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

A ginning factory in Rahim Yar Khan or Sanghar sits between the cotton grower and the spinning mill. The law gives ginners one clear sales tax advantage, a faster refund route. The income tax position is less favourable than many ginners assume, because a special opt-out they once had is no longer in the Ordinance.

What does the law say?

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, including “(a) a manufacturer who is not running a cottage industry”. Section 2(16) defines manufacture to include any process by which an article is “so changed, transformed or reshaped that it becomes capable of being put to use differently or distinctly”. The Act does not name ginning specifically, but rule 34(1)(a) of the Sales Tax Rules treats cotton ginners as registered persons filing refund claims.

Refund in any tax period. Rule 34(1) deals with refund of excess input tax on supplies that are not zero-rated. Clause (a) says gas transmission and distribution companies, manufacturers of fertilizers, cotton ginners, electric power producers and electric power distribution companies “may claim refund of excess input tax over output tax in any tax period”. Cotton ginners were added to that list by S.R.O. 1203(I)/2019. Most other registered persons fall under clause (d), which requires excess input tax to stay unadjusted for a minimum consecutive period of twelve months before a claim.

Section 153 deduction. Section 153(1)(a) of the Income Tax Ordinance 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 include a company, and a sales tax registered person with turnover of one hundred million rupees or more in any preceding tax year (section 153(7)).

The omitted ginner clause. Section 153(5) lists payments to which sub-section (1) does not apply. The footnote to the 30 June 2026 text records that clause (e), which covered “a cotton ginner who deposits in the Government Treasury, an amount equal to the amount of tax deductible on the payment being made to him”, was omitted by the Finance Act, 2016. The current section 153(5) has no ginner exclusion.

How does it work in practice?

Rates for tax year 2027. Paragraph (1) of Division III sets:

Seller	Sale of goods (not toll manufacturing)	Toll manufacturing
Company	5% of gross amount payable	9%
Other than a company	5.5% of gross amount payable	11%

The lower 1.5 percent rate in paragraph (1)(a) covers “rice, cotton seed or edible oils”. The word “cotton” was omitted from that clause by the Finance Act, 2005, and the Explanation says “cotton seed and edible oils” means cotton seed oil and edible oils. Lint therefore falls in the general sale of goods rate.

Not on the active taxpayers’ list. Rule 1 of the Tenth Schedule increases the deduction rate by hundred percent of the specified rate for persons not appearing in the active taxpayers’ list.

Minimum or adjustable. Under section 153(3), tax deducted under section 153 is minimum tax, but tax deducted under clause (a) is not minimum tax where the payment is received by a company that is a manufacturer of those goods. Section 153(4) lets the Commissioner allow deduction at a reduced rate where the tax is not minimum.

Worked example (illustrative figures)

Sadiq Ginners, a partnership in Rahim Yar Khan, sells cotton lint to a spinning company in Multan. The gross amount payable, including any sales tax, is Rs. 20,000,000.

1. The buyer is a company, so it is a prescribed person under section 153(7).
2. Seller is not a company, rate is 5.5%: 5.5% x Rs. 20,000,000 = Rs. 1,100,000 deducted.
3. Net paid to the ginner: Rs. 20,000,000 minus Rs. 1,100,000 = Rs. 18,900,000.
4. If the partnership is not on the active taxpayers’ list, the rate doubles to 11%: 11% x Rs. 20,000,000 = Rs. 2,200,000.
5. If the ginner were a company, the rate would be 5%: Rs. 1,000,000.

On the sales tax side, suppose the ginner’s input tax for a month (electricity, packing material, services) exceeds its output tax by Rs. 400,000. Under rule 34(1)(a) it may claim that Rs. 400,000 as a refund for that tax period instead of carrying it forward.

What if …?

What if the ginner wants the buyer not to deduct? The deposit-it-yourself route is gone. The remaining route is a certificate from the Commissioner under section 153(4), available only where the tax is not minimum tax.

What if the refund claim is for a period covered by another notification? Rule 34(6) says a refund under rule 34 shall not be claimed where it has already been claimed or paid under any other notification of the Federal Government or the Board.

Common mistakes

• Relying on the old treasury-deposit clause. It was omitted in 2016.
• Applying the 1.5 percent rate to lint. That rate is for rice, cotton seed and edible oils, with cotton seed read as cotton seed oil.
• Assuming a special sales tax rate on cotton. The Act in this corpus sets none. The law’s silence is not the same as an exemption or a reduced rate.

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, Division III of Part III of the First Schedule and rule 1 of the Tenth Schedule. S.R.O. 1087(I)/2019, referred to in Form STR-7 for purchases of ginned cotton, and any other notification fixing the sales tax treatment of cotton are not held in this corpus.