TY2010-22 period: Tax rate for small companies slashed by 4 percent

The government has stated that tax rate for small companies has been reduced from 25 percent for the Tax Year 2010 to 21 percent for the Tax Year 2022.

The Federal Board of Revenue (FBR) informed a meeting of the Senate Standing Committee on Finance that there is no tax concession/exemption under the Income Tax Ordinance, 2001 wherein small and medium enterprises or cottage industries have specifically been mentioned. However, there are various other tax incentives and concessions under the Income Tax Ordinance, 2001 which may be applicable to cottage industries as well as small and medium enterprises and several tax concessions in this regard included: (i) small companies are taxed at a lower rate as opposed to other companies. As per Income Tax Ordinance, 2001, small company is defined as a company having paid-up capital plus undistributed reserves not exceeding Rs 50 million and employees not exceeding 250 any time during the year. The company's annual turnover must not be exceeding Rs 250 million and the company is not formed by the splitting up or the reconstitution of a company already in existence; (ii) profit and gains derived by a start-up for the tax year in which the start-up is certified by the Pakistan Software Export Board (PSEB) and the following two tax years have been exempted from tax. Additionally, a start-up is exempt from levy of minimum tax under section 113 of the Income Tax Ordinance and from withholding tax on being received by such start-up as a recipient.

A start-up as per Ordinance is a person engaged in providing technology driven products or services, registered with the Pakistan Software Export Board (PSEB) and has turnover of less than Rs 100 million in the last five years; (iii) in order to mitigate undue hardships for small business, the legislature has provided a minimum threshold of turnover for applicability of minimum tax individual businesses and Association of Persons having turnover below ten million rupees are not required to pay minimum tax; (iv) similarly Individual businesses and AoPs having turnover below Rs 50 million not are required to act as withholding agents under section 153 of the income tax Ordinance, 2001.

The government said that small and medium enterprises may also be entitled to avail various tax concessions and exemptions delineated in the Second Schedule to the Income tax Ordinance, 2001 by setting up businesses in Special Economic Zones or certain areas or certain types of business.