Taxation of Trading Businesses in Pakistan

Trading businesses form the backbone of Pakistan’s commercial ecosystem, dealing in goods sourced locally and internationally. Whether operating as wholesalers, retailers, or importers/exporters, these businesses are subject to a multi-layered taxation framework governed by federal and provincial laws. Navigating this framework is crucial not only for compliance but also for maintaining profitability and avoiding legal risks.

This detailed guide provides a comprehensive overview of the taxation landscape for trading businesses in Pakistan, including income tax, sales tax, customs duties, and key compliance requirements applicable in 2025.

Nature of Trading Businesses and Legal Status

In Pakistan, a trading business can be structured as:

• Sole Proprietorship

• Association of Persons (AOP) / Partnership

• Private Limited Company

• Public Limited Company

Each structure carries different tax implications:

• Sole proprietorships and AOPs are taxed under progressive income tax slabs applicable to individuals or partners

• Companies are subject to corporate income tax, minimum tax on turnover, and stricter reporting under the Companies Act, 2017

The legal status also affects eligibility for tax credits, exemptions, and compliance thresholds.

Types of Taxes Applicable to Trading Businesses

1. Income Tax

Under the Income Tax Ordinance, 2001, all trading businesses must file annual income tax returns. Applicable tax rates for FY 2024–25 include:

• Companies: 29%

• Small companies (turnover < Rs. 250 million): 20%

• Individuals and AOPs: Taxed as per individual slabs (up to 35%)

Minimum Tax (Section 113)

Even if a trading business earns little or no profit, it must pay minimum tax at 1.25% of turnover. Exemptions may apply to ATL filers and certain sectors.

Advance Tax (Section 147)

Businesses must pay advance tax quarterly if their last year’s tax liability exceeded Rs. 500,000. This includes estimated tax based on turnover or provisional profits.

2. Sales Tax (Sales Tax Act, 1990)

Most trading businesses dealing in taxable goods must register and comply with sales tax regulations. Key provisions include:

• Standard Rate: 18%

• Threshold: Businesses with turnover exceeding Rs. 10 million must register for sales tax

• Monthly Sales Tax Returns: Due by the 15th of each month

• Input Tax Adjustments: Allowed with proper documentation

• CNIC-linked Sales: Mandatory for B2B and certain B2C transactions

Non-filers are subject to enhanced scrutiny and may face blacklisting by FBR.

3. Customs Duties and Import Taxes

Import-based trading businesses must comply with:

• Customs Act, 1969

• Import Policy Order

• SROs for exemptions/concessions

Key taxes at import stage:

• Customs Duty (CD): Product-specific rates

• Additional Customs Duty (ACD): Usually 1-7%

• Sales Tax: 18% on import value

• Withholding Tax on Imports:

  • Industrial importer: 3.5%

  • Commercial importer: 5.5%

• Value Addition Tax (VAT): 3% on commercial imports

All importers must register with WeBOC and declare import goods through Goods Declaration (GD) forms.

4. Withholding Tax (WHT)

Trading businesses are both withholding agents and withholdees, meaning they deduct tax on payments and have taxes deducted on their income.

Common Withholding Sections:

• Section 153: Payments to suppliers and service providers

• Section 231A: Cash withdrawals

• Section 236G & 236H: Sales to distributors and retailers

• Section 148: Tax on import value

WHT must be deposited monthly and filed through FBR’s withholding statements.

5. Provincial Taxes

Trading businesses must also comply with taxes levied by provincial authorities, including:

• Professional Tax: Annual fee based on number of employees

• Sales Tax on Services (if trading includes logistics, warehousing)

• Stamp Duty: On rental or business agreements

• Excise Duty: On certain wholesale/retail activities

Registration with Punjab Revenue Authority (PRA), Sindh Revenue Board (SRB), or KPRA is required where applicable.

Tax Registration Process

Mandatory Registrations:

1. National Tax Number (NTN) with FBR

2. Sales Tax Registration Number (STRN) if applicable

3. WeBOC ID for importers/exporters

4. Professional Tax Registration from Provincial Excise Department

5. Chamber of Commerce Membership (optional but recommended)

These ensure legal standing and eligibility to claim input tax, import goods, or open business bank accounts.

Filing and Compliance Calendar

Failure to comply can lead to heavy penalties, default surcharges, and blacklisting on ATL.

Exemptions and Tax Incentives

Trading businesses can benefit from specific tax relaxations:

1. Small Traders Relief

FBR has announced simplified tax schemes for small retailers and traders, such as:

• Fixed tax schemes (under consideration)

• Exemption from audit for turnover below threshold

• Simplified return filing via mobile apps and FBR’s online portal

2. Tax Credits

Eligible businesses may claim:

• Investment Tax Credit (Section 65B/D/E) for capital expenditures

• Employment-based credits

• Export rebates and duty drawbacks

3. Sector-Specific SROs

Certain goods may enjoy concessional rates or sales tax exemptions under SROs for imports or local trading. Always consult the latest Statutory Regulatory Orders (SROs) for your industry.

Common Tax Challenges for Trading Businesses

1. Misclassification of Goods

Wrong HS codes or product categories during import or sales return filing can:

• Trigger audits or penalties

• Delay clearance

• Disallow input tax claims

2. Mismatch in Sales & Purchase

CNIC-linked sales must reconcile with vendor reports. Any mismatch results in:

• Show-cause notices

• Disallowance of input tax

• Withholding agent penalties

3. Improper Books of Account

Under Section 174, businesses must maintain:

• Purchase and sales registers

• Bank statements

• Salary and inventory records

• Tax payment proof

Failure to do so leads to audit complications and tax disallowances.

Tax Audit and Risk Management

FBR conducts random and risk-based audits under:

• Section 177: Audit of income tax

• Section 25: Audit of sales tax

• Section 214C: Random selection audit

To prepare:

• Maintain clean records

• Respond to notices within deadlines

• Get professional representation during proceedings

Digital Tools and Software for Compliance

Modern trading businesses should consider:

• Point of Sale (POS) integration with FBR

• Accounting software like QuickBooks, Xero, and Wave

• POS invoice generation compliant with FBR e-invoicing

• Tax calculation apps (FBR Tax Asaan, IRIS)

This improves accuracy, automates return filing, and reduces audit risk.

Importance of ATL Status

The Active Taxpayers List (ATL) published by FBR determines:

• Lower withholding tax rates

• Eligibility for government tenders

• Exemption from advance/fixed taxes

• Banking privileges

Update your returns regularly to remain on ATL.

Role of Tax Consultants

Due to the complex and evolving nature of tax laws, trading businesses benefit greatly from engaging a professional consultant who can:

• Accurately classify transactions

• Optimize tax structure

• Handle filings and audits

• Advise on legal compliance

At Sterling.pk, we help trading businesses across Pakistan manage tax risks, improve compliance, and save money.

Case Study: Retailer Importing Consumer Electronics

A small retailer in Lahore importing electronics from China:

• Pays 5.5% WHT, customs, VAT at import stage

• Collects 18% sales tax on sales

• Files monthly sales tax and quarterly advance tax

• Keeps sales invoice copies linked to CNICs of buyers

• Files annual return using accounting software

This ensures full compliance and allows the business to maintain ATL status and claim refunds where applicable.

Future of Taxation in Trading Sector

The government is modernizing the tax system:

• Mandatory integration of large traders with POS

• e-Invoicing and digital receipts

• Unified digital filing portals (IRIS 2.0)

• Real-time inventory tracking for wholesalers

Traders need to invest in systems and stay ahead of reforms to avoid penalties and seize growth opportunities.

Conclusion

Taxation of trading businesses in Pakistan involves multiple layers — from income tax and sales tax to withholding and import-related taxes. Proper registration, documentation, and tax planning can significantly improve financial efficiency and regulatory compliance.

With continuous reforms and increased enforcement by FBR and provincial authorities, trading businesses must stay informed and proactive. Partnering with professionals like Sterling.pk ensures accurate compliance, maximized deductions, and business sustainability in a competitive market.