If I supply yarn or fabric to an exporter locally as an indirect exporter, what income tax and sales tax treatment applies?

A mill that supplies yarn or fabric to an exporter is not itself exporting, but the Income Tax Ordinance, 2001 and the Customs Rules, 2001 can treat it much like one. Which treatment applies depends on how the sale is arranged and whether the buyer is an authorized user of an export scheme.

What does the Income Tax Ordinance say?

Section 154 deals with exports. Two of its sub-sections reach local sales to exporters:

• Section 154(3), inland back-to-back letter of credit. Every banking company must deduct tax when it realises the proceeds of a sale of goods to an exporter under an inland back-to-back letter of credit, or any other arrangement prescribed by the Board.
• Section 154(3B), firm contract. Every direct exporter and export house registered under the Duty and Tax Remission for Exports Rules, 2001 and the Export Facilitation Scheme, 2021 must deduct tax when making payment for a firm contract to an indirect exporter as defined in those rules. The words on the Export Facilitation Scheme were inserted by the Finance Act, 2023.

Both sub-sections point to Division IV of Part III of the First Schedule. Clause (1) of that Division sets the rate for tax deducted under sub-sections (1), (3), (3A), (3B) or (3C) of section 154 at 1.25 percent. The Finance Act, 2026 substituted 1.25 percent for 1 percent, so this is the rate for tax year 2027.

Section 154(4) says the tax deductible under the section is minimum tax on the income arising from the transactions referred to in the section.

Who counts as an indirect exporter?

Section 154(3B) uses the definition in the rules. Rule 871(l) of the Customs Rules defines an indirect exporter as a person with a firm contract or export purchase order from a direct exporter or commercial exporter for the manufacture and supply of goods to that exporter, authorized under the rules. Rule 871(k) says “export” includes supply of goods by an indirect exporter to a direct exporter.

Rule 872(1)(d) makes the Export Facilitation Scheme available to persons registered under the Sales Tax Act, 1990 as manufacturers and operating as indirect exporters. Rule 874 places indirect exporters in Category C.

What about sales tax on the supply?

Rule 880(1) lets an authorized user acquire input goods without customs duty, federal excise duty, sales tax or withholding tax, as per its authorization. Clause (b) says local input goods liable to sales tax “shall be supplied against a zero-rated invoice”. Rule 880(2) requires the user to upload details of domestic acquisitions in WeBOC or PSW within thirty days.

So when a mill supplies yarn to an exporter that holds an EFS authorization covering that yarn, the supply goes on a zero-rated invoice. The Sales Tax Act’s own zero-rating provisions are covered on the related zero-rating page.

Worked example (illustrative figures)

A spinning mill in Multan holds a firm contract from a Karachi towel exporter authorized under the Export Facilitation Scheme. In November 2026 it supplies yarn invoiced at Rs. 12,000,000.

1. Sales tax: the yarn is a local input for an EFS user, so rule 880(1)(b) has it supplied on a zero-rated invoice.
2. Income tax under section 154(3B): Rs. 12,000,000 x 1.25 percent = Rs. 150,000, deducted by the exporter when paying.
3. Net received by the mill: Rs. 12,000,000 - Rs. 150,000 = Rs. 11,850,000.
4. Under section 154(4), the Rs. 150,000 is minimum tax on the income from that supply.

What if the sale is an ordinary local sale?

If there is no inland back-to-back letter of credit, no arrangement prescribed by the Board and no firm contract with a DTRE or EFS exporter, section 154 does not reach the sale. The general withholding on payments for goods would then be the relevant rule. It is covered on the related page on tax deducted from supplies of goods.

Is there a tension in the texts?

Rule 880(1) speaks of acquisition “without payment of … withholding tax”, while section 154(3B) requires the exporter to deduct tax when paying the indirect exporter. Rule 898(3) says the Income Tax Ordinance applies to users unless specifically addressed in the rules. The corpus does not expressly reconcile the two, so this page does not resolve it.

Section 154(3B) also still names the DTRE rules. Rule 898(1) says DTRE approvals may remain operative for two years from the issuance of the EFS rules and then stand abolished.

Common mistakes

• Treating the deduction as final tax. Since the Finance Act, 2024, section 154(4) calls it minimum tax.
• Using 1 percent. The Division IV rate is 1.25 percent for tax year 2027.
• Zero-rating without an authorization. Rule 880(1)(b) sits inside the EFS scheme and ties zero-rated supply to the buyer’s authorization.

What to check in the official text

• Section 154(3), (3B) and (4) of the Income Tax Ordinance, 2001, as amended to 30 June 2026.
• Clause (1) of Division IV of Part III of the First Schedule.
• Rules 871, 872, 874, 880 and 898 of the Customs Rules, 2001. The corpus holds the Customs Rules only as updated to 30 June 2023, so later SROs amending Chapter XL are not reflected.
• Any Board arrangement prescribed under section 154(3). None is held in this corpus.