Blog article: Income from Business in Pakistan — complete tax guide

Tax Guide · Sialkot · Business Tax

Income from Business in Pakistan: A Complete Tax Guide for Business Owners

What Does “Income from Business” Mean Under Pakistani Tax Law?

If you run a shop in Sialkot, manage a factory, or provide professional services, the money you earn falls under a specific category: Income from Business in Pakistan. It is one of five heads of income under FBR’s Income Tax Ordinance 2001, defined under Section 11 alongside Salary, Income from Property, Capital Gains, and Income from Other Sources.

This head is governed by Sections 18 to 36 of the Ordinance. It covers not just large companies, but also small traders, manufacturers, freelancers, and self-employed professionals — including those operating in Sialkot‘s export industries.

Who Is Covered Under This Head of Income?

Under Section 18 of the Income Tax Ordinance 2001, the following are chargeable under Income from Business in Pakistan:

• Sole proprietors running any trade or commerce
• Partnerships and Associations of Persons (AOP)
• Private and public limited companies
• Professional firms — doctors, lawyers, engineers, accountants
• Trade and professional associations earning from members
• Banks and leasing companies earning from asset leasing
• Management companies earning management fees

What Incomes Are Taxable Under This Head?

Section 18(1) lists taxable incomes chargeable under Income from Business in Pakistan:

• Profits and gains from any business during the tax year
• Income from hire or lease of tangible movable property
• Fair market value of any benefit or perquisite received in a business relationship
• Management fees earned by management companies
• Profit on debt where the core business is lending
• Leasing income for scheduled banks and leasing companies

Allowable Deductions: What Can You Subtract?

Under Section 20, a deduction is allowed for expenditure incurred wholly and exclusively for business during the tax year. This is where a professional Sialkot tax consultant can save you significant money.

• Salaries, wages, and employee benefits
• Rent of business premises
• Utility bills for business use
• Cost of goods sold and raw materials
• Advertising and marketing expenses
• Repairs and maintenance of business assets
• Profit on debt (interest) on business loans — Section 28
• Bad debts written off — Section 29
• Depreciation on business assets — Section 22
• Pre-commencement expenses — Section 25
• Scientific research expenditure — Section 26
• Employee training costs — Section 27

Deductions That Are NOT Allowed

Section 21 explicitly prohibits deductions for certain items. Knowing these is critical for correct FBR return filing.

• Income tax itself — not deductible
• Capital expenditure (must be depreciated)
• Personal expenses of owner or family
• Fines and court-imposed penalties
• Donations not made to approved organisations
• Cash payments exceeding Rs. 250,000
• 50% disallowance for non-banking payments over Rs. 200,000 per invoice

Special Deductions: Depreciation, Bad Debts & More

Depreciation — Section 22

Long-term assets cannot be fully expensed in one year. Instead, their cost is spread via depreciation at rates prescribed in the Third Schedule. Computed as: WDV at start of year × Prescribed Rate. If used partly for personal use, only the proportional business amount is deductible.

Initial Allowance — Section 23

A taxpayer may claim an initial allowance in the first year an asset is put to use, in addition to annual depreciation.

Bad Debts — Section 29

A bad debt is deductible if: (1) previously included in business income, (2) written off in accounts, and (3) there are reasonable grounds for believing it is irrecoverable. If later recovered, the amount must be added back to income.

Tax Rates for Business Income in Pakistan

For Companies (First Schedule, amended Feb 2026)

Type of Company	Tax Rate
Banking Company (Tax Year 2025)	44%
Banking Company (Tax Year 2026)	43%
Banking Company (Tax Year 2027+)	42%
Small Company	20%
Any Other Company	29%

For SMEs (Fourteenth Schedule, Section 100E)

Category	Turnover	Normal Rate	Final Tax Regime
Category 1	Up to Rs. 100M	7.5% of taxable income	0.25% of gross turnover
Category 2	Rs. 100M – 250M	15% of taxable income	0.5% of gross turnover

Business Losses: Set-Off & Carry Forward

• Section 56: Business loss may be set off against other heads of income in the same year (set off last)
• Section 57: Unabsorbed business loss carried forward for up to six tax years, set off against future business income only
• Section 58: Speculation losses can only be set off against other speculation income
• AOP losses cannot be set off by individual members against their personal income

Step-by-Step Guide: Computing Business Income Tax

1. 1
   Identify all taxable business receiptsSales, services, lease income, management fees, benefits — as per Section 18.
2. 2
   Subtract allowable deductions (Section 20)Salaries, rent, utilities, advertising, and all wholly and exclusively business expenses.
3. 3
   Apply special deductions (Sections 22–31)Depreciation, initial allowance, bad debts, pre-commencement expenses.
4. 4
   Add back disallowed expenditure (Section 21)Personal expenses, income tax paid, incorrectly expensed capital expenditure.
5. 5
   Compute net business incomeReceipts − Allowable Deductions + Disallowed amounts added back.
6. 6
   Set off brought-forward losses (Section 57)Apply any business losses carried forward from prior years (within 6 years).
7. 7
   Determine taxable income and apply tax rateUse appropriate rate for your taxpayer category.
8. 8
   Check minimum tax (Section 113)Ensure tax is not below the minimum turnover-based threshold.
9. 9
   Adjust for advance tax and WHTReduce by advance tax paid and withholding tax deducted at source.
10. 10
    File your return on FBR IRISSubmit by the prescribed due date via iris.fbr.gov.pk.

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