Sales Tax on Goods
Sales tax on Goods Pakistan was a provincial tax at the time of partition. It was being administered in the provinces of Punjab & Sindh as a provincial levy.
Sales tax was declared a federal subject in 1948 vide General Sales Tax Act 1948 and this levy was transferred permanently to the Central Government in 1952. Sales Tax was levied at the standard rate of 6% at every stage of sale.
Later on, system of licensed manufacturers & wholesalers was instituted through the Sales Tax Act 1951, whereby they were allowed to purchase goods free of Sales Tax from each other and pay tax on sales to unlicensed traders. Imports were chargeable to Sales Tax but the licensed manufacturers & wholesalers were allowed to import goods without payment of Sales Tax.
Later on Sales Tax became chargeable on locally produced & imported goods at the time of their sales and import, respectively. The sales tax was collected, under the Finance Ordinance 1956 on goods which were chargeable to Excise Duty, as if it were a duty of Excise.
In 1981, by virtue of an amendment in the Sales Tax Act 1951, the collection of Sales Tax on non-excisable goods was also entrusted to the Excise Department.
In the late eighties, Sales Tax was replaced with the Value Added Tax in the country and accordingly new enactment titled Sales Tax Act 1990 replaced Sales Tax Act 1951 with effect from 1.11.1990.
Federal Sales Tax Salient Features
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 (including dealers and distributors) and retailers with certain exceptions. Therefore, the sales tax is a multi-stage tax payable on value of:
- Taxable supplies by a registered person in respect of any taxable activity carried on by him;
- 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 normally utilized a system of tax credit (called input tax adjustment) to place the ultimate and real burden of tax on the final consumer and to relieve the intermediaries (i.e. the purpose other than the final consumers) from any tax burden.
Under the new procedures, retailers have been segregated into 2 categories:
Retailers who are subject to tax under the normal tax regime. These are called Tier 1 and include
- National or international chains
- Retailers operating in air-conditioned malls
- Retailer who has a credit and debit card machine
- Retailers whose cumulative electricity bill exceeds Rs. 600,000 for a 12-month period
- Wholesaler-cum-retailer who engages in bulk import of goods and supply of consumer goods on
wholesale basis to retailers as well as on a retail basis to the general body of the consumers
- These retailers will be charged tax under regular procedures of law. This means sales tax to be
charged at 17% with the relevant input adjustment.
Retailers other than Tier-1 retailers are not required to be registered and they shall pay sales tax with their monthly electricity bill 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. Monthly sales tax return is not required to be filed and they are not subject to audit.
Sales tax is applied at the rate of 17%. Further tax at 2% shall also be charged when the goods are supplied to unregistered persons. it means that the tax rate is 17% + 2% on supplies of goods to unregistered persons. However, further tax shall not be charged in the following cases:
- supply of goods directly to end consumers including supplies by retailer
- items that fall under the 3rd Schedule
- electricity supplied to domestic and agricultural consumers
- natural gas supplied to domestic consumers and CNG stations
- supply of second-hand worn clothing and other work articles
- goods falling under zero rating
- fertilizers, supplies by steel milters, re-rollers and ship breakers and few other items specified in the notification
Further tax shall not become part of output tax, which means that further tax is payable to the FBR as a bottom-line figure. It should however be noted that sales through factory outlets means sales to end users and therefore further tax is not chargeable.
Likewise, sales to employees, educational institutions, hospitals government department and so on will not be subject to further tax being end users.
Higher rate of tax
FBR with the approval of Federal Minister in charge has power to fix a lower or higher rate on specified items. Examples of higher rate of sales tax is petroleum products through notifications issued by the FBR from time to time.
The 8th schedule specified imports or supply of certain goods on which sales tax is chargeable at reduced rates subject to certain conditions. Few examples are:
- 5% on import of raw cotton (Local supply of raw cotton is exempt)
- 8% on white crystalline sugar
- 10% on flavored milk, cheese, butter etc. if sold in retail packing under a brand name
- 10% on import of plant and machinery not manufactured locally and having no compatible local substitutes
FBR has the authority to levy and collect sales tax on fixed basis or on the basis of capacity of plant in lieu of sales tax on the basis of value of supply of goods (may also be called as capacity tax)
The 9th Schedule specifies imports or supply of certain goods on which sales tax is charged on fixed basis. Fixed sales tax has been imposed under 9th Schedule as under:
- on activation of SIM card by a Cellular Mobile Operator(“CMO”)
- on mobile phones including smart phones and satellite phones ranging from Rs.650 to Rs. 1500
- Fixed sales tax under 9th Schedule shall be paid by the CMO, importer or manufacturer, as the case may be, and the purchaser is not entitled to claim input tax of such fixed sales tax paid by him. CMO is not entitled to claim any input tax against fixed sales tax charged by it from its customers.