Taxes in Pakistan can feel like a puzzle, especially when you’re trying to figure out Income Tax and Sales Tax. Whether you’re a salaried worker, a small business owner, or running a corporation, these two taxes touch your life in different ways. So, what’s the difference between them, and do they ever overlap? In this guide, we’ll discover their mechanics, compare them side-by-side, and explore their subtle connections—all based on the latest rules for 2024-2025.
What Is Income Tax in Pakistan?
Income Tax is a direct tax you pay on what you earn—think salaries, business profits, or rental income. It’s governed by the Income Tax Ordinance, 2001, enforced by the Federal Board of Revenue (FBR), Pakistan’s tax authority.
How It Works
For individuals, Income Tax is progressive: the more you make, the more you pay. The latest slabs for 2024-2025, per Section 13 of the Income Tax Ordinance, 2001 (as amended), are:
- Up to PKR 600,000: 0% (no tax, per First Schedule, Part I)
- PKR 600,001 – 1,200,000: 2.5% of the amount exceeding PKR 600,000
- PKR 6,000,001 – 12,000,000: PKR 645,000 + 12.5% of the amount above PKR 6,000,000
- Above PKR 12,000,000: PKR 1,395,000 + 20% of the amount exceeding PKR 12,000,000.
If you want learn more about the income tax slabs read our well informed Tax Slabs for Salaried Individuals in Pakistan: FY 2024-2025.
For companies, it’s a flat 29% on taxable profits, as outlined in Section 18 and the First Schedule, Part I, Division II (subject to annual Finance Act updates).
Who Pays It?
Anyone earning income—employees, freelancers, or businesses—falls under this tax. It’s collected directly, often deducted at source for salaries (Section 149) or filed yearly via returns (Section 114).
Wondering how much income tax you have to pay, use our FBR INCOME TAX CALCULATOR 2025 for your tax estimations.
What Is Sales Tax in Pakistan?
Sales Tax is an indirect tax you pay when you buy something, like groceries or a haircut. It’s added to the price and collected by businesses for the government. The Sales Tax Act, 1990, governs it, with a split system:
- Sales Tax on Goods: A federal tax at 18%, per Section 3 of the Sales Tax Act, 1990, managed by the FBR.
- Sales Tax on Services: Handled by provinces, with rates between 15% and 16%, as per provincial laws like the Punjab Sales Tax on Services Act, 2012.
How It Works
When you purchase goods, the 18% Sales Tax is baked into the price (Section 3(1)). Businesses can claim back tax paid on inputs (Section 7) and remit the difference. For services, provincial rates apply—say, 16% in Sindh or 15% in Punjab—depending on local rules.
Income Tax vs. Sales Tax: Breaking Down the Differences
Let’s get straight to it—here’s how these taxes stack up:
1. Nature of the Tax
- Income Tax: Direct, hitting your earnings head-on (Section 4, Income Tax Ordinance, 2001).
- Sales Tax: Indirect, paid through consumption (Section 3, Sales Tax Act, 1990).
2. Who Feels the Pinch?
- Income Tax: You, the earner, fork it over to the FBR.
- Sales Tax: Consumers pay, but businesses collect and pass it on.
3. What’s Taxed?
- Income Tax: Your income—salaries, profits, investments (Section 9).
- Sales Tax: The value of goods or services sold (Section 2(46)).
4. Rates and Rules
- Income Tax: 0% to 20% for individuals, 29% for companies (First Schedule).
- Sales Tax: 18% on goods, 15-16% on services (provincial variation).
5. Who Runs the Show?
- Income Tax: FBR, top to bottom (Section 2(20)).
- Sales Tax: FBR for goods, provinces for services—two bosses, one system.
Here’s a quick comparison:
| Feature | Income Tax | Sales Tax |
|---|---|---|
| Type | Direct | Indirect |
| Base | Income | Consumption |
| Rate | 0-20% (individuals), 29% (cos) | 18% (goods), 15-16% (services) |
| Authority | FBR | FBR (goods), Provinces (services) |
Do Income Tax and Sales Tax Overlap?
They’re separate beasts, but they do bump into each other—especially for businesses:
1. Deducting Sales Tax as an Expense
Pay Sales Tax on supplies? You can deduct it from your income as a business expense (Section 21, Income Tax Ordinance, 2001), shrinking your taxable profit and thus your Income Tax.
2. Input Tax Credits
Businesses registered under Section 14 of the Sales Tax Act, 1990, can claim credits for Sales Tax paid on inputs. This boosts cash flow, indirectly affecting profits taxed under Income Tax.
3. Small Business Challenges
Here’s a curveball: small traders deal with both. They pay Income Tax on earnings (Section 39) and collect Sales Tax on sales (Section 3). With federal and provincial oversight, it’s a juggling act—sometimes pushing them off the tax grid entirely.
4. Consumer Impact
Sales Tax cuts into your spending money. For lower earners, this might keep them below taxable income thresholds (Section 12), linking the two taxes in a roundabout way.
Why Should You Care?
This isn’t just tax nerd stuff—it’s real-life info:
- Individuals: Know your slab and how Sales Tax bumps up your bills.
- Businesses: Balance both taxes to keep profits healthy.
- Policy Buffs: See how these taxes shape spending and saving habits.
Wrapping It Up: Taxes in Pakistan Made Simple
Income Tax and Sales Tax are the yin and yang of Pakistan’s revenue system—one taxes what you earn, the other what you spend. Their differences are clear, but their overlaps—like expense deductions or small business woes—tie them together. As of March 2025, with rates at 18% for goods and up to 20% for high earners, knowing the ropes can save you headaches.
Got tax questions or need filing tips? Leave a comment or check out our INCOME TAX category for more detailed articles.
Frequently Asked Questions (FAQs)
Got questions about Income Tax and Sales Tax in Pakistan? Here are answers to what people commonly ask, straight from the rules for 2024-2025.
What’s the main difference between Income Tax and Sales Tax in Pakistan?
Income Tax is a direct tax on your earnings—like salaries or profits—under Section 4 of the Income Tax Ordinance, 2001. Sales Tax is an indirect tax on what you buy, set at 18% for goods per Section 3 of the Sales Tax Act, 1990, or 15-16% for services by provinces.
Does Sales Tax affect my Income Tax?
Yes, indirectly. If you’re a business, Sales Tax paid on supplies can be deducted as an expense under Section 21 of the Income Tax Ordinance, 2001, lowering your taxable income and Income Tax.
Who collects Sales Tax on services in Pakistan?
Provincial authorities—like the Punjab Revenue Authority or Sindh Revenue Board—handle Sales Tax on services, not the FBR, which sticks to goods under Section 3 of the Sales Tax Act, 1990.
Are there exemptions for Income Tax or Sales Tax?
Absolutely. Income up to PKR 600,000 is tax-free per the First Schedule of the Income Tax Ordinance, 2001. Goods like medicines skip Sales Tax under the Sixth Schedule of the Sales Tax Act, 1990.
How do businesses handle both taxes?
Businesses pay Income Tax on profits (Section 39, Income Tax Ordinance, 2001) and collect Sales Tax on sales (Section 3, Sales Tax Act, 1990). They can claim input credits (Section 7) to offset Sales Tax, which indirectly cuts their Income Tax by boosting cash flow.
