Understanding Small Companies and their Tax Benefits in Pakistan

Small companies play a vital role in Pakistan’s economy, especially for small and medium-sized enterprises (SMEs). To support these businesses, the Income Tax Ordinance 2002 provides a tax benefit for small companies. However, to be eligible for this benefit, small companies must meet certain criteria.

In this article, we will explain the definition of a small company and the tax benefits that come with it. We will also discuss the requirements that small companies must meet to qualify for these benefits.

Definition of a Small Company

According to the Income Tax Ordinance 2002, a small company is defined as a company that meets the following criteria:

  1. Incorporated on or after July 01, 2005
  2. Paid up capital and undistributed reserves not exceeding fifty million rupees
  3. Employees not exceeding two hundred and fifty during a year
  4. Annual turnover not exceeding two hundred and fifty million rupees
  5. Not formed by splitting or reconstruction of a company already in existence
  6. Not a small and medium enterprise

The above conditions must be met simultaneously for a company to be classified as a small company. If even one of the conditions is not met, the company will be treated as a normal company for tax purposes. For instance, if the total number of employees exceeds two hundred and fifty during a year, the company will no longer be considered a small company.

Tax Benefits for Small Companies

Small companies enjoy a tax benefit in Pakistan in terms of lower tax rates. The tax rate for a company in tax year 2022 is 29%, while the tax rate for a small company is 21%. This means that small companies can benefit from an 8% tax reduction, which can significantly impact their bottom line.

Filing Income Tax Return for Small Companies

To take advantage of the reduced tax rates, small companies must meet the criteria specified above and file their income tax return accordingly. It is essential to ensure that all the requirements are met to avoid any legal issues or penalties.


Small companies play a significant role in Pakistan’s economy, and the tax benefit provided to them can be a game-changer for their business. However, to qualify for this benefit, small companies must meet the specified criteria. As a small business owner in Pakistan, it is essential to understand these criteria and take advantage of the reduced tax rates. This can help you save a significant amount of money, which can be reinvested in your business to foster growth and development.

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