Introduction
The Truth About Export Payments Nobody Tells You
You have worked hard sent your goods and you are waiting for that international payment to come into your bank account When it finally comes Why is it so much less than what you invoiced for with your export payments?
If you are an exporter in Pakistan or any other developing market this is one of the common and frustrating things that will happen to you with your export payments. There are a lot of costs that you do not think about like the buyers bank charges, government taxes and your banks fees for your export payments. So a big part of the money you earned from your export payments is gone before you even get to see it with your export payments.
In this blog we will explain exactly what gets taken away from your export payment. We will use an example. So you are never surprised again, with your export payments.
What happens when you get paid for exporting goods?
When a buyer from another country pays you the money does not directly go into your account.
- The buyers bank takes out its charges
- Your bank takes out its service fees
- The government takes out taxes
You only get the remaining amount after all these deductions. The difference, between what the buyer sent and what you receive can be quite large.
Real-Life Export Payment Example Step-by-Step Breakdown
To make this really clear lets go through an export payment that was received via advance payment terms, which is also called Export Payment. The buyer sent around five thousand dollars.
Here’s what actually happened:
Step 1: The Foreign Bank Takes Its Fees
The buyers bank in another country takes some money for itself before sending the rest to you.
- The buyer sends you around $5,000
- The foreign bank takes around $30.20 for its fees
- You get around $4,969.80 in Pakistan
So the foreign bank gets its share before the money even gets to Pakistan. The foreign bank takes its cut from the money the buyer sends. That is why you do not get the full amount the buyer sends. The foreign bank charges the buyer, around $30.20. That is taken out of the $5,000 the buyer sends.
Step 2: Currency Conversion at Daily Exchange Rate
When the money got to the bank they changed the United States Dollars to Pakistani Rupees using the exchange rate. For this example the exchange rate they used was around Pakistani Rupees 2,785, for every United States Dollar. This made the amount of Pakistani Rupees around 1,34,000.
Pro Tip: The exchange rate you get can be really different. You should always check the interbank rate with your bank before you say a price or make a deal with someone.
Step 3: Your Banks Handling And Service Charges
Your local bank does not process the transaction for free. Here are the Banks Handling And Service Charges that are typically deducted:
a) DS Handling Charges on the Remittance
- There is no charge on the advance permit itself but you have to pay transaction-based charges.
- The Banks Handling And Service Charges include a 15 percent Sales Tax that is added on top of any service fee charged by the bank.
- For example if the bank charges PKR 80 as a service fee then 15 percent of that which is PKR 12 goes to the government.
b) Bank Service Charges for Export Remittance. This is 0.15 percent
- The Bank charges a percentage of the remittance received as a service fee for Export Remittance.
- This rate is different for each bank.
- In this example which was processed through Habib Metro Bank, the Bank Service Charges were PKR 277.
- Then 15 percent sales tax on PKR 277 is PKR 41.55 which is also deducted.
c) EP Handling Charges for Advance Payment Endorsement on the Bill of Lading
- The bank charges you for endorsing your bill of lading against the advance payment.
- The charge in this example is PKR 740.
- Then 15 percent sales tax on PKR 740 is PKR 111 which is also deducted.
Important: Every bank has a service charge schedule, for Banks Handling And Service Charges.
You should always. Review your banks export charges schedule to know exactly what will be deducted before you quote your buyer.
Step 4: Government Taxes Deducted at Source
The deductions really start to add up. The Pakistani government takes taxes straight from export payments.
A) Export Development Surcharge (EDS). 0.25%
- This is also known as DS or Development Surcharge. The government takes this tax from every exporter.
- They use this money to help exporters by giving them training and making it easier for them to do business.
- They also use it to promote exports.
- For example if we have PKR 1,34,000 the tax will be 0.25% of that which’s PKR 335.
b) Withholding Tax on Export Advance Payment. 1%
- The government takes 1% of every export payment.
- If we have PKR 13,84,500 the tax will be 1% of that which’s PKR 13,845.
- This money goes to the government.
c) Advance Income Tax. 1%
- The government also takes 1% advance income tax.
- This tax is the same, as the withholding tax.
- Both of these taxes add up throughout the year.
When you file your income tax return at the end of the year these taxes are adjusted.
The good news is that the withholding tax and advance income tax you pay throughout the year are not wasted.
These taxes are used to reduce your tax liability when you file your annual return.
If you have already paid tax you may not owe much or anything at all when it is time to pay taxes.
Total Deductions at a Glance
| Deduction Item | Amount (PKR) |
|---|---|
|
Foreign Bank Charges |
~PKR 900 (equivalent) |
|
Bank DS Handling Charge + 15% ST |
PKR 92 |
|
Bank Service Charges (0.15%) + 15% ST |
PKR 319 |
|
EP Handling Charges + 15% ST |
PKR 851 |
|
Export Development Surcharge (0.25%) |
PKR 335 |
|
Withholding Tax (1%) |
PKR 13,845 |
|
Advance Income Tax (1%) |
PKR 13,845 |
|
Total Deductions |
~PKR 30,000–34,000 |
Here is what happened with the money. We got around PKR 1,34,000.. Then they took out a lot of money for charges and taxes. This was about PKR 34,000 which’s roughly twenty five percent of the total money. So the amount of PKR 1,34,000 that we actually got to use was, around PKR 1,00,000. The PKR 34,000 that was deducted for charges and taxes is a part of the PKR 1,34,000 we received. We were left with PKR 1,00,000 out of the PKR 1,34,000.
What About Other Payment Terms Like DP and LC?
The example I gave earlier is about advance payment, which’s simple and usually cheap. Other payment methods cost more:
DP or Documents against Payment
- Involves sending shipping papers to the buyers bank, which costs money for couriers.
- The buyers bank also charges fees for handling.
- This adds around PKR 1,000 to 2,000 or more in costs.
LC or Letter of Credit
- This is the costly payment method.
- The buyers bank charges for opening or changing the LC.
- My bank also charges for advising on the LC negotiating and discounting.
- Some banks charge a fee of $50 or more for each LC deal.
- All these charges for LC can add up to be much higher, than advance payment.
The Golden Rule Always Add 2.5%–3.5% to Your Product Price
Here is a tip for exporters:
When you calculate your export price add 2.5% to 3% to your base cost. You can even add up to 3.5% to be on the side. This will help you cover taxes and bank charges.
If you do not include these charges, in your price quote you will lose money. The charges will be taken out of your profit, which might even wipe out your profit.
How to Calculate Your Export Price
- This is a formula: Export Price = (Cost of Goods + Packing + Freight + Margin) ÷ (1. 0.03)
- *You can simply multiply your target net price by 1.03 to get your quoted price.
Key Takeaways for Exporters
✅ Make sure to check your banks fees before finalizing a deal. Each bank has charges.
✅ Paying in advance is the way to make a payment. Using a Letter of Credit is the expensive option.
✅ You do not lose money on government taxes. They can be adjusted when you file your income tax return.
✅ Plan to spend 2.5% to 3.5% of your invoice value on charges and taxes.
✅ Try to get your buyer to share or pay some foreign bank charges if possible.
✅ Keep track of all deductions, on every payment statement. You can deduct them at the end of the year.
Frequently Asked Questions (FAQs)
The tax that is withheld on exports is not given back to you directly. However it is added to your income tax when you file your annual return. If the total income tax you have to pay is less than the tax that was withheld on exports then you might get some money back. You can use it to pay tax next time.
The fees that banks charge for sending export money to Pakistan are different. You should look at the fees that Habib Metro, HBL, MCB and UBL charge for export services. Compare these fees so you can choose the bank that’s best for you.
The idea behind the Export Development Surcharge is that it helps exporters. The government uses this money to promote exports train people and support exporters.. Many exporters do not think they get much benefit from the Export Development Surcharge.
Banks always charge a minimum fee no matter how much money is being sent. So if you get an amount of money from exports the bank will still charge you the minimum fee. This means that the fee could be a part of the money you get from small export transactions. The export payment is still charged the minimum fee by the banks and this minimum fee is the same for export payments of all sizes which’s why the percentage of the fee can be very high, for small export payments.
Conclusion
Export payments are not always easy. When you send an invoice you do not always get the amount. There are charges from banks, your local bank and government taxes. These charges take away a part of the payment before you receive it.
To make a profit as an exporter you need to be clear and prepared. You must know the charges beforehand. Add them to your price. Keep track of every deduction. This way you can claim all the tax credits you’re eligible for, at the end of the year.
A good rule to start with is to set 2.5% to 3% of the payment. Regularly check your banks charges. This way you will not be surprised if the payment you receive is less than expected.
