Principal-agent transactions and commission under sales tax

By Junaid IqbalUpdated 1 August 20264 min read

CA Finalist, ACCA FinalistEditorial team: Chartered Advisory Team of Chartered Accountants

Quick answer: In a principal-agent arrangement where the agent sells on the principal's behalf, the supply of goods to the customer is generally treated as the principal's supply under the federal regime, while the commission the agent earns is consideration for a service and falls under provincial sales tax on services. Where the agent instead buys and resells, there are two separate goods supplies.

Many sales happen through an intermediary — a commission agent, a broker, a sales representative who closes deals for a principal. The sales tax treatment depends on what the intermediary actually does: facilitate the principal's sale, or buy and resell in its own right. And the commission itself is a service, which pulls in a second tax regime. This guide untangles both.

Supplies made through an agent

Where an agent sells on the principal's behalf, the supply of the goods to the end customer is generally treated as the principal's supply, made through the agent. The principal accounts for the sales tax on the goods, because economically it is the principal who is selling; the agent has simply facilitated that sale. This is the same logic that underlies a consignment, where the consignee sells on the principal's behalf. The agent has not acquired and disposed of the goods — so its own sales tax exposure is not about the goods at all, but about the service it rendered.

Commission is a taxable service

That service is the commission. The commission an agent earns is consideration for a service — arranging, introducing, or facilitating the sale — and services fall under provincial sales tax administered by the relevant provincial authority. So an agent earning commission generally needs to account for provincial sales tax on that commission, quite separately from the goods supply that the principal accounts for under the federal regime. This is where principal-agent deals routinely straddle both tax systems at once: goods to FBR (the principal's sale) and commission to the province (the agent's service). Missing the provincial side on commission is a common gap, because businesses focus on the goods and overlook that the fee they earned is a taxable service.

Buy-and-resell is different

Not every intermediary is an agent. Where the intermediary buys the goods and resells them, it is not an agency at all but two separate supplies of goods: the principal sells to the intermediary, and the intermediary sells to the customer. Each is a taxable supply of goods in its own right under the federal regime, with input and output tax on both legs. So whether an arrangement is a true agency (facilitating the principal's sale for commission) or a buy-and-resell chain (two goods supplies) changes the whole analysis. The substance and the documents decide it — a contract calling someone an "agent" who actually takes title and resells is, for tax, a reseller.

Worked illustration. A manufacturer sells through a commission agent who introduces buyers and closes orders for a fee. The sale of goods to each buyer is the manufacturer's supply, on which the manufacturer charges federal sales tax; the agent charges provincial sales tax on its commission as a service. If, instead, the intermediary had bought the goods outright and sold them on at its own price, there would be two goods supplies — manufacturer to intermediary, intermediary to buyer — each federally taxed.

Common mistakes

Overlooking provincial sales tax on the commission, and treating the fee as tax-free.
Assuming an "agent" who actually buys and resells is facilitating a supply rather than making one.
Double-counting the goods supply as both the agent\'s and the principal\'s.
Leaving the arrangement undocumented, so its true nature is unclear on audit.

Selling through agents or earning commission?

We map principal-agent arrangements across the federal goods regime and provincial commission-service tax, so both sides are covered.

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Where it fits

Agency is the commission-side companion to consignment sales, and because commission is a service it sits within provincial services taxation and the federal-versus-provincial divide. Clear invoicing is what distinguishes an agency from a resale chain. Tax the goods as the principal\'s, and the commission as the agent\'s service.

Confirm before you rely on this. Principal-agent and commission treatment is set by the Sales Tax Act 1990, provincial law and the relevant rules, and can change. Confirm the current position from the FBR or the relevant provincial authority, or a qualified tax adviser.

Sources

This guide is written against the official and clearly labelled professional references below. Rates, thresholds and portal procedures change between reviews, so open the primary source before relying on a figure.

Questions people also ask

How is a supply made through an agent treated?

Where an agent sells on the principal's behalf, the supply of the goods to the end customer is generally treated as the principal's supply, made through the agent. The principal accounts for the sales tax on the goods. The agent has not bought and resold the goods; it has facilitated the principal's sale, and its own tax position is about the service it provided, not the goods.

Is commission subject to sales tax?

Yes, as a service. The commission an agent earns is consideration for a service — arranging or facilitating the sale — and services fall under provincial sales tax administered by the relevant provincial authority. So an agent earning commission generally needs to account for provincial sales tax on that commission, separately from the goods supply that the principal accounts for.

What if the agent buys the goods and resells them?

Then it is not really an agency for tax purposes but two separate supplies of goods: the principal sells to the intermediary, and the intermediary sells to the customer. Each is a taxable supply of goods in its own right under the federal regime. Whether an arrangement is a true agency or a buy-and-resell chain therefore changes the analysis, so the substance and the documents matter.

Scope note: General educational information for Pakistan, not a legal opinion or a substitute for advice based on your documents. Law, notifications, portal procedures and individual facts can change the result.

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