Running a business in Pakistan — whether as a sole proprietor or as part of an AOP — comes with a tax framework quite different from salaried employment. There's no employer withholding the right amount automatically, no preferential salaried slab, and quite a bit more that needs to be calculated, documented, and filed correctly. Getting it wrong is expensive: FBR's audit-selection systems increasingly flag businesses whose declared income looks low against their bank credits and utility consumption.
What Counts as Business Income
The Income Tax Ordinance defines business income broadly — any trade, profession, or commercial activity you carry on during the tax year. This covers retail and wholesale trade, manufacturing, service businesses, freelancing done under a registered business name, contracting, commission-based agency work, and import/export operations. It's worth distinguishing this from salary income (an employment relationship) and property income (taxed separately under its own rules) — business income is what's left after those two categories, taxed on net profit rather than gross receipts.
Tax Rates for Sole Proprietors and AOPs
An important point many business owners miss: business income is taxed at the standard individual slab rates, not the more favourable salaried-person rates.
| Annual Taxable Business Income | Tax |
|---|---|
| Up to Rs. 600,000 | 0% |
| Rs. 600,001 – 1,200,000 | 5% of amount above Rs. 600,000 |
| Rs. 1,200,001 – 2,200,000 | Rs. 30,000 + 15% above Rs. 1,200,000 |
| Rs. 2,200,001 – 3,200,000 | Rs. 180,000 + 25% above Rs. 2,200,000 |
| Rs. 3,200,001 – 4,100,000 | Rs. 430,000 + 30% above Rs. 3,200,000 |
| Above Rs. 4,100,000 | Rs. 700,000 + 35% above Rs. 4,100,000 |
AOPs are treated as separate entities and, following recent Finance Act changes, pay a flat 29% on net income above Rs. 400,000 rather than progressive rates. Partners then declare their profit share individually, with credit given for tax already paid at the AOP level so nothing gets taxed twice.
Expenses You Can Actually Deduct
The upside of business taxation is that legitimate expenses reduce your taxable base — something salaried employees don't get. Commonly deductible items include:
- Rent on business premises, backed by a tenancy agreement and payment records
- Employee salaries and employer EOBI contributions, with payroll records to match
- Utility bills for the business — or the proportionate business-use share if operating from a residence
- Depreciation on machinery, vehicles, computers, and furniture at FBR-prescribed annual rates rather than the full purchase cost upfront
- Cost of goods sold for trading businesses, reconciled against opening and closing stock
- Genuine business travel, professional fees, and written-off bad debts with documented recovery attempts
What FBR Will Not Let You Deduct
Equally important is knowing what gets rejected on audit. Personal expenses dressed up as business costs, excessive entertainment beyond industry norms, FBR penalties and surcharges, and owner/partner drawings are all disallowed. Capital expenditure — the full cost of a machine or vehicle — can't be expensed in the year of purchase; only the depreciation is deductible. And under Section 21, any single cash payment above Rs. 250,000 for a business expense loses its deductibility entirely — it needs to go through a bank transfer or cheque instead.
Working Out Your Tax, Step by Step
- Start with total gross sales or receipts for the tax year
- Subtract cost of goods sold to arrive at gross profit
- Subtract all allowable operating expenses to get net business profit
- Apply the relevant slab rate to that net profit figure
- Subtract any withholding tax already deducted by customers during the year
- Pay the remaining balance via PSID, or claim a refund if WHT credits exceeded the liability
Worked example: gross sales of Rs. 8,000,000, less COGS of Rs. 4,500,000, gives gross profit of Rs. 3,500,000. After Rs. 1,500,000 in operating expenses, net profit is Rs. 2,000,000, which falls in the 15% bracket above Rs. 1,200,000 — working out to Rs. 150,000 in tax before any WHT credit.
Quarterly Advance Tax
If your net tax liability in the prior year exceeded Rs. 1 million, Section 147 requires quarterly advance tax payments — 25 September, 25 December, 25 March, and 15 June — each equal to roughly a quarter of your estimated annual tax. Missing an instalment triggers default surcharge on the shortfall from that specific due date, calculated separately per instalment.
The Minimum Tax Floor on Turnover
Section 113 exists specifically to stop businesses from declaring near-zero profit through aggressive expense claims. If your computed income tax comes out lower than 1.5% of gross turnover, you pay the 1.5% figure instead — regardless of how thin your actual margin was, and even if the business technically ran at a loss. A business with Rs. 5 million turnover and only Rs. 200,000 net profit, for instance, would owe Rs. 75,000 in minimum tax even though normal slab tax on that profit level would be zero. The good news is that minimum tax paid isn't lost forever — it can be carried forward and credited against future years once normal tax exceeds the minimum threshold again.
What Goes Into the Annual Return
A business return is more involved than a salary-only filing. It needs a profit and loss statement with sales, COGS, and expenses broken down by category; a balance sheet summary of assets and liabilities; any carried-forward losses from the past six years; a full wealth statement reconciling opening and closing net worth; bank account details; and records of WHT certificates and advance tax payments made during the year. The deadline is 30 September, with a Rs. 1,000-per-day penalty for late filing on top of any surcharge on unpaid tax.