Chapter 11 – Sales Tax

Taxation
From the desk of M. Khalid Petiwala

Chapter 11

SALES TAX

1. Basic concepts including VAT

1.1 Overview of Sales Tax System

Sales tax is a Value Added Tax (VAT) system.

It is an indirect tax collectable from the whole supply chain i.e. importers,
manufacturers, wholesalers and retailers with certain exceptions.

Therefore, the sales tax is payable on the value of:

- Taxable supplies by a registered person;

- Goods imported into Pakistan; and

- Specified taxable services

VAT is a percentage tax levied on the price each registered person charges for goods
supplied or taxable services rendered by him.

VAT utilizes a system of tax credit (called input tax adjustment) to place the ultimate
and real burden of tax on the final consumer.

1.2 Sales tax rates and who is liable to pay sales tax

Tax Rates

(a) Sales tax rate is 18%.

Further tax @ 4% shall also be charged when the goods are supplied to unregistered
persons or inactive taxpayers. It means that the tax rate in this case is 18% + 4%.
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However, further tax shall not be charged in the following cases:

- supplies to Government

- supply of goods directly to end consumers including supplies by a retailer

Notes:
Sale through factory’s outlets means sales to end users and therefore further
tax is not chargeable.

Likewise, sales to employees etc. will not be subject to further tax being end
users.

- items falling under 3rd Schedule i.e. items on which sales tax is chargeable on
retail price

- goods falling under zero rating; and

- specified goods such as white sugar etc.

Who is liable to pay sales tax

(b) Liability to pay the sales tax to the sales tax department shall be of the person:

o making the supply, in the case of supply of goods;

o importing the goods, in the case of goods imported into Pakistan; and

o providing taxable services.

1.3 When to pay sales tax

Sales tax shall be paid at the time of:

- payment of custom duty in the case of import of goods; and

- filing of sales tax returns in the case of supplies made or services provided in
Pakistan

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1.4 Example No.1 to explain basic concept of VAT:

Every person in the supply chain is a registered person for sales tax purpose and subject
to sales tax @ 18%:

S. Input Output Pay to

No. Transactions Tax Tax FBR

1 Importer’s import value Rs.9,200 1,656 1,656

Importer sells to a wholesaler of raw materials for

Rs.11,000 + 1,980 sales tax 1,656 1,980 324

= margin is Rs.1,800

2 Wholesaler of raw materials buys at Rs.11,000 +

1,980 input tax and sells to a manufacturer for
Rs.11,600 + 2,088 sales tax 1,980 2,088 108

= margin is Rs.600

3 Manufacturer buys at Rs.11,600 + 2,088 input tax

(his other manufacturing expenses are Rs.9,000)
and sells to a wholesaler of finished product at
Rs.23,600 + 4,248 sales tax 2,088 4,248 2,160

= margin is Rs.3,000

4 Wholesaler of finished product buys at Rs.23,600 +

4,248 input tax and sells to a retailer at Rs.24,000 +
4,320 sales tax 4,248 4,320 72
= margin is Rs.400

5 Retailer buys at Rs.24,000 + 4,320 input tax and

sells to consumer at Rs.24,600 + 4,428 sales tax 4,320 4,428 108

= margin is Rs.600

TOTAL 4,428

In VAT system every person in a supply chain is supposed to be a registered person but
it is very difficult in Pakistan due to certain problems e.g. chips manufacturer may be a
company for which registration, record keeping, input-output adjustment etc. are not a

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big issue but a chips manufacturer may be an individual running a small bakery who can
not be expected to comply all such legal requirements.

Likewise, every retailer in Pakistan is not expected to comply with all the legal
requirements.

Therefore, a structure has been developed in Pakistan whereby two types of exemptions
have been given as under:

- Turnover based exemption i.e. small manufacturers termed as cottage

industry and retailers (other than specified retailers i.e. Tier 1 retailers) are
exempt from registration and they do not charge sales tax on their supplies; and

- Items based exemption i.e. certain products are exempt without any turnover
limit e.g. books, newspapers and locally manufactured computers and laptops

The following chart explains the situation:

Importer Registration is required.

Importer shall pay sales tax on import stage and

subsequently charge sales tax on value of taxable
supply.

Wholesaler Registration is required and sales tax shall be

charged on value of taxable supply

Retailer Only Tier 1 retailers (i.e. specified retailers) are

required to be registered.

Manufacturer
Cottage industry Exempt under 6th Schedule

Other than cottage industry Registration is required and sales tax shall be
charged on value of taxable supply

Definition of Cottage Industry

means a manufacturer which fulfills each of the following conditions:

(a) does not have an industrial connection of gas or electricity;

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(b) is located in a residential area;

(c) does not have a total labour force of more than 10 workers; and

(d) annual turnover from all supplies does not exceed Rs.8 million.

1.5 Zero Rated Supplies – 5th schedule

a) Goods falling under this category are chargeable to sales tax at 0%.

It means that their output tax is 0% however, their purchases may not necessarily
zero rated and therefore, input tax would be suffered which is reclaimable as input
tax i.e. refund can be claimed from FBR.

Examples of items under this category:

 Export of goods

 supply to diplomats

 supply of raw materials for further manufacture of goods in Export Processing

Zone (EPZ)

 imports or supplies made to Gwadar Special Economic Zone

 packing materials used for zero rated supplies

 Other specified items such as pencils, pens etc.

1.6 Exempt Supplies: 6th schedule

a) Certain imports and supplies of goods falling under this category are outside the
scope of sales tax and therefore not subject to sales tax.

b) An example is publication of books and newspapers where paper purchases suffer

sales tax but their supply does not and in this case input tax can not be reclaimed.

Few examples of exempt items are:

 Agricultural produce not subject to any further manufacture

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 Goods imported by diplomats

 Fertilizers

 Locally manufactured laptops, computers and notebooks

c) Difference between zero rated supplies and exempt supplies:

No output tax shall be charged and collected on both zero rated and exempt
supplies but input tax can be reclaimed only in respect of zero rated supplies.

1.7 Adjustment of input tax

a) A registered person is entitled to deduct his input tax during the tax period for the
purpose of taxable supplies made or to be made (e.g. stocks not yet sold) from his
output tax liability and for this purpose he must hold:

i. tax invoice in his name bearing his NTN/NIC; or

ii. goods declaration (i.e. bill of entry) in case of goods imported by him.

It means that input tax cannot be claimed on purchases from unregistered person.

Input tax can be claimed on accrual basis subject to payment within a prescribed period
as per section 73.

Input tax paid (not on accrual basis) with electric and gas bills can be claimed by a
registered consumer and in this case the gas or electric bill shall be regarded as tax
invoice.

b) Where a registered person did not deduct input tax within the relevant period, he
may claim such input tax in the return for any of the next 6 tax periods.

c) In the following cases a registered person is not entitled to claim his input tax:

i. Supply of exempt goods

ii. Goods and services not related to taxable supplies

iii. Input tax on fake invoices

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iv. Goods in respect of which sales tax has not been deposited into the government
treasury by the supplier

v. Purchases in respect of which a discrepancy is indicated by the computerized

system of FBR and input tax of which is not verifiable in the supply chain

vi. Building materials including electric fittings etc.

vii. Any goods which the FBR may specify.

The FBR has specified the following goods acquired otherwise than stock in trade
by a registered person in respect of which input tax shall not be claimed:

 Food, beverages etc.

 Gifts including dairies and calendars

 Vehicles, office equipments and furniture

viii. A registered person cannot claim input tax in the following cases as well:

 Purchase from unregistered person

 Purchase from a person not included in active taxpayers’ list

 Purchase from a suspended person

 Purchase from a blacklisted person.

1.8 Payment through banking channel – Section 73

Payment for a transaction exceeding Rs.50,000 (other than utility bills) must be –

 made through banking channel

 made within 180 days of the date of the issuance of the tax invoice through
banking channel

If the above conditions are not met then the buyer would not be allowed any input tax
credit, zero rating etc.

Input tax can be claimed on accrual basis.

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However, payment through banking channel is required within 180 days.

If payment is made in cash or the payment is not made within 180 days then input tax
adjustment earlier made would be reversed.

Exceptions
- transaction up to Rs.50,000 can be paid in cash

- utility bills can be paid in cash

1.9 Apportionment of Input Tax Rules

These rules apply to the registered person supplying taxable and exempt goods
simultaneously.

Input tax used for both taxable and exempt supplies shall be apportioned according to
the following formula:

Value of taxable supplies x Residual input tax

Value of taxable + exempt supplies

Residual input tax is sales tax on goods being used for taxable as well as exempt
supplies.

Note:
There are three categories of supplies i.e.

- taxable at normal rate

- taxable at zero rate; and

- exempt supplies.

If there are two or more categories then residual input tax shall be apportioned.

1.10 Debit and Credit Note

Where a registered person has issued a tax invoice and the tax invoice needs to be
modified as a result of:

o return of goods; or
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o change in the nature or value of supply

within 180 days then the registered person may issue a debit / credit note and make
adjustments accordingly.

However, where sales tax liability increases on issuance of debit note then the time limit
of 180 days shall not apply.

EXAMPLE
Mr. A, a registered person, supplied goods of Rs.100,000 to Mr. B who is also a
registered person and received Rs.118,000 from Mr. B (including sales tax of
Rs.18,000).

Goods returned to Mr. A.

Mr. B will now issue a debit note.

Mr. A:
Mr. A has already received Rs.18,000 from Mr. B and paid to FBR as his output tax.

Now he will pay back Rs.18,000 to Mr. B and reclaim this amount from FBR.

In this case, Mr. A is allowed to deduct Rs.18,000 from his output tax.

Mr. B:
Mr. B has already paid Rs.18,000 to Mr. A and reclaimed this amount from FBR as his
input tax.

Now he will receive Rs.18,000 from Mr. A and he is required to pay the said amount
to FBR.

In this case, Mr. B is required to deduct Rs.18,000 from his input tax.

1.11 Restriction on input tax

A registered person shall not be allowed to adjust input tax in excess of 90% of the
output tax for a particular tax period.

Therefore, input tax claim for a tax period shall be lower of:

- Actual input tax; or

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- 90% of output tax.

Input tax disallowed due to this restriction shall be carried forward to the next period
and shall be treated as input tax of that period.

FBR has power to increase the limit from 90% to 95% in any particular case including all
Tier-1 retailers who have integrated all their point of sales (POS) with the FBR.

Note:
Refund of zero rated items including exports may be claimed at the time of filing of
return and need not be carried forward.

2. Third Schedule

Sales tax is charged @ 18% in respect of goods specified in Third Schedule on the
recommended retail price which shall be legibly printed on the label etc along with the
amount of sales tax.

After charging / paying such sales tax, the same amount of sales tax will be charged on
subsequent supply.

Items covered under this category are:

o Cigarettes

o Juices, ice cream, beverages

o Mineral / bottled water

o Detergents, shampoo, soap, toothpaste, shaving cream, cosmetics, shoe polish

o Tea, milky drinks

o Toilet paper and tissue paper

o Spices sold in retail packing with brand name and trade mark

o Cement

o Household electrical goods including ACs, refrigerators, deep freezers, TV etc.

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o Household gas appliances including cooking range, ovens and geysers

o Foam products including spring mattresses.

o Paints, lubricating oils etc.

o Auto-parts in retail packing, storage batteries, tyres and tubes

o Motorcycles and Auto rickshaws

o Biscuits in retail packing with brand name

o Tiles

Note: Further tax is not applicable on 3rd Schedule items.

3. Retailers

Retailers are divided into two categories as under:

1. Tier 1 retailers i.e. specified retailers are:

(a) a retailer operating as a unit of a national or international chain of stores;

(b) a retail shop in an air-conditioned shopping mall excluding kiosk;

(c) a retailer whose cumulative electricity bill during the immediately preceding
12 months exceeds Rs.1,200,000;

(d) a retailer who has acquired point of sale accepting payment through debit or
credit cards or any other digital payment service; and

(e) any other person as prescribed by the FBR.

2. Retailers other than Tier 1 retailers

Tier 1 retailers [i.e. specified retailers]

Tier 1 retailers are required to be registered and all the provisions shall apply in the
normal manner including charge of sales tax, filing of monthly return, input tax
adjustment / apportionment, debit / credit note, audit and so on.

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All Tier-1 retailers shall integrate their retail outlets with FBR’s computerized system for
real time reporting of sales. In case of default, input tax claim would be reduced by
60%.

Service charges by Tier – 1 retailers

Service charge @ Re.1 per invoice shall be collected by Tier – 1 retailers integrated with
the FBR and the said service charge shall be deposited along with the filing of monthly
sales tax return without adjustment of any input tax against the said service charge.

Retailers other than Tier 1 retailers

Retailers other than Tier 1 retailers are not required to be registered and they shall pay
sales tax with their monthly electric bills as under:

- 5% where the monthly bill does not exceed Rs.20,000; and

- 7.5% where the monthly bill exceeds Rs.20,000.

The above sales tax is the final discharge of their sales tax liability and they are not
allowed to claim input tax adjustment.

4. Definitions

4.1 Goods: include every movable property other than actionable claims, money, shares
and securities.

Notes:
a) Immovable property is not subject to sales tax.

Immovable property is land and building.

b) Actionable claim means a claim to a debt, bill receivable etc.

4.2 Input Tax: in relation to a registered person, means -

a) tax levied under Sales Tax Act on supply of goods to the person;

b) tax levied under Sales Tax Act on the import of goods by the person; and

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c) tax levied on services provided to the person under sales tax laws of provinces
including Islamabad.

4.3 Manufacture: includes

a) any process in which an article is converted into another distinct article

b) any process in which an article is so changed or reshaped that it becomes

capable of being put to use differently

c) printing and publishing

d) assembling, mixing, cutting, diluting, bottling, packaging, repacking

4.4 Output Tax: in relation to a registered person, means -

a) tax levied under the Sales Tax Act on a supply of goods made by the person;
and

b) sales tax levied on services rendered by the person under Islamabad Capital
Territory (Tax on Services) Ordinance, 2001.

4.5 Supply: means a sale and also includes —

(a) putting to private use of manufactured goods or given to employees under

employment benefit etc.;

(b) auction or disposal of goods to satisfy a debt owed by a person; and

(c) manufacture of goods belonging to another person.

4.6 Taxable Goods: All goods other than exempt goods.

It means that all goods are subject to sales tax unless specifically exempt.

On the other hand, services are not all inclusive and only specified services are subject
to sales tax under provincial ordinances.

4.7 Tax Invoice: a sales invoice, which includes the following particulars in Urdu or
English language:
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- Must be serially numbered

- Name, address and NIC/NTN of recipient

- Date of issue

- Quantity of goods

- Value exclusive of tax

- Amount of sales tax

- Value inclusive of tax

4.8 Time of Supply:

Time at which goods are delivered or made available to the recipient of the supply.

4.9 Value of Supply:

Value of supply is the consideration in money including all Federal and Provincial duties
which the supplier receives in respect of the supply excluding the amount of sales tax.

Trade discount shall be excluded provided that:

(i) the tax invoice shows the discounted price; and

(ii) the amount of discount is in conformity with the normal business practice.

Notes:
 Discount shall not be considered for 3 rd Schedule items as the supplier is
supposed to charge sales tax on recommended retail price instead of his
own value of supply.

 Early payment discount shall not be considered as the invoice does not
show the discounted price in this case.

In certain cases, value of supply shall be a different amount.

The different situations are as under:

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Situation Value of supply

Normal case Consideration in money including all Federal
and Provincial duties which the supplier
receives in respect of the supply excluding
amount of sales tax.

Sale is made on installment basis Open market price excluding sales tax
where the price includes mark up or
surcharge [It means that mark up or surcharge included
in credit sales or installment sale is not subject
to sales tax]

In case of imported goods Value determined under the Customs Act

including custom and excise duty levied
thereon.

Example:
The value of raw material imported is Rs.1,000

customs duty 20%

excise duty 10%

sales tax 18%

advance income tax is 6%.

The amount of sales tax and income tax in this

case would be:

Rs.1,000 + custom duty Rs.200 = Rs.1,200

Rs.1,200 + excise duty Rs.120 = Rs.1,320

Sales tax is Rs.1,320 x 18% = Rs.238

Advance income tax is 6% x (1,320 + 238) =

Rs.93

If there is reason to believe that the Value determined by the Valuation Committee
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value is under declared in the tax comprising representatives of trade and the
invoice sales tax department

Supply of used vehicles after value Difference between sale price and purchase
addition on which sales tax has price
already been paid at the time of
import or manufacturing

4.10 Active Taxpayers List (ATL)

Definition of active taxpayer

“active taxpayer” means a registered person who does not fall in any of the
following categories:

(a) who is blacklisted or whose registration is suspended; and

(b) who fails to file certain documents to the tax department including sales tax
return by the due date for two consecutive tax periods or return of income

Effect of being inactive person

(1) A non-active taxpayer shall not be entitled to -

(a) file Goods Declarations for import or export;

(b) issue sales tax invoices; or

(c) claim input tax or refund.

(2) No input tax can be claimed in case of purchase from any non-active taxpayer.

(3) A non-active taxpayer may be restored as active taxpayer, if -

(a) the registered person files the return of sales tax or income tax along with
payment of any tax due; and

(b) the FBR issues an order to such effect.

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5. Theory provisions

5.1 Registration

(A) Requirement of registration:

The following persons engaged in making taxable supplies in Pakistan (including zero
rated supplies) are required to be registered, namely:

i. a manufacturer other than a cottage industry

ii. a Tier 1 retailer;

iii. an importer

iv. a wholesaler

v. An exporter.

(B) Blacklisting and suspension of registration

SUSPENSION

(i) Where a Commissioner is satisfied that a registered person has issued fake
invoices or committed tax fraud, registration of such person may be suspended through
the system, without prior notice, pending further inquiry.

(ii) The written suspension order shall indicate the reason for suspension.

(iii) No input tax adjustment/refund shall be admissible to the suspended /

blacklisted person during the period of suspension / blacklisting.

Similarly, no input tax adjustment shall be allowed to the buyers on the basis of invoices
issued by such suspended / blacklisted person during the period of suspension /
blacklisting.

(iv) The Commissioner shall issue a notice to initiate enquiry within 7 days of
issuance of suspension order and the registered person will be blacklisted in case:

a) there is no response to the notice by the registered person

b) the registered person has not provided the required record

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c) the registered person has not allowed access to his business record /
premises.

(v) On receipt of the reply to the notice, if the Commissioner is satisfied, he may
order for revoking of suspension of the registered person.

BLACKLISTING
(vi) In case the offence is confirmed, the Commissioner shall issue an order for
blacklisting and shall proceed to take legal and penal action.

(vii) The order of blacklisting shall contain reasons and time period for blacklisting.

5.2 Return filing requirements

Every registered person is required to file monthly return electronically through FBR e-
portal by the prescribed date of filing of return.

A general due date of filing of return is 15 th of the next month.

However, in case where due date is 15 th of a month, the tax due shall be deposited by
15th and the return shall be submitted electronically by 18 th of the same month.

Tax shall be deposited in National bank on the prescribed bank challan or through
electronic payment.

Question 1 of Sales Tax

Mr. A, a manufacturer, has submitted the following data for the month:

Rs.
Local taxable sales to registered persons 1,000,000

Local taxable sales to unregistered persons 5,000,000

Export sales 2,500,000

Exempt supplies 500,000

Purchases from registered suppliers 6,500,000

Purchases from unregistered suppliers 600,000

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Sales tax paid on electric bills 245,000

Required:
Compute sales tax liability

Question 2 of Sales Tax

Mr. Z, a manufacturer, has submitted the following data for the month:

Rs.
Local taxable sales to registered persons 7,000,000

Local taxable sales to unregistered persons

including sales to employees Rs.400,000 3,000,000

Export sales 4,200,000

Exempt supplies 800,000

Purchases from registered suppliers 7,200,000

Purchases from unregistered suppliers 580,000

Sales tax paid on gas bills 46,000

Required:
Compute sales tax liability

Question 3
Mr. B is engaged in manufacturing of taxable goods.

During February 20X8 his sales / purchases were recorded as:

- Local purchases from registered persons Rs.9,000,000

- Local purchases from unregistered persons Rs.2,400,000

- Import of raw materials Rs.4,600,000

- Sales tax Rs.150,000 paid on utility bills

- Sales tax of Rs.425,000 paid on purchase of a vehicle for staff

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- Local taxable sales to registered persons Rs.6,400,000

- Local taxable sales to unregistered persons Rs.7,200,000

- Exports Rs.6,000,000

Notes:
1. Mr. A also took goods worth Rs.400,000 for his private use

2. Purchases include an invoice of Rs.200,000 of January 20X8. Input tax was not
claimed on this invoice in the sales tax return of January 20X8 due to its late receipt.

Required:
Calculate sales tax payable for the month.

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