Minimum tax on turnover: the 1.25% that applies at a loss
Minimum tax under section 113 is the provision that most reliably surprises Pakistani business owners, because it breaks the intuition that tax follows profit. It does not. It follows turnover, and it applies whether you made money or lost it.
How it works
The computation is a comparison, run after the normal computation is complete:
- Compute regular tax on taxable income in the normal way.
- Compute 1.25% of gross turnover for the year.
- Pay the higher of the two.
- Where the minimum exceeds the regular figure, track the excess — it can generally be carried forward for up to three years against future tax liability.
Profit Rs 30m → regular tax Rs 8,700,000 vs minimum Rs 3,750,000. Regular tax governs.
Profit Rs 10m → regular tax Rs 2,900,000 vs minimum Rs 3,750,000. Minimum governs; Rs 850,000 excess carried forward.
Loss of Rs 5m → regular tax nil vs minimum Rs 3,750,000. Minimum governs in full.
The crossover for a company at 29% sits at a net margin of roughly 4.3% of turnover. Below that, minimum tax is your liability regardless of what the accounts say.
Who it hits hardest
- Distribution and wholesale. High turnover on thin percentage margins is precisely the profile minimum tax catches.
- Trading and commodity businesses, where volume is large relative to gross profit.
- Contractors and construction, where a single loss-making contract can produce a large turnover figure with no profit.
- Early-stage businesses scaling revenue ahead of profitability. Growth-stage companies are structurally exposed and frequently have not budgeted for it.
- Services businesses with pass-through costs recorded as revenue rather than netted, which inflates the turnover base.
That last point is worth acting on: where amounts are genuinely recoveries or disbursements rather than your own revenue, how they are recorded affects the base. Get the accounting policy right on a proper basis rather than to reduce a tax figure, but do get it right.
We handle the computation, the minimum-tax comparison, statutory accounts and the annual filings together.
Avail our corporate tax servicesThe definition of turnover is the whole argument
Because the rate is applied to a large number, a definitional error multiplies. Turnover for section 113 is set by statute and is not automatically the revenue line in your income statement. It broadly captures gross receipts from the sale of goods, rendering of services and execution of contracts, with adjustments and exclusions that the provision specifies.
Practical implications:
- Establish the statutory base rather than applying 1.25% to accounting revenue.
- Keep the turnover reconciliation between audited accounts and the aggregate of your sales tax returns — this is the first document a reviewer asks for, and an unexplained difference undermines your figure. See bookkeeping for tax compliance.
- Where receipts fall under a final or separate regime, confirm whether they belong in the minimum tax base at all before including them.
How it interacts with everything else
| Mechanism | Interaction |
|---|---|
| Concessionary rates | Minimum tax can cancel the benefit entirely. A small company at 20% still pays the turnover floor if margins are thin — small company treatment |
| Carried-forward losses | Losses reduce taxable income and therefore regular tax, which makes the minimum more likely to govern |
| Withholding suffered | Adjustable withholding is credited against the liability, including where the minimum governs |
| Advance tax instalments | Quarterly instalments should anticipate the minimum tax position, not just projected profit |
| Export withholding | Section 154 export withholding was aligned to 1.25% by the Finance Act 2026 — Finance Act 2026 register |
What to actually do about it
- Model it quarterly, not annually. Minimum tax is predictable from turnover, so there is no excuse for it arriving as a surprise in December.
- Build it into advance tax instalments to avoid default surcharge on underpayment.
- Maintain a carry-forward schedule showing each year excess and the year it expires. Unrecorded carry forwards are simply lost.
- Reconsider pricing on thin-margin lines. A contract at 2% net margin carries a tax cost above its profit, which is a commercial fact rather than a tax problem.
- Check whether a sector-specific reduced rate applies. The Federal Government was empowered by the Finance Act 2026 to reduce rates to a floor of 1% for specified sectors where withholding operates as minimum tax, subject to being tabled before the National Assembly.
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
Why should a loss-making business pay any tax at all?
Because minimum tax is a floor by design rather than a tax on profit. The policy intent is to secure a minimum contribution from businesses with substantial economic activity irrespective of the declared profit position. Whether that is fair is a policy question; the practical consequence is that a loss does not remove the liability and cash has to be planned for it.
What counts as turnover for this purpose?
Turnover for section 113 is defined by the statute and it is not simply the revenue line in your accounts. Gross receipts from the sale of goods, rendering of services and execution of contracts feature, and there are adjustments and exclusions. Because a small definitional difference multiplies straight into the liability, establish the correct base rather than applying the percentage to accounting revenue.
Can I actually recover the excess I paid?
Excess of minimum tax over regular tax can generally be carried forward for up to three years and set against future tax liability. In practice recovery depends on becoming profitable enough within that window that regular tax exceeds the minimum. A business that stays thin-margined loses the benefit as each year expires, so the carry forward should be tracked year by year rather than assumed.
Does minimum tax apply to individuals and AOPs too?
The minimum tax regime is not confined to companies, though its application depends on the taxpayer and the activity. A business individual or association of persons with substantial turnover should test the position rather than assuming the regime is a corporate-only concern.
We are an exporter. Does minimum tax still apply?
Export receipts operate under their own withholding treatment, and the Finance Act 2026 moved the section 154 export withholding rate to 1.25% specifically to align it with the standard minimum tax rate under section 113. Establish which regime governs your receipts before adding a separate minimum tax computation on the same turnover.
Send the tax year and the transaction or filing involved, and we will tell you what is actually required.
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