What is Advance Tax in Pakistan – A Guide by WaysTax

What is advance tax in Pakistan? Because of the complexity of the tax system, businesses and professionals ask this question a lot.

If you’ve ever received an FBR notice under Section 147 or been asked to pay a tax installment before even filing your return, you’re already dealing with advance tax.

At WaysTax, we help you decode complex legal and tax matters, making compliance stress-free and accurate. Our professionals are available to help you at every stage, whether it be with tax filing, NTN issuance, or business registration.

What is Advance Tax in Pakistan?

Advance tax is a prepaid tax that the Federal Board of Revenue (FBR) collects in advance from taxpayers on the basis of their estimated annual income. 

The goal is to streamline revenue collection and avoid a lump-sum burden at the end of the tax year.

Advance tax is typically paid in four quarterly installments and applies to:

• Business individuals
• Companies
• Associations of Persons (AOPs)

Section 147 of the Income Tax Ordinance of 2001 governs this tax.

Why Does Advance Tax Matter?

The FBR introduced an advance tax to ensure a regular inflow of revenue and reduce evasion risks. 

It also helps taxpayers manage their finances better by spreading the liability over four quarters, rather than paying it all at once during filing.

According to an FBR Press Release, the system of advance tax is meant to facilitate taxpayers and not to burden them. 

Timely payment can also help avoid penalties and default surcharges.

The Importance of the Advance Tax Revenue System

The introduction of advance tax under Section 147 of the Income Tax Ordinance, 2001, marked a major shift in Pakistan’s tax policy, transforming tax collection from a year-end event to a continuous, installment-based process.

Previously, income tax was typically collected only after the end of the financial year, often leading to two key challenges:

• Unpredictable revenue inflows for the government
• A heavy financial burden for taxpayers facing a large, one-time payment

To address these concerns, Section 147 introduced a more balanced system.

Benefits of introducing Section 147 are

Stable Revenue for the Government

By requiring advance payments throughout the year, the Federal Board of Revenue (FBR) secures a more consistent and reliable income stream. 

This allows for better budget management and ensures ongoing funding for national projects and public services.

Easier Financial Planning for Taxpayers

For individuals and businesses, paying taxes in quarterly installments significantly reduces the financial pressure of a lump-sum payment at year-end. 

It also encourages timely compliance and reduces the risk of default.

In short, the advanced tax FBR framework is designed to be a win-win: it strengthens the government’s ability to plan and operate efficiently while giving taxpayers a more manageable, predictable, and less stressful way to fulfill their tax obligations.

Understanding Advance Tax Exemptions: Who Doesn’t Pay Under Section 147?

The requirement of 147 intimation to pay advance tax under Pakistan’s Income Tax Ordinance doesn’t apply equally to all taxpayers. 

Certain individuals and entities enjoy exemptions from this obligation, providing much-needed relief in specific circumstances. 

Let’s examine who qualifies for these exemptions and why.

Categories Exempt from Advance Tax

These are some of the categories that are exempt from advance tax in Pakistan

1. The Small Earner’s Shield

Individuals or entities whose latest assessed annual taxable income is less than PKR 1 million are exempt from paying advance tax. 

This provision supports small businesses and lower-income individuals by sparing them from installment-based payments, simplifying their compliance process.

2. Salaried Individuals with TDS

You are exempt from paying advance tax separately if you are a salaried worker whose employer regularly deducts income tax at the source. 

Since tax is already being collected through the TDS system every month, this effectively serves the same function as advance tax.

3. Revenue Subject to the Final Tax Regime (FTR)

Some income types fall under the Final Tax Regime, where tax is deducted at a fixed rate at the time of payment, and no further liability is assessed. 

Common FTR income categories include:

• Dividend income
• Profits from shipping or air transport businesses
• Payments to non-residents
• Income of commercial importers
• Contractual income
• Profit on debt (interest)
• Prize or lottery winnings

Because tax is already considered final on these incomes, there’s no requirement to pay additional advance tax.

4. Taxpayers Who Have Made Enough Tax Payments

If a taxpayer has already paid an amount equal to or exceeding their projected advance tax liability, whether through TDS, withholding, or voluntary payments, no further advance tax is due.

Each quarter, taxpayers can adjust their advance tax liability by subtracting any taxes already paid or withheld during that period. This helps avoid double taxation and keeps the system fair and transparent.

In cases where more tax has been paid than required, the excess may be refunded or adjusted against future liabilities. 

Ideally, this ensures that taxpayers enter the new fiscal year without facing a large year-end tax burden.

How to Answer Notices of Advance Tax

If you receive an advance tax notice via the FBR’s Iris portal, don’t ignore it. 

Prompt action is key to avoiding penalties.

Here’s what you can do:

• Pay the Tax: If the notice reflects your actual income, pay it as per the schedule.
• Submit an Estimate: If your income this year is lower than expected, file an income estimate to revise your advance tax.
• Claim Exemption: If you’re exempt (e.g., salaried with TDS or income below the threshold), provide proof and respond accordingly.
• Appeal (if needed): Do you disagree with the notice? You are entitled to submit an appeal along with any necessary supporting documentation.

How Can Advance Tax Be Calculated?

Paying advance tax? 

Here’s a simplified process:

1. Estimate Annual Income: Add up your expected income from all sources.
2. Apply Tax Rates: To determine your expected tax, use the current tax slabs.
3. Divide by Four: Divide the sum into four equal payments.
4. Adjust for Payments: Subtract any taxes already paid or withheld during each quarter.

The Formula:

(A × B) ÷ C – D

Where:

• A = Your income or turnover for the current quarter
• B = Total tax paid in the previous tax year
• C = Total income or turnover in the previous year
• D = Any advance tax already paid for the current quarter

Example:

Let’s break it down with numbers:

• Last year’s turnover: Rs. 2,000,000
• Tax paid last year: Rs. 40,000
• Turnover this quarter: Rs. 500,000
• Advance tax already paid this quarter: Rs. 5,000

Now apply the formula:

(500,000 × 40,000) ÷ 2,000,000

= Rs. 10,000 (estimated advance tax for the quarter)

Rs. 10,000 – Rs. 5,000 

= Rs. 5,000

So, you’ll owe Rs. 5,000 in advance tax for this quarter.

Installment Due Dates:

• 1st: 25th September
• 2nd: 25th December
• 3rd: 25th March
• 4th: 15th June

What If You Don’t Pay Advance Tax?

Failing to pay advance tax on time under Section 147 can lead to several consequences, both financial and legal. 

Here’s what you could face:

1. Late Payment Penalty

Failure to meet the deadline may result in a penalty or surcharge from the Federal Board of Revenue (FBR). Over time, this penalty may accumulate and raise your total tax obligation.

2. Default Surcharge (Interest)

In addition to penalties, interest (default surcharge) is charged on the unpaid amount. This interest is calculated on a monthly basis until the full payment is made.

3. Legal Action or Notices

If the non-payment continues, the FBR can issue demand notices or initiate recovery proceedings. In serious cases, your bank accounts may be frozen, or enforcement actions may be taken under tax law.

4. Complications with Annual Return Filing

Unpaid advance tax may lead to mismatches or issues when you file your annual income tax return, possibly resulting in delays in processing refunds or assessments.

How Waystax Can Help You

Waystax simplifies advance tax compliance so you stay stress-free and penalty-free:

• Accurate Calculations: We compute your quarterly tax using correct data.
• Estimate Filing: We help reduce your liability by filing realistic income estimates.
• Notice Handling: Got an FBR notice? We respond and resolve it for you.
• Exemption Claims: We identify if you’re exempt and file accordingly.
• Advisory & Planning: Our experts guide you to plan smart and avoid surprises.

Let Waystax take care of the headache so you can concentrate on expanding your company.

Stay Ahead with Waystax

Now that you are aware of what is advance tax in Pakistan, understanding and managing it doesn’t have to be stressful. 

You can stay in compliance, avoid fines, and even enhance your financial planning with the correct advice and prompt action. 

At Waystax, we’re committed to making taxation simple, accurate, and stress-free for individuals, businesses, and professionals across Pakistan.