Taxation of Manufacturing Businesses in Pakistan

Manufacturing is a vital sector of Pakistan’s economy, contributing approximately 13–15% to the country’s GDP and employing millions of workers. From textiles to pharmaceuticals, and from food processing to cement, manufacturing businesses form the backbone of industrial activity. However, these businesses are also subject to a complex web of federal and provincial tax regulations. This article presents a detailed breakdown of the taxation framework for manufacturing entities in Pakistan, focusing on income tax, sales tax, federal excise duties, withholding taxes, and compliance obligations under the latest 2025 tax policies.

Legal and Regulatory Framework

Manufacturing businesses are primarily governed by the following laws:

1. Income Tax Ordinance, 2001
Covers the levy of corporate and individual income tax on manufacturing profits, tax credits, depreciation, and withholding requirements.

2. Sales Tax Act, 1990
Imposes a value-added tax on the supply of taxable goods, including most manufactured items, and mandates registration and regular returns.

3. Federal Excise Act, 2005
Applicable to manufacturers of excisable goods such as cigarettes, beverages, cement, and certain petroleum products.

4. Provincial Sales Tax Laws (on Services)
Manufacturing-related services (like contract manufacturing, warehousing) may fall under provincial laws such as Punjab Sales Tax on Services Act, 2012.

Business Structures and Taxability

Manufacturing operations in Pakistan can be structured as:

• Sole Proprietorships

• Partnerships (AOPs)

• Private Limited Companies (SMC or LLC)

• Public Limited Companies

Each structure affects how the income is taxed:

• Companies are taxed as separate legal entities

• Sole proprietorships and AOPs are taxed under personal income slabs

Income Tax Rates for Manufacturing Businesses (2025)

Definition of Small Company
According to Clause (59A) of Section 2 of the Income Tax Ordinance, a “Small Company”:

• Is registered under the Companies Act, 2017

• Has annual turnover not exceeding Rs. 250 million

• Has less than 250 employees

• Is not formed from restructuring

Minimum Tax on Turnover

Even if a manufacturing business reports a loss or low profit, it must pay Minimum Tax on Turnover under Section 113:

Tax Credits for Manufacturing Sector

Several tax credits are available to reduce the effective tax burden:

1. Investment in Plant & Machinery (Section 65B)
A credit of 10% of the cost of new plant and machinery is allowed if acquired and installed by June 30 of the tax year.

2. Employment Generation (Section 64B)
A company hiring more than 50 employees can avail tax credit of 2% per 50 employees, up to a specified limit.

3. Industrial Undertaking Setup (Section 65D & 65E)
Newly established industrial undertakings can avail 100% tax credit for 5 years if set up between July 1, 2019 and June 30, 2025.

4. Export of Manufactured Goods
Exporters of manufactured goods may be taxed at reduced rates (1%) under the Final Tax Regime on export proceeds.

Depreciation and Capital Allowances

1. Initial Allowance
Available under Section 23: 25% of the cost of eligible assets for new industrial plants or buildings.

2. Normal Depreciation
Charged annually on the written down value (WDV) of assets. For plant and machinery, the depreciation rate is 15%.

3. Amortization of Pre-Commencement Expenditure
Expenses incurred before starting operations (e.g., feasibility, legal, licensing) can be amortized over 5 years under Section 25.

Sales Tax Obligations

Manufacturing businesses involved in the production or sale of taxable goods must:

1. Get Registered with FBR
Using Form STR-1 via the IRIS portal, with NTN, CNIC, utility bills, lease agreement, and business details.

2. Charge Sales Tax
Standard rate is 18% (as of 2025) on the value of supplies. Certain essential items or exports may be zero-rated or exempt.

3. File Monthly Returns
Sales tax returns must be submitted by the 18th of every month through FBR’s eFBR portal using Form STR-7.

4. Maintain Proper Invoicing
Manufacturers must issue tax invoices with full details and maintain sales registers and stock records.

Input Tax Adjustments

Manufacturers are allowed to claim input tax paid on raw materials, electricity, packing, and other purchases, except:

• Goods not directly used in manufacturing

• Personal or non-business items

• Blacklisted or inactive suppliers

Federal Excise Duty (FED)

Some manufacturers are liable for Federal Excise Duty, imposed under the Federal Excise Act, 2005:

FED returns are filed monthly via FE-I return by the 15th of the following month.

Withholding Tax (WHT) on Manufacturing Sector

Manufacturers are responsible for deducting and depositing the following WHT taxes:

1. Salary (Section 149)
Based on income slabs. Deposited monthly using PSID on IRIS.

2. Supplier Payments (Section 153)
Deducted at 4% for companies and 4.5% for others, unless exempted via exemption certificate.

3. Utility Bills (Section 235)
Tax withheld on electricity bills if in the name of the manufacturing concern.

4. Imports (Section 148)
Importers of raw materials or machinery are subject to advance tax at 2%–5.5% at the import stage.

5. Rent Payments (Section 155)
Withheld at 7.5% to 15% depending on recipient’s status.

Provincial Taxes on Manufacturing Businesses

While goods are federally taxed, some related services may fall under provincial jurisdictions:

• Contract manufacturing

• Warehousing

• Testing & quality assurance

• Packing and labeling services

Each province has its own Revenue Authority (e.g., PRA, SRB, KPRA, BRA) and service tax rates vary between 13%–16%.

Income Tax Return Filing Requirements

Manufacturers must file:

• Income Tax Return (online via IRIS by September 30 for individuals/AOPs, December 31 for companies)

• Sales Tax Return (by 18th of each month)

• Statement of Final Tax (Section 115) if under presumptive regime

• Withholding Statements under Section 165 (quarterly)

Books and Record Maintenance

Section 174 mandates that every manufacturer must maintain:

• Purchase register

• Sales register

• Production records

• Inventory sheets

• Salary and expense registers

• Electronic point of sale (POS) records if applicable

Books must be preserved for six years.

Audits and Assessments

Manufacturing businesses may face:

1. Desk Audit
Automatic review based on return anomalies

2. Onsite Audit
Detailed audit under Section 177, requiring production, tax records, and invoices

3. Sales Tax Audit
FBR’s Field Audit Officers can visit premises to check stock and verify input/output tax

Penalties for Non-Compliance

Incentives for Export-Oriented Manufacturing

• Zero-Rated Supplies under Section 4 of Sales Tax Act

• Export Refinance Scheme (SBP) for cheaper working capital

• Duty Drawback of Taxes Scheme by FBR

• SEZ and EPZ Benefits including tax holidays, duty exemptions

Recent Developments and Budget 2025 Proposals

• Reduction of Minimum Tax Rate for exporters to 0.25%

• Withdrawal of Zero Rating for certain local industries to enhance tax revenue

• Mandatory POS Integration for medium/large manufacturers

• Green Manufacturing Incentives for energy-efficient equipment

Common Challenges Faced by Manufacturers

1. Tax Refund Delays
Sales tax refund claims often face delays, affecting liquidity

2. Complex Compliance
Multiple federal and provincial laws require parallel reporting

3. Informal Sector Competition
Registered manufacturers face pricing pressure from non-taxpaying competitors

4. Limited Tax Education
Small manufacturers often lack in-house tax knowledge and miss out on benefits

5. Audit Harassment
Excessive audit notices and arbitrary tax adjustments increase compliance costs

Tips for Efficient Tax Management

• Hire qualified tax consultants or advisors

• Ensure timely and accurate filing of all returns

• Conduct internal audits every 6 months

• Digitize records and use ERP/Accounting software

• Apply for tax credits and incentives proactively

Conclusion

Manufacturing businesses in Pakistan operate in a heavily regulated tax environment, but there are also numerous tax credits, exemptions, and reliefs available to reduce the burden. Understanding federal income tax, sales tax, withholding tax, and provincial service tax laws is critical to ensure full compliance and financial efficiency. With the government emphasizing broadening of the tax base and digital integration in Budget 2025, manufacturing entities must stay updated and adapt to remain competitive and tax-efficient.