The Pakistani tax system incorporates a concept called “minimum tax,” which applies to certain businesses and individuals regardless of their actual taxable income. This article explains who is subject to minimum tax, how it’s calculated, and its implications.
Who Pays Minimum Tax in Pakistan?
Minimum tax applies to resident companies, permanent establishments of non-resident companies, individuals with a turnover exceeding 100 million rupees in a tax year, and associations of persons (AOPs) with a similar high turnover.
Exemptions from Minimum Tax
Several situations exempt taxpayers from minimum tax:
- Reporting a loss for the tax year.
- Offsetting losses from previous years.
- Qualifying for tax exemption.
- Claiming tax credits, rebates, or allowances (including depreciation).
- Paying tax equal to or exceeding the minimum tax liability.
Calculating Minimum Tax
The minimum tax is calculated as a percentage of the taxpayer’s turnover, which encompasses:
- Gross sales or receipts from selling goods (excluding sales tax and federal excise duty).
- Gross fees for services rendered (excluding commissions already taxed).
- Gross receipts from executing contracts (excluding those already taxed).
- The company’s share of the above amounts in any association they’re a member of.
Tax Rates Explained:
The table outlines the minimum tax rates for specific categories of businesses:
| S. No. | Industry | Minimum Tax Rate (%) |
|---|---|---|
| 1(a) | Sui Southern Gas Company Limited & Sui Northern Gas Pipelines Limited (over Rs. 1 billion turnover) | 3% |
| 1(b) | Pakistan International Airlines Corporation | 0.75% |
| 1(c) | Poultry Industry (breeding, broiler production, egg production, feed) | 0.75% |
| 2(a) | Oil Refineries | 0.5% |
| 3 | Various Industries (including): | 0.25% |
| * Distributors of pharmaceuticals, FMCG & cigarettes | ||
| * Petroleum agents & distributors (registered under Sales Tax Act) | ||
| * Rice mills & dealers | ||
| * Tier-1 FMCG retailers (integrated with real-time reporting system) | ||
| * E-commerce businesses & online marketplaces | ||
| * Used vehicle sale & purchase businesses | ||
| * Flour mills | ||
| 4 | All Other Cases | 1.25% |
Tax Treatment of Minimum Tax
- The total turnover for the tax year becomes the taxable income for minimum tax purposes.
- The minimum tax amount is paid as income tax instead of the regular tax liability (if applicable).
- If the minimum tax paid exceeds the actual tax liability, the excess gets carried forward to be adjusted against tax in subsequent years (up to three years).
Conclusion
Minimum tax ensures a baseline tax contribution from businesses and individuals with high turnover (over 100 million rupees), even if they have low taxable income due to deductions or exemptions. Understanding minimum tax and its applicability is crucial for Pakistani businesses and individuals to ensure proper tax compliance and avoid penalties.
