Introduction
Understanding tax deductions and credits is essential for Pakistani businesses looking to reduce their tax liabilities, improve cash flow, and remain compliant with FBR regulations. The Income Tax Ordinance, 2001 and Finance Acts provide a variety of allowable deductions, tax credits, and exemptions—many of which go unclaimed due to lack of awareness or improper documentation.
Whether you’re a startup, SME, manufacturing unit, exporter, or services provider, this article will guide you through the key tax deductions and credits available to businesses in Pakistan, including eligibility, documentation requirements, and strategic insights for 2025.
1. What Are Tax Deductions and Tax Credits?
| Term | Description |
|---|---|
| Tax Deduction | Reduces taxable income before calculating tax |
| Tax Credit | Directly reduces the tax payable, often based on specific activities |
Both tools help legally minimize your business’s income tax burden.
2. Legal Framework
The following sections of the Income Tax Ordinance, 2001 govern deductions and credits:
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Section 20–24: Business income deductions
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Section 61–65F: Tax credits for donations, investments, employment, etc.
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Section 100C: Exemptions for non-profits
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Section 153–165: Withholding adjustments
3. Commonly Allowed Tax Deductions for Businesses
A. Salaries and Wages
Deductible: Yes
Conditions: Must be paid via bank transfer, verifiable with salary sheet and payroll records
WHT Implication: Section 149 – Withholding tax must be deducted and deposited
B. Rent on Business Premises
Deductible: Yes
Documentation: Rent agreement, rent payment challans, CNIC copy of landlord
WHT Implication: Deduct and deposit under Section 155
C. Utilities and Communication Expenses
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Electricity, gas, water, mobile and landline bills used for business purposes
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Must be in the company’s name and paid through bank transfer
D. Repairs and Maintenance
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Expenses related to the upkeep of office or factory premises, equipment, or machinery
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Must be properly invoiced with vendor NTN
E. Depreciation on Fixed Assets
| Asset Type | Rate (General) |
|---|---|
| Building | 10% |
| Plant & Machinery | 15% |
| Vehicles | 15% |
| Computers | 30% |
| Furniture | 10% |
Method: Straight Line or Reducing Balance as per Section 22
Condition: Assets must be owned and used during the tax year
F. Amortization of Intangibles
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Trademarks, patents, goodwill, etc. can be amortized over 10 years under Section 24
G. Advertising and Marketing
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Fully deductible if incurred to promote business
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Requires invoices with supplier NTN and tax paid
H. Employee-Related Benefits
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Provident fund contributions, EOBI, gratuity, and group insurance are deductible
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Must be deposited timely and verified with contribution receipts
I. Bad Debts Written Off
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Deductible if proven that efforts were made for recovery
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Must have been previously included in income
J. Interest on Loans (Financial Cost)
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Allowed if borrowed capital is used wholly for business purposes
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Subject to documentation and Section 18 interest restriction rules
4. Key Tax Credits Available Under Income Tax Ordinance
A. Section 61 – Donations to Approved Institutions
Eligible Donations:
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To organizations listed in Second Schedule, Clause 61
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Includes Edhi Foundation, Shaukat Khanum, LUMS, and many NGOs
Credit Formula:
Lower of:
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Donation amount, or
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30% of taxable income for companies
B. Section 62 – Investment in Shares, Sukuks
Eligible Investments:
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IPOs, listed securities, or mutual funds
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Maximum investment: 15% of taxable income or Rs. 5 million
Tax Credit: Proportional to investment and average tax rate
C. Section 63 – Contributions to Approved Pension Fund
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Contributions to Voluntary Pension System (VPS) or SECP-approved pension funds
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Credit allowed up to 20% of taxable income
D. Section 64A – Employment Generation Tax Credit
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For businesses that hire fresh graduates or new employees
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2% of tax payable per new employee (up to 10% of tax payable)
E. Section 64B – Enlistment on Stock Exchange
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Companies that list on Pakistan Stock Exchange (PSX)
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Receive 20% tax credit for 2 years from listing
F. Section 65B – Investment in Plant and Machinery
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10% tax credit on acquisition of new machinery for manufacturing
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Must be used in Pakistan and not transferred for 3 years
G. Section 65C – Tax Credit for New Listed Companies
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20% tax credit for 4 years for companies listing between 2015–2025
H. Section 65D – Equity Investment in New Company
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Sponsors investing in new manufacturing company
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100% tax credit for 5 years if 100% equity is introduced via banking channel
I. Section 65E – Expansion of Existing Manufacturing
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100% tax credit for 5 years on expansion of plant and capacity
5. Export-Related Deductions and Incentives
| Benefit | Description |
|---|---|
| Export Rebate | Refund based on % of export value (for selected sectors) |
| Reduced WHT Rates on Export Proceeds | WHT @ 1% (Section 154) |
| Export Zones/SEZs | Tax holidays for qualified export-based units |
6. Sales Tax Input Adjustments (STGO)
Businesses registered under the Sales Tax Act, 1990 can:
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Claim input tax on goods and services purchased
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Must be declared in the monthly return
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Must hold valid tax invoice with STRN and supplier must be active on FBR ATL
7. Withholding Tax Adjustments
Withholding taxes deducted on:
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Contracts, services, supplies, imports, dividends
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Are adjustable against income tax liability
Use Withholding Tax Certificate (CPR) as evidence to claim in IRIS portal
8. Tax Exemptions and Reduced Rates (Industry-Specific)
| Sector | Incentive Type |
|---|---|
| IT/ITES exporters | 100% tax exemption under PSEB/SECP registration (till 2026) |
| Renewable energy | 5-year tax holiday under SROs |
| Gems & Jewelry | Reduced WHT and simplified returns |
| Agri-based SMEs | Exemptions under provincial tax laws |
9. Tax Planning Strategies for Maximizing Deductions
✅ Maintain complete documentation of all business expenses
✅ Hire a tax consultant for year-round compliance monitoring
✅ Claim input tax only from registered and ATL-listed suppliers
✅ Consider investing in machinery or plant upgrades for Section 65 credits
✅ Separate personal and business expenses
✅ File returns on time to avoid penalty and credit denial
✅ Reconcile WHT deductions and credits quarterly
10. Common Mistakes to Avoid
| Mistake | Consequence |
|---|---|
| Not maintaining proper expense records | Disallowance of deduction |
| Late return filing | Forfeiture of tax credits |
| Claiming unapproved donations | Credit denied under Section 61 |
| Using unregistered suppliers (sales tax) | No input adjustment allowed |
| Mixing capital and revenue expenses | Wrong classification, possible audit exposure |
11. Documentation Required to Support Claims
| Deduction/Credit Type | Supporting Document |
|---|---|
| Salaries & Wages | Payroll sheet, salary slips, WHT challans |
| Rent | Rental agreement, bank payments |
| Advertising | Invoices, STRN of vendor, tax paid |
| Donations | Receipt from approved institution, NTN |
| Machinery Acquisition | Supplier invoice, bank proof, installation cert |
| Pension Contribution | VPS statement and acknowledgment |
| WHT Adjustments | CPRs downloaded from FBR IRIS |
12. Role of Tax Technology
Modern tools help Pakistani businesses:
✅ Track eligible tax credits
✅ Reconcile WHT with vendor payments
✅ Auto-fill IRIS and PRA/SRB returns
✅ Alert for deduction or credit mismatches
✅ Generate CPRs and STRNs reports for compliance
Tools like QuickBooks, SAP, Tax Asaan, and FBR POS integrations are useful.
13. Frequently Asked Questions (FAQs)
Q1: Can I claim a deduction if the expense is paid in cash?
Not if it exceeds Rs. 250,000. Must be paid via crossed cheque or bank transfer.
Q2: Are all donations eligible for tax credit?
No. Only those made to approved institutions listed in Second Schedule.
Q3: Can a tax credit carry forward to next year?
Generally, no—tax credits are only for the year of expenditure/investment.
Q4: What happens if I don’t have STRN of vendor for input claim?
FBR will disallow input tax, and may impose penalties.
Q5: Can unregistered businesses claim tax deductions?
Deductions are limited, and input tax adjustments not allowed.
14. How Sterling.pk Can Help
At Sterling.pk, we help businesses:
✅ Identify and claim all eligible deductions and credits
✅ Prepare and file optimized tax returns on IRIS and PRA/SRB portals
✅ Track and reconcile WHT and input tax adjustments
✅ Structure asset purchases for maximum tax savings
✅ Maintain documentation for FBR audit readiness
✅ Advise on donation, investment, and employment-related credits
Our team ensures you minimize tax legally while staying fully compliant.
Conclusion
Tax deductions and credits are valuable tools that allow Pakistani businesses to optimize their tax burden and improve financial health. By understanding the provisions in the Income Tax Ordinance and planning strategically throughout the year, companies can reduce tax liabilities and improve profitability.
With expert guidance from Sterling.pk, your business can confidently claim every allowable deduction, ensure full documentation, and maintain a proactive tax strategy.
