If my minimum tax on turnover is more than my normal tax, can I carry the excess forward?

Minimum tax that exceeds your normal tax is not lost straight away. Section 113(2)(c) of the Income Tax Ordinance, 2001 lets you carry the excess into later years and set it against tax at the normal rates. The window is short: two tax years.

What does the law say?

Section 113(2)(c) applies where tax paid under sub-section (1) exceeds the actual tax payable under Part I, clause (1) of Division I, or Division II of the First Schedule. In that case “the excess amount of tax paid shall be carried forward for adjustment against tax liability under the aforesaid Part of the subsequent tax year”.

Two provisos follow:

1. Loss or nil-tax years. If minimum tax was paid because no tax was payable or paid for the year, “the entire amount of tax paid under sub-section (1) shall be carried forward”.
2. Time limit. The amount is carried forward and adjusted against tax liability for two tax years immediately succeeding the tax year for which it was paid.

An Explanation, added by the Finance Act, 2023, says “the aforesaid Part” means clause (1) of Division I or Division II of Part I of the First Schedule. Those are the normal rate tables, so the excess is set against tax computed at normal rates.

The footnotes to section 113 show how the window has shrunk. The Finance Act, 2021 proviso allowed five years. The Finance Act, 2022 substituted “five”, and the Finance Act, 2025 substituted “three”, leaving two.

Why does this matter for distributors?

Distributors often work on thin margins, so tax on profit can be well below a percentage of turnover. For tax year 2027 the Division IX rate “In all other cases” is 1.25% of turnover. A distributor paying that rate year after year may build up excess amounts that it can use only if, within two years, its normal tax rises above its minimum tax.

Worked example (illustrative figures)

Noor Distribution (Pvt) Ltd in Peshawar is a resident company distributing building hardware. Its turnover and normal tax below are invented. The minimum tax rate used is 1.25% from Division IX, assumed to stay the same in later years for the sake of the example; later Finance Acts may change it.

Tax year 2027

• Turnover Rs. 400,000,000. Minimum tax: 400,000,000 × 1.25% = Rs. 5,000,000.
• Normal tax on profit: Rs. 3,200,000.
• Minimum tax applies. Excess: 5,000,000 - 3,200,000 = Rs. 1,800,000.
• Available for tax years 2028 and 2029.

Tax year 2028

• Turnover Rs. 380,000,000. Minimum tax: 380,000,000 × 1.25% = Rs. 4,750,000.
• Normal tax on profit: Rs. 4,000,000.
• Minimum tax applies again. New excess: 4,750,000 - 4,000,000 = Rs. 750,000, available for 2029 and 2030.
• The example makes no adjustment of the 2027 excess this year. Section 113 does not say expressly whether a carried-forward amount can reduce tax in a year in which minimum tax itself applies.

Tax year 2029

• Turnover Rs. 400,000,000. Minimum tax: Rs. 5,000,000.
• Normal tax on profit: Rs. 8,000,000, higher than minimum tax.
• Adjustment: 1,800,000 (from 2027, last year it can be used) + 750,000 (from 2028) = Rs. 2,550,000.
• Tax after adjustment: 8,000,000 - 2,550,000 = Rs. 5,450,000, which is still above that year’s minimum tax of Rs. 5,000,000.

If the company’s 2029 normal tax had also been below minimum tax, the unused 2027 amount would reach the end of its two-year window.

What if …?

What if I made a loss? Under the first proviso the whole minimum tax paid is carried forward, not just an excess, since no tax was payable at normal rates.

What if the adjustment would take my tax below minimum tax? Section 113(2)(c) does not state whether an adjustment may reduce a later year’s tax below that year’s minimum tax. The example above avoids the point. The law is unclear on it here.

What if the excess arose before the Finance Act, 2025? The section as amended says two years. It contains no transitional rule for amounts paid when the limit was three or five years.

Common mistakes

• Assuming a refund. Section 113(2)(c) provides adjustment against later tax, not a refund.
• Counting from the wrong year. The two years are those immediately succeeding the tax year for which the amount was paid.
• Using old guidance. Pages written before the Finance Act, 2025 describe a three-year window.
• Treating the excess as a general credit. It is adjusted against tax liability under clause (1) of Division I or Division II of Part I, the normal rate tables.

What to check in the official text

Read section 113(2)(c), both provisos and the Explanation, with the footnotes showing the Finance Acts of 2021, 2022, 2023 and 2025. Check the Division IX Table in Part I of the First Schedule for the rate that applies to your business, and any reduced rate in the Second Schedule.