Taxation of trading businesses in Pakistan is governed by the Income Tax Ordinance, 2001, which imposes income tax on profits earned by businesses. Trading businesses are those that engage in buying and selling of goods, and may include retailers, wholesalers, and importers/exporters. In this article, we will discuss the various aspects of taxation of trading businesses in Pakistan.
Income Tax Rates for Trading Businesses
The income tax rate for trading businesses in Pakistan is determined based on their annual turnover. The tax rates for trading businesses for tax year 2022 are as follows:
Turnover up to Rs. 2 million: 0%
Turnover above Rs. 2 million but not exceeding Rs. 5 million: 1%
Turnover above Rs. 5 million but not exceeding Rs. 10 million: 2%
Turnover above Rs. 10 million but not exceeding Rs. 15 million: 4%
Turnover above Rs. 15 million but not exceeding Rs. 25 million: 6%
Turnover above Rs. 25 million but not exceeding Rs. 50 million: 8%
Turnover above Rs. 50 million but not exceeding Rs. 100 million: 10%
Turnover above Rs. 100 million but not exceeding Rs. 200 million: 12%
Turnover above Rs. 200 million: 14%
These rates are subject to change every year with the announcement of the budget.
Taxable Income for Trading Businesses
The taxable income of a trading business is determined by deducting allowable expenses from the gross receipts or sales. Allowable expenses include the cost of goods sold, rent, salaries, repairs and maintenance, and other expenses that are necessary for the business operations. The following are some examples of allowable expenses for trading businesses:
Cost of goods sold: This includes the purchase price of goods, freight charges, customs duties, and other expenses related to the acquisition of goods for resale.
Rent: The rent paid for the business premises is an allowable expense.
Salaries and wages: The salaries and wages paid to employees of the business are allowable expenses.
Repairs and maintenance: The cost of repairing and maintaining business premises, equipment, and vehicles is an allowable expense.
Utilities: The cost of electricity, gas, and water used for the business operations is an allowable expense.
Insurance: The cost of insurance premiums paid for the business is an allowable expense.
Advertising and marketing: The cost of advertising and marketing the business and its products is an allowable expense.
These expenses must be supported by proper documentation, such as invoices, receipts, and bills, to be deductible for tax purposes.
Advance Tax on Trading Businesses
Trading businesses in Pakistan are required to pay advance tax on a quarterly basis. The advance tax is calculated as a percentage of the estimated tax liability for the year. The following are the advance tax rates for trading businesses for tax year 2022:
Turnover up to Rs. 2 million: No advance tax
Turnover above Rs. 2 million but not exceeding Rs. 5 million: 2%
Turnover above Rs. 5 million but not exceeding Rs. 10 million: 4%
Turnover above Rs. 10 million but not exceeding Rs. 15 million: 6%
Turnover above Rs. 15 million but not exceeding Rs. 25 million: 8%
Turnover above Rs. 25 million but not exceeding Rs. 50 million: 10%
Turnover above Rs. 50 million but not exceeding Rs. 100 million: 12%
Turnover above Rs. 100 million but not exceeding Rs. 200 million: 14%
In addition to the advance tax, trading businesses are also required to file quarterly tax returns and make quarterly tax payments based on their estimated income for the year. The final tax liability is determined at the end of the tax year, and any excess tax paid during the year is refunded to the taxpayer.
Sales Tax on Trading Businesses
In addition to income tax, trading businesses are also subject to sales tax on the sale of goods. The sales tax rate for trading businesses in Pakistan is currently 17%. However, there are some exemptions and reduced rates available for certain categories of goods, such as agricultural inputs, medical equipment, and certain export-oriented industries.
In order to charge sales tax on sales, trading businesses must obtain a sales tax registration number from the Federal Board of Revenue (FBR) and file periodic sales tax returns. The sales tax collected from customers must be deposited with the government on a monthly basis.
Final Thoughts
In conclusion, taxation of trading businesses in Pakistan is subject to income tax and sales tax. The income tax rate is determined based on the annual turnover of the business, and the taxable income is calculated by deducting allowable expenses from the gross receipts or sales. Advance tax must be paid on a quarterly basis, and sales tax must be charged and collected on sales of goods. Trading businesses must comply with all tax laws and regulations, including filing periodic tax returns and making tax payments on time, to avoid penalties and interest charges. It is recommended that businesses consult with a tax professional to ensure compliance with all tax laws and regulations.