Sales Tax Vs Income Tax in Pakistan: A Business Owner's Guide

Running a business in Pakistan comes with several tax responsibilities, and two of the most important ones are sales tax and income tax. Understanding the differences between them is critical for compliance and effective financial management. This guide will breakdown the key differences, commitments, and suggestions of both taxes for business owners in Pakistan.

What is Sales Tax?

Sales tax is an incidental tax levied on the sale of goods and convinced services. Businesses act as tax hoarders by charging sales tax to customers and then sending it to the Federal Board of Revenue (FBR) or related provincial tax authorities.

Sales Tax Rates in Pakistan

The general sales tax (GST) rate in Pakistan is 18% on most goods. However, different rates apply depending on the category of goods or services:

Category	Rate
General goods and imports	18%
Services such as banking, telecom, consulting	16%, 15%, 13%
Local imports, export-related items, sugar, machinery	10%, 8%, 5%, 3%
Petroleum, metals, chemicals	18.5% – 25%
Exports, office stationery	0%
Pharmaceuticals, books, agricultural produce	Exempt

Who Needs to Register for Sales Tax?

Manufacturers, retailers, importers, and wholesalers with a turnover exceeding PKR 7.5 million (for retailers) or PKR 50 million (for service providers)
Businesses supplying taxable goods or services in Pakistan
Online sellers and eCommerce businesses (depending on economic nexus rules)

Compliance Requirements

Sales Tax Invoices: Businesses must issue proper invoices including supplier/customer details, tax numbers, and breakdowns.
Filing & Payment: Monthly tax returns must be submitted to the FBR.
Withholding Tax Agents: Some businesses are required to withhold a portion of the sales tax before making payments to suppliers.

What is Income Tax?

Income tax is a direct tax levied on the income earned by individuals and businesses. Unlike sales tax, which is collected at the point of sale, income tax is paid on profits earned by a business or an individual.

Income Tax Rates in Pakistan

The income tax rate varies depending on whether the taxpayer is an individual, partnership, or corporation:

Category	Tax Rate
Individuals (Annual Income below PKR 600,000)	0%
Individuals (PKR 600,001 – 1,200,000)	2.5%
Individuals (PKR 1,200,001 – 2,400,000)	12.5%
Individuals (Above PKR 2,400,000)	Up to 35%
Companies	29%
Small Businesses (Turnover under PKR 100 million)	20%

Who Needs to Pay Income Tax?

Salaried individuals earning above PKR 600,000 per year
Self-employed professionals and freelancers earning taxable income
Companies, partnerships, and AOPs required to pay tax
Startups and digital ventures that cross the taxable limit

Compliance Requirements

Annual Tax Filing: It is mandatory for individuals and businesses to file their tax returns with the FBR each year.
Advance Tax Payments: Some businesses must remit advance tax payments on a quarterly basis.
Withholding Tax Deduction: Businesses are responsible for withholding tax on payments like salaries and contractor fees.

Key Differences Between Sales Tax and Income Tax

Feature	Sales Tax	Income Tax
Nature	Indirect tax on sales of goods/services	Direct tax on income and profits
Who Pays?	Collected from customers and remitted by businesses	Paid directly by individuals and businesses
Rate	Varies (3%-25%)	Varies (2.5%-35% for individuals, 29% for corporations)
Payment Frequency	Monthly	Annually (or quarterly for advance tax)
Regulatory Authority	FBR & Provincial Tax Authorities	FBR
Nexus Rule	Based on place of business, warehouse, or online sales	Based on residence and source of income

Which Tax Affects Businesses More?

For greatest businesses,sales tax compliance is more frequent and needs monthly filings. But, income tax impacts overall profitability, and failure to fulfil can lead to severe penalties. Understanding both is crucial for financial planning.

How to Ensure Compliance?

Register with FBR – Obtain a Sales Tax Registration Number (STRN) and National Tax Number (NTN).
Keep Proper Records – Maintain invoices, sales receipts, and expense records.
File Returns on Time – Submit monthly sales tax returns and annual income tax filings.
Consult a Tax Professional – Get expert advice to avoid penalties and optimize tax savings.

Final Thoughts

Both sales tax and income tax play essential roles in Pakistan’s tax system. As a business owner, understanding these taxes will help you stay obedient, avoid penalties, and achieve your finances effectively. Whether you’re a seller, service provider, or eCommerce seller, staying on top of your tax responsibilities is key to running a successful business.

Need professional assistance? Consult a tax advisor to ensure compliance and maximize your tax benefits!