When you are in Pakistan and engaging in international dropshipping, the tax implications depend significantly on whether the products you are selling originate from within Pakistan or from outside Pakistan, and how your dropshipping activity is classified for tax purposes (as a sale of goods or a provision of services).
As a resident individual in Pakistan (generally, if you are present in Pakistan for 183 days or more in a tax year, or meet other criteria), your worldwide income is generally taxable in Pakistan. The relevant tax laws would be the Income Tax Ordinance, 2001, and potentially the Sales Tax Act, 1990, and the Islamabad Capital Territory (Tax on Services) Ordinance, 2001, depending on the nature and location of your business activities.
Here's a breakdown based on the likely scenarios:
Scenario 1: Products Sourced from Pakistan and Shipped Internationally
If the products you are dropshipping are sourced from within Pakistan and then shipped directly to international customers, this would generally be considered an export of goods from Pakistan.
Sales Tax Implications:
- Under the Sales Tax Act, 1990, goods exported are charged to tax at the rate of zero percent. This means you do not charge sales tax on these exports.
- However, if you paid input tax on purchases or imports that were actually consumed in producing these exported goods, you may be eligible for a refund of that input tax.
- To engage in such activities, you are generally required to be registered under the Sales Tax Act, 1990, as every person engaged in making taxable supplies in Pakistan, including zero-rated supplies, is required to register.
- If you are selling digitally ordered goods that are delivered from within Pakistan using locally operated online platforms (including online marketplaces or websites), the Sales Tax Act has provisions for e-commerce transactions.
Income Tax Implications:
- Your income from this activity would typically be classified as "Income from Business".
- If the transactions involve digitally ordered goods delivered from within Pakistan using locally operated online platforms, Section 6A of the Income Tax Ordinance, 2001, imposes a tax on the person receiving payment for such supplies. The rate for this tax is:
- 1% of the gross amount paid or payable if the payment is received through digital means or banking channels by a payment intermediary.
- 2% of the gross amount paid or payable if the payment is collected by a courier service under Cash on Delivery (CoD) terms.
- You would declare this business income in your income tax return (e.g., using the "Simplified Return of Income for SMEs" form or other applicable business income forms).
- As a resident, you are liable to income tax on your total taxable income. The tax rates for individuals and Associations of Persons (AOPs) are progressive, ranging from 0% to 35% depending on your income bracket.
Scenario 2: Products Sourced Internationally and Shipped Directly to International Customers
If the products you are dropshipping are sourced from outside Pakistan (e.g., from China) and then shipped directly to international customers (e.g., in the USA), the goods never physically enter or exit Pakistan under your direct control. In this case, your income would likely be considered foreign-source business income.
Income Tax Implications:
- Your income would be categorized as foreign-source "Income from Business". As a resident of Pakistan, your worldwide income is subject to tax in Pakistan.
- You would declare this "Foreign Income" in your annual tax return.
- If you paid any income tax in the foreign country where the transaction occurred or the supplier is located, you might be eligible for a foreign tax credit against your Pakistan income tax liability on that foreign-source income. This credit is limited to the lesser of the foreign income tax paid or the Pakistan tax payable in respect of that income. This mechanism helps to avoid international double taxation. For computing the credit, different heads of income are treated separately.
- Export of Services: If your dropshipping activity is primarily viewed as providing online services (e.g., marketing, order management, customer support, web design, or web hosting) rather than directly selling goods, then the export of these services is subject to tax deduction at source under Section 154A of the Income Tax Ordinance, 2001.
- The tax deductible under this section is a final tax on the income arising from these transactions, meaning no further income tax is due on that specific income.
- The rates for service exports under Section 154A are:
- 0.25% of proceeds for export proceeds of computer software, IT services, or IT-enabled services, if you are registered with the Pakistan Software Export Board (PSEB).
- 1% of proceeds for "any other case" of service export.
- One of the conditions for this final tax regime is that no credit for foreign taxes paid shall be allowed.
- Tax on payments for digital transactions in e-commerce platforms (Section 6A): This section applies to "supply of digitally ordered goods or services which are delivered from within Pakistan". If your products are never physically in Pakistan, this section might not apply to the sale of goods. However, if the online platform you use is locally operated in Pakistan, and you receive payments through it, the tax authorities might interpret it differently.
Sales Tax Implications:
- Since the goods do not physically enter or exit Pakistan via your business and the core transactions occur internationally, Pakistan's sales tax on goods (under the Sales Tax Act, 1990) would generally not apply to the goods themselves.
- However, if your activity is considered the provision of a service originating from Pakistan, the Islamabad Capital Territory (Tax on Services) Ordinance, 2001, states that the export of services shall be charged at the rate of zero percent. This is similar to the zero-rating for goods exports.
General Considerations for Dropshippers
- Taxpayer Registration (NTN): As an individual engaging in business activities, you are required to apply for registration and obtain a National Tax Number (NTN).
- Electronic Return Filing: You will be required to file your income tax return electronically, specifying your income from various sources, including foreign income.
- Withholding Tax on Outward Remittances: If you, as the dropshipper, make payments abroad (e.g., to your international suppliers) using credit, debit, or prepaid cards, banking companies are required to collect advance tax on these remittances. The rate for this advance tax is 5% of the gross amount remitted abroad. This is a tax on your payments out, not directly on your income, but it's an important financial consideration.
Due to the evolving nature of e-commerce and digital services taxation, and the specific nuances of dropshipping models, it is advisable to consult a tax professional in Pakistan for personalized advice based on your exact business operations.
