The legal form of your business is not just a paperwork decision - it directly sets your tax rate, your compliance load and how much of your profit reaches you. A freelancer trading in their own name, a two-partner trading firm and a registered private limited company are each taxed under different rules of the Income Tax Ordinance 2001. This guide breaks down how the Federal Board of Revenue (FBR) taxes each structure, the minimum-tax rules that catch loss-making and low-margin businesses, and the registration and filing duties that come with each. For the wider picture, start with our complete income tax guide for 2026-27.
The three business structures
Almost every business in Pakistan falls into one of three tax categories:
- Sole trader (sole proprietor) - one owner trading under a personal NTN. Simplest to start; the owner and the business are the same taxpayer.
- Association of Persons (AOP) - two or more people carrying on business together, typically a partnership firm. The AOP is a separate taxpayer.
- Company - a private or public limited company incorporated with the Securities and Exchange Commission of Pakistan (SECP). A distinct legal person, taxed at corporate rates.
Sole traders and AOPs are taxed on progressive slab rates; companies pay a flat rate. That single difference drives most of the tax planning around business structure.
How sole traders are taxed
A sole proprietor is taxed as an individual on the net profit of the business, using the non-salaried slab rates (these are higher than the salaried slabs). The current rates for a business individual are:
| Annual taxable income (PKR) | Tax on that income |
|---|---|
| Up to 600,000 | 0% - exempt |
| 600,001 - 1,200,000 | 15% of the amount over 600,000 |
| 1,200,001 - 1,600,000 | 90,000 + 20% of the amount over 1,200,000 |
| 1,600,001 - 3,200,000 | 170,000 + 30% of the amount over 1,600,000 |
| 3,200,001 - 5,600,000 | 650,000 + 40% of the amount over 3,200,000 |
| Above 5,600,000 | 1,610,000 + 45% of the amount over 5,600,000 |
Because the system is progressive, only the slice of profit inside each band is taxed at that band's rate. A sole trader with taxable income above PKR 10 million also pays a surcharge of 10% on the tax due. Sole traders file an individual return and, in most cases, a wealth statement under Section 116.
How AOPs are taxed
An AOP - most commonly a partnership firm - is taxed as a single taxpayer using the same non-salaried slab rates shown above, from 15% up to 45%. Two important rules apply:
- Profit share is not taxed twice. Once the AOP has paid tax on its income, each partner's share of that profit is exempt in the partner's own hands (it is only taken into account to set the rate on any other income the partner has).
- Professional firms have a cap. An AOP that is a professional firm - for example, a firm of lawyers or accountants - which is prohibited by law from incorporating is taxed at a maximum of 40% rather than 45%.
Because AOP and sole-trader income both climb to 45%, high-profit unincorporated businesses often pay more tax than an equivalent company. That is the core reason many growing firms incorporate - but the decision also turns on compliance cost, credibility and how profits will be drawn out.
How companies are taxed
A company pays a flat rate on its taxable income - it does not use slabs. The current corporate rates are:
| Company type | Tax rate | Notes |
|---|---|---|
| Standard company | 29% | Private and public limited companies |
| Small company | 20% | Must meet the Section 2(59A) conditions |
| SME - turnover up to 100M | 7.5% | Category 1, if it opts for the SME regime |
| SME - turnover 100M to 250M | 15% | Category 2 |
| Banking company | 39% | Higher rate for banks |
A small company broadly needs paid-up capital plus reserves under PKR 50 million, annual turnover not exceeding PKR 250 million, not more than 250 employees, and it must not have been formed by splitting an existing business. On top of the corporate rate, distributed dividends are taxed separately in the shareholders' hands, and very large companies can also face super tax under Section 4C, which climbs progressively to 10% on incomes above PKR 150 million.
Side by side: tax on PKR 5 million profit
Here is the tax on the same PKR 5,000,000 of annual business profit under each structure (before minimum tax and surcharge):
The chart shows why structure matters, but the flat corporate rate is only cheaper once profit is high enough to push the slab rates past 20%. At modest profits the exempt slab and low bands often make a sole trader the lighter option. Run your own numbers with our income tax calculator.
Minimum and turnover tax
Profit-based tax is not the whole story. Two provisions can raise your bill even when profits are thin:
- Minimum turnover tax (Section 113). Companies, and individuals and AOPs with turnover of PKR 100 million or more, must pay a minimum tax of generally 1.25% of turnover where their normal tax works out lower - including in a loss year. Reduced rates apply to some sectors (for example, dealers and certain distributors). SMEs opting for the SME regime are exempt.
- Advance tax (Section 147). Businesses pay tax in four quarterly instalments during the year, based on the prior year's liability, and settle the balance at filing.
Withholding tax collected on your supplies, imports and utility bills is generally adjustable against your final liability - unless it falls under a final tax regime. See our withholding tax rate card for the deduction rates that apply to business payments.
Registration and filing duties
Each structure has its own set-up and yearly duties:
| Structure | How to register | Return due date |
|---|---|---|
| Sole trader | NTN on FBR IRIS (free) | 30 September |
| AOP / firm | Partnership deed + FBR; Registrar of Firms in most provinces | 30 September |
| Company | Incorporate with SECP, then NTN | 31 December (June year-end) |
All three should stay on the FBR's Active Taxpayers List (ATL) by filing on time - being a non-filer means much higher withholding tax on banking, property and vehicle transactions, as our filer vs non-filer guide explains. Companies also file audited or unaudited accounts with their return and keep records for six years. If you are setting up now, our new business tax registration checklist walks through every step.
Frequently asked questions
How is a sole trader taxed in Pakistan?
As an individual on the non-salaried slabs - the first PKR 600,000 is exempt, then rates run from 15% up to a top 45% above PKR 5.6 million, plus a 10% surcharge over PKR 10 million income.
What tax rate applies to an AOP?
The same non-salaried slabs as a sole trader, 15% to 45% (40% cap for professional firms barred from incorporating). Partners are not taxed again on their share of AOP profit.
What is the company income tax rate?
29% for a standard company, 20% for a small company, 39% for banks, and 7.5% or 15% for SMEs that opt for the SME regime.
What is minimum turnover tax?
Section 113 charges a minimum tax of about 1.25% of turnover on companies and on individuals or AOPs with turnover of PKR 100 million or more - payable even in a loss year. SMEs are exempt.
Which structure pays the least tax?
It depends on profit. A small company (20%) or SME (7.5%) can beat the slab rates at higher profits, but sole traders often win at low profits thanks to the exempt band. Compliance cost matters too.
Do I have to register with the FBR?
Yes. A sole trader gets an NTN on IRIS; an AOP registers with the FBR and Registrar of Firms; a company incorporates with the SECP first, then obtains its NTN.