Tax planning is a legal and essential part of managing a business in Pakistan. It allows companies to reduce their tax liability, maximize available deductions, and ensure compliance with the Income Tax Ordinance, 2001, and other fiscal laws. Effective tax planning helps businesses free up resources for reinvestment and growth while maintaining transparency with the Federal Board of Revenue (FBR).
This article covers the most commonly used tax planning strategies for businesses operating in Pakistan.
What Is Tax Planning?
Tax planning refers to the analysis and arrangement of a business’s financial activities in a way that minimizes tax liability while complying with applicable laws. It differs from tax evasion (which is illegal) and tax avoidance (which uses legal means to reduce taxes).
1. Choosing the Right Business Structure
The form in which a business is registered directly affects its tax treatment.
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Sole Proprietorship: Taxed as individual under progressive slabs
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Partnership (AOP): Profits divided and taxed at partner level
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Private Limited Company: Taxed at flat rate (29% for FY 2023–24)
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Single Member Company (SMC): Enjoys simpler compliance under SECP
Businesses should choose a structure that aligns with their income level, growth plans, and compliance capacity.
2. Claiming Allowable Business Expenses
Businesses can lower taxable income by deducting expenses that are wholly and exclusively incurred for business operations.
Examples of Allowable Deductions
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Salaries and wages
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Rent and utilities
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Marketing and advertising
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Legal and professional fees
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Repair and maintenance
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Travel and vehicle expenses
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Interest on business loans
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Depreciation on fixed assets
Ensure proper documentation and payment through banking channels to avoid disallowance.
3. Depreciation and Initial Allowance
Under the Third Schedule of the Income Tax Ordinance, businesses can claim depreciation and initial allowance on eligible assets.
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Depreciation: Annual wear and tear deduction (typically 10–15%)
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Initial Allowance: 25% in the year of purchase (for new machinery/buildings)
This reduces taxable income without affecting cash flow.
4. Utilizing Tax Credits and Rebates
Section 65A – Manufacturing Tax Credit
Tax credit for manufacturers who increase the number of employees compared to the previous year.
Section 65B – Investment in Plant & Machinery
A 10% tax credit is allowed on the purchase of new machinery used in an industrial undertaking.
Section 62 – Investment in Shares and Life Insurance
Taxpayers can claim a credit on investments held for two years in listed companies or life insurance premiums.
Section 61 – Donations to Charitable Institutions
Businesses can donate to approved NGOs and charitable organizations and claim 30–100% deduction from taxable income.
5. Managing Withholding Taxes Efficiently
Businesses often act as withholding agents and must deduct tax at source on payments like:
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Salaries
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Contracts
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Rent
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Commission
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Services
Efficient tax planning includes:
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Deducting and depositing WHT on time
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Filing monthly/quarterly statements (FBR IRIS)
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Avoiding penalties under Section 182
Also, ensure you’re listed on the Active Taxpayer List (ATL) to avoid higher withholding tax rates on receipts.
6. Proper Recordkeeping and Documentation
One of the best tax planning tools is good bookkeeping. It helps:
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Identify deductible expenses
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Justify claims during audits
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Prepare accurate financial and tax statements
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Avoid disallowance of input tax or business expenses
Keep digital and physical records of:
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Invoices
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Bank statements
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Payroll
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Sales and purchase records
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Tax challans and returns
7. Avoiding Cash Transactions
FBR discourages cash-based operations and disallows certain expenses if paid in cash above Rs. 50,000.
Strategy
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Use bank transfers, cheques, or digital payments for salaries, vendor payments, and asset purchases
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Keep payment evidence for tax audits
8. Tax Planning Around Financial Year-End
Smart companies time their purchases and payments to maximize deductions before year-end (June 30).
Techniques
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Advance payments for deductible expenses
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Acquisition of depreciable assets
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Clearing overdue liabilities
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Writing off bad debts with board approval
Such year-end moves can substantially reduce taxable profits.
9. Registering for Sales Tax and STRN
Businesses with turnover exceeding Rs. 10 million are required to register for sales tax.
Benefits of Registration
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Legally claim input tax adjustments
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Issue sales tax invoices
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Avoid sales tax audits or blacklisting
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Participate in government tenders and B2B trade
Once registered, file monthly sales tax returns through FBR’s IRIS portal.
10. Incorporating a Group Company Structure
For businesses operating multiple divisions or companies, forming a group under Section 59B can help:
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Offset losses of one company against profits of another
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Claim group taxation relief
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Consolidate tax returns under SECP group rules
This strategy is suitable for large corporations and holding companies.
11. Strategic Use of Tax-Free Incomes
Certain income types are exempt from tax under the Second Schedule of the Ordinance. These may include:
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Dividend income from group companies
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Agricultural income (if declared separately)
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Export income under some government schemes
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Foreign remittance-based income
Plan investments and operations around these sources to reduce overall tax burden.
12. Managing Advance Tax and Refunds
Businesses must manage advance tax payments (under Section 147) and ensure timely refunds for excess withholding.
Tips
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Accurately estimate advance tax liability to avoid default surcharge
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File timely refund claims with supporting documents
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Adjust tax credits from CPRs, 3B reports, and bank challans
13. Using Tax Asaan App and IRIS Tools
FBR has simplified compliance using:
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Tax Asaan Mobile App: Quick tax profiles, NTN search, ATL status
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IRIS Portal: Return filing, WHT statements, refund applications
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POS Integration: For retailers to automate sales and input tax data
Leveraging these tools reduces errors, speeds up processes, and strengthens audit readiness.
14. Staying Compliant to Avoid Penalties
Planning is ineffective without compliance. Non-compliance can result in:
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Disallowance of deductions
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Additional tax and default surcharge
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Audit selection and legal notices
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Being removed from ATL
Ensure:
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Timely return filing
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Payment of due taxes
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Regular reconciliation of WHT and CPRs
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Compliance with SECP, PRA, and other regulatory bodies
15. Consult a Tax Advisor or CFO
When operations scale or become complex, businesses benefit from hiring a professional:
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Chartered accountant or tax lawyer
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Part-time or outsourced CFO
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Financial consultant specializing in tax strategy
They help with:
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Audit preparation
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Tax structuring
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Exemption applications
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Managing FBR disputes and litigation
Conclusion
Tax planning in Pakistan is not about avoiding taxes—it’s about smart, legal financial planning. Businesses that implement proactive strategies like optimal structuring, timely filing, recordkeeping, and leveraging credits can significantly reduce their tax burden while staying compliant with FBR rules.
Whether you’re a startup, SME, or established company, proper tax planning ensures sustainability, improves profitability, and builds long-term credibility with regulators and investors alike.
