Advance Tax in Pakistan – An Overview

Advance tax is a mechanism under Pakistan’s income tax regime that allows the government to collect tax revenue in installments before the end of the tax year. Rather than paying income tax in one lump sum at the time of filing the return, certain taxpayers are required to pay advance tax quarterly based on estimated income or past year’s tax liability. Advance tax improves cash flow for the government and spreads the tax burden for the taxpayer. This article provides a complete overview of advance tax in Pakistan, including legal provisions, who is liable, how it is calculated, payment deadlines, adjustments, and common compliance challenges.

Legal Basis for Advance Tax
Advance tax in Pakistan is governed under Section 147 of the Income Tax Ordinance, 2001. It applies primarily to companies, AOPs, and individuals with business or professional income. It does not apply to salaried individuals, except in specific cases where salary is combined with other taxable income.

Objectives of Advance Tax

• To ensure early collection of tax

• To improve revenue flow for the government

• To spread out the tax burden for taxpayers over the year

• To reduce the risk of underreporting income at year-end

• To encourage taxpayers to maintain regular accounting and reporting

Who Is Liable to Pay Advance Tax?

The following categories of taxpayers are generally required to pay advance tax under Section 147:

• Companies (Private and Public)

• Association of Persons (AOPs)

• Individuals with business or professional income exceeding the threshold

• Taxpayers whose latest assessed income tax liability exceeds Rs. 500,000

Advance tax does not apply to:

• Salaried individuals (unless they have significant non-salary income)

• Taxpayers under final tax regime for specific types of income (e.g., exports, certain contracts)

• Persons not required to file a return due to exemption

Due Dates for Advance Tax Payment

Advance tax is paid quarterly during the tax year, which runs from July 1 to June 30.

Payments must be made before the 15th day of the last month of each quarter.

How Is Advance Tax Calculated?

Advance tax liability is computed using one of the following methods:

1. Based on Latest Assessed Tax Liability
Advance tax is calculated as 100% of the last assessed income tax liability, divided into four equal installments.

Example:

• Last assessed tax: Rs. 1,200,000

• Quarterly advance tax: Rs. 300,000

2. Based on Estimate by the Taxpayer
The taxpayer may estimate current year’s income and submit Estimation of Income and Tax Payable (Form 114A) to the FBR before the due date of the second installment.

In such case, the tax is calculated based on estimated income, and the remaining quarters are adjusted accordingly.

3. Based on Estimated Turnover (Minimum Tax)
In cases where taxpayers declare low or no profits, advance tax may be calculated on the basis of minimum tax under Section 113, typically 1.25% of turnover.

How to Pay Advance Tax?

Advance tax must be paid through the FBR’s Computerized Payment Receipt (CPR) system, using the following methods:

• Internet banking

• Mobile banking apps

• ATM or branch deposit

• 1Link system

Tax is deposited using Tax Payment Challan (CPR) under Head Code 9202 – Advance Tax.

Filing and Compliance Requirements

While no separate return is required for each installment, the taxpayer must:

• Maintain calculation and payment records

• Submit Form 114A if opting for estimated tax

• Adjust any shortfall or excess in the final return filed after year-end

• Reconcile CPRs during final tax assessment or refund application

Advance Tax on Specific Transactions (Deemed Advance Tax)

In addition to quarterly payments, advance tax is also collected on certain transactions as withholding tax, which is treated as advance tax. Common examples include:

• On vehicle registration (Section 231B)

• On property transactions (Section 236K and 236C)

• On cash withdrawals from bank (Section 231A)

• On electricity bills (Section 235)

• On educational institution fee (Section 236I)

These taxes are adjusted against the taxpayer’s final liability at the time of filing the return.

Adjustment of Advance Tax Against Final Tax Liability

At the end of the tax year, the total advance tax paid is:

• Credited against final tax payable in the income tax return

• If tax paid exceeds the liability, a refund may be claimed

• If underpaid, the balance is payable with return

Refunds must be claimed using Form 170 along with the income tax return and wealth statement.

Penalty for Non-Payment or Late Payment

Failure to pay advance tax on time can result in:

• Default surcharge under Section 205

• Penalties under Section 182 for non-compliance

• Potential audit or notices from FBR

• Loss of Active Taxpayer List (ATL) status

Surcharge is calculated at 12% per annum on the amount due from the date of default till the date of payment.

Advance Tax for Salaried Individuals with Additional Income

If a salaried person has other sources of income, such as:

• Rental income

• Capital gains

• Business income
  They may be required to pay advance tax if their total tax liability exceeds Rs. 500,000.

They must declare their estimated additional income and submit Form 114A accordingly.

Benefits of Advance Tax Payment

• Avoids large year-end tax liability

• Helps maintain ATL status

• Allows better tax planning and cash flow management

• Enhances business credibility and compliance

• Prevents penalty and audit risks

Challenges and Issues Faced by Taxpayers

• Misunderstanding of whether advance tax applies

• Incorrect calculation of estimated income

• Late filing of Form 114A

• Discrepancies in CPR or challan details

• Delay in adjusting withholding tax as advance tax

• Overpayment and refund delays

Recent Developments and Reforms

• Introduction of Form 114A online on IRIS

• Simplification of challan payment through e-Pay and 1Link

• Integration of advance tax data with Active Taxpayer List (ATL)

• Increased enforcement of advance tax compliance for non-filers

• Encouragement to use digital platforms for estimation and submission

How Sterling.pk Assists with Advance Tax Compliance

At Sterling.pk, we provide:

• Analysis of your business income and tax liability

• Accurate calculation of advance tax

• Timely filing of Form 114A and submission on IRIS

• Advance tax payment through proper challan codes

• Reconciliation and adjustment at year-end

• Assistance with overpayment and refund claims

• Legal advisory on exemption or estimation disputes

Whether you’re a company, AOP, freelancer, or salaried individual with other income, our expert team ensures your advance tax obligations are met timely and accurately.

Frequently Asked Questions (FAQs)

Is advance tax refundable?
Yes, if your total advance tax exceeds your final income tax liability, the excess amount is refundable after filing your return.

Can I revise my estimate after filing Form 114A?
Yes, you may file a revised estimation of advance tax if there is a material change in income projection.

What happens if I skip a quarter’s payment?
You will be liable for default surcharge and may receive a notice from FBR for short payment.

Are freelancers required to pay advance tax?
Yes, if their annual tax liability exceeds Rs. 500,000, they are required to pay advance tax.

What if I am in loss?
You can file Form 114A showing estimated loss or no tax liability. No advance tax is payable if the estimate is accepted.

Conclusion
Advance tax is an important aspect of Pakistan’s income tax system, aimed at early and equitable collection of taxes. Understanding its applicability, calculation, and payment process is critical for businesses and professionals with sizable tax liabilities. Timely payment and proper recordkeeping help avoid penalties, audits, and legal complications. With expert guidance from Sterling.pk, you can manage your advance tax obligations efficiently, maintain compliance with FBR, and ensure smooth year-end settlement of your tax affairs.