Minimum Tax Section 113 & the Rs. 10 Crore Withholding Rule

Two questions come up in our office more often than almost any others, and they usually arrive together, in the same visit, from the same worried client:

• “My business made a loss this year. Why is FBR still demanding tax from me?”
• “Since when am I supposed to deduct tax from my own suppliers? Nobody told me I had become a withholding agent.”

The client believes these are two symptoms of one rule, the “10 crore rule”, and that crossing Rs. 100 million in sales triggered both at once. That belief is understandable, because both provisions use the same figure. But it is wrong, and the mistake is expensive. These are two separate sections of the Income Tax Ordinance, 2001, doing two entirely different jobs, and after the Finance Act, 2026 they no longer even share the same threshold.

This article separates them, defines “turnover” for each, and works through the numbers.

1. Two laws, one number

Before anything else, hold these two provisions apart in your mind. Everything that follows depends on it.

A business can be caught by one and not the other. After the Finance Act, 2026, that mismatch is no longer a rare edge case. For individual traders it is now the normal position. We return to this at Section 9 below.

2. What Section 113 actually says

Read that phrase again: “for any reason whatsoever”. That is the answer to the client’s first question, and it is deliberate drafting. Parliament has decided that once a business reaches a certain scale, it should contribute a floor amount to the exchequer regardless of how its accounts come out. Section 113 is not a tax on income at all. It is a tax on size.

So a trading loss does not save you. Nor does a brought-forward loss, an exemption, a tax credit, an initial allowance, or an aggressive depreciation claim. Each of those is a perfectly lawful way to reduce taxable income, and each of them is expressly listed as a reason that does not relieve you of minimum tax.

The threshold is recent, and clients remember the old one

Part of the confusion in the market is historical. For individuals and AOPs the threshold under Section 113 was only Rs. 10 million until the Finance Act, 2021 raised it tenfold to Rs. 100 million with effect from 1st July 2021. The same Finance Act reduced the general rate from 1.5% to 1.25%. Clients who were advised before 2021, or who read an old article, are frequently working from a stale figure in both directions.

3. The rate: what you actually pay on turnover

The rates sit in Division IX of Part I of the First Schedule. The general rate is 1.25%, with reduced rates for specified sectors. The Finance Act, 2026 left the Division IX table intact but made a significant change to the separate reduced rate for distributors and dealers under Clause (24D) of Part II of the Second Schedule.

Clause (24D), distributors and dealers: the rate has doubled

Clause (24D) of Part II of the Second Schedule gives a reduced minimum tax rate to distributors, dealers, sub-dealers, wholesalers and retailers of specified goods, subject to the prescribed conditions. The Finance Act, 2026 has changed this in two ways at once, and a lot of distribution businesses will feel it.

Note what has dropped off that list. Cement, steel and edible oil are no longer in Clause (24D) from Tax Year 2027 (1st July 2026 to 30th June 2027). A cement or steel distributor who budgeted at 0.25% now falls to the general 1.25% rate, a fivefold increase in minimum tax rather than a doubling. If you distribute any of these three commodities, this is the paragraph to re-read.

4. What “turnover” means under Section 113

Because the whole liability is computed on turnover, the definition is not a technicality. It is the tax. Sub-section (3) of Section 113 defines it in four limbs:

Three practical points follow from the wording:

• It is gross, not net. Returns, cost of sales, and expenses do not come off. The word used throughout is “gross”.
• Trade discount must be on the face of the invoice. The exclusion is for trade discounts “shown on invoices, or bills”. A discount settled by later credit note, or a volume rebate paid at year end, does not obviously fall within the words used. Document your discount policy on the invoice itself.
• Final tax receipts come out. This matters most for exporters and for anyone with a meaningful slice of income under a final tax regime. Those receipts are stripped out of the turnover base, which is also why an exporter’s Section 113 exposure can look very different from its accounting revenue.

5. Worked example: an AOP with a book loss

6. Carry forward of excess minimum tax, a shrinking relief

Where minimum tax exceeds tax under the normal provisions, the excess has historically been available for carry forward and adjustment against tax liability in later, more profitable years. That relief has been cut back steadily, and any advice more than a year or two old is likely to overstate it.

Two years is a short runway. For a business that is loss-making because it is in a build-out phase, the practical effect is that much of the minimum tax paid during the loss years will simply expire unused before profitability arrives. Treat it as a cost, not a receivable, when you model the numbers for a client.

7. Who falls outside Section 113

• Small and medium enterprises. Minimum tax on turnover does not apply to an SME taxed under the special regime. For a manufacturing individual or AOP sitting between Rs. 100 million and Rs. 250 million of turnover, SME status is the single most valuable planning point in this entire article, because it takes you out of Section 113 altogether. Registration and the category conditions must be satisfied. This is not automatic.
• Companies with a declared gross loss. The proviso to Section 113(1) excludes a company that has declared a gross loss before set-off of depreciation and inadmissible expenses. Where a gross profit has been declared, the section applies. Note carefully that this proviso is drafted for companies. It does not, on its face, extend to individuals and AOPs.
• Persons below the threshold who have never crossed Rs. 100 million in any tax year from Tax Year 2017 (1st July 2016 to 30th June 2017) onwards.

8. How you became a withholding agent

Now the second question. Nobody sent a letter, no certificate was issued, and no officer visited. The status is automatic. It arises by operation of Section 153(7) the moment you meet the description of a “prescribed person”.

A prescribed person under Section 153(7) includes, among others:

• the Federal Government;
• a company;
• an association of persons constituted by, or under, law;
• a non-profit organisation;
• a foreign contractor or consultant; a consortium or joint venture;
• an exporter or an export house, for the purposes of sub-section (2);
• an association of persons having turnover of the prescribed threshold or above in Tax Year 2007 or in any subsequent tax year;
• an individual having turnover of the prescribed threshold or above in Tax Year 2009 or in any subsequent tax year; and
• a person registered under the Sales Tax Act, 1990.

The same word, measured two different ways

Here is the detail that catches out even careful accountants. Section 153(7) does not borrow the Section 113 definition of turnover. It carries its own definition, and on its wording that definition is inclusive of sales tax and federal excise duty, where the Section 113 definition is expressly exclusive of them.

A business at Rs. 9.5 crore of net sales can therefore be outside minimum tax and inside the withholding regime in the very same year. When a client tells you “I am under 10 crore”, the correct next question is: under 10 crore on which measure?

9. The Finance Act, 2026: the two thresholds have split

This is the change your clients have not yet heard about, and it takes effect from Tax Year 2027 (1st July 2026 to 30th June 2027).

Clause (115) of Part IV of the Second Schedule shields individual traders below a stated turnover figure from being treated as prescribed persons under Section 153. The Finance Act, 2026 has raised that figure from Rs. 100 million to Rs. 200 million. The definition of “trader” in Clause (28D) of Part II of the Second Schedule is unchanged.

Two traps sit inside that relief:

• “Trader” is a defined term, not an ordinary English word. It carries the meaning given in Clause (28D) and is confined to trading activity. An individual running a manufacturing unit, or providing services, does not become a trader merely because he also buys and resells. Check the definition against the actual business before you rely on the relief.
• The relief does nothing to Section 113. The minimum tax threshold stays at Rs. 100 million. So from Tax Year 2027 (1st July 2026 to 30th June 2027) an individual trader at Rs. 15 crore of turnover will be paying minimum tax on turnover while having no obligation to deduct from suppliers at all. That is a new and slightly counter-intuitive combination, and clients will need it explained to them rather than discovering it in a notice.

10. If you provide services rather than sell goods

Most commentary on Section 113 is written around traders and manufacturers, which leaves service businesses, consultants, transporters, security agencies, software houses, event managers and advertising firms, guessing at their position. Their position is in some ways harder, and it is worth setting out separately.

Your turnover is your gross fees

Limb (b) of Section 113(3) captures “the gross fees for the rendering of services for giving benefits including commissions”. For a service business there is no cost of goods to argue about. Your invoiced fees, before any expense, are the base. A consultancy AOP billing Rs. 110 million and paying out Rs. 95 million in salaries and subcontracting is squarely inside Section 113 despite a thin margin, and 1.25% of Rs. 110 million is Rs. 1,375,000.

You are already being taxed at source, and that tax is usually minimum tax too

When a prescribed person pays you for services, it deducts under Section 153(1)(b). For individuals and AOPs that deduction is generally treated as minimum tax, not adjustable advance tax. In plain terms, you cannot get it back by showing a loss. The rates applying from Tax Year 2027 (1st July 2026 to 30th June 2027) are as follows, with the second figure applying where the recipient is not on the Active Taxpayers List:

One more consequence worth naming. Because tax on services is minimum tax, a loss-making service business gets no refund of it and cannot set it against other income. This is the mechanical reason so many consultancy and contracting firms show tax paid in a year they made nothing.

11. Worked example: the cost of one missed deduction

Clients rarely appreciate the arithmetic of failing to withhold, because they assume the exposure is limited to the tax they should have deducted. It is not. Three separate provisions bite, and they compound.

12. What the status costs you month to month

Becoming a prescribed person is not a single event. It is an ongoing compliance function that most SME clients are not staffed for.

• Verify ATL status before every payment. The rate depends on the payee’s status at the time of payment, not last year’s. Deduct at the filer rate from a non-filer and the shortfall is yours under Section 161. It cannot be recovered from the supplier afterwards.
• Deduct at the point of payment, on the gross amount, at the correct sectional rate, and with the Tenth Schedule uplift where the payee is not on the ATL.
• Deposit within the prescribed time. For a withholding agent other than the Federal or a Provincial Government, the Rules require deposit within seven days from the end of each week ending on a Sunday. This is a weekly discipline, not a monthly one, and it is where most defaults begin.
• File the withholding statement under Section 165 on IRIS, with evidence of deposit, and reconcile it annually against the return and the financial statements.
• Issue withholding certificates to payees, who will need them to claim credit.
• Keep the underlying record. A Section 161 proceeding is won or lost on invoices, CPRs and supplier confirmations, not on argument.

13. Questions clients actually ask

14. Plain-language glossary

15. What to do now

1. Compute your turnover twice, once on the Section 113(3) basis, exclusive of sales tax and federal excise duty, and once on the Section 153(7) basis. Do not assume one number answers both questions.
2. Go back through your history to Tax Year 2017 (1st July 2016 to 30th June 2017). Because of the “or in any subsequent tax year” wording, a single year in the past can have fixed your status permanently. Find that year before FBR does.
3. Check whether you hold a sales tax registration. If you do, you are a prescribed person irrespective of turnover, and have been since the date of registration.
4. If you are a manufacturer between Rs. 100 million and Rs. 250 million, test your eligibility for SME status. It removes Section 113 entirely and is usually the highest-value step available.
5. If you provide services, reconcile your withholding certificates against 1.25% of turnover before filing, so that any Section 113 shortfall is identified by you rather than by an assessing officer.
6. If you are an individual trader, reassess your position for Tax Year 2027 (1st July 2026 to 30th June 2027) against the raised Rs. 200 million threshold in Clause (115), but confirm first that you fall within the Clause (28D) definition of “trader”.
7. If you distribute cement, steel or edible oil, re-budget your minimum tax for Tax Year 2027 (1st July 2026 to 30th June 2027). Those goods have come out of Clause (24D).
8. Where deductions have already been missed, collect the payment evidence from your suppliers now. Section 161(1B) relief depends on proof, and proof gets harder to obtain with every passing month.