Income Tax vs Sales Tax: Know the Difference
Pakistani business owners often confuse income tax and sales tax. They are separate obligations under different laws. Sales tax (17%) is charged on the sale of goods and services and remitted monthly to FBR. Income tax is charged on your business profits — revenue minus allowable expenses — and is filed annually. Both apply to most registered businesses.
Who Must File Income Tax Returns
Under Section 114 of the Income Tax Ordinance 2001, every company, every person deriving income from business, and every person with annual income exceeding the basic exemption threshold must file an annual income tax return. For tax year 2025 (July 2024 – June 2025), the return due date is September 30, 2025 for individuals and companies with non-special tax year.
There is no minimum threshold for businesses — if you operate a registered business, you must file, even if you made a loss. Filing a loss return correctly is important because it allows you to carry forward losses against future profits.
Tax Rates for 2024–25
For individuals and sole traders (Association of Persons treated similarly):
- Up to Rs. 600,000: 0%
- Rs. 600,001 – Rs. 1,200,000: 5% on amount exceeding Rs. 600,000
- Rs. 1,200,001 – Rs. 2,400,000: Rs. 30,000 + 15% on amount exceeding Rs. 1,200,000
- Rs. 2,400,001 – Rs. 3,600,000: Rs. 210,000 + 25%
- Rs. 3,600,001 – Rs. 6,000,000: Rs. 510,000 + 30%
- Above Rs. 6,000,000: Rs. 1,230,000 + 35%
Private limited companies pay 29% flat corporate tax on taxable income.
Allowable Deductions for Retailers
Business expenses that reduce your taxable income include:
- Cost of goods sold (purchases from suppliers)
- Staff salaries and wages
- Rent of business premises
- Utility bills (electricity, gas, internet)
- Depreciation on business assets (computers, furniture, POS hardware)
- Bank charges and financial costs
- Advertising and marketing expenses
- Repairs and maintenance
Each deduction requires documentary evidence — invoices, receipts, bank statements. A business without organised records cannot substantiate deductions, potentially overpaying tax significantly.
Minimum Tax: The Floor You Cannot Go Below
Even if your business shows a loss or very low profit, minimum tax under Section 113 applies at 1.25% of gross turnover for most businesses. This means a retailer with Rs. 10 million in annual sales pays at least Rs. 125,000 in income tax regardless of profit. Certain categories (including registered taxpayers on reduced rate schemes) have different minimum tax rates.
Withholding Tax Credits
Pakistani businesses pay withholding tax on many transactions throughout the year — on imports, on property purchases, on contracts. These withholdings are advance payments of income tax and are credited against your annual liability. Keeping records of all WHT deducted from your transactions ensures you claim every credit you are entitled to.
How Your POS Helps at Tax Time
The most important contribution your POS makes to income tax compliance is an accurate annual revenue figure. FBR increasingly cross-references declared income against FBR-integrated POS data, bank statements, and third-party information. A declared income of Rs. 3 million when your POS transmitted Rs. 8 million in sales to FBR is an automatic audit trigger.
OneScale's annual financial reports provide gross revenue, cost of goods, gross margin, and operating expense summaries — the core figures your tax consultant needs to prepare an accurate return.
Conclusion
Filing accurate income tax returns is not just a legal obligation — it is protection against FBR audit and penalty exposure. The businesses that maintain clean POS records, organised expense documentation, and timely filing pay the right amount of tax. Those that do not eventually pay more — in back taxes, penalties, and legal costs — than they ever saved by keeping informal records.
