The Income Tax Ordinance, 2001 explains how to calculate the cost of stock-in-trade when it is sold or used during the tax year 2025-26. Section 35 of the updated law gives a simple formula for this calculation.
The cost of stock-in-trade disposed of in a year is worked out using this formula:
(A + B) – C
• A is the opening value of stock-in-trade at the start of the year.
• B is the cost of stock-in-trade purchased during the year.
• C is the closing value of stock-in-trade at the end of the year.
The opening value of stock-in-trade is normally the same as the closing value from the previous year. However, if a person starts a new business, the fair market value of stock at the start will be considered.
The closing value is taken as the lower of cost or net realizable value at the end of the year. This means stock is valued carefully to avoid overstating profits.
Taxpayers who keep accounts on a cash basis can use either the prime-cost or absorption-cost method for calculating stock. On the other hand, those using the accrual method must apply the absorption-cost method.
If stock items cannot be easily identified, a person may use either the first-in-first-out method or the average-cost method. Once chosen, the method cannot be changed without approval from the Commissioner.
In short, the law provides a clear system for valuing stock-in-trade. This ensures that income from business is reported fairly and tax is calculated on the correct basis.
(This article is only for general information. It should not be taken as tax or legal advice. For personal guidance, please consult a professional advisor or the relevant tax authority.)