Circular No. 02 of 2026-27 (Income Tax) — record

Circular No. 02 of 2026-27 is FBR’s own explanation of the important income tax amendments made by the Finance Act 2026. It walks through thirty changes to the Income Tax Ordinance 2001 — from the new National Faceless Centre and the algorithmic settlement mechanism to lower salary slabs, the end of section 7E deemed-income tax, flat property advance taxes and a reshaped penalty regime.

For most businesses the immediate items are the integration provisions (a 3% expenditure disallowance for failing to install an electronic resource, against a 10% tax credit for integrating), the new bank data reporting threshold of Rs. 100 million, and the changed withholding rates on services. For individuals, the lower salary slabs, the withdrawal of the salaried surcharge and the flat 2.75% / 1.25% property rates matter most.

Each amendment below is summarised from the circular as issued; the numbering follows the circular’s own.

1. Faceless regime for audit, assessment, appeals and jurisdiction [sections 2(5), 2(35)(1A), 122E, 129A, 209B and 227D]

Section 227D has been substituted to let the Board establish a National Faceless Centre that conducts proceedings under the Ordinance in a faceless manner, organised into separate wings and units; audit, assessment and quality control for the same case and tax year must be performed by different officers, and all communication is electronic.

New section 122E allows audits under sections 177 or 214C, orders under section 111, assessments under Part II of Chapter X and rectifications under section 221 to be conducted facelessly for persons or cases the Board specifies, with hearings through E-hearing under section 227E and the officer’s identity kept confidential. New section 129A lets appeals under section 127 be processed through the centre, and new section 209B creates faceless jurisdiction that cannot be challenged merely on grounds of section 209 jurisdiction or the authority’s confidentiality.

2. Algorithmic settlement mechanism [sections 2(1AA), 114(6) & (6B) and 134B]

New section 134B empowers the Board to run a digitally operated settlement mechanism for tax proceedings at any stage before assessment or amendment under sections 121, 122 or 122E, through revision of return under section 114(6). The offer is computed from the stage of proceedings, the taxpayer’s compliance history and the nature of the discrepancy.

The taxpayer may accept the offer on IRIS within ten days, deposit the settlement amount and revise the return; the confronted issues then abate. Under new section 114(6B), no Commissioner’s approval is needed for that revision and no separate penalty or default surcharge is payable.

3. Independent case scrutiny committee [section 133A]

A reference before the High Court, or an appeal or review before the Federal Constitutional Court or the Supreme Court, may now be filed by the Commissioner only after approval by an independent case scrutiny committee: a retired judge of the superior courts as chairman, an advocate with at least fifteen years’ tax and commercial litigation experience, and a senior serving or retired FBR officer (BS-20 or above), with the option to co-opt a chartered accountant as a non-voting member.

The committee’s recommendations bind the Commissioner, members get immunity from legal proceedings, and the time spent obtaining approval is excluded from the limitation period for filing.

4. Alternative dispute resolution amendments [section 134A]

New sub-section (10A) lets the ADR committee rectify mistakes apparent from the record — on its own motion or when pointed out by the taxpayer or Commissioner — within thirty days of receipt of its decision, even after its dissolution.

New provisos provide for reconstitution where a member becomes unavailable (replacement within fifteen days), a further sixty days to conclude proceedings after reconstitution, and a minimum total period of ninety days from the original constitution.

5. Tax on certain payments by life insurance business [sections 7G, 151B and Division IC of Part III of the First Schedule]

From tax year 2026, new section 7G taxes any payout, benefit, surrender value or maturity proceeds an individual receives from a life insurance policy, family takaful certificate or similar plan. The taxable amount is the gross payout minus the aggregate premiums or contributions paid, and the tax is final. It does not apply to payouts on death or disability, or after four years from issuance.

New section 151B requires the insurer (including takaful and window takaful operators) to deduct the tax at payment: 15% where the payout comes within one year of issuance, 10% after one year but before completion of four years.

6. Withholding tax on revenues from social media platforms [section 154B and Division IIIAB of Part III of the First Schedule]

New section 154B requires every banking and non-banking financial institution to deduct tax at 5% when crediting amounts that represent revenues received from social media platforms. “Digital content creator”, “social media influencer” and “payment” are defined for the section.

The deduction is minimum tax for a resident and final tax for a non-resident without a permanent establishment in Pakistan.

7. Relief in tax rates for salaried and individual taxpayers [clause (2) of Division I of Part I of the First Schedule]

The salary slab table has been substituted with lower rates:

8. Withdrawal of surcharge on salaried individuals [section 4AB]

The 9% surcharge that applied to salaried individuals whose taxable income exceeds Rs. 10 million has been withdrawn. The 10% surcharge on other individuals and associations of persons above that threshold continues.

9. Omission of tax on deemed income [section 7E and Division VIIIC]

Tax on deemed income under section 7E has been abolished by omitting the section, along with Division VIIIC (its rate) and the references to section 7E in section 8.

10. Adjustability of tax under the e-commerce tax regime [section 6A]

New sub-section (3) makes the tax imposed under section 6A adjustable for a person whose turnover exceeds Rs. 200 million in a tax year. A person with turnover up to Rs. 200 million may opt into the normal tax regime at the time of filing the return for tax year 2027 and onwards.

11. Integration with the Board’s computerized system [sections 2(19DA), 2(30A), 2(30D), 2(42AA), 21(r), 64D and 174(5)]

Definitions now cover the Board’s computerized system “through a licensed integrator”, “licensed integrator” (by reference to the Sales Tax Act 1990), “electronically readable format” and “PRAL”.

Substituted clause 21(r) disallows 3% of claimed expenditure for failing to install an electronic resource or act as an integrated enterprise. Substituted section 64D gives a tax credit for integration equal to 10% of the amount actually invested in the electronic resource in the year of installation, available only against normal tax under Division I or II of Part I of the First Schedule. Section 174(5) lets the Board require any person or class to install and use an electronic resource.

12. Reporting of financial transaction data by banks [sections 165AB and 175AA]

New section 165AB requires every banking company and Electronic Money Institution — notwithstanding banking confidentiality laws — to upload prescribed information to the Central Data Hub for account holders whose deposits or withdrawals exceed Rs. 100 million during a reporting period, for algorithmic cross-matching of tax and bank information.

The data is not visible to any income tax authority during cross-matching; only a gross mismatch is fed into the Board’s Compliance Risk Management system for proceedings by the National Faceless Centre. Section 175AA now also enables the State Bank to maintain a secure centralized virtual repository of banking data.

13. Taxation of non-resident shipping through an authorised shipping agent [sections 2(6A) and 143]

New clause 2(6A) defines an “authorised shipping agent” — a person in Pakistan authorised by a non-resident ship owner, charterer or operator, responsible for freight receipt and documentation, who furnishes the return under section 143. The agent is the non-resident’s representative under section 172 and jointly and severally liable.

Section 143 now requires one return per vessel or voyage covering total freight, makes the ship’s master or the agent jointly responsible, and requires electronic confirmation of filing and payment before port clearance.

14. Power to reduce withholding tax rates in the nature of minimum tax [section 53A]

New section 53A empowers the Federal Government to reduce, by one percent, the rate of any withholding tax in the nature of minimum tax in the First Schedule (other than section 113 minimum tax) on the basis of “economic viability” for persons or classes of persons. All such reductions must be placed before the National Assembly in the relevant financial year.

15. Cost of inherited immovable property and transmission on death [sections 76(8A) and 79]

New sub-section 76(8A) provides that where an individual acquires immovable property through inheritance, its cost in their hands is the fair market value determined under section 68(5) on transfer to the beneficiary.

An explanation added to section 79 clarifies that transmission on death includes assets passing by a family settlement among family members consequent upon the death.

16. Limited liability partnership [sections 80(2)(a) and 92]

A limited liability partnership is now expressly an association of persons under section 80(2)(a). Under new section 92(4A), where an LLP’s income is exempt, any amount a member receives as a share of its profits is included in the member’s income.

17. Capital gains — computation and withholding [sections 100B and 152(1DA)]

Section 100B has been amended so that section 37A read with the Eighth Schedule applies to capital gains on disposal of securities by non-banking finance companies, modarabas, and companies in respect of debt securities. New sub-section (3) makes NCCPL compute and determine the gain for mutual funds, banking companies and insurance companies, which continue to deposit the tax themselves.

Substituted section 152(1DA) requires banks maintaining FCVA, FCBVA, NRVA or NRBVA accounts to deduct tax on capital gains from disposal of debt instruments, Government securities and certificates (including Shariah-compliant variants) invested through those accounts, at the Division II, Part III rate.

18. Electronic filing of returns and financial statements [section 114(2A)]

Returns of income must be filed electronically on IRIS as prescribed, and the Board may make rules for verification, digital signatures and related matters. For companies, from tax year 2026 onwards, the financial statements accompanying the return must be filed only in an electronically readable file format.

19. Enhanced powers of re-audit, re-valuation and actuarial valuation [section 177(6B)]

Under new sub-section 177(6B), the Commissioner — considering the nature, complexity and volume of accounts, doubts about correctness, multiplicity of transactions or the specialised nature of the business — may, after hearing the taxpayer and with the Chief Commissioner’s prior approval, direct re-audit by an accountant, inventory re-valuation by a cost accountant, or actuarial determination by an actuary, each from a Board-nominated panel. The taxpayer can object to a particular nomination.

20. Super tax on high earning persons [Division IIB of Part I of the First Schedule; clause (104B) of Part IV of the Second Schedule]

The section 4C super tax table now charges: 10% on income of a banking company exceeding Rs. 150 million; 10% on income computed under Part I of the Fifth Schedule exceeding Rs. 150 million (within the rule 4 limit); 10% on income from sale of any kind of fertilizer exceeding Rs. 150 million; and 8% on income of any other person exceeding Rs. 500 million.

In effect, super tax is abolished for everyone with income up to Rs. 500 million except the three specified categories, and the rate above Rs. 500 million drops from 10% to 8%. New clause (104B) abolishes super tax entirely for exporters with income above Rs. 500 million where realized export proceeds exceed eighty percent of total turnover for the year.

21. Advance tax on immovable property and international cards; TV plays and advertisements [Divisions X, XVIII, XXVII and XA of Part IV of the First Schedule]

Advance tax under section 236C on sale or transfer of immovable property is now a flat 2.75% of the gross consideration, and under section 236K on purchase a flat 1.25% of fair market value — replacing the earlier slab-based higher rates.

The rate on international credit, debit or prepaid card transactions (Division XXVII) falls from 5% to 0.5%, and the section 236CA advance tax on TV plays and advertisements is abolished.

22. Withholding tax on services and certain debt securities [Divisions III and IIIAA of Part III of the First Schedule]

In Division III paragraph (2): the sub-paragraph (i) rate rises from 6% to 7%; independent professional services (doctors, lawyers, architects, accountants, independent software engineers or developers) get a 15% rate; terminal and port operating services by companies 12%; other unspecified services 14%.

Withholding under section 151A on the gross capital gain at disposal of debt securities (Division IIIAA) rises from 15% to 20%.

23. Exemption certificates for certain persons and NPOs [section 159(1C) and (1D)]

New sub-section (1C): a person who distributed 90% or more of accounting income under clauses (99) and (99C) of Part I of the Second Schedule for the preceding tax year shall be issued the section 159(1) certificate for the subsequent year; a first-year business gets it on an undertaking to make the 90% distribution.

New sub-section (1D): a person approved under section 2(36)(c) for a tax year shall be issued the certificate for the whole tax year.

24. Reduced rates and exemptions [Second Schedule Part I clauses (79) and (99C); Part II clauses (5AA) and (24D)]

Clause (79) now exempts profit on debt from a rupee account with a scheduled bank for holders of Non-Resident Rupee Value Accounts and Non-Resident Business Value Accounts. New clause (99C) exempts income of a Private Equity and Venture Capital Fund registered under the Private Funds Regulations 2015 that distributes at least ninety percent of accounting income.

Clause (5AA) sets a 10% rate on profit on debt from Federal Government debt instruments under the Public Debt Act 1944 purchased exclusively through NRAR, FCVA, FCBVA, NRVA or NRBVA accounts. Clause (24D) cuts minimum tax under section 113(1) to 0.5% for distributors, dealers, sub-dealers and wholesalers of specified goods appearing on both active taxpayers’ lists.

25. Rationalization of exemptions from specific provisions [Part IV of the Second Schedule — clauses (47B), (111AB), (114A) and (115)]

Clause (47B) extends non-application of section 151A withholding to collective investment schemes and other specified recipients. Clause (111AB) extends the exclusion from Tenth Schedule enhanced rates to FCBVA and NRBVA accounts alongside FCVA and NRVA.

Amended clause (114A) excludes FCVA/FCBVA/NRVA/NRBVA holders from the return-filing and registration requirements of sections 114(1)(ae) and 181 where their only Pakistan-source income is from the listed account-linked sources (profit on debt, GoP securities, and capital gains or dividends on assets acquired from account proceeds). Clause (115) provides that an individual trader with turnover up to Rs. 200 million is not a prescribed person for withholding under section 153.

26. Enhancement of penalties [section 182]

The explanation to S. No. 1 now defines “tax payable” as the higher of the tax chargeable on assessed taxable income (sections 120, 121, 122, 122D or 122E) or the tax payable for the preceding duly-filed year. New S. Nos. 2A and 2B penalise failure to install or operate an electronic resource under section 174(5) — 1% of turnover or Rs. 1 million, whichever is higher, for the first default and Rs. 2 million for each subsequent quarterly default — and failure by an integrated organisation under section 175A to integrate its IT platform or share data — Rs. 500,000 then Rs. 1 million, imposed on the principal officer or chief executive.

Penalties against S. Nos. 8 and 10 are substantially enhanced. S. No. 35 now covers any “person, including a company”, and audited financial statements furnished as image files, scanned documents or password-protected/illegible files are deemed blank or incomplete. New S. No. 36 imposes a penalty equal to the excess where credit is claimed for tax withheld beyond what was verifiably deducted and deposited.

27. Surcharge and undertaking option for persons not on the Active Taxpayers’ List [section 182A]

The surcharge amounts for persons not on the ATL have been substantially enhanced. A new sub-section (3) waives the surcharge condition for an individual who gives an undertaking before the Commissioner not to purchase, acquire or obtain ownership or beneficial interest in any property for six months from the date of the undertaking.

28. Omission and relocation of certain provisions [sections 147(6C), 209A, 231B(6)(c), 236CA and 237C; Eighth and Tenth Schedules]

The 1% adjustable advance tax on exporters under section 147(6C) is abolished, and the uniform provision of section 209A is relocated to section 237C. Section 231B(6)(c) is omitted so the date of first registration of a vehicle is the Excise and Taxation Department’s registration date for Federal, Provincial and Local Governments alike.

The Eighth Schedule rule 5 option to opt out of NCCPL computation with Commissioner approval is abolished. In the Tenth Schedule: rule 1A’s higher 236C/236K rates for late filers on the ATL are abolished; new rule 10(aa) excludes the enhanced section 151B rate for non-residents not on the ATL; and rule 10(y) is omitted, so the enhanced rate on section 37A capital gains applies where the person is not on the ATL.

29. Directorate General (Field Compliance) and disclosure of information [sections 216, 222 and 228A]

New section 228A establishes the Directorate General (Field Compliance), Inland Revenue, with functions, jurisdiction and powers to be specified by the Board. Section 216(3)(ba) now permits disclosure to auditors, audit mentors and sectoral experts engaged contractually or through third parties after a non-disclosure agreement, clause (ke) adds international research institutions, and section 222 recognises audit mentors and sectoral experts alongside auditors.

30. Other amendments [section 99B; First Schedule Part III Divisions IV and IVA; Twelfth Schedule]

The section 99B special procedure for small traders and shopkeepers is widened to cover the rate and payment of tax including fixed tax, filing of return and audit. Advance tax on exports under Division IV paragraphs (1) and (3) is fixed at 1.25% as minimum tax, with the additional 1% under section 147(6C) abolished; the 0.25% reduced rate on export of IT and IT-enabled services is extended from tax year 2027 to 2029.

In Part II of the Twelfth Schedule a new PCT code 1520.0000 (glycerol, crude; glycerol waters and lyes) is inserted; the advance tax under section 148 on Part II imports is 2% of import value as increased by customs duty, sales tax and federal excise, and 3% ad valorem for commercial importers.

Primary source

Original PDF on FBR’s portal

Our copy

income-tax-circular-2-of-2026-27.pdf (5.5 MB, 13 pages)

Last reviewed 3 October 2026. This page records the contents of the circular as issued. Confirm the current position on IRIS or through FBR’s own channels before relying on this.