How is sales tax charged when a unit dyes, processes or weaves someone else's yarn or fabric on conversion charges?

A great deal of textile work in Pakistan is done on goods the worker does not own. A sizing unit in Faisalabad sizes a weaver’s yarn, a shed weaves a mill’s yarn into greige cloth, and a processing house dyes and finishes an exporter’s fabric, charging only for the work. The Sales Tax Act, 1990 has specific wording for this arrangement, and the Finance Act, 2026 added a withholding entry for it.

Is a unit that works on someone else’s goods a manufacturer?

Yes. Section 2(17) defines a “manufacturer” or “producer” as a person engaged in the production or manufacture of goods “whether or not the raw material of which the goods are produced or manufactured are owned by him”. It also includes a person who by any process or operation “prepares goods by any other manner”.

Section 2(16) says “manufacture” includes any process in which an article is converted into another distinct article, or is so changed, transformed or reshaped that it can be put to use differently or distinctly, and any process incidental or ancillary to completing a manufactured product. Weaving yarn into cloth, or dyeing and finishing greige fabric, is the kind of process that definition describes.

So a processing unit does not escape being a manufacturer because the yarn or fabric on its floor belongs to a customer.

When is there a supply?

Ordinarily a supply under section 2(33) is a sale or other transfer of the right to dispose of goods as owner. A processing unit never owns the customer’s fabric, so that part of the definition would not reach it. Section 2(33)(d), added by the Finance Act, 2015, closes the gap. It includes as a supply, “in case of manufacture of goods belonging to another person, the transfer or delivery of such goods to the owner or to a person nominated by him”.

The taxable event is therefore the moment the processed goods go back to the owner, or to someone the owner names, such as a stitching unit or a freight forwarder.

Section 3(1)(a) then charges sales tax at eighteen per cent of the value of taxable supplies made by a registered person in the course or furtherance of any taxable activity.

What is the value of that supply?

The Act has no valuation rule written specifically for toll manufacturing. The general definition in section 2(46)(a) takes the value of a taxable supply as the consideration in money, including federal and provincial duties and taxes, that the supplier receives from the recipient for that supply, excluding the tax itself. In a conversion arrangement the money the processing unit receives from the owner is its conversion charge. Section 2(46)(c) provides that where, because of the special nature of a transaction, it is difficult to ascertain the value, the open market price applies.

Section 3(1A) adds further tax at four per cent of the value where taxable supplies are made to a person who has not obtained a registration number or is not an active taxpayer. The sub-section lets the Federal Government exclude supplies from further tax by notification.

What does the new Eleventh Schedule entry add?

Section 3(7) requires tax to be withheld at the rate in the Eleventh Schedule by a person, being a purchaser of goods or services, “as withholding agent for the purpose of depositing the same”. The Finance Act, 2026 added serial number 14 to the Schedule’s Table:

Column	Entry for S. No. 14
Withholding agent	Registered persons engaged in toll manufacturing
Supplier category	Person other than registered person
Rate or extent of deduction	Four times of the tax charged on conversion charges

Clause (viii) after the Table excludes supplies made by an active taxpayer to another registered person, except the supplies at serial numbers 5, 7, 9, 10, 11, 12 and 13. Serial number 14 is not in that exception list, but its supplier category is a person who is not registered, so clause (viii) does not describe the same supplies.

The Schedule does not say which side of a toll arrangement the unregistered person sits on, does not define “conversion charges”, and does not explain how “the tax charged” is measured where the supplier is unregistered and does not charge tax. The text alone does not settle how the entry is applied.

The procedure rules for withholding agents, rules 150ZZH to 150ZZK of the Sales Tax Rules, 2006, are in this corpus only as amended to 30 June 2025, before serial number 14 existed. Rule 150ZZI requires a withholding agent to deduct the Schedule amount, deposit it with its monthly return if registered, and issue the supplier a certificate. Its proviso bars the agent from claiming the withheld tax as input tax.

Worked example (illustrative figures)

A registered processing unit in Faisalabad dyes 40,000 metres of greige fabric owned by a registered, active exporter in Lahore. It charges a conversion charge of Rs. 800,000 and delivers the dyed fabric to the exporter’s stitching contractor, whom the exporter has nominated.

1. Is there a supply? Yes. Under section 2(33)(d), delivery to a person nominated by the owner is a supply.
2. Value. Under section 2(46)(a), the consideration in money the unit receives is Rs. 800,000.
3. Tax at section 3(1). Rs. 800,000 x 18% = Rs. 144,000.
4. Invoice total. Rs. 800,000 + Rs. 144,000 = Rs. 944,000.

If the owner were not registered, section 3(1A) would add further tax of Rs. 800,000 x 4% = Rs. 32,000, bringing the tax to Rs. 176,000, unless a notification excludes the supply. No figure is shown for serial number 14, because the Schedule does not give enough to calculate it with confidence.

Common mistakes

• Treating job work as outside sales tax because the goods are not owned. Section 2(17) and section 2(33)(d) are written to cover exactly this case.
• Assuming the income tax and sales tax rules are the same. Income tax deduction on toll manufacturing falls under the Income Tax Ordinance, 2001, which is a separate law with its own rates.
• Claiming withheld tax as input tax. The proviso to rule 150ZZI(2) bars the withholding agent from doing so.
• Assuming a sub-contracting mill is a manufacturer-cum-exporter for refunds. The proviso to section 2(17) says that for refunds only a person who owns or has his own manufacturing facility to make the exported goods is treated as a manufacturer-cum-exporter.

What to check in the official text

• Section 2, clauses (16), (17), (33) and (46), and section 3(1), (1A) and (7) of the Sales Tax Act, 1990.
• The Eleventh Schedule, serial number 14 and clauses (i) to (ix) after the Table.
• Rules 150ZZH to 150ZZK of the Sales Tax Rules, 2006, and any later amendment covering serial number 14, which this corpus does not hold.
• Any notification under section 3(1A) or the proviso to section 2(33) about toll or conversion supplies, and any zero-rating notification for supplies to exporters. None is in this corpus.