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ICAP Circular 7: Guidance on Minimum tax, final tax, deferred tax latest. Applicability This Circular is not applied to entities following AFRS for SSE
Withdrawn TR27, in its 382nd meeting held on March 30, 2024
" Minimum tax has two scenarios:
Minimum Tax under section 113 of the Income tax Ordinance 2001.
Minimum Tax under other sections of the Income tax Ordinance 2001.
Final Tax
Full and final discharge of tax liability"
"“turnover” means, the [gross sales or] gross receipts, exclusive of Sales Tax and Federal Excise duty or any trade discounts shown on invoices, or bills, derived from the sale of goods, and also excluding any amount taken as deemed income and is assessed as final discharge of the tax liability for which tax is already paid or payable.
When tax is not chargeable or charged at general rate ( in case of losses)
When tax at general rate is less than the minimum tax (when company is in profit but corporate tax is below minimum tax)
The difference of minimum tax and normal tax is carry forward to subsequent next three years.
Current rate of minimum tax is 1.5%."
" Example: Tax deducted on services by non manufauror section 153(B)
The difference of minimum tax and normal tax is NOT carry forward to subsequent years.
If normal tax is more than minimum tax under this case, person will pay tax to tax department.
However, tax losses in this case can be carry forward.
"
This tax charged is full discharge of Liability. Not allowed to carry forward of tax losses. Charge this tax to levy.
" Previously minimum and final tax is presented as income tax within the scope of IAS12.
Para 2 of IAS12 explains that Income taxes include all taxes domestic and foreign based on taxable profits.
Taxable profits (tax loss) is the profit (loss) for a period, determined in accordance with the rules established by the taxation authorities, upon which income taxes are payables(recoverables).

Minimum and final taxes are not calculated on taxable profits so are outside the scope of IAS12.

Comparison of Minimum tax with corporate tax: where as per Income Tax Ordinance comparison is required between Minimum and corporate tax. This is called hybrid taxes which includes a component within the scope of IAS12 (Income tax) and a component within the scope of ifric 21(Levies).

Final tax is based on revenue or other basis than taxable profit so it falls under IFRIC21/IAS37."
Current tax considerations for minimum tax scenarios " Two component Approach
(a) Amount of tax calculated on Gross revenue or other basis will be designated to Operating expenses as per IFRIC21/IAS37. Any excess amount recognized in current income tax expense as per IAS12.
(b) Amount of tax calculated on taxable profit recognized in Current income tax as per IAS12 and excess over it recognized as per IFRIC21/IAS37.
Management can apply any of both approach consistently."
Deferred tax considerations for minimum tax scenarios " Deferred tax calculation in each approach above is different
In scenario (a) Deferred tax will be calculated on the basis of Average effective rate of tax rather than enacted or notified rate. Effective income tax rate varies, management reassess the Deferred tax even when enacted or notified rate remain unchanged.

In scenario (b) when the excess is treated as a ‘levy’, the effective rate of income tax is equal to the enacted rate of income tax"
Implication Current and deferred tax implication for entities where tax is paid under Section 113 or other sections

Situations Explained under section 113
Scenario I: Expectation of Always Paying Minimum Tax
Business Model Insight: The entity anticipates it will always be subject to minimum tax due to low taxable profits or recurring losses.
Accounting Approach (a) is suitable: "Recognition as a Levy: The minimum tax paid should be recorded as a levy (a kind of tax or charge) in the profit and loss account.

No Current Income Tax: No current income tax will be recognized because the entity doesn't expect to generate sufficient taxable profits.

Deferred Tax Consideration:
' Even though temporary differences arise (differences between accounting and tax values of assets/liabilities), no deferred tax will be recorded.
This is because the effective tax rate is expected to be zero in the foreseeable future (no future taxable profits to offset the deferred tax asset).
Scenario II: Expectation of Future Taxable Profits