What counts as a cottage industry for the online sales tax rules?

A cottage industry, for sales tax, is a small manufacturing concern that passes four tests at once: no industrial gas or electricity connection, a residential location, ten workers or fewer, and annual turnover of no more than Rs. 8,000,000. Meeting all four changes two things for an online seller: registration and what happens to the 2% withheld on online orders.

What does the law say?

Section 2(5AB) of the Sales Tax Act defines “cottage industry” as a manufacturing concern which fulfils each of these conditions:

Condition	Text of section 2(5AB)
(a)	does not have an industrial gas or electricity connection
(b)	is located in a residential area
(c)	does not have a total labour force of more than ten workers
(d)	annual turnover from all supplies does not exceed eight million rupees

The turnover figure was raised to eight million by the Finance (Supplementary) Act, 2022.

What does qualifying change for an online seller?

No sales tax registration for online selling. Section 14(1A), added by the Finance Act, 2025, requires every person selling digitally ordered goods from within Pakistan through an online marketplace, website or software application to apply for registration. It excepts two groups: a person running a cottage industry, and retailers who pay sales tax through electricity bills under section 3(9).

No registration as a manufacturer either. Section 14(1)(a) lists among those who must register “a manufacturer who is not running a cottage industry”.

An NTN is still needed. Section 14(1B) says an online marketplace or courier shall not let anyone use its services for e-commerce unless that person holds an NTN, and also sales tax registration where section 14(1A) applies. For a cottage industry, section 14(1A) does not apply, so the NTN is the requirement the marketplace or courier checks.

The 2% withheld is final. Serial 8 of the Eleventh Schedule has couriers and payment intermediaries withhold 2% of gross value of supplies of digitally ordered goods. Section 3(7A)(i) says that withheld tax is the final discharge of tax liability on taxable supplies of digitally ordered goods by a cottage industry as defined in section 2(5AB).

Who is a “manufacturing concern”?

The definition begins with a manufacturing concern, so it is about making things. Section 2(16) defines “manufacture” widely: any process that converts articles into a distinct product, printing and publishing, and operations such as assembling, mixing, cutting, diluting, bottling, packaging, repacking or preparing goods. Stitching garments, cooking pickles, making candles or carving wood would naturally fall within that language.

Section 2(5AB) does not say whether a business that only repackages goods it bought in counts as a manufacturing concern for this purpose. The text does not resolve that case.

Worked example (illustrative figures)

Rukhsana makes ralli quilts in her house in Hyderabad, with four women from the neighbourhood helping her. The house has an ordinary domestic electricity connection. She sells through her own Instagram-linked website and at two craft exhibitions a year.

Step 1, check condition (a): domestic connection, no industrial connection. Met.

Step 2, check condition (b): her house is in a residential area. Met.

Step 3, check condition (c): Rukhsana plus four helpers is five people, not more than ten. Met.

Step 4, check condition (d): annual turnover from all supplies, online Rs. 3,600,000 plus exhibition sales Rs. 900,000 = Rs. 4,500,000. Not more than Rs. 8,000,000. Met.

Step 5, the 2% in one month: online orders of Rs. 300,000 x 2% = Rs. 6,000 withheld by the courier and gateway. Under section 3(7A)(i) this is the final discharge of sales tax on those online supplies.

What if …?

What if I hire more help for Eid season? Condition (c) is about total labour force “of more than ten workers”. If Rukhsana takes on eight extra helpers, she has 13 and fails (c). The Act does not say whether a short seasonal peak counts, or over what period labour force is measured.

What if my exhibition sales push me over Rs. 8 million? Condition (d) counts turnover “from all supplies”, not only online sales. Rs. 3,600,000 online plus Rs. 4,700,000 offline is Rs. 8,300,000, which fails (d). Section 2(5AB) says “annual” but does not define the twelve-month period.

What if I fail one condition? You are then not a cottage industry. Section 14(1)(a) requires registration as a manufacturer and section 14(1A) requires registration for online selling. Section 3(7A)(i) no longer makes the 2% final. Whether a maker who sells direct to the public could instead rely on section 3(7A)(ii), for retailers other than Tier-1, is not addressed in the text.

Common mistakes

• Counting only online sales toward the Rs. 8 million. Condition (d) says all supplies.
• Assuming a home business automatically qualifies. All four conditions must be met; a residential address alone is not enough.
• Thinking no registration of any kind is needed. Section 14(1B) still requires an NTN before a marketplace or courier can serve you.
• Treating a trader as a cottage industry. The definition starts with a manufacturing concern.

What to check in the official text

Read section 2(5AB) for the four conditions, section 2(16) for what counts as manufacture, section 14(1), (1A) and (1B) for registration, and section 3(7A) with serial 8 of the Eleventh Schedule for the 2%. Income tax on the same online sales is a separate matter under the Income Tax Ordinance, covered on other pages.