This document provides an overview of key concepts in Pakistan's sales tax system, including: 1) Sales tax is collected at multiple stages of the supply chain from importers to manufacturers to wholesalers and retailers. 2) Liability for sales tax falls on the person making the supply or importing goods, with some exceptions. 3) There are different sales tax rates and rules for importers, manufacturers, wholesalers, distributors, and retailers depending on their annual turnover. 4) The document outlines concepts like zero-rated supplies, exempt supplies, input tax adjustment, and registration requirements.

1. STUDY NOTES ON SALES TAX Overview of Sales Tax System: Sales tax is a Value Added Tax (VAT) system which is collectable from the whole supply chain i.e.

2. Continue Importers, manufactures, wholesalers / dealers / distributors and retailers with certain exceptions. Therefore, the sales tax is a multi stage tax payable on the value of: Taxable supplies by a registered person in respect of any taxable activity carried on by him; and Goods imported into Pakistan (Section 3 (1) being charging provision)

3. Continue Liability to pay the sales tax shall be – In the case of supply of goods, of the person making the supply, and In the case of goods imported into Pakistan, of the person importing the goods. However, Federal Govt. may specify the goods in respect of which liability to pay the tax shall be of the person receiving the supply.

4. Continue 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 in Pakistan (Section 6)

5. Continue Importer/Wholesaler/Distributor Sales Tax @ 17% on value of taxable supply Manufacturer Taxable turnover up to Rs.5 million during the last 12 months Exempt supplies (serial no.3, Table-2, 6 th Schedule) Taxable turnover exceeds Rs.5 million during the last 12 months Sales tax @ 17% on value of taxable supply

6. Continue Retailer Total turnover up to Rs.5 million during the last 12 months Exempt supplies (serial no.3, Table-2, 6 th Schedule) Total turnover exceeds Rs.5 million during the last 12 months Retail tax @ 17% on value of taxable supply, However, presently Govt. fixed the minimum value addition on retailer for payment of retail tax.

7. Example No.1 In the following example it is assumed that every person is a registered person for sales tax purposes and subject to sales tax @ 17%:

8. Continue S.No. Transactions Input Tax Output Tax Pay to FBR 1 Importer’s import value Rs.10,000 Importer sells to a wholesaler of raw materials for Rs.11,000 +1,870 sales tax =Value addition Rs.1,000 (Margin Rs.1,000) 1,700 1,700 1,870 1,700 170

9. Continue S.No. Transactions Input Tax Output Tax Pay to FBR 2 Wholesaler of raw materials buys at Rs.11,000 + 1, 870 input tax and sells to a manufacturer for Rs.11,600 +1972 =Value addition Rs.600 (Margin Rs. 600) 1,870 1,972 102

10. Continue S.No. Transactions Input Tax Output Tax Pay to FBR 3 Manufacturer buys at Rs.11,600+1,972 input tax (his other manufacturing expenses are Rs.9,000) and sells to a wholesaler of finished product at Rs.23,600+4,012 sales tax =Value addition Rs. 12,000 (Margin Rs.3,000) 1,972 4,012 2,040

11. Continue S.No. Transactions Input Tax Output Tax Pay to FBR 4 Wholesaler of finished product buys at Rs.23,600 + 4,012 input tax and sells to a retailer at Rs.24,000 + 4,080 sales tax =Value addition Rs. 400 (Margin Rs.400) 4,012 4080 68

12. Continue S.No. Transactions Input Tax Output Tax Pay to FBR 5 Retailer buys at Rs. 24,000+4,080 input tax and sells to consumer at Rs.24,600+4,182 sales tax =Value addition Rs.600(Margin Rs.600) 4,080 4,182 102 Total 4,182

13. Example No.2 Assumptions in the following example are: Manufacturer and retailer are unregistered Sales price is determined in accordance with example No. 1

14. Continue S.No. Transactions Input Tax Output Tax Pay to Govt. 1 Importer’s import value Rs.10,000 Commercial importer is required to pay 17% normal plus 2% of import value and no refund can be claimed by him sells to a wholesaler of raw materials for Rs.11,000+ 1,900 sales tax =Value addition Rs.1,000 (Margin Rs. 1,000)

15. Continue S.No. Transactions Input Tax Output Tax Pay to Govt. 2 Wholesaler of raw materials buys at Rs. 11,000+1,900 input tax and sells to a manufacturer for Rs. 11,600+1,972 sales tax =Value addition Rs.600 (Margin Rs.600) 1,900 1,972 72

16. Continue S.No. Transactions Input Tax Output Tax Pay to Govt. 3 Manufacturer buys at Rs.13,572 (his other manufacturing expenses are Rs.9,000) and sells to a wholesaler of finished product at Rs. 25,572 =Value addition Rs.3,000 Nil Nil Nil

17. Continue S.No. Transactions Input Tax Output Tax Pay to Govt. 4 Wholesaler of finished product buys at Rs. 25,572 and sells to a retailer at Rs.25,972+ 4,415 sales tax =Value addition Rs.400 (Margin Rs.400) Nil 4,415 4,415

18. Continue S.No. Transactions Input Tax Output Tax Pay to Govt. 5 Retailer buys at Rs.30,387 and sells to consumer at Rs.30,987 =Value addition Rs.600 (Margin Rs.600) Nil Nil Nil Total 6,387 Less: Standard amount to be paid to Govt. 4,182 Excess amount paid 1,926

19. Third Schedule items – Section 3(2)(a) Goods falling under this category are chargeable to sales tax @ 17% of the retail price where value + sales tax shall be legibly and prominently printed by the manufacturer on each article, packet, container, package, cover or label. Examples of goods under this category are juices, cigarettes, ice cream, syrups and squashed, aerated water and beverages, toilet soap, detergents, shampoo, toothpaste, shaving cream, perfumery and cosmetics, biscuits, confectionery, footwear, tea, powder drinks, milky drinks, toilet paper, tissue paper, spices branded, Electric bulbs, snacks, potato chips and shoe polish etc.

20. Zero Rated Supplies – Section 4 and 5 th schedule a)Goods falling under this category are chargeable to sales tax at 0%. It means that their output tax is 0% however, their corresponding purchases may not necessarily zero rated and therefore, input tax would be suffered which is reclaimable / refundable as input tax.

21. Continue Export of goods falls under this category other than the following: 1) Export to any country as notified by the Federal Government 1) Export intended to be re-imported into Pakistan

22. Continue Examples of other items under this category. Supply to diplomats, diplomatic missions and privileged persons Supply of raw materials for further manufacture of goods in EPZ Supplies to exporters under Duty and Tax Remission Rules 2001 Supply to duty free shops including air flights

23. Continue Supply against international tenders [Import of raw materials and components is exempt which is required for manufacturing of goods to be supplied against international tender – SRO 608 dated 8.8.1997] Import or supply made to Gawadar Special Economic Zone excluding vehicles Supply of plant, machinery and equipments subject to certain conditions.

24. Continue b ) Input tax, if any, on zero rated supply shall be refunded within 30 days of filing of return – S 10(2). In case of delayed refunds, the FBR shall be pay an additional amount to the registered person @ KIBOR p.a by the Sales Tax Department in addition to the amount of refund if there is no dispute in the claim of refund – S 67

25. Continue c) A person who does not want to avail the facility of zero rating on export of taxable goods may be de-registered on his request [instruction 4 of 2003] d) Sales tax on packing materials etc. used for zero rated supply shall be refunded [instruction 49 of 2002]

26. Continue f) The Govt. thru SRO 621 dated 17.6.2005 declared under respective PCT Headings the following goods along with the associated items as zero rate both on the supply and import stage: Leather and articles thereof Textile and articles thereof Carpets Sports Surgical goods Certain other items

27. Continue h) Under SRO 531 dated 6.6.2005, the raw materials and components, as are purchased locally from authorized vendors by a recognized manufacturer of tractors for use in the manufacturing of such tractors, shall be zero rated subject to certain conditions. Electricity and gas consumed in the plant where tractors are manufactured shall also be zero-rated.

28. Exempt Supplies – section 13 and 6 th schedule Certain imports and supplies of goods falling under this category are outside the scope of sales tax and therefore not subject to sales tax. other important exempt items are: Live animals Agricultural produce not subject to any further manufacture

29. Continue Pharmaceutical products registered under Drug Act with certain exceptions [SRO 555 dated 23.8.2002] Pharmaceutical raw material [SRO 673 dt. 2.7.2005] Holy Quran and other holy books or recorded in audio or video cassettes Imported samples

30. Continue Goods imported by diplomats, diplomatic missions or privileged persons Personal baggage imported by overseas Pakistanis Raw materials or intermediary goods manufactured or services provided by a registered person used by himself in the manufacture of taxable goods.

31. Continue 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, if leviable, can be reclaimed only in respect of zero rated supplies .

32. Continue d) Export of exempt goods – SRO 343 dated 15.6.2002 If exempt goods are exported then this will be treated as supply of zero rated and therefore input tax paid, if any, can be reclaimed.

33. Adjustment of Input Tax – section 7 and 8 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:

34. Continue Tax invoice in his name bearing his registration number in respect of such supply for which a return is furnished Bill of entry or goods declaration in case of goods imported by him In case of goods purchased in auction, treasury challan in his name bearing his registration number

35. Continue If a registered person did not claim input tax in the 12 preceding tax periods then he is allowed to adjust input tax in the current period or he may revise the previous return subject to the condition that he specifies the reason for such delayed adjustment.

36. Continue Section 66 provides that if a person fails (through inadvertence, error or misconstruction) to claim adjustment of input tax in a tax period which is reclaimable, he is allowed to claim refund/adjust within one year of the date of payment. This time limit of one year is not applicable where refund relates to matter which was in appeal.

37. Continue Under SRO 978 dated 10.12.2004 the Collector is empowered to condone the time of section 66 subject to certain conditions including: Payment has been made as per section 73 Transaction does not involve any closed, de-registered or blacklisted / suspended person Adjustment or refund of the amount has not been claimed previously.

38. Continue In the following cases a registered person is not entitled to reclaim/ deduct his input tax: Input tax on goods of a purpose other than taxable activity Input tax on fake invoices Input tax paid on purchases if he fails to furnish the information required by the FBR The goods under Section 3(5) i.e. Extra Tax

39. Purchase of stocks before registration – section 59 Purchaser of stocks who has paid sales tax on such goods is required to apply for registration within 30 days of such purchases if he wants to take credit of his input tax provided that he holds tax invoice and such goods constitute verifiable unsold stock on the date of registration. This period is 90 days in case of imports.

40. Application of section 73 Payment of a transaction exceeding value of Rs.50,000 excluding utility bills is required to be made thru a crossed banking instrument otherwise the buyer shall not be entitled to claim input tax, refund, zero rating of tax etc.

41. Continue Input tax can be claimed on accrual basis. However, payment thru banking channel is required within 180 days. If payment is subsequently made in cash or the payment is not made within 180 days then input tax adjustment earlier made would be reversed.

42. Continue The amount transferred shall be deposited in the business bank account of the supplier already declared to the sales tax department, otherwise the supplier shall not be entitled to claim input tax, refund, zero rating of tax etc. On line transfer of payment as well as payments through credit card is also allowed subject to the condition that such transaction are verifiable from the bank statements of the respective buyer and the supplier.

43. Continue U/s 74 CBR may condone any time limit or any thing to be done under Sales tax Laws in appropriate cases. Under SRO 642 of 2004 the Collector is empowered to condone the limit of section 73 subject to the conditions that payment has been made as per section 73 and the transaction does not involve any closed, de-registered or blacklisted / suspended person.

44. Continue Certain clarifications issued by the FBR in respect of section 73 are as under: (a) Supplies made by a registered person to unregistered person and payment received other than thru banking channel would not be attracted by section 73 – instruction 58 of 2002. However, registered seller is required to deposit the amount received in his declared business bank account to avail input tax credit, zero rating etc. – circular letter dated 14.7.2004

45. Continue (b) Actual transfer of payment from buyer’s bank account to seller’s bank account is required and mere issuance of cheque is not sufficient [instruction 68 of 2002] (c) Bearer cheques and traveler cheques are not banking channel. However, crossed traveler cheque issued from the business bank account of the buyer and crossed in the name of the seller is acceptable [instructions 9 and 53 of 2002]

46. Continue (d) Can payment be made in kind: Instruction 62 of 2002 / 7 of 2003 clarified that payment can be received in kind provided: Goods received in kind represent taxable goods [or landed property where proper mutation has been executed]

47. Continue Goods received in kind as consideration are adequately reflected in the books with reference to sales tax invoice number and date; and The balance amount even if it is less than Rs. 50,000 should be made through banking channel

48. Input tax on goods subsequently destroyed A registered person is entitled to reclaim input tax paid on goods which were subsequently destroyed and were not meant for use – Lahore High Court in the case of Mayfair spinning Mills Ltd PTCL 2002 CL.115.

49. Input tax on wastage of raw materials during manufacturing Circular 1 of 1989 clarifies that such input is reclaimable. However, if the wastage is such that can be sold then the same shall be considered as a by-product and chargeable to sales tax unless specifically exempt.

50. Debit and Credit Note – section 9 Where a registered person has issued a tax invoice and the tax return or tax invoice needs to be modified as a result of cancellation of supply or return of goods or any change in the nature / value of supply or some such even the registered person may within 180 days issue a debit / credit note and make adjustments accordingly. Period of 180 days may be extended by the collector for any special reason.

51. Destruction of goods Where goods are returned by the buyer being unfit for consumption and are required to be destroyed by the supplier then the same shall be destroyed with the permission and under the supervision of the sales tax department.

52. Excess of Input Tax over Output Tax – section 10 If total input tax including adjustment of debit / credit note exceeds output tax in a tax period, the excess amount shall be refunded. However, under SRO N. 666 dated 30.6.2005 and SRO 813 dated 13.8.2005 CBR has provided the option to manufacturers, dealers, distributors and wholesalers to adjust their excess amount from output tax liabilities for subsequent three tax period with certain conditions specified therein.

53. Registration, Compulsory Registration and De-Registration Chapter I – Sales Tax Rules 2005 Abbreviations used: CRO The Central Registration Office LRO The Local Registration Office

54. 1. Requirement of registration The following persons engaged in making taxable supplies in the course or furtherance of any taxable activity carried on by them are required to be registered, namely; (a) A manufacture whose annual turnover from taxable supplies during the last 12 months exceeds Rs. 5 million;

55. Continue (b) A retailer whose value of supplies (total supplies including exempt supplies) during the last 12 months exceeds Rs.5 million (c) An importer [Importers of taxable items who are not conduction any taxable activity at post import stage are also required to be registered – instruction 14 of 2003]; and (d) A wholesaler, dealer or distributor;

56. Application for registration (1) A person required to be registered shall apply for registration before making any taxable supply in the prescribed form to LRO having jurisdiction or via e-mail to FBR at [email_address] pk on form STRN-1 after scanning and signing it, namely:

57. Continue In case of a company the place where the registered office is located (registration may be transferred to the area where palace of business is located at the option of the company); and In case of non-corporate person, the place where the business is actually carried on ( in case business premises and single manufacturing unit are located in different areas, area of manufacturing unit shall be considered for registration purpose).

58. Continue (2) Where an applicant has unsold or un-used stock of tax-paid inputs on which he desires to claim the benefit u/s 59, he shall declare such stock in a statement with his application for registration. (3) Where the application for registration is complete in all respects, LRO shall transmit the same to CRO. CRO, after conducting verification, may register the applicant and issue a certificate of registration within 15 days.

59. 3. Compulsory registration (1) If a person, who is required to be registered, does not apply for registration and the Collector is satisfied after inquiry that such person is required to be registered, he shall submit a written report to LRO. On receipt of such report, LRO shall issue notice to such person to provide opportunity of being heard. After receiving a written reply from the said person, LRO shall pass an order whether or not such person is liable to compulsory registration.

60. Continue (2) Where the person to whom a notice is given does not respond within the time specified in the notice, LRO shall transmit the particulars of the person to CRO, which shall compulsorily register the said person. (3) A compulsory registered person is required to comply with all the provisions from the date of compulsory registration, and in the case of failure to do so, LRO may issue notice for production of records or documents and appearance in person to assess the amount of sales tax payable and take and other action under the law against such person.

61. Continue (4) If it is subsequently established that a person was not liable to be registered but was wrongly registered due to inadvertence, error or misconstruction, CRO on the recommendation of LRO, shall cancel such registration and such person shall not be liable to pay any tax, additional tax or penalty.

62. Continue (5) In case there is a change in the name, address or other particulars of registration, the registered person shall notify the change within 14 days of such change. (6) Revised registration certificate: In case of multiple registrations, the registered person may apply for single registration to the CRO which after verification shall issue revised registration certificate in which previous registration number shall be merged.

63. Continue (7) De – registration – (1) Every registered person who ceases to carry on his business or whose supplies become exempt shall apply to LRO for de-registration and LRO may recommend to CRO to cancel the registration from a date not later than 3 months from the date of application or the date all the dues are cleared by the taxpayer, whichever is later.

64. Continue (2) The following may apply to LRO for de-registration: A registered manufacturer whose total taxable turnover during the last 12 months remains below Rs.5 million A registered retailer whose total turnover during the last 12 months remains below re.5 million

65. Continue (3) LRO, after satisfying itself, shall director the applicant to discharge any outstanding liability, if any, by filing a Final Return. (4) If a registered person fails to file monthly tax returns for 6 consecutive months, LRO may, after issuing a notice in writing and after giving an opportunity of being heard to such person, recommend to CRO for cancellation of the registration after satisfying itself that no tax liability is outstanding against such person.

66. 8. Blacklisting and suspension of registration Where a collector has reasons to believe that a registered person is found to have issued fake invoices evaded tax Has failed to deposit the tax due on his supplies despite having recovered it from the respective buyers or recipients of such supplies, the commissioner may suspend his registration and initiate such inquiry, as deemed appropriate. after confirming the facts and giving opportunity to such person to clarify his position. Copy of this order shall be communicated to the registered person, CRO and STARR system (Sales Tax Automated Refund Repository Computer System)

67. Continue (2) The inquiry in such cases shall be completed within 90 days. Show cause notice for recovery of any evaded tax etc. may be issued within 90 days of completion of inquiry. Where the registered person or his suppliers do not produce the records, the period of 90 days for completion of inquiry shall be extended.

68. Continue Each Collector shall circulate list of black-listing or suspension to the concerned staff related to refund and audit to ensure that no refund is paid or no input adjustment is taken on invoices issued by such persons – Clause 33 of General Order 3 of 2004 Inquiry against black-listed or suspended person may be extended to his suppliers and buyers to ascertain whether any inadmissible inputs or refunds haven been taken by them – Clause 34 of General Order 3 of 2004

69. Continue (3) If the taxpayer proves that a proper opportunity was not provided to him or he proves during the inquiry that he is not involved in tax fraud activity, the collector may withdraw such order of suspension or blacklisting from the date of original order after conducting inquiry including consultations with the concerned trade association.

70. Continue Value addition by commercial importers Chapter II Special Procedure Rules: A commercial importer (whether registered exclusively or otherwise) shall pay sales tax @ 17% on import value on the normal manner. He is also required to pay sales tax @ 2% on a value addition at the same time along with custom duty and sales tax in the bill of entry. If the value addition by such commercial importer during any period in the preceding year was higher than 2% then he shall pay sales tax on such higher value addition instead of 2%

71. Continue ‘ Value addition’ means the difference between assessed import value and the value of supply for which the goods are supplied. ‘ Assessed import’ means the value determined under the Customs Act including custom duty and central excise duty, if any.

72. Example Value of imported goods under the Custom Act 100 Custom duty e.g. @ 20% 20 Assessed import value 120 Sales tax @ 17% payable on the bill of entry Rs. 20.4 Value of supply with value addition of minimum 2% 2.40 Value addition 2.40 Sales tax on value addition payable on treasury challan at the time of import 22.8

73. Continue However, the commercial importer shall: Issue tax invoice for every supply made by him Maintain the prescribed records Play sales tax if any in excess of sales tax paid on value addition File monthly tax returns in the prescribed form File annual statement in the prescribed form