By Muhammad Saqib Raza, Advocate High Court
Minimum tax is one of the most debated features of Pakistan’s income tax architecture. It was introduced to address an enforcement reality, namely that many entities with substantial turnover legally reported little or no taxable income because of depreciation, exemptions, allowances, set off of losses, credits, and other deductions recognized by law. In response, the legislature adopted a turnover-based minimum contribution rule, while simultaneously creating a statutory adjustment framework so that minimum tax does not permanently replace normal income tax. The controversy intensifies at the intersection of minimum tax and its carry forward adjustment mechanism, particularly where the taxpayer is in a loss position. The Supreme Court judgment in Messrs Kassim Textile Mills (Pvt.) Ltd v Commissioner Inland Revenue, Karachi, decided on 2 May 2025, has now decisively shaped this debate for pre-2021 periods.
This article explains the concept of minimum tax, the meaning of adjustment against actual tax, and then presents a structured critique of the Supreme Court’s approach in Kassim Textile.
Concept and purpose of minimum tax: Minimum tax is a statutory fallback. It is designed to ensure that an enterprise with meaningful economic presence, evidenced by turnover, contributes a minimum amount to public revenue even when normal computation results in no tax payable or a very low tax payable. Under section 113, minimum tax applies where, for reasons expressly contemplated by law including loss for the year, set off of losses, exemptions, credits, rebates, allowances, and deductions, either no tax is payable or the tax payable is less than the prescribed percentage of turnover from all sources. This design makes minimum tax an exception to the classical income tax idea that tax follows taxable income. The legislature nevertheless considered it justified as a policy tool against profit suppression, timing differences, aggressive deductions, and structural liquidity of revenue.
Legal character of minimum tax: Minimum tax does not re-write the main charging scheme. The charging provision remains section 4, tax on taxable income computed u/s 9 & 10 read with the relevant heads and rules. Minimum tax is imposed through a deeming mechanism. Turnover is treated as a surrogate base for a limited statutory purpose, and tax is collected on that surrogate base where normal tax would otherwise be ‘nil’ or below the minimum threshold. This distinction is important because it frames minimum tax as an alternate collection mechanism, not a replacement of income based taxation. Its character becomes clearer when the statute provides an adjustment and carry forward mechanism. An amount that can be carried forward and adjusted against future normal tax liability is, in fiscal logic, closer to a provisional collection or credit, not a final or confiscatory extraction.
Adjustment against actual tax under section 113(2)(c), what it means: Section 113(2)(c) provides that where tax paid under subsection (1) exceeds the actual tax payable under Part I, Division II of the First Schedule, the excess amount shall be carried forward for adjustment against the tax liability of subsequent years, subject to the statutory time window. The intended operation is straightforward in principle.
- Compute tax under normal law, meaning actual tax payable under the First Schedule based on taxable income.
- Compute minimum tax under section 113(1) based on turnover.
The adjustment mechanism is a balancing device. It allows the State to secure baseline revenue in weak years but allows the taxpayer to recoup that temporary over collection when profitability returns, within the legislatively prescribed window.
The Kassim Textile Mills judgment, the Supreme Court’s core holding: In Kassim Textile, the Supreme Court held that under the pre-2021 text of section 113(2)(c), a taxpayer cannot carry forward minimum tax paid in a year where it had no actual tax payable because it declared a loss. The Court adopted a strict literal approach to the expression “actual tax payable”. It reasoned that for an excess amount to exist, the law contemplates that some actual tax must first be payable in the relevant year. If actual tax payable is zero due to losses, the Court held there is nothing for minimum tax to exceed within the meaning of section 113(2)(c), therefore, no excess is created for carry forward.
The Court further held that the Finance Act 2021 change, which expressly allowed carry forward where no tax is payable, is prospective and cannot be treated as clarificatory for earlier years. The Court also held that FBR Circular No. 17 of 2004 cannot override or enlarge the statute.
Doctrinal strengths in the judgment: The judgment is strong on orthodox canons of interpretation applicable to fiscal statutes. It reiterates that taxation must be founded on the clear language of the law, that courts cannot add or substitute words, and that equity or fairness arguments cannot be used to re-write a tax provision. It also correctly re-affirms that administrative circulars cannot create a right not found in the statute, particularly where statutory language is treated as plain. This portion of the reasoning is attractive from the perspective of certainty and separation of powers.
Critical appraisal, conceptual, structural, and practical issues:
Despite its doctrinal clarity, the Kassim Textile approach raises serious concerns at the level of concept, statutory structure, and tax policy coherence.
Treating ‘zero’ as a legal bar and creating a ‘one rupee’ eligibility divide: Under the interpretation adopted in Kassim Textile, the phrase ‘actual tax payable’ is treated as requiring some positive normal tax liability in the relevant year. The practical consequence is that where the taxpayer has even one rupee of actual tax payable under the normal regime, the minimum tax paid can exceed that amount and the excess becomes eligible for carry forward adjustment under section 113(2)(c). However, where the actual tax payable is exactly zero because of a declared loss, the Court holds that no excess arises for statutory purposes, therefore, no carry forward adjustment is allowable. This effectively introduces a positivity threshold, not stated in the text in express terms, which creates a sharp, outcome determinative distinction between a taxpayer with nominal tax liability and a taxpayer with zero tax liability, even though both may have paid substantial minimum tax on turnover.
Rendering section 113(2)(c) least effective where section 113(1) is most triggered: Section 113(1) is primarily triggered in loss years and deduction driven years, the very cases the provision enumerates. If carry forward is denied whenever actual tax payable is zero, then the adjustment mechanism becomes least available in the very circumstances that generate minimum tax most frequently. This shrinks the practical scope of section 113(2)(c) to cases where the taxpayer has low but non zero tax under normal law, while excluding the class that most commonly pays minimum tax, loss making entities. Structurally, this outcome appears inconsistent with the rationale advanced historically for insertion of section 113(2)(c), namely liquidity relief and temporality of the turnover tax burden.
Converting a revenue safeguard into a permanent burden on genuine losses: Minimum tax is defensible as a baseline contribution device, but its legitimacy is often tied to the idea that it is provisional and reconcilable. If minimum tax paid in genuine loss years becomes permanently non-adjustable, it starts resembling a turnover levy that punishes legitimate business cycles, rather than a temporary revenue hedge. The statute does not expressly declare that minimum tax in loss years is intended to be a sunk cost. The Court’s interpretation tends to produce that effect for pre-2021 years.
Unaddressed constitutional implications: A serious constitutional dimension of the issue has remained entirely unaddressed by the Supreme Court. If a company is denied the right to carry forward and adjust tax paid during loss making years against income tax payable when it subsequently earns profits, the law effectively permits taxation at a time when no income existed and only losses were incurred. Such a levy departs from the foundational principle of income taxation and operates, in substance, as a compulsory taking of property without corresponding income. In constitutional terms, taxing losses in this manner approximates expropriation and directly attracts the protection of Articles 23 and 24 of the Constitution. It also raises grave concerns under Articles 4, 18, and 25, as it offends due process, impairs lawful business activity, and results in unequal and arbitrary treatment between similarly placed taxpayers. This constitutional question, despite its centrality, has been entirely glossed over, rendering the judgment vulnerable to criticism as having been delivered per incuriam on this fundamental aspect. Moreover, minimum tax in its non-adjustable form assumes the character of an additional tax burden rather than a substitute levy. After the utilization of Entry 47, the imposition of a further fiscal burden under Entry 52 creates a tax ‘in addition to’, and not ‘in lieu of’, income tax. This distinction is constitutionally significant and was expressly recognized by the Supreme Court in Elahi Cotton Mills, where such levies were upheld only within defined constitutional limits.
Under engagement with ambiguity and the clarificatory argument: The Court rejected the view that the 2021 amendment is clarificatory. While that conclusion may be sustainable, the reasoning would have been stronger if it had more fully engaged with the long history of conflicting High Court views and Tribunal interpretation across jurisdictions. Where judicial opinion is demonstrably split, it is difficult to assert that the earlier text admitted only one inevitable reading without acknowledging why multiple superior courts plausibly read it differently. A more explicit analysis of why the previous language was unambiguous, despite a sustained interpretive conflict, would have strengthened the persuasiveness.
Collateral consequences in amendment and revision litigation: A significant practical fallout is departmental reliance on Kassim Textile to reopen matters under section 122(5A) or to treat earlier adjustments as erroneous. Where, at the relevant time, a taxpayer’s treatment was supported by appellate fora or High Court interpretations, branding that treatment as an error can collide with the principle that debatable legal issues generally do not justify revision merely because the department later succeeds in a different interpretation. This is especially sensitive where taxpayers relied on existing jurisprudence and administrative practice when filing returns and finalizing assessments.
Post-2021 position and the limited future reach of Kassim Textile: After the Finance Act 2021 substitution, the law expressly allows carry forward where tax is paid under section 113(1) because no tax is payable or paid for the year, thereby allowing the entire amount paid to be carried forward for adjustment in the manner stated. This statutory clarity substantially reduces future disputes of the Kassim Textile type for subsequent years. The continuing relevance of the judgment is therefore, concentrated in legacy years and pending litigation where pre-2021 text governs.
Minimum tax under section 113 represents a legislative compromise between fiscal certainty for the State and the income based character of taxation. It operates as a revenue protection device in years when the normal charging provisions yield little or no tax, yet its legitimacy has always rested on its continued conceptual linkage with the ordinary tax regime through an adjustment and carry forward mechanism. The Supreme Court in Kassim Textile has now authoritatively determined that, for pre 2021 periods, this linkage breaks where the taxpayer’s actual tax payable is zero on account of losses, thereby excluding such cases from the statutory adjustment framework.
From a conceptual and structural perspective, this construction is open to sustained critique. It treats zero not as a computed outcome of the charging provisions but as a disqualifying absence, it significantly restricts the functional reach of section 113(2)(c) in the very circumstances where section 113(1) is most frequently triggered, and it risks transforming what was conceived as a provisional revenue safeguard into a permanent fiscal burden on genuine loss making enterprises. While the legislature has now intervened through the Finance Act 2021 to expressly restore the adjustability of minimum tax in loss years, that clarification does not cure the doctrinal and constitutional tensions embedded in the pre amendment regime.
For legacy periods, Kassim Textile will remain binding authority. However, its implications extend beyond mere statutory interpretation. They touch questions of fiscal fairness, constitutional protection of property, and the proper limits of revisionary jurisdiction where taxpayers acted in accordance with prevailing judicial opinion. These issues ensure that the judgment will continue to attract critical examination in tax jurisprudence and will remain central to litigation strategy in disputes involving minimum tax, loss years, and retrospective re characterization of settled positions.