What special sales tax and income tax rules apply to a cotton ginning factory?

A ginning factory in Rahim Yar Khan, Sanghar or Khanewal sits between the cotton grower and the spinning mill. The law treats ginners differently from other manufacturers in three places: a faster sales tax refund route, a 1 percent ceiling on income tax from ginning and oil milling, and a rule that keeps tax deducted from their sales as minimum tax. It also removed, in 2016, a deposit route ginners once had.

What does the sales tax law say about ginners?

Registration. Section 14(1) of the Sales Tax Act requires every person making taxable supplies in the course of a taxable activity to register if it falls in a listed category, the first being “(a) a manufacturer who is not running a cottage industry”. The Act does not name ginning, but rule 34(1)(a) of the Sales Tax Rules deals with cotton ginners as registered persons filing returns and refund claims.

Refund in any tax period. Rule 34(1) covers refund of excess input tax on supplies that are not zero-rated. Clause (a) lists gas transmission and distribution companies, fertilizer manufacturers, cotton ginners, electric power producers and electric power distribution companies, who “may claim refund of excess input tax over output tax in any tax period”. Cotton ginners were added by S.R.O. 1203(I)/2019. By contrast, rule 34(1)(d) makes most other registered persons wait until the excess has stayed unadjusted for a minimum consecutive period of twelve months. Under rule 34(2) the claim is filed electronically on Form STR-7A after the return in which the refund is claimed, and rule 34(6) bars a claim already made under another notification.

Rate on cotton. The Sales Tax Act as amended to 30 June 2026 does not mention cotton anywhere in its text or schedules. The law’s silence here is not an exemption and not a reduced rate. Form STR-7 in the Sales Tax Rules has a row for purchases of ginned cotton covered under SRO 1087(I)/2019, and that SRO is not held in this corpus.

What does the income tax law say?

The 1 percent ceiling. Clause (17) of Part III (Reduction in tax liability) of the Second Schedule to the Income Tax Ordinance reads: “The tax payable by cotton ginners on their income and profits shall not be more than sum of 1% of their turnover from cotton lint, cotton seed, cotton seed oil and cotton seed cake”. Its proviso says the tax so payable “shall be final tax in respect of their cotton ginning and oil milling activities only.” The footnote says the clause was inserted by the Finance Act, 2021 with effect from 1 July 2019.

Deduction by buyers. Section 153(1)(a) requires every prescribed person paying for the sale of goods to deduct tax from the gross amount payable, including sales tax, at the rate in Division III of Part III of the First Schedule. Prescribed persons in section 153(7) include a company and a sales tax registered person with turnover of one hundred million rupees or more in any preceding tax year.

Clause (47D). Section 153(3) makes tax deducted under the section minimum tax, but clause (a) of its proviso says tax deducted on sale of goods is not minimum tax where received by a company that manufactures those goods. Clause (47D) of Part IV of the Second Schedule says that clause (a) “shall not apply to cotton ginners”. A ginning company therefore does not get the manufacturer carve-out: tax deducted from its sales stays minimum tax. Section 153(4) allows a reduced-rate certificate only where the tax deductible is not minimum.

The omitted deposit route. The footnote to section 153(5) in the 30 June 2026 text records that clause (e), covering “a cotton ginner who deposits in the Government Treasury, an amount equal to the amount of tax deductible”, was omitted by the Finance Act, 2016. It is not current law.

What rates do buyers deduct for tax year 2027?

Paragraph (1) of Division III sets:

Goods sold by the ginner	Company	Other than a company
Cotton seed oil (paragraph (1)(a))	1.5%	1.5%
Lint, cotton seed and other goods (paragraph (1)(b))	5%	5.5%

The word “cotton” was omitted from paragraph (1)(a) by the Finance Act, 2005, and its Explanation says “cotton seed and edible oils” means cotton seed oil and edible oils. Lint and raw cotton seed therefore fall under paragraph (1)(b).

Worked example (illustrative figures)

Sadiq Ginners, a partnership in Rahim Yar Khan, has turnover for tax year 2027 of Rs. 400,000,000 from lint and Rs. 60,000,000 from cotton seed.

1. Turnover covered by clause (17): Rs. 400,000,000 + Rs. 60,000,000 = Rs. 460,000,000.
2. Ceiling under clause (17): 1% x Rs. 460,000,000 = Rs. 4,600,000, as final tax on ginning income.
3. A spinning company in Multan buys the whole lint output. The ginner is not a company, so the buyer deducts 5.5%: 5.5% x Rs. 400,000,000 = Rs. 22,000,000.
4. The deduction in step 3 is far above the ceiling in step 2. Clause (17), clause (47D) and section 153 as printed in this corpus do not say how that difference is refunded or adjusted. This page does not resolve that point.

What if the ginner is a company?

The deduction rate on lint falls to 5 percent. Because of clause (47D), the company still cannot rely on the manufacturer carve-out in section 153(3)(a), so the deduction remains minimum tax and the section 153(4) reduced-rate certificate is not available on that basis.

Common mistakes

• Relying on the old treasury-deposit clause. It was omitted from section 153(5) in 2016.
• Applying 1.5 percent to lint or raw seed. That rate is for cotton seed oil and edible oils.
• Treating the 1 percent ceiling as covering all income. The proviso to clause (17) limits final tax treatment to ginning and oil milling activities.
• Assuming a special sales tax rate on cotton. The Act in this corpus sets none.

What to check in the official text

Read section 14 of the Sales Tax Act, rule 34 of the Sales Tax Rules, section 153 of the Income Tax Ordinance with its footnotes, clause (17) of Part III and clause (47D) of Part IV of the Second Schedule, and Division III of Part III of the First Schedule. S.R.O. 1087(I)/2019 and any other notification fixing the sales tax treatment of cotton are not held in this corpus.