Why is 4% cut from my COD remittance when the income tax rate is 2%?

The courier statement shows one deduction line, or two lines that add up to 4%, and the natural reading is that the income tax rate is 4%. It is not. On cash on delivery orders for goods, the courier is acting as a collection agent for two separate federal taxes, each at 2%. One is income tax under the Income Tax Ordinance, 2001. The other is sales tax under the Sales Tax Act, 1990.

What does the law say?

Income tax: 2%. Section 6A of the Income Tax Ordinance charges tax on payments received for digitally ordered goods or services delivered from within Pakistan through locally operated online platforms, including marketplaces and websites. Section 153(2A)(ii) requires every courier business that collects cash from a buyer under cash on delivery terms on behalf of an online seller to collect that tax “from the gross amount payable (including sales tax, if any) to the seller” and deposit it. Division IVA of Part I of the First Schedule sets the rate for cash on delivery by a courier service at “2% of the gross amount paid or payable” for tax year 2027.

Sales tax: 2%. Section 3(3)(c) of the Sales Tax Act says that for digitally ordered taxable goods supplied through an online marketplace, website or software application from within Pakistan, the liability to collect and pay tax is on the payment intermediary where the buyer pays digitally, and “of the courier delivering the goods where those are supplied on Cash on Delivery (CoD) basis at the rates provided in the Eleventh Schedule”. Serial number 8 of the Eleventh Schedule names “Payment intermediaries and couriers” as withholding agents for “digitally ordered goods from within Pakistan”, with the supplier category being persons supplying such goods through an online marketplace, website or software applications. The rate is “2% of gross value of supplies”.

Tax	Law	Who deducts on COD	Rate
Income tax	Section 153(2A), Income Tax Ordinance; First Schedule, Part I, Division IVA	Courier	2% of gross amount
Sales tax	Section 3(3)(c), Sales Tax Act; Eleventh Schedule, serial 8	Courier	2% of gross value of supplies

How does it work in practice?

The courier collects the full price from the buyer, takes out both amounts, and remits the rest, usually after its own delivery charges too. The two taxes go to the same federal government but under different laws, with different consequences for you:

• the income tax part is tax on your income under section 6A, and whether it is final or adjustable depends on the Income Tax Ordinance;
• the sales tax part is withheld on your supply of goods, and its effect depends on your status under the Sales Tax Act.

The sales tax withholding under serial 8 applies to goods only. Section 3(3)(c) and serial 8 both speak of digitally ordered goods. The income tax charge in section 6A covers both goods and services. So a seller of an online service collected by cash on delivery would, on the text, see the 2% income tax but not the serial 8 sales tax withholding.

Worked example (illustrative figures)

Bilal sells phone accessories from Rawalpindi through his website. A buyer in Multan orders a set for Rs. 5,000 and pays cash on delivery. The courier collects Rs. 5,000.

Step 1, income tax under section 153(2A): Rs. 5,000 x 2% = Rs. 100.

Step 2, sales tax under serial 8 of the Eleventh Schedule: Rs. 5,000 x 2% = Rs. 100. This assumes the “gross value of supplies” is the full Rs. 5,000 collected. The Schedule does not itself say whether that value is taken with or without tax, so the base the courier uses should be checked on its statement.

Step 3, total tax withheld: Rs. 100 + Rs. 100 = Rs. 200.

Step 4, as a share of the order: Rs. 200 / Rs. 5,000 = 4%.

Step 5, amount before the courier’s own charges: Rs. 5,000 - Rs. 200 = Rs. 4,800.

Any delivery or cash handling fee the courier charges comes off after this and is not a tax.

What if …?

What if the buyer paid by card instead? The income tax rate for payment through digital means by a payment intermediary is 1%, not 2%. Serial 8 applies the same 2% sales tax withholding to payment intermediaries. On the same Rs. 5,000 that would be Rs. 50 plus Rs. 100, or 3%.

What if I run a cottage industry or am a small retailer? Section 3(7A) of the Sales Tax Act says the tax withheld under the Eleventh Schedule by the payment intermediary or courier is final discharge of tax liability for taxable supplies of digitally ordered goods by a cottage industry as defined in section 2(5AB), and by retailers other than Tier-1 retailers.

What if the deduction is more than 4%? The statutory rates for these two taxes add to 4% on cash on delivery goods. A higher figure may include courier charges or another tax. This page does not cover whether higher rates apply to a seller not on the active taxpayers’ list.

Common mistakes

• Treating 4% as the income tax rate. Division IVA sets 2% for cash on delivery. The other 2% is sales tax.
• Claiming the full 4% as an income tax credit. Only the income tax part is income tax. The sales tax part is dealt with under the Sales Tax Act.
• Assuming the sales tax cut applies to services. Serial 8 is limited to digitally ordered goods.

What to check in the official text

Read section 153(2A) and Division IVA of Part I of the First Schedule of the Income Tax Ordinance for the income tax part. Read section 3(3)(c) and (7A) of the Sales Tax Act and serial number 8 of the Eleventh Schedule for the sales tax part. Note the opening words of the Eleventh Schedule, which exclude certain goods and supplies listed after the Table from withholding. Provincial sales tax on services is outside this corpus.