Taxation of Exports in Pakistan

Exports play a vital role in Pakistan’s economy by earning valuable foreign exchange, reducing the current account deficit, and generating employment. To promote exports, the Government of Pakistan offers various tax incentives, exemptions, and special regimes to exporters. While exports are generally treated favorably under tax laws, understanding the specific provisions, documentation requirements, and compliance obligations is essential for exporters to avoid legal issues and maximize benefits. This comprehensive guide explains how exports are taxed in Pakistan, which taxes apply or are exempt, and how exporters can ensure compliance with FBR and other authorities.

Legal Framework for Export Taxation in Pakistan
Taxation of exports in Pakistan is governed under the following key laws:

• Income Tax Ordinance, 2001

• Sales Tax Act, 1990

• Customs Act, 1969

• Federal Excise Act, 2005

• Finance Acts (annual updates)

• Export Policy Order (by Ministry of Commerce)

The Federal Board of Revenue (FBR) administers tax compliance through customs offices, inland revenue offices, and electronic portals like IRIS and WeBOC.

Are Exports Taxable in Pakistan?
Exports are generally exempt from sales tax and subject to reduced or final tax under income tax laws. The treatment depends on the type of tax involved:

• Sales Tax: Exports are zero-rated

• Income Tax: Exports are subject to final tax regime under Section 154

• Federal Excise Duty (FED): Not applicable on most exported goods

• Customs Duties: Exporters may be eligible for duty drawback or exemption on raw materials

1. Sales Tax Treatment on Exports

Zero-Rating Under Section 4 of the Sales Tax Act, 1990
Exports are considered zero-rated, meaning:

• No sales tax is charged on exported goods

• Exporters can claim refunds of input tax paid on purchases used in production

Conditions for Zero-Rating:

• Goods must be physically exported out of Pakistan

• Export must be backed by a valid Goods Declaration (GD) filed through WeBOC system

• Exporter must be a registered person under the Sales Tax Act

• Sales invoice must mention zero-rated tax

• Shipment must be reported in FBR’s Annex-H for refund purposes

Important Notes:

• Export to Afghanistan and Central Asian Republics via land route is treated as zero-rated if payment is received in foreign exchange

• Refunds must be claimed within 3 years

• Registered manufacturers can also export through commercial exporters under prescribed conditions

2. Income Tax on Exporters – Section 154

Income tax is deducted from export proceeds under Section 154 of the Income Tax Ordinance, 2001. This is treated as final tax, meaning:

• Exporters do not need to calculate taxable profit

• The tax deducted at source is considered full and final liability

Rates of Withholding Tax on Exports (TY 2024–25):

• Export of goods: 1% of export proceeds (final tax)

• Export of services (IT/ITES): 0.25% to 1% (reduced for registered IT exporters)

• Freight forwarding/indenting/commission agents: 1%

Exemptions and Concessions:

• IT & IT-enabled services can apply for 0.25% concessional tax if registered with Pakistan Software Export Board (PSEB)

• Freelancers earning up to USD 24,000 per year are exempt under Clause 133 of Second Schedule

• Exporters operating through export processing zones (EPZs) may enjoy full income tax exemptions

3. Refund of Sales Tax to Exporters

Exporters can claim refund of input sales tax through:

• FASTER system for manufacturers/exporters (refund within 72 hours, subject to system validations)

• Annex-H filing along with monthly sales tax returns

• Supporting documents such as:

  • Sales tax invoices

  • Goods declarations (GDs)

  • Purchase records

  • Bank credit advice from SBP (evidence of foreign currency receipt)

Filing Requirements:

• Monthly sales tax return

• Annex-H and refund claim submission

• Valid bank credit advice (BCA) confirming receipt of export proceeds in foreign exchange

• Refund claims must match WeBOC export data

4. Customs Duties and Drawbacks

Most raw materials used in exports can be imported under the following facilities:

• Duty and Tax Remission for Exporters (DTRE)

• Manufacturing Bond Scheme

• Temporary Importation Scheme

• Export-Oriented Units (EOU) status

Exporters may claim duty drawback under the Customs Rules if:

• Finished goods are exported and import duty has been paid on inputs

• Standard rates of drawback are notified by FBR for each industry

• Claims are filed electronically through WeBOC within 2 years of export

5. Federal Excise Duty (FED)

Exports are generally exempt from Federal Excise Duty under Section 16 of the Federal Excise Act, 2005. However:

• If goods are subject to FED in the domestic market, exemption applies only if exported

• Proper documentation of export is essential to avoid audit issues

6. Export of Services

Export of services (IT, software development, consultancy, BPO, logistics) is taxed differently:

• Income Tax: 0.25% to 1% final tax under Section 154A (for registered IT exporters)

• Sales Tax:

  • Zero-rated in Sindh and Punjab for registered IT companies

  • Exempt under PRA and SRB for export of intangible services if received in foreign exchange

  • Export of services from Islamabad may be subject to FED if not exempt

7. Freelancers and Small Exporters

• Freelancers providing digital or IT services abroad are also considered exporters of services

• Income up to USD 24,000 per annum may be tax-exempt under Clause 133

• However, freelancers must:

  • Register with FBR and obtain NTN

  • File annual income tax return and wealth statement

  • Submit foreign remittance proof via bank statement or BCA

8. Currency Regulations and Bank Reporting

The State Bank of Pakistan (SBP) requires all export proceeds to be:

• Received through formal banking channels

• Converted to Pakistani Rupees within a specific time

• Reported through E-Form or Web-Based One Customs (WeBOC) system

Failure to repatriate proceeds within 120 days may result in penalties or blacklisting of exporter codes.

9. Export Processing Zones (EPZs)

Companies registered in EPZs are entitled to tax incentives including:

• Exemption from income tax, sales tax, and customs duty

• Exemption from import/export restrictions

• Simplified procedures and dedicated infrastructure

• 100% foreign ownership and repatriation of capital allowed

Registration in EPZs is subject to EPZA approval and relevant SECP/FBR registrations.

10. Documentation Requirements for Exporters

To comply with taxation laws, exporters must maintain and submit the following documents:

• NTN and STRN registration certificates

• Goods Declarations (GDs)

• Export invoices and packing lists

• Sales tax returns and Annex-H

• Bank Credit Advice (BCA)

• FBR Withholding Tax Certificate (under Section 154)

• Refund applications (if applicable)

• Contracts or Letters of Credit (LCs)

11. Common Mistakes Made by Exporters

• Not filing returns despite zero-rated status

• Delayed submission of Annex-H or refund claims

• Not registering with PSEB (for IT exporters)

• Failing to repatriate export proceeds on time

• Claiming refund without sufficient documentation

• Incorrectly applying standard sales tax on zero-rated supplies

12. FBR Audit and Compliance Risk

Exporters are often selected for audit under:

• Section 177: Detailed audit

• Section 214C: Random selection

• Sales Tax Audit by field offices

Common audit issues include:

• Mismatch between export value and refund claim

• Fake or ineligible invoices in input tax

• Unreported sales

• Suspicion of over-invoicing or under-invoicing

To reduce audit risk, exporters should:

• Maintain proper reconciliation of GDs, invoices, and bank receipts

• Ensure proper supplier registration

• Conduct internal reviews of refund claims

13. Role of PSEB and Trade Bodies

For IT and software exporters:

• Registration with Pakistan Software Export Board (PSEB) is mandatory to claim 0.25% tax rate

• Exporters must submit monthly reports to PSEB for retention

• TDAP, Chambers of Commerce, and Commercial Counselors can assist with documentation and market access

14. How Sterling.pk Assists Exporters

At Sterling.pk, we offer:

• FBR and SECP registration for exporters

• PSEB registration and compliance filing

• Sales tax zero-rating and refund claims

• Filing of income tax returns under Section 154/154A

• Documentation and audit support for exporters

• Advice on DTRE, manufacturing bonds, and duty drawbacks

Whether you’re a manufacturer, service exporter, freelancer, or trading company, our tax experts help you comply with all export-related taxation requirements in Pakistan.

Conclusion
Exports are a critical driver of economic growth in Pakistan, and the tax regime is designed to facilitate rather than burden exporters. While goods are generally zero-rated and income is taxed at reduced final rates, the key to benefiting from these incentives lies in proper registration, documentation, and timely filing. Exporters must understand the applicable sections, utilize refund mechanisms, and stay audit-ready. With expert support from Sterling.pk, you can navigate Pakistan’s export taxation system confidently and compliantly, ensuring uninterrupted business growth and legal security.