Advance tax on business income under section 147
Advance tax is the part of the Pakistani system that catches growing businesses off guard: the tax on this year's profit is not something you settle next year at filing — a large part of it has to be paid, in instalments, during the year it is earned. Section 147 of the Income Tax Ordinance is the mechanism. This guide explains who is caught, how each instalment is worked out, when it is due, and how it reconciles against the final return so nothing is paid twice.
Pay-as-you-earn for business income
Salaried taxpayers have their tax collected in real time through payroll under section 149. Business income has no such automatic mechanism, so section 147 creates one: it requires the taxpayer to estimate the year's tax and pay it in quarterly instalments, rather than accumulating a full year's liability to be settled after year end. The state gets its revenue through the year; the taxpayer avoids a single large bill at filing. The trade-off is that the business has to fund tax on profit it may not yet have collected in cash — a working-capital discipline that catches out fast-growing firms in particular.
Who is within section 147
- Companies and AOPs: generally within the advance-tax net as a matter of course, with instalments driven by the latest assessed income.
- Individuals with business income above the threshold the Ordinance specifies for their latest assessed year.
- Not, generally, the purely salaried: where tax is fully deducted under section 149, section 147 does not add a separate instalment obligation on that salary.
The threshold and the categories are set in the Ordinance, so confirm whether a particular taxpayer is in scope for the relevant year before assuming either way.
You draw a salary, tax is deducted at source every month, and you want the return filed properly without spending a weekend inside IRIS.
How the instalment is calculated
The default basis is mechanical and rests on the latest assessed income:
- Take the tax assessed for the most recent tax year for which an assessment is available.
- Scale it to the quarter — broadly a quarter of the annual figure, adjusted as the Ordinance's formula requires.
- Reduce the quarterly figure by tax already collected at source from the taxpayer during that quarter, so the same tax is not paid twice.
- Pay the net amount as the instalment for the quarter.
A taxpayer who expects the current year's income to be lower than the last assessed year can file an estimate and pay reduced instalments. This is genuinely useful for a business in decline or facing a one-off downturn — but the estimate must be defensible. If the year closes higher than the estimate, default surcharge applies to the shortfall as though the estimate had never been filed. Estimating down to ease cash flow, then earning more, is a costly miscalculation.
Where the instalment actually lands, by turnover movement
| This quarter's turnover vs base | Ratio | Scaled annual tax on Rs 4,800,000 assessed | Quarter share | After Rs 410,000 of withholding |
|---|---|---|---|---|
| Rs 46,500,000 against Rs 62,000,000 | 0.75 | Rs 3,600,000 | Rs 900,000 | Rs 490,000 |
| Rs 62,000,000 against Rs 62,000,000 | 1.00 | Rs 4,800,000 | Rs 1,200,000 | Rs 790,000 |
| Rs 74,400,000 against Rs 62,000,000 | 1.20 | Rs 5,760,000 | Rs 1,440,000 | Rs 1,030,000 |
| Rs 93,000,000 against Rs 62,000,000 | 1.50 | Rs 7,200,000 | Rs 1,800,000 | Rs 1,390,000 |
The last column is what actually leaves the bank. Two things are worth reading out of the table: the instalment moves with turnover and is indifferent to what happened to margin, and the withholding credit is a flat deduction, so as turnover rises the credit covers a shrinking share of the instalment. A business growing at 50 per cent pays nearly three times the instalment of one contracting by a quarter, on the same assessed tax from the same prior year.
Due dates
The instalment calendar and what falls due
| Quarter | Period covered | Due date | Instalment on an assessed tax of Rs 4,800,000, flat turnover |
|---|---|---|---|
| September | Jul - Sep | 25 September | Rs 1,200,000 |
| December | Oct - Dec | 25 December | Rs 1,200,000 |
| March | Jan - Mar | 25 March | Rs 1,200,000 |
| June | Apr - Jun | 15 June | Rs 1,200,000 |
Note the June date. It falls on the 15th, not the 25th, and it is the one most often missed because it breaks the pattern the other three establish. It also falls before the year has ended, so the final instalment is paid on an estimate of a period that is still running.
The Rs 1,200,000 column assumes turnover flat against the base period. It is not a fixed quarterly figure — each instalment scales by that quarter's turnover ratio and is then reduced by withholding already suffered, so four equal payments are the exception rather than the rule.
The instalments fall on quarterly dates fixed by the Ordinance, with companies and other taxpayers following the schedule set for them, and a final instalment timed near the year end. Because the exact dates are specified by law and occasionally adjusted, confirm them against the FBR income tax due dates and diarise each one. The discipline that works is treating advance tax like a recurring quarterly bill with a hard deadline, not a discretionary payment.
Reconciling against the final return
Advance tax is not an extra tax — it is a prepayment. At year end, the annual return computes the actual liability, and every rupee paid under section 147, together with tax collected at source, is credited against it. Three outcomes follow: if advance tax roughly matched the final liability, little is left to pay; if it fell short, the balance is due with the return; if it exceeded the liability, the excess is refundable. Keeping a running schedule of instalments paid — part of ordinary bookkeeping for tax compliance — is what makes the reconciliation clean and the refund claimable.
Interaction with minimum tax and disputes
Section 147 sits alongside other charges. The final liability it pre-funds may itself be driven by minimum tax on turnover in a low-margin year, and the advance instalments are computed on assessed income that may later be revised. Where the department and the taxpayer disagree on the basis for instalments or the surcharge on a shortfall, the matter can proceed through the appeals process. Companies should also read across to the corporate income tax rate that ultimately determines the liability being pre-funded.
Sources
This guide is written against the official and clearly labelled professional references below. Rates, thresholds and portal procedures change between reviews, so open the primary source before relying on a figure.
Questions people also ask
Who has to pay advance tax under section 147?
Broadly, taxpayers with business income above the threshold the Ordinance sets — companies and AOPs as a rule, and individuals whose latest assessed business income exceeds the specified level. Salaried people whose tax is fully deducted at source under section 149 generally fall outside it, because their tax is already being collected in real time through payroll.
How is the quarterly instalment calculated?
The default basis is the tax assessed for the latest tax year, scaled to the quarter and reduced by tax already collected at source in that quarter. A taxpayer who expects lower income can file an estimate to reduce the instalments, but the estimate has to be honest and supportable — an under-estimate that proves wrong exposes the taxpayer to default surcharge on the shortfall.
What happens if I pay my advance tax late or short?
Default surcharge runs on the unpaid or late-paid instalment for the period it was outstanding. The instalment itself does not disappear — it is still due — and persistent shortfall can also draw recovery action. Because the surcharge is a real cost, it is usually cheaper to fund the instalment on time than to defer it, unless a genuine downward estimate applies.
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