Taxation of Private Limited Companies in Pakistan

Private Limited Companies (Pvt Ltd) are the most commonly adopted business structures in Pakistan due to their legal status, credibility, and scalability. Registered with the Securities and Exchange Commission of Pakistan (SECP) under the Companies Act, 2017, these entities are recognized as separate legal persons. Consequently, they are taxed independently from their shareholders or directors under the Income Tax Ordinance, 2001. This article provides an in-depth explanation of the tax framework applicable to Private Limited Companies in Pakistan, including applicable rates, minimum tax, withholding obligations, filing requirements, and available tax credits.

Regulatory Framework
The taxation of private limited companies is governed by:

• Income Tax Ordinance, 2001

• Income Tax Rules, 2002

• Finance Acts issued annually

• Sales Tax Act, 1990 (for sales tax compliance)

• Federal Excise Act, 2005

• Companies Act, 2017

• Regulatory oversight by SECP and FBR

As separate taxable entities, private limited companies are obligated to file corporate tax returns, pay advance tax, deduct withholding tax, and submit audited accounts annually.

Corporate Income Tax Rate for Private Limited Companies
For Tax Year 2025, the applicable corporate tax rates for private limited companies are:

1. General Corporate Tax Rate:

• 29% of taxable income for all private companies not qualifying as small companies

2. Small Company Tax Rate (Section 2(59A)):

• 20% for entities that meet the following conditions:

  • Registered with SECP and FBR

  • Annual turnover does not exceed Rs. 250 million

  • Paid-up capital plus reserves do not exceed Rs. 50 million

  • Not formed by restructuring or splitting of existing business

3. Minimum Tax on Turnover (Section 113):

• 1.25% of turnover is applicable if:

  • The company incurs a tax loss

  • Tax calculated is less than minimum tax liability

Certain sectors have lower turnover tax rates under specific SROs issued by FBR.

Advance Tax under Section 147
Private limited companies must pay advance tax in four quarterly installments based on estimated annual taxable income. Due dates are:

• September 15

• December 15

• March 15

• June 15

Advance tax is computed as 25% of estimated annual liability and must be deposited timely to avoid default surcharge.

Withholding Tax Obligations
Private companies are withholding agents and are required to deduct tax on payments to employees, vendors, and service providers:

Failure to deduct or deposit withholding tax results in penalties and disallowance of related expenses under Section 21.

Annual Tax Filing Requirements

1. Corporate Tax Return:

• Filed via FBR IRIS portal (Form IT-2)

• Includes audited financial statements, tax computations, directors’ report, and schedules

• Due by September 30 if tax year ends on June 30

2. Audited Accounts Submission:

• Companies with turnover exceeding Rs. 10 million must submit audited financials signed by a Chartered Accountant

3. Withholding Tax Statements:

• Monthly filing due by the 15th of the following month (Form 44)

4. Sales Tax Returns (if applicable):

• Filed monthly on eFBR portal by 15th of the following month

Allowable Deductions and Expenses
To compute taxable income, a private limited company may deduct expenses incurred wholly and exclusively for business purposes. Allowable expenses include:

• Salaries and wages

• Rent, utilities, and office expenses

• Depreciation and amortization

• Advertising and marketing

• Repair and maintenance

• Research and development

• Professional and legal fees

• Insurance premiums

• Bad debts (written off in accordance with rules)

Non-Allowable Expenses under Section 21:

• Personal expenses of directors

• Expenses exceeding Rs. 50,000 not paid via banking channels

• Entertainment exceeding allowable threshold

• Salaries paid to persons without NTN

• Utility expenses without proof

Tax Credits and Incentives Available

1. Investment in Plant and Machinery (Section 65B):

• 10% tax credit for purchase of new eligible plant and machinery

2. Employment Generation (Section 64B):

• Tax credit for hiring fresh graduates and apprentices

3. Donations (Section 61):

• Tax credit up to 10% of taxable income for donations to FBR-approved organizations

4. R&D Expenditures:

• Tax credits or deductions may apply depending on the nature of research and eligibility under Section 59B

5. Green Investment and Energy Equipment:

• Customs duty exemptions and accelerated depreciation for solar and energy-efficient investments under AEDB/FBR policies

Sales Tax and Federal Excise Obligations
A private company that supplies taxable goods or services must register for Sales Tax and comply with the following:

• Charge 17% GST on taxable supplies

• Issue tax invoices with STRN and NTN

• Maintain purchase and sales records

• File monthly sales tax return on FBR portal

For companies operating in sectors like telecom, beverages, or tobacco, Federal Excise Duty (FED) may also apply.

Capital Gains Tax (CGT)
CGT applies on the sale or disposal of capital assets including:

• Shares

• Land and buildings

• Business equipment

Capital Gains on Securities:

• 15% for filers, 30% for non-filers

• Gains exempt if listed shares held for more than one year (subject to SBP/FBR clarification)

Capital Gains on Immovable Property:

• Based on holding period and fair market value

• Gains held over four years may be exempt or taxed at reduced rates

Taxation of Dividends and Profit Distribution
Dividends distributed by private companies are subject to withholding tax under Section 150:

• 15% for ATL (Active Taxpayer List) filers

• 30% for non-filers

Dividends received by resident individuals are treated as final tax, while corporate recipients must report them as income from other sources.

Taxation of Foreign-Owned Private Companies
Foreign shareholders or parent companies owning shares in a Pakistani Pvt Ltd are subject to:

• Withholding tax on dividends and royalty payments

• Requirements under State Bank of Pakistan (SBP) for repatriation

• Filing of relevant documentation with SECP and FBR

Audit and Record-Keeping Requirements
Private companies are required to:

• Maintain records for 6 years including books of accounts, invoices, tax returns, and supporting documents

• Appoint a statutory auditor if their turnover exceeds Rs. 10 million

• Submit Form A, Form 29, and annual returns to SECP

Penalties for Non-Compliance

Tax Planning Tips for Pvt Ltd Companies

• Optimize tax liability through eligible credits and deductions

• Consider small company classification if conditions are met

• Ensure accurate withholding to avoid disallowances

• Keep detailed records and pay expenses via banking channels

• Claim depreciation and amortization effectively

FAQs on Taxation of Private Limited Companies

Q. What is the current corporate tax rate for Pvt Ltd companies?
A. 29% standard rate; 20% for small companies meeting eligibility criteria.

Q. Is audit mandatory for Pvt Ltd companies?
A. Yes, if turnover exceeds Rs. 10 million, a statutory audit is required.

Q. Can private companies claim tax credits for donations?
A. Yes, up to 10% of taxable income for donations to approved organizations.

Q. What if my Pvt Ltd company has no profit?
A. You may still be liable to pay minimum tax at 1.25% of turnover.

Q. Are directors’ salaries deductible?
A. Yes, if properly documented and supported by board resolution.

Q. What is the due date for filing tax returns?
A. Generally, September 30 each year, unless extended by FBR.

Conclusion
Private limited companies in Pakistan are subject to a comprehensive tax structure involving corporate income tax, advance tax, minimum tax, and withholding responsibilities. While the system includes a broad compliance framework, it also offers several tax credits and incentives for growth-oriented businesses. Staying compliant with filing deadlines, audit rules, and financial reporting requirements is essential to avoid penalties and ensure smooth operations. Proper tax planning, combined with adherence to FBR and SECP regulations, can help Pvt Ltd companies maximize their profitability and reputation in Pakistan’s corporate sector.