How is my business income calculated? Is tax charged on my sales or on my profit?

For a sole proprietor, income tax is normally charged on profit. The Income Tax Ordinance, 2001 takes what the business earns in the year, subtracts the expenses the law allows, and applies the rates to what is left. Turnover is used as the base only when section 113 minimum tax applies.

What does the law say?

The calculation runs through four sections in order.

1. Section 18: what is taxed. The head Income from Business charges “the profits and gains of any business carried on by a person at any time in the year”.
2. Section 20: what is deducted. Section 20(1) allows a deduction for any expenditure incurred in the year wholly and exclusively for the purposes of business. Section 20(2) says that spending on a depreciable asset, an intangible with a life of more than one year, or pre-commencement expenditure is not deducted at once. It is depreciated or amortised instead. The Ordinance also lists expenses that are never allowed, covered on a separate page.
3. Section 11: one head for all businesses. Section 11(1) sorts income into five heads: Salary, Income from Property, Income from Business, Capital Gains and Income from Other Sources. Under section 11(2), income under a head is the total of amounts chargeable under it, reduced by the total deductions allowed under it.
4. Section 9: taxable income. Section 10 adds up income under all heads and exempt income to give total income. Section 9 then reduces total income under section 10(a), but not below zero, by any deductible allowances under Part IX of Chapter III.

The tax rates are then applied to taxable income, and any tax credits are subtracted. For an individual the rates are in Division I of Part I of the First Schedule, covered on a separate page.

How does it work in practice?

Every sale and every fee earned by the business goes into the gross figure. Stock purchases, rent, staff salaries, utilities and similar running costs come off, provided they meet the section 20 test and are not on the Ordinance’s list of disallowed expenses. Equipment and vehicles come off gradually through depreciation. The result is the profit that is taxed.

If you run two businesses, there is no separate calculation for each one at the end. Both sit under the single head Income from Business in section 11(1)(c). Their amounts and deductions are totalled under section 11(2), and the combined figure feeds into total income under section 10 for the tax year.

Worked example (illustrative figures)

Saima owns a cloth shop in Faisalabad and a small mobile repair counter in another market. Her made-up figures for tax year 2027:

Item	Cloth shop	Repair counter
Sales and fees	Rs. 12,000,000	Rs. 800,000
Cost of cloth sold or parts used	Rs. 9,000,000	Rs. 250,000
Rent	Rs. 600,000	Rs. 180,000
Staff salaries	Rs. 900,000	Rs. 120,000
Electricity and phone	Rs. 240,000	Rs. 60,000

Step by step:

1. Cloth shop expenses: Rs. 9,000,000 + Rs. 600,000 + Rs. 900,000 + Rs. 240,000 = Rs. 10,740,000.
2. Cloth shop profit: Rs. 12,000,000 minus Rs. 10,740,000 = Rs. 1,260,000.
3. Repair counter expenses: Rs. 250,000 + Rs. 180,000 + Rs. 120,000 + Rs. 60,000 = Rs. 610,000.
4. Repair counter profit: Rs. 800,000 minus Rs. 610,000 = Rs. 190,000.
5. Income from Business under section 11(2): Rs. 1,260,000 + Rs. 190,000 = Rs. 1,450,000.

Assuming Saima has no other income and no deductible allowances, her taxable income under section 9 is Rs. 1,450,000. The rates in Division I of Part I of the First Schedule apply to that figure, not to her Rs. 12,800,000 of combined sales. This example also assumes every expense passes the section 20 test and none is disallowed.

What if …?

What if one business makes a loss? Section 11(2) nets all amounts and deductions under the head, so a loss in one business reduces the profit of the other. If the whole head ends in a loss, section 11(3) treats it as a loss for that head, dealt with under Part VIII of Chapter III.

What if my turnover is Rs. 100 million or more? Section 113 may apply. Where the tax on profit is lower than the percentage of turnover set in Division IX of Part I of the First Schedule, the person pays the minimum tax, and under section 113(2)(a) turnover is treated as income for the year.

What if I also have a salary? Salary is a different head under section 11(1). Both heads feed into total income under section 10.

Common mistakes

• Believing tax is a percentage of sales. Under sections 9 and 18, the normal base is taxable income, which is profit after allowed deductions.
• Deducting the full price of a vehicle or machine in one year. Section 20(2) sends that cost through depreciation.
• Filing separate figures for each shop as if they were separate taxpayers. A sole proprietorship is not a separate person. All business income sits under one head.
• Forgetting withholding and final taxes. Some receipts may be taxed separately under final tax provisions. That is covered on the page on adjustable and final withholding taxes.

What to check in the official text

Read sections 9, 10, 11, 18 and 20 together, then the list of disallowed expenses that follows section 20. Check Division I of Part I of the First Schedule for the rates on individuals, and section 113 with Division IX if your turnover reaches Rs. 100 million.