incurred outside Pakistan" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 11 (Heads of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#11-heads-of-income), as amended to 2026-06-30: "The income of a resident person under a head of income shall be computed by taking into account amounts that are Pakistan-source income and amounts that are foreign-source income." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Should I become a filer and join the Active Taxpayers List even though I have no income in Pakistan? Source: https://qanoondigest.com/faq/overseas-pakistanis/should-overseas-pakistani-become-filer Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer The Ordinance does not make the choice for you, but it sets the trade-offs. Section 100BA applies higher Tenth Schedule rates to people off the active taxpayers' list, several Second Schedule clauses already shield non-residents, and section 114(1)(b)(vii) requires anyone who has obtained an NTN to file a return. **Applies to:** Pakistanis and people of Pakistani origin living abroad, with little or no Pakistani income, who are deciding whether to register, file returns and appear on the active taxpayers' list. Relatives, estate agents and bank staff often tell overseas Pakistanis to "become a filer". The Income Tax Ordinance, 2001 does not answer whether you should. It does set out what changes if you are off the active taxpayers' list, which reliefs non-residents already have, and when getting registered creates a duty to keep filing. This page sets those out as they stand in the Ordinance amended to 30 June 2026, for tax year 2027 (1 July 2026 to 30 June 2027). ### What does being off the active taxpayers' list change? Section 100BA says the collection or deduction of advance tax, and the computation of income and tax, for a person not appearing on the active taxpayers' list "shall be determined in accordance with the rules in the Tenth Schedule". Rule 1 of that Schedule increases the rate of tax to be deducted or collected by one hundred percent, with its own tables for some sections. For a property seller, the section 236C rate is 11.5% instead of the 2.75% in Division X of Part IV. For rent withheld by a tenant at the Division V rates of Part III, the increase doubles the deduction. Rule 2 of the Tenth Schedule gives a separate route: where the withholding agent is satisfied that the person was not required to file a return under section 114, the agent notifies the Commissioner before collecting, and the Commissioner decides within thirty days. If no order is passed in that time, the contention is treated as accepted. ### Which non-resident exemptions already apply? Several clauses of Part IV of the Second Schedule switch off section 100BA and rule 1 for particular overseas transactions, whether or not you are on the list: | Clause | What it says, in short | |---|---| | (111A) | Section 100BA and rule 1 do not apply to payment of dividend to non-resident persons | | (111AB) | Section 100BA and rule 1 do not apply to FCVA, FCBVA, NRVA or NRBVA accounts with authorised banks | | (111AC) | Section 100BA and rule 1 do not apply to a non-resident individual holding a POC or NICOP on property sale and purchase transactions on which tax is collectible, including section 236C | | (114A) | The return duty for final-tax income, and the registration requirement, do not apply to a person maintaining an FCVA, FCBVA, NRVA or NRBVA, unless the person has other Pakistan-source taxable income beyond the listed items | The items listed in clause (114A) are profit on those accounts, profit on Government securities bought from them, capital gains on property bought from FCVA or NRVA proceeds, and capital gains and dividends on listed shares and mutual funds bought from those accounts. These clauses do not cover everything. A company tenant's rent withholding, for example, is not in any of them. ### Does getting an NTN create a filing duty? Yes. Section 114(1)(b) lists persons who must file a return even when they are not otherwise covered, and sub-clause (vii) is a person who "has obtained National Tax Number". Clause (114A) disapplies the final-tax filing clause and the registration requirement, not sub-clause (vii). On the text, a person who registers to get on the list takes on a return duty for each year that follows. Other triggers in section 114(1)(b) include owning immovable property above set sizes and owning a motor vehicle above 1000cc. Section 115(3)(d) says a non-resident person is not required to file solely by reason of the property triggers. That relief is limited to "ownership of immovable property", so it does not reach the vehicle trigger. A return also carries its own paperwork. Section 114(2)(e) says a return shall be accompanied with a wealth statement. ### Worked example (illustrative figures) Sana lives in Riyadh, holds a NICOP and has an NRVA. In tax year 2027 she sells a plot in Multan that she bought from her NRVA, for Rs. 12,000,000. She also owns a flat in Karachi let to a company for Rs. 150,000 a month, Rs. 1,800,000 for the year. **Property sale.** 1. Tax collected under section 236C: Rs. 12,000,000 x 2.75% = Rs. 330,000. 2. Because of clause (111AC), this is the same whether or not she is on the list. Without that clause, the Tenth Schedule rate would give Rs. 12,000,000 x 11.5% = Rs. 1,380,000. **Rent.** 1. Division V for an individual landlord: Rs. 15,000 + 10% x (Rs. 1,800,000 - Rs. 600,000) = Rs. 15,000 + Rs. 120,000 = Rs. 135,000. 2. If she is not on the list, rule 1 doubles it: Rs. 270,000. 3. No Second Schedule clause in the table above covers rent. The rent is also Pakistan-source income beyond the items listed in clause (114A), so that clause's filing relief would not apply to her for that year. ### Common mistakes - **Thinking an NTN is a one-off.** Section 114(1)(b)(vii) ties a continuing filing duty to having obtained one. - **Assuming every overseas transaction carries non-filer rates.** Clauses (111A), (111AB) and (111AC) already remove them for dividends, the listed accounts and POC or NICOP property transactions. - **Assuming the clauses cover CNIC-only holders.** Clause (111AC) names POC and NICOP holders. - **Assuming non-residents never need to file.** Taxable Pakistani income, a vehicle above 1000cc, or an NTN can each bring a filing duty. ### What to check in the official text Read section 100BA, section 114(1)(b) and (2), section 115(3), rules 1 and 2 of the Tenth Schedule, and clauses (111A), (111AB), (111AC) and (114A) of Part IV of the Second Schedule. How a person is placed on or removed from the active taxpayers' list is regulated by rules made by the Board, and the IRIS registration steps are outside this corpus. ### Frequently asked #### If I get an NTN, do I have to file every year? Section 114(1)(b)(vii) lists a person who has obtained a National Tax Number among those required to furnish a return. Clause (114A) of the Second Schedule disapplies other provisions, not sub-clause (vii), so the text gives no exemption from that duty for FCVA or NRVA holders. #### Do I have to file just because I own a house in Pakistan while living abroad? Section 115(3)(d) says a non-resident person is not required to file solely because of the property-ownership triggers in section 114(1)(b). The same relief does not cover a car above 1000cc, which is a separate trigger. #### Will I pay double tax on selling property if I am not on the list? Not at the collection stage if you are a non-resident holding a POC or NICOP. Clause (111AC) switches off the Tenth Schedule increase for such persons on property sale and purchase transactions, so the section 236C rate stays at 2.75% instead of 11.5%. ### Citations - [Income Tax Ordinance, 2001, section 100BA (Special provisions relating to persons not appearing in active taxpayers’ list)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#100ba-special-provisions-relating-to-persons-not-appearing-in-active-taxpayers-list), as amended to 2026-06-30: "shall be determined in accordance with the rules in the Tenth Schedule." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 114 (Return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114-return-of-income), as amended to 2026-06-30: "has obtained National Tax Number" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 115 (Persons not required to furnish a return of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#115-persons-not-required-to-furnish-a-return-of-income), as amended to 2026-06-30: "in the case of ownership of immovable property, a non-resident person" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236C (Advance Tax on sale or transfer of immovable Property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236c-advance-tax-on-sale-or-transfer-of-immovable-property), as amended to 2026-06-30: "shall collect from the seller or transferor advance tax at the rate specified in Division X of Part IV of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clauses (111A), (111AB), (111AC) and (114A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rules 1 and 2; First Schedule, Part IV, Division X and Part III, Division V](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can I get back tax that was deducted in Pakistan while I was a non-resident? Source: https://qanoondigest.com/faq/overseas-pakistanis/refund-tax-deducted-while-non-resident Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Often yes, but only through a return and a refund claim. Section 168 treats adjustable tax deducted or collected as tax you paid, and section 170 lets you claim back any excess within three years. Tax that the Ordinance makes final, such as property tax collected through an FCVA or NRVA under sections 236C and 236K, is generally not refunded. **Applies to:** Overseas Pakistanis and other non-residents who had income tax deducted or collected in Pakistan, for example on bank profit or on buying or selling property. ### What does the law say? Four parts of the Income Tax Ordinance, 2001 decide whether tax deducted from you can come back. - **Section 168(1)(b)** treats tax collected or deducted under the withholding provisions as "tax paid by the person from whom the tax was collected or deducted." - **Section 168(2)** gives that person a tax credit for it "in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted." - **Section 168(5)** says credit that cannot be used against the year's tax "shall be refunded to the taxpayer in accordance with section 170." - **Section 170(1)** lets a taxpayer who has paid more than the amount properly chargeable apply to the Commissioner for a refund of the excess. Being a non-resident does not switch these rules off. What matters is whether the particular deduction is **adjustable**, which means it counts toward your final bill, or **final**, which means it settles the tax on that income by itself. ### Which deductions are final and so usually not refunded? Section 168(3) says no tax credit is allowed for tax that is final under the provisions it lists. Section 169 sets out what happens to final tax, and section 169(2)(e) says "there shall be no refund of the tax collected or deducted" unless it is more than the amount for which the taxpayer is chargeable. Two property provisos matter most to overseas Pakistanis: - **Selling property, section 236C.** Advance tax collected from a seller is adjustable under section 236C(2). A proviso to section 236C(1) changes this for a non-resident individual holding a POC, NICOP or CNIC who acquired the property through a Foreign Currency Value Account (FCVA) or NRP Rupee Value Account (NRVA). For that seller the tax collected is a final discharge of tax liability in place of capital gains tax on the disposal. - **Buying property, section 236K.** Advance tax collected from a buyer is adjustable under section 236K(2). The proviso says that for a non-resident POC, NICOP or CNIC holder who acquired the property through an FCVA or NRVA, the tax "shall be final discharge of tax liability for such buyer or transferee." A second proviso to section 236C(2) makes the tax a **minimum tax** where the property is bought and sold in the same tax year. ### What about tax on bank profit? Section 151(1)(b) requires a bank that pays profit on an account or deposit to deduct tax from the gross profit at the Division IA rate. Section 151(3) calls that deduction a minimum tax, except where the taxpayer is a company or the profit is taxed under the separate profit-on-debt charge in the Ordinance. The Ordinance does not spell out in section 151 how a minimum-tax deduction interacts with a refund claim, and this page does not decide that question. The Division IA rates themselves are in the First Schedule and are not reproduced here. ### What if I was charged the higher non-filer rate? Section 169(4) deals with final tax collected at the higher rate for people not on the active taxpayers' list. The final tax is the First Schedule rate, and the excess collected under the Tenth Schedule "shall be adjustable in case the return is filed before finalization of assessment as provided in rule 4 of the Tenth Schedule." Filing a return is therefore the route to recovering that difference. ### How does a refund claim work? 1. **File the return** for the tax year in which the tax was deducted, so the credit under section 168(2) can be set against your tax. 2. **Apply under section 170(2)** in the prescribed form, verified in the prescribed manner, within three years of the later of the assessment order for that year and the date the tax was paid. 3. **Decision.** Section 170(4) requires a written order within sixty days, after giving you a chance to be heard. 4. **Set-off first.** Under section 170(3), the Commissioner applies the excess against any other income tax you owe, then against other outstanding taxes, and refunds the rest. 5. **Appeal.** Section 170(5) allows an appeal against the order, or against a failure to pass one in time. ### Worked example (illustrative figures) Sana lives in Dubai and is not resident in Pakistan. In tax year 2027 she sells a plot in Rawalpindi that she had bought from her ordinary Pakistani rupee account, not through an FCVA or NRVA. The amounts are invented. | Item | Amount | |---|---| | Advance tax collected from her under section 236C | Rs. 450,000 | | Her tax liability for the year, as computed in her return | Rs. 200,000 | 1. The tax collected is adjustable, so section 168(2) gives a credit of Rs. 450,000. 2. Tax due after the credit: Rs. 200,000 - Rs. 450,000 = a surplus of Rs. 250,000. 3. Section 168(5) sends the unused Rs. 250,000 to section 170, and she can apply for it as a refund. If she had bought the plot through her NRVA, the section 236C proviso would make the Rs. 450,000 a final discharge in place of capital gains tax, and section 169(2)(e) would bar a refund unless the tax exceeded the amount chargeable. ### Common mistakes - **Expecting a refund without a return.** The credit under section 168(2) is given in computing tax for the year, which happens through the return. - **Treating all property tax as refundable.** The FCVA and NRVA provisos in sections 236C and 236K make it final for the people they describe. - **Waiting too long.** The three-year limit in section 170(2) runs from the later of the assessment order and the payment date. ### What to check in the official text Read sections 168, 169, 170, 151, 236C and 236K of the Income Tax Ordinance, 2001 as amended to 30 June 2026. The rates in Divisions IA, X and XVIII of the First Schedule and the Tenth Schedule rules are in the official PDF. The prescribed refund form and FBR's online filing steps are not in this corpus. ### Frequently asked #### How long do I have to claim a refund? Section 170(2)(c) requires the application within three years of the later of the date the Commissioner issued the assessment order for that tax year and the date the tax was paid. The application must be in the prescribed form and verified in the prescribed manner. #### I bought a plot through my NRVA and paid advance tax. Can I claim it back? The proviso to section 236K(2) says tax collected from a non-resident buyer holding a POC, NICOP or CNIC who paid through an FCVA or NRVA is a final discharge of that buyer's tax liability. Section 169(2)(e) allows no refund of final tax unless it is more than the amount properly chargeable. #### What if the Commissioner does not decide my refund application? Section 170(4) gives the Commissioner sixty days to serve a written order after hearing you. Section 170(5)(b) allows an appeal where the Commissioner fails to pass an order within that time. ### Citations - [Income Tax Ordinance, 2001, section 168 (Credit for tax collected or deducted)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#168-credit-for-tax-collected-or-deducted), as amended to 2026-06-30: "the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 169 (Tax collected or deducted as a final tax)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#169-tax-collected-or-deducted-as-a-final-tax), as amended to 2026-06-30: "unless the tax so collected or deducted is in excess of the amount for which the taxpayer is chargeable under this Ordinance" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 170 (Refunds)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#170-refunds), as amended to 2026-06-30: "A taxpayer who has paid tax in excess of the amount which the taxpayer is properly chargeable under this Ordinance may apply to the Commissioner for a refund of the excess." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236C (Advance Tax on sale or transfer of immovable Property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236c-advance-tax-on-sale-or-transfer-of-immovable-property), as amended to 2026-06-30: "who had acquired the said immovable property through a Foreign Currency Value Account (FCVA) or NRP Rupee Value Account (NRVA) maintained with authorized banks in Pakistan" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236K (Advance tax on purchase or transfer of immovable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236k-advance-tax-on-purchase-or-transfer-of-immovable-property), as amended to 2026-06-30: "the tax collected under this section from such persons shall be final discharge of tax liability for such buyer or transferee." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 151 (Profit on debt)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#151-profit-on-debt), as amended to 2026-06-30: "the payer of the profit shall deduct tax at the rate specified in Division IA of Part III of the First Schedule from the gross amount of the yield or profit paid" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## I work remotely from abroad for a Pakistani company. Is my salary Pakistan-source income? Source: https://qanoondigest.com/faq/overseas-pakistanis/remote-work-abroad-for-pakistani-employer Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 101(1) makes salary Pakistan-source only if the employment is exercised in Pakistan, or a Pakistani government pays it. Who pays and where it is paid do not decide it. Work physically done abroad points to foreign-source salary, but the Ordinance does not define where remote employment is exercised, and section 149 withholding is not switched off expressly. **Applies to:** Employees of Pakistani companies who have moved abroad and work remotely, and their payroll teams. ### What does the law say? **Section 101(1)** of the Income Tax Ordinance, 2001 is the source rule for salary. Salary is Pakistan-source income to the extent it: - (a) is "received from any employment exercised in Pakistan, wherever paid"; or - (b) is paid by or on behalf of the Federal Government, a Provincial Government or a Local Government in Pakistan, wherever the employment is exercised. Section 101(16) makes everything else foreign-source. The rule does not mention the employer's nationality, where the contract was signed, or which bank account receives the salary. For a private employer, the only test is where the employment is exercised. **Section 11(6)** then says a non-resident's income is computed using only Pakistan-source amounts. So if you are non-resident under section 82 and your employment is exercised abroad, your salary from a Pakistani company falls outside your Pakistani taxable income. If you are resident, section 11(5) brings foreign-source income in as well, and the source question matters less. ### Where is remote employment "exercised"? The Ordinance does not define "employment exercised in Pakistan", and it has no provision on remote or online work. Read plainly, employment is exercised where the employee does the work, which for someone sitting in Toronto points to Canada. The text does not say how to treat factors such as a Pakistani office being the employee's formal place of posting, the work serving Pakistani clients, or time spent working during visits to Pakistan. This page does not resolve those points. Days you work while visiting Pakistan are a clearer case: during those days the employment is being exercised in Pakistan, so section 101(1)(a) makes the salary for that work Pakistan-source "to the extent" it relates to them. The Ordinance does not set a method for splitting a monthly salary between days worked here and abroad. ### How does withholding work? **Section 149(1)** requires every person responsible for paying salary to an employee to deduct tax at the time of payment at the employee's average rate, computed on "the estimated income of the employee chargeable under the head “Salary”". The section does not carve out non-resident employees. Its calculation is built on salary income that is chargeable, but it does not say how the employer is to establish that a remote employee's salary is foreign-source. **Section 152(2)** is the general withholding rule for payments to non-residents. Section 152(3)(a) says it does not apply to amounts subject to deduction under section 149, and section 152(3)(d) excludes amounts on which the non-resident "is not chargeable to tax". Salary to an employee is therefore handled under section 149, not section 152. Where tax has been deducted on salary that turns out not to be chargeable, **section 170** allows a refund application to the Commissioner, within three years of the later of the assessment order or the date the tax was paid. ### Worked example (illustrative figures) Rabia works for a software house in Lahore. On 1 July 2026 she moves to Melbourne and continues the same job remotely, on Rs. 400,000 a month. In tax year 2027 she visits Lahore for 20 days in December and works from the Lahore office on 10 of them. 1. **Residence.** 20 days in Pakistan is below 183, so section 82(a) does not apply. She spends more than 182 days in Australia and, for this illustration, is an Australian resident taxpayer, so section 82(d) does not catch her. She is non-resident. 2. **Source of the salary for work in Australia.** The employment is exercised in Australia on the plain reading of section 101(1)(a), so that part is foreign-source and outside her Pakistani income under section 11(6). 3. **The 10 working days in Lahore.** That work is exercised in Pakistan, so the salary for it is Pakistan-source. At an illustrative split of 10 working days out of 22 in December, that would be Rs. 400,000 x 10 / 22 = about Rs. 181,818. The Ordinance does not prescribe this method. 4. **Withholding.** If her employer continues deducting under section 149 on her full salary, the deducted amount beyond what her Pakistan-source salary justifies is the kind of excess section 170 addresses. ### Common mistakes - **Treating a Pakistani payslip as proof of Pakistan-source income.** Section 101(1)(a) applies "wherever paid". - **Applying section 152 non-resident rates to salary.** Section 152(3)(a) excludes amounts subject to section 149. - **Ignoring working visits.** Days worked in Pakistan make that part of the salary Pakistan-source. - **Assuming government salary follows the same rule.** Section 101(1)(b) makes it Pakistan-source wherever the work is done. ### What to check in the official text Read section 101(1) and (16), section 149(1), section 152(2) and (3), section 11(5) and (6), section 82 and section 170. Any tax treaty between Pakistan and the country you work in, and the other country's own tax on your salary, are outside this corpus. ### Frequently asked #### My salary is paid into a bank account in Karachi. Does that make it Pakistan-source? Not by itself. Section 101(1)(a) looks at whether the salary is received from employment exercised in Pakistan, wherever paid, so the place of payment is not the test. The exception is salary paid by or on behalf of a Pakistani government, which section 101(1)(b) treats as Pakistan-source wherever the work is done. #### Does my employer deduct tax under section 152 because I am a non-resident? Section 152(3)(a) says section 152(2) does not apply to an amount subject to deduction under section 149, the salary withholding section. Section 152(3)(d) also excludes amounts on which the non-resident is not chargeable to tax. Salary withholding is therefore governed by section 149. #### My employer kept deducting tax after I moved abroad. Can I get it back? Section 170 lets a taxpayer who paid more tax than they are properly chargeable apply to the Commissioner for a refund. The application must be in the prescribed form and made within three years of the later of the assessment order for that year or the date the tax was paid. ### Citations - [Income Tax Ordinance, 2001, section 101 (Geographical source of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#101-geographical-source-of-income), as amended to 2026-06-30: "is received from any employment exercised in Pakistan, wherever paid; or" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 149 (Salary)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#149-salary), as amended to 2026-06-30: "deduct tax from the amount paid at the employee’s average rate of tax" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 152 (Payments to non-residents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#152-payments-to-non-residents), as amended to 2026-06-30: "where the non-resident person is not chargeable to tax in respect of the amount." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 11 (Heads of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#11-heads-of-income), as amended to 2026-06-30: "The income of a non-resident person under a head of income shall be computed by taking into account only amounts that are Pakistan-source income." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 170 (Refunds)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#170-refunds), as amended to 2026-06-30: "A taxpayer who has paid tax in excess of the amount which the taxpayer is properly chargeable under this Ordinance may apply to the Commissioner for a refund of the excess." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 82 (Resident individual)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#82-resident-individual), as amended to 2026-06-30: "being a citizen of Pakistan is not present in any other country for more than one hundred and eighty-two days during the tax year or who is not a resident taxpayer of any other country." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Is the rent from my house in Pakistan taxable if I live abroad, and what should my tenant deduct? Source: https://qanoondigest.com/faq/overseas-pakistanis/rent-from-pakistan-property-non-resident-tax Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes. Section 101(9) makes rent from property in Pakistan Pakistan-source income, so a landlord abroad is taxable on it. A tenant who is a prescribed person deducts under section 155 at the Division V rates, and section 152(2) separately requires 20% from payments to non-residents. The Ordinance does not say which deduction prevails. **Applies to:** Pakistanis and people of Pakistani origin living abroad who let out a house, flat, shop or plot in Pakistan and want to know how the rent is taxed and what the tenant withholds. Many overseas Pakistanis keep the family house and let it out. The rent is taxable in Pakistan, and the practical question is what the tenant should take off before paying. Two withholding sections in the Income Tax Ordinance, 2001 can apply to the same rent, and the law does not say which one wins. This page follows the Ordinance as amended to 30 June 2026, with rates for tax year 2027 (1 July 2026 to 30 June 2027). ### Is the rent taxable in Pakistan? Yes. Section 101(9) says rental income is Pakistan-source income if it is derived from "the lease of immovable property in Pakistan whether improved or not", or from any other interest in or over immovable property. The test is where the property is. A landlord living in Toronto is taxable in Pakistan on rent from a house in Islamabad in the same way as a landlord living next door. The rent is taxed under the head Income from Property. ### Which deductions can the tenant be required to make? **Section 155 (rent withholding).** A "prescribed person" paying rent to any person deducts tax from the gross rent at the Division V rates. Prescribed persons are listed in section 155(3): the Federal and Provincial Governments, Local Government, companies, non-profit organisations and charitable institutions, diplomatic missions, private schools, boutiques, beauty parlours, hospitals, clinics and maternity homes, individuals or associations of persons paying gross rent of Rs. 1.5 million or more in a year, and anyone the Board notifies. For an individual landlord, Division V sets: | Gross rent for the year | Deduction | |---|---| | Up to Rs. 300,000 | Nil | | Rs. 300,001 to Rs. 600,000 | 5% of the amount above Rs. 300,000 | | Rs. 600,001 to Rs. 2,000,000 | Rs. 15,000 + 10% of the amount above Rs. 600,000 | | Above Rs. 2,000,000 | Rs. 155,000 + 25% of the amount above Rs. 2,000,000 | Rule 1 of the Tenth Schedule increases the rate by one hundred percent where the landlord is not on the active taxpayers' list. **Section 152(2) (payments to non-residents).** "Every person paying an amount to a non-resident person" deducts tax from the gross amount at the rate in Division II of Part III, which paragraph (2) sets at 20% of the gross amount paid. This is not limited to prescribed persons. Rule 10(b) of the Tenth Schedule says the Tenth Schedule does not apply to section 152 deductions other than those under section 152(2A), so the 20% is not doubled for a landlord off the list. ### Which one takes priority? The Ordinance does not say. Section 152(3)(a) lists deductions that take a payment out of section 152(2), such as tax deducted from salary. Section 155 used to be on that list, but the Finance Act, 2013 omitted it. Section 155(1) has its own explanation that it applies to rent "irrespective of head of income". Nothing in either section says how a tenant should proceed when both apply to the same payment to a non-resident landlord. This page does not resolve that. ### Can a representative in Pakistan change the position? Section 172(3) says the representative of a non-resident includes any person in Pakistan "from or through whom the non-resident person is in receipt of any income, whether directly or indirectly", or who holds or controls money belonging to the non-resident. Section 152(3)(c) takes a payment out of section 152(2) where it is payable by a person liable to pay tax on it as the non-resident's representative under section 172(3). Section 152(4) says a person claiming to be a representative must file a declaration with the Commissioner before making any payment. Separately, section 152(3)(d) excludes a payment where the non-resident is not chargeable to tax on the amount, and section 152(5) requires a payer who intends to pay without deduction to notify the Commissioner first. ### Worked example (illustrative figures) Tahir lives in Toronto and is non-resident for tax year 2027. He lets his house in F-10, Islamabad to a private company for Rs. 250,000 a month, Rs. 3,000,000 for the year. **Reading 1: section 155.** 1. Band: above Rs. 2,000,000. 2. Deduction: Rs. 155,000 + 25% x (Rs. 3,000,000 - Rs. 2,000,000) = Rs. 155,000 + Rs. 250,000 = **Rs. 405,000**. 3. If Tahir is not on the active taxpayers' list, rule 1 doubles it: Rs. 810,000. **Reading 2: section 152(2).** 1. Deduction: Rs. 3,000,000 x 20% = **Rs. 600,000**, whether or not he is on the list. If his cousin in Rawalpindi collects the rent and has filed a declaration as his representative under section 152(4), section 152(3)(c) takes the payment out of section 152(2). Section 155 is not switched off by that provision. ### What if my tenant is a family, not a company? A family paying Rs. 100,000 a month pays Rs. 1,200,000 a year. That is below the Rs. 1.5 million line in section 155(3)(vib), so the family is not a prescribed person under that sub-clause. Section 152(2), however, is written for "every person" paying a non-resident. On its text, 20% of Rs. 1,200,000, which is Rs. 240,000, would apply unless an exclusion in section 152(3) fits. ### Common mistakes - **Assuming rent is foreign income because the landlord lives abroad.** Section 101(9) ties the source to the property. - **Assuming only section 155 matters.** Section 152(2) also reaches payments to non-residents, and section 155 is no longer excluded from it. - **Assuming a relative collecting the rent is automatically a representative for section 152(3)(c).** Section 152(4) requires a declaration before payment. ### What to check in the official text Read section 101(9), section 155(1) and (3), section 152(2), (3), (4) and (5), section 172(3), paragraph (2) of Division II and Division V of Part III of the First Schedule, and rules 1 and 10 of the Tenth Schedule. Whether the tax deducted settles the landlord's liability, and how it is credited in a return, depends on the landlord's overall position. Board notifications adding prescribed persons under section 155(3)(vii), treaty rates, and provincial property tax are outside this corpus. ### Frequently asked #### Is rent from my Karachi flat taxable in Pakistan if I live in Canada? Yes. Section 101(9) makes rental income Pakistan-source income if it is derived from the lease of immovable property in Pakistan. Where the landlord lives does not change the source. #### My tenant is a company. Which rate should it deduct? Section 155 requires a company tenant to deduct at the Division V rates, and section 152(2) requires 20% of the gross amount paid to a non-resident. Since 2013 section 152(3)(a) no longer lists section 155 as an exclusion, and the Ordinance does not say which deduction takes priority. #### Can a relative in Pakistan act for me and stop the 20% deduction? Section 152(3)(c) takes a payment out of section 152(2) where it is payable by a person liable to pay tax as the non-resident's representative under section 172(3). Section 152(4) requires that person to file a declaration with the Commissioner before making any payment. ### Citations - [Income Tax Ordinance, 2001, section 101 (Geographical source of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#101-geographical-source-of-income), as amended to 2026-06-30: "the lease of immovable property in Pakistan whether improved or not" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 155 (Rent of immoveable property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#155-rent-of-immoveable-property), as amended to 2026-06-30: "shall deduct tax from the gross amount of rent paid at the rate specified in Division V of Part III of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 152 (Payments to non-residents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#152-payments-to-non-residents), as amended to 2026-06-30: "that is payable by a person who is liable to pay tax on the amount as representative of the non-resident person under sub- section (3) of section 172" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 172 (Representatives)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#172-representatives), as amended to 2026-06-30: "from or through whom the non-resident person is in receipt of any income, whether directly or indirectly" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division II, paragraph (2) (Payments to non-residents) and Division V (Income from Property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Tenth Schedule, rule 1 and rule 10(b)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## Can I buy property, a car or shares in Pakistan without being a filer now that section 114C restricts ineligible persons? Source: https://qanoondigest.com/faq/overseas-pakistanis/114c-restrictions-non-resident-exemption Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Yes, if you are non-resident for the year. Section 114C(1) stops ineligible persons from buying a car over Rs. 7 million, property over Rs. 100 million or securities over Rs. 50 million. Section 114C(2) says those limits do not apply to transactions by a non-resident person, except the cash withdrawal limit in clause (d). **Applies to:** Pakistanis and people of Pakistani origin living abroad who want to buy property, a vehicle or investments in Pakistan and do not file Pakistani returns. The Finance Act, 2025 added section 114C to the Income Tax Ordinance, 2001. It lets banks, registrars, car makers and brokers refuse large transactions by people who have not shown their resources to FBR. Overseas Pakistanis often read about it and assume it blocks them too. The section has its own carve-out for non-residents, with one exception. This page follows the Ordinance as amended to 30 June 2026. ### What does section 114C restrict? Section 114C(1) sets four restrictions, each tied to a threshold in the Fifteenth Schedule: | Clause | Transaction | Fifteenth Schedule threshold | Applies to non-residents? | |---|---|---|---| | (a) | Booking, purchase or registration of a motor vehicle | Invoice value (or value assessed by Customs for an import), inclusive of all taxes, exceeding Rs. 7 million | No | | (b) | Registering, recording or attesting transfer of immovable property | Fair market value exceeding Rs. 100 million | No | | (c) | Opening or maintaining an account for securities, mutual fund units or similar investment | Acquisition cost exceeding Rs. 50 million of new investment in a financial year, excluding reinvestment | No | | (d) | Cash withdrawal from bank accounts | Annual cash withdrawal of Rs. 100 million in all bank accounts held by an individual | Yes | Clauses (a) to (c) are aimed at an "ineligible person". Section 114C(4) defines an eligible person as someone who filed a return for the previous tax year with sufficient resources in the wealth statement, or who filed a sources of investment and expenditure statement for the particular transaction. For an individual, eligibility extends to immediate family members: parents, spouse and dependent children. Clause (d) is worded differently. It says "a banking company shall not allow cash withdrawal from any of the bank account of any person, exceeding the threshold". The Fifteenth Schedule's opening words say the thresholds are "to be applied in respect of ineligible persons". The text does not reconcile those two wordings. ### How does the non-resident exemption work? Section 114C(2) says: "The provisions of sub-section (1), shall not apply on transactions made by a non-resident person or a public company except that mentioned in clause (d) of sub-section (1)." A non-resident person can therefore buy a car, register a property or invest in securities above the thresholds without being an eligible person. The only restriction left in place is the cash withdrawal limit. The exemption turns on being a non-resident person, not on holding a NICOP or POC or on living abroad in a general sense. Section 81(2) says a person is non-resident for a tax year if the person is not a resident person for that year. Section 82 makes an individual resident on several tests, including presence in Pakistan for 183 days or more in the tax year. It also makes a citizen of Pakistan resident if the citizen "is not present in any other country for more than one hundred and eighty-two days during the tax year or who is not a resident taxpayer of any other country". A Pakistani citizen who moves between countries without settling in one for more than 182 days, and who is not a resident taxpayer anywhere else, can be resident in Pakistan under that clause. ### Is section 114C in force yet? Section 114C(5) says the restrictions "shall come into force on such date as the Federal Government may, by notification in official Gazette, appoint", with any reductions or increases in the thresholds it thinks appropriate. This corpus does not include such a notification. Check whether one has been issued, and whether it changed the thresholds, before relying on the figures above. ### Worked example (illustrative figures) Kamran works in Manchester. In tax year 2027 he spends 40 days in Pakistan, lives the rest of the year in the United Kingdom and is a resident taxpayer there, so under section 82 he is not resident in Pakistan for that year. He does not file Pakistani returns. 1. He buys a house in DHA Lahore with a fair market value of Rs. 120,000,000. That is above the Rs. 100 million threshold in clause (b), but section 114C(2) disapplies clause (b) for a non-resident. The registrar is not barred by section 114C from processing it. 2. He books a car with an invoice value of Rs. 9,000,000, above the Rs. 7 million threshold in clause (a). Section 114C(2) disapplies that clause too. 3. His brother Adnan lives in Lahore, is resident and did not file last year. Adnan wanting the same car would be an ineligible person under clause (a) unless he or an immediate family member he can rely on is eligible. Kamran is a brother, not a parent, spouse or dependent child. Section 114C(2) removes the 114C bar. It does not remove other taxes on the same transactions. Advance tax on the property purchase is a separate matter, and clause (111AC) of Part IV of the Second Schedule keeps the non-filer increase away from a non-resident POC or NICOP holder on those property transactions. ### Common mistakes - **Assuming a NICOP is enough.** Section 114C(2) uses the words "non-resident person". A NICOP holder who is resident for the year under section 82 is not covered. - **Assuming the exemption covers cash.** Section 114C(2) keeps clause (d), the cash withdrawal limit, for non-residents. - **Treating the thresholds as final.** Section 114C(5) allows the Federal Government to change them in the commencement notification. - **Confusing 114C with the non-filer tax rates.** Section 114C is about whether a transaction can be processed. The higher advance tax rates for people off the active taxpayers' list come from a different part of the Ordinance. ### What to check in the official text Read section 114C(1), (2), (4) and (5), the Fifteenth Schedule, sections 81 and 82, and clause (111AC) of Part IV of the Second Schedule. The commencement notification under section 114C(5), and any rules on the sources of investment and expenditure statement, are outside this corpus. ### Frequently asked #### Does section 114C stop an overseas Pakistani from buying a house worth more than Rs. 100 million? Not if the buyer is a non-resident person. Section 114C(2) says sub-section (1) does not apply to transactions made by a non-resident person, and the property limit is in clause (b) of sub-section (1). #### Does the cash withdrawal limit apply to non-residents? Yes. Section 114C(2) keeps clause (d) of sub-section (1) in place for non-residents. The Fifteenth Schedule sets the annual cash withdrawal limit at one hundred million rupees in all bank accounts held by an individual. #### Is section 114C already in force? Section 114C(5) says the restrictions come into force on a date the Federal Government appoints by notification in the official Gazette, with any changes to the thresholds it considers appropriate. This site does not hold such a notification. ### Citations - [Income Tax Ordinance, 2001, section 114C (Restriction on economic transactions by certain persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#114c-restriction-on-economic-transactions-by-certain-persons), as amended to 2026-06-30: "The provisions of sub-section (1), shall not apply on transactions made by a non-resident person or a public company except that mentioned in clause (d) of sub-section (1)." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Fifteenth Schedule (Threshold for Economic Transactions), S. Nos. 1 to 4](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 81 (Resident and non-resident persons)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#81-resident-and-non-resident-persons), as amended to 2026-06-30: "A person shall be a non-resident person for a tax year if the person is" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 82 (Resident individual)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#82-resident-individual), as amended to 2026-06-30: "being a citizen of Pakistan is not present in any other country for more than one hundred and eighty-two days during the tax year or who is not a resident taxpayer of any other country" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clause (111AC)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## What tax do I pay when I sell my property in Pakistan while living abroad? Source: https://qanoondigest.com/faq/overseas-pakistanis/tax-selling-property-pakistan-living-abroad Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Living abroad does not move the gain out of Pakistan. Section 101(10) makes it Pakistan-source income, section 37 taxes it as a capital gain, and section 236C collects 2.75% of the sale price at transfer. For a non-resident who bought through an FCVA or NRVA, that 2.75% is the final tax in place of capital gains tax. **Applies to:** Pakistanis and people of Pakistani origin living abroad who sell a plot, house or flat located in Pakistan in tax year 2027. Moving abroad changes a lot about your Pakistani tax position, but it does not change where a property gain comes from. A plot in Islamabad or a flat in Karachi is Pakistani property, and the gain on selling it is taxed in Pakistan. What your overseas status can change is how much tax is collected at the registrar's desk and whether that amount settles the matter. This page follows the Income Tax Ordinance, 2001 as amended to 30 June 2026, so the rates apply to sales in tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say? **The gain is Pakistan-source.** Section 101(9) treats rent from immovable property in Pakistan as Pakistan-source income. Section 101(10) then says "Any gain from the alienation of any property or right referred to in sub- section (9)" is also Pakistan-source income. Residence is not part of the test. A seller living in Jeddah or Birmingham is covered in the same way as a seller in Multan. **The gain is charged under section 37.** Section 37(1A) says the gain on disposal of immovable property in Pakistan shall "be chargeable to tax under the head capital gains at the rates specified in Division VIII of Part I of the First Schedule". For property acquired on or after 1 July 2024, Division VIII sets 15% for a person appearing on the active taxpayers' list on the date of disposal. For others, it applies the normal slab rates, with a floor of 15% of the gain for individuals. Property acquired on or before 30 June 2024 is taxed on a separate holding-period table. **Advance tax is collected at transfer under section 236C.** The person who registers, records or attests the transfer collects tax from the seller at the rate in Division X of Part IV of the First Schedule. After the Finance Act, 2026, that rate is 2.75% of the gross amount of the consideration received. Section 236C(2) makes the tax adjustable, and where the property is bought and sold in the same tax year, it is minimum tax. ### When is the 236C tax final for someone living abroad? A proviso to section 236C(1) changes the treatment for one group of sellers. It applies "if the seller or transferor is a non-resident individual holding Pakistan Origin Card (POC) or National ID Card for Overseas Pakistanis (NICOP) or Computerized National ID Card (CNIC) who had acquired the said immovable property through a Foreign Currency Value Account (FCVA) or NRP Rupee Value Account (NRVA)". For that seller, the tax collected is the final discharge of tax liability in lieu of capital gains under section 37. All the conditions have to be met together: non-resident for the year, an individual, one of the three identity documents, and the purchase paid through an FCVA or NRVA. A property bought years ago from a local rupee account, or bought while you were still living in Pakistan, does not fit the proviso as written. ### What about the higher rate for people not on the active taxpayers' list? The Tenth Schedule raises the section 236C rate to 11.5% for a seller who does not appear on the active taxpayers' list. Clause (111AC) of Part IV of the Second Schedule says that increase does not apply to a "non-resident individual holding Pakistan Origin Card (POC) or National ID Card for Overseas Pakistanis (NICOP)" on transactions on which tax is collectible under section 236C and the matching tax on purchases. A CNIC is not mentioned in clause (111AC), even though it is mentioned in the final-tax proviso. Clause (111AC) speaks to the collection rate. Division VIII's own distinction between persons on and off the list, which sets the capital gains rate, is a separate provision, and the clause does not say that it reaches it. ### Worked example (illustrative figures) Faisal lives in Doha and holds a NICOP. He bought a flat in Bahria Town, Rawalpindi in March 2025 for Rs. 20,000,000 and sells it in October 2026 for Rs. 26,000,000. **Case 1: he paid for the flat through his NRVA.** 1. Tax collected under section 236C: Rs. 26,000,000 x 2.75% = Rs. 715,000. 2. The proviso to section 236C(1) makes this the final discharge in lieu of capital gains tax. Nothing more is due on this gain. **Case 2: he paid from a local rupee account and is on the active taxpayers' list.** 1. Tax collected under section 236C: Rs. 715,000, adjustable. 2. Gain: Rs. 26,000,000 - Rs. 20,000,000 = Rs. 6,000,000. 3. Tax on the gain under Division VIII (acquired after 1 July 2024, on the list): Rs. 6,000,000 x 15% = Rs. 900,000. 4. Balance: Rs. 900,000 - Rs. 715,000 = **Rs. 185,000**. **Case 3: as Case 2, but Faisal is not on the active taxpayers' list.** Because he holds a NICOP and is non-resident, clause (111AC) keeps the collection at 2.75%, so Rs. 715,000. A non-resident seller with only a CNIC who is not on the list would face 11.5%: Rs. 26,000,000 x 11.5% = Rs. 2,990,000. ### Do I need to file a return after the sale? That depends on your other Pakistani income and on which case you fall into. Clause (114A) of Part IV of the Second Schedule switches off the return-filing duty for final-tax income for a person maintaining an FCVA or NRVA, provided the person's other Pakistan-source taxable income is limited to listed items. One listed item is "capital gain on disposal of immovable property acquired from proceeds of FCVA or NRVA". In Case 2 and Case 3, the 236C tax is only a payment on account, and the capital gain still has to be worked out and settled. The related page on whether an overseas Pakistani must file a return covers the filing rules in full. ### Common mistakes - **Assuming a foreign address makes the gain foreign income.** Section 101(10) ties the source to where the property is, not where the seller lives. - **Treating every overseas sale as final at 2.75%.** The final-tax proviso depends on how the property was paid for. Being abroad at the time of sale is not enough. - **Assuming a CNIC holder gets the (111AC) relief.** The clause names POC and NICOP holders only. - **Forgetting the same-year rule.** If the property is bought and sold within one tax year, section 236C(2) makes the tax collected minimum tax. ### What to check in the official text Read section 101(9) and (10), section 37(1A), section 236C(1) with both provisos and 236C(2), Division X of Part IV and Division VIII of Part I of the First Schedule, rule 1 of the Tenth Schedule, and clauses (111AC) and (114A) of Part IV of the Second Schedule. Whether you count as non-resident for the year depends on the residence rules covered on the related residence pages. Tax payable in your country of residence on the same gain, and any treaty relief, is outside this page. Provincial stamp duty and transfer charges are outside this corpus. ### Frequently asked #### Is the gain on my Lahore flat taxable in Pakistan if I live in Dubai? Yes. Section 101(10) makes a gain from the alienation of immovable property in Pakistan Pakistan-source income, whoever sells it and wherever they live. Section 37(1A) then charges it under the head capital gains at the Division VIII rates. #### When is the 236C tax the only tax I pay on the sale? When you are a non-resident individual holding a POC, NICOP or CNIC and you acquired the property through a Foreign Currency Value Account or NRP Rupee Value Account. The proviso to section 236C(1) then makes the tax collected a final discharge in lieu of capital gains tax under section 37. #### Will I pay 11.5% at transfer if I am not on the active taxpayers' list? Not if you are a non-resident individual holding a POC or NICOP. Clause (111AC) of Part IV of the Second Schedule switches off the Tenth Schedule increase for such a person on transactions taxed under section 236C. A non-resident who holds only a CNIC is not named in that clause. ### Citations - [Income Tax Ordinance, 2001, section 101 (Geographical source of income)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#101-geographical-source-of-income), as amended to 2026-06-30: "Any gain from the alienation of any property or right referred to in sub- section (9)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 37 (Capital gains)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#37-capital-gains), as amended to 2026-06-30: "be chargeable to tax under the head capital gains at the rates specified in Division VIII of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 236C (Advance Tax on sale or transfer of immovable Property)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#236c-advance-tax-on-sale-or-transfer-of-immovable-property), as amended to 2026-06-30: "if the seller or transferor is a non-resident individual holding Pakistan Origin Card (POC) or National ID Card for Overseas Pakistanis (NICOP) or Computerized National ID Card (CNIC) who had acquired the said immovable property through a Foreign Currency Value Account (FCVA) or NRP Rupee Value Account (NRVA)" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part IV, Division X (Advance tax on sale or transfer of immovable property) and Tenth Schedule, rule 1, Table, S. No. 2 (section 236C)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part I, Division VIII (rate of tax under sub-section (1A) of section 37)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clauses (111AC) and (114A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf --- ## How are government securities, PSX shares and dividends bought through my FCVA or NRVA taxed? Source: https://qanoondigest.com/faq/overseas-pakistanis/tax-on-investments-through-fcva-nrva Law current to: 30 June 2026. Reviewed: 2026-09-25. Checked line by line against the law: not yet. ### Short answer Section 152(1DA) requires the bank maintaining your FCVA, FCBVA, NRVA or NRBVA to deduct 10% of the capital gain on debt instruments and government securities and certificates, and section 152(1E) makes that a final tax. Dividends are taxed under section 150, with no non-filer increase under clause (111A). PSX share gains fall under section 37A. **Applies to:** Non-residents who invest in Pakistani government securities, certificates, listed shares or mutual funds from a Foreign Currency Value Account or Non-Resident Rupee Value Account. Investments made from a Foreign Currency Value Account (FCVA), Foreign Currency Business Value Account (FCBVA), Non-Resident Rupee Value Account (NRVA) or Non-Resident Rupee Business Value Account (NRBVA) are taxed under different provisions depending on what you hold. Government securities and certificates have their own bank deduction. Dividends follow the general dividend rule. Share gains follow the securities rule. This page reads the Income Tax Ordinance, 2001 as amended to 30 June 2026, which governs tax year 2027 (1 July 2026 to 30 June 2027). ### What does the law say about government securities and certificates? Section 152(1DA), as substituted by the Finance Act, 2026, requires every banking company maintaining an FCVA, FCBVA, NRVA or NRBVA to deduct tax from capital gain on the disposal of "debt instruments and Government securities and certificates (including Shariah compliant variant)" invested through those accounts. The rate is in paragraph (3A) of Division II of Part III of the First Schedule: 10% of the amount of capital gain. Section 152(1E) says the tax deductible under sub-section (1DA) "shall be a final tax in respect of persons and income mentioned therein". So once the bank deducts 10% of the gain, no further tax is due on it. The sub-section names no product. Treasury bills, Pakistan Investment Bonds, sukuk or certificates sold under a brand name are covered only where they fit the words "debt instruments", "Government securities" or "certificates" and were invested through one of the four accounts. ### How are dividends taxed? Section 150 requires every person paying a dividend to deduct tax from the gross amount at the rate in Division I of Part III of the First Schedule. Section 152(3)(a) keeps dividends out of the general 20% non-resident rule in section 152(2). The Division I rates include: | Division I paragraph | Case | Rate | |---|---|---| | (a) | Dividend from Independent Power Producers that is a pass-through item reimbursed by CPPA-G | 7.5% | | (b) | REITs and cases not covered by (a), (ba), (c) and (d) | 15% | | (ba) | Mutual funds, by share of income from debt securities and from equities | 25% and 15% | | (d) | Dividend from a company that pays no tax because of exemption, carried forward losses or tax credits | 25% | Clause (111A) of Part IV of the Second Schedule says the provisions for persons not on the Active Taxpayers List, including rule 1 of the Tenth Schedule, do not apply "to the extent of payment of dividend to non-resident persons". So a non-resident's dividend is not deducted at an increased non-filer rate. ### How are gains on PSX shares taxed? Section 37A charges capital gain on disposal of securities, which includes shares of a public company and units of exchange traded funds, at the rates in Division VII of Part I of the First Schedule. That table sets rates by holding period, acquisition date and whether the person appears on the Active Taxpayers List. Section 152(1DA) does not cover share gains, because it is limited to debt instruments, government securities and certificates. This page does not reproduce the Division VII table; read it in the official PDF. ### Do I have to register or file? Clause (114A) of Part IV says the registration requirement and the filing trigger for final-tax income do not apply to a person maintaining an FCVA, FCBVA, NRVA or NRBVA, provided the person has no Pakistan-source taxable income other than: - (a) profit on debt on those accounts; - (b) profit on debt on Government of Pakistan securities bought from their proceeds; - (c) capital gain on immovable property acquired from FCVA or NRVA proceeds; - (d) capital gain on PSX securities and mutual fund units bought from the accounts; - (e) dividends from PSX securities and mutual funds bought from the accounts. ### Worked example (illustrative figures) Nadia lives in Doha and holds an NRVA with a bank in Islamabad. In tax year 2027: 1. She sells Pakistan Investment Bonds bought through the NRVA at a capital gain of Rs. 400,000. The bank deducts 400,000 x 10% = Rs. 40,000 under section 152(1DA). Under section 152(1E) this is final. 2. She receives a dividend of Rs. 200,000 from a listed cement company whose case falls under paragraph (b) of Division I. The company deducts 200,000 x 15% = Rs. 30,000 under section 150. Clause (111A) means this is not increased because she is not on the Active Taxpayers List. 3. Total tax deducted: 40,000 + 30,000 = Rs. 70,000. 4. Both items are on the clause (114A) list. If she has no other Pakistani income, she is outside the registration and final-tax filing requirements. ### Common mistakes - **Treating every product sold to overseas Pakistanis as a "certificate".** Section 152(1DA) applies only to what its words cover. - **Expecting the 10% to apply to share gains.** PSX gains are under section 37A and its own table. - **Assuming the dividend rate is always 15%.** Paragraphs (a), (ba), (c) and (d) of Division I set different rates. ### What to check in the official text Read section 152(1DA), (1E) and (3), section 150, Division I and paragraph (3A) of Division II of Part III, Division VII of Part I, and clauses (111A) and (114A) of Part IV of the Second Schedule. The terms of issue of any certificate, and State Bank rules on these accounts, are outside this corpus. ### Frequently asked #### Is the 10% on my T-bill or PIB gain the end of the matter? Section 152(1E) says tax deductible under section 152(1DA) is a final tax in respect of the persons and income mentioned there. So the 10% the bank deducts under paragraph (3A) of Division II is the final tax on that capital gain. #### Are Naya Pakistan Certificates covered by section 152(1DA)? Section 152(1DA) does not name any product. It covers debt instruments and government securities and certificates, including Shariah compliant variants, invested through an FCVA, FCBVA, NRVA or NRBVA. A branded product is covered only if it falls within those words, which depends on the terms of its issue. #### Do I need to file a return because of these investments? Not if all your Pakistan-source taxable income is on the list in clause (114A) of Part IV of the Second Schedule, which includes profit on government securities, capital gains on PSX securities and mutual funds, and dividends, all bought from these accounts. Any other Pakistani income takes you out of the clause. ### Citations - [Income Tax Ordinance, 2001, section 152 (Payments to non-residents)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#152-payments-to-non-residents), as amended to 2026-06-30: "shall deduct tax from capital gain arising on the disposal of debt instruments and Government securities and certificates (including Shariah compliant variant) invested through aforesaid accounts at the rate specified in Division II of Part III of the First Schedule." Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, First Schedule, Part III, Division I (Advance Tax on Dividend) and Division II (Payments to non-residents), paragraphs (2) and (3A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 150 (Dividends)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#150-dividends), as amended to 2026-06-30: "paying a dividend shall deduct tax from the gross amount of the dividend paid" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clause (111A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, Second Schedule, Part IV, clause (114A)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30), as amended to 2026-06-30 Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf - [Income Tax Ordinance, 2001, section 37A (Capital gain on disposal of securities)](https://qanoondigest.com/ordinances/income-tax-ordinance-2001/income-tax-ordinance-2001-2026-06-30#37a-capital-gain-on-disposal-of-securities), as amended to 2026-06-30: "shall be chargeable to tax at the rates specified in Division VII of Part I of the First Schedule" Official source: https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf ---