STUDY NOTES ON FEDERAL EXCISE DUTY (FED)

CHARGE OF FED

FED is levied and collected, at rates specified in the First Schedule, on

o Goods produced or manufactured in Pakistan;

o Goods imported into Pakistan;
o Specified goods which are produced or manufactured in the non-tariff areas, excluding
Azad Jammu & Kashmir and are brought to the tariff areas for sale or consumption
therein; and

SRO 649 dated 1.7.2005

Goods which are produced or manufactured in the non-tariff areas excluding the territory
of Azad Jammu and Kashmir and brought to the tariff areas shall be leviable for duty.
Example

- Vegetable ghee and cooking oil

- Cigars, cigarettes, etc.
- Perfumes and toilet waters
- Beauty or make-up preparations
- Pre-shave, shaving or after-shave preparations,

o Services are provided or rendered in Pakistan

POINT OF CHARGE

The value and the rate of duty in respect of goods and services shall be the value and the rate
on the date: (Section 11)

o when goods are cleared for exports;

o when goods are cleared for home consumption;
o when services are rendered or provided;
o when goods are brought for sale or consumption from the non tariff area into the tariff
area.

BASIS OF CHARGE

FED on the goods shall be levied on either of the following basis, depending on the category of
goodsbeing subject to excise duty:

o Ad volarem
o Retail Price
o Weight (Ton, kilogram, Litre, etc)
o Quantity
o Measurement (Cubic Meters)
o Unit (British Thermal Unit)
o Charges, bill of lading and premium (in case of excisable services)
o Production capacity, machinery, undertakings, establishments or installations
 o On fixed basis on any goods or services

RATE OF TAX

The general rate of FED is 15% advolarem.

‘VALUE’ FOR CHARGE

Where FED is leviable on the basis of value, then value for the purpose of determining FED shall
be: Section 12

o wholesale cash price of the goods on the day on which sales is made, and where such
wholesale price is not available, the whole sale cash price for identical or similar goods,
to a general body of retail trade or the general body of consumers, if retail trade body is
not available, on the day of sale, without deduction whatsoever, except the amount of
duty and sale tax.

o the total amount of charges in case of services irrespective whether services are
provided on payment or free of charge or any concessional basis.

o value determined in accordance with section 25 of the Customs Act, in case of imports.

o where duty is leviable on the basis of retail price, the retail price as fixed by the
manufacturer inclusive of all charges and taxes other than sales tax, if it is specified.

o Minimum price fixed by the CBR. However, where the goods or classes of goods are sold
at a price higher then the price fixed by the Board, the duty shall be levied at such
higher price of goods or class of goods, unless otherwise directed by the Board in this
regard.

When to pay (Section 4 read with Section 2(9a)

Duty shall be paid:

o In respectr of import, at the time of payment of custom duty in the case of import of
goods; and

o in respect of clearance made in a month, the last day of that month(previously within
seven days of the following month through prescribed challan.

However, monthly excise return shall be filed to the Collector within 15 days following the end
of the month or such other notified date. In case of change in the rate of duty during the
month, separate returns showing different rates are to be filed.

Revised return can also be filed to correct a bonafide mistake or error in the original return
within 90 days of the filing of original return. .

Zero rate of duty and drawback of duty (Section 5)

Zero-rate of duty is allowed on the goods –

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 o exported out of Pakistan
o specified by the Federal government.

The CBR may, by notification in the official Gazette, and subject to such conditions and rates as
may be prescribed, allow draw back of duty paid on goods used for the manufacture of goods:
(Section 5 & Rule 33).

o manufactured in and exported outside Pakistan; or

o shipped as provisions or stores for consumption in board a ship or aircraft proceeding to
a destination outside Pakistan.

Adjustment of duty will be available to zero-rate excisable goods.

The CBR may, however, by a specific notification, prohibit or restrict payment of duty draw
back, refund or adjustment of duty in respect of goods exported outside Pakistan or any
specified goods or class of goods to any specified goreign port or territory.

Adjustment of duties of excise (Section 6)

Adjustment of duty is allowed on excisable goods used as direct input for the
manufacture or production of such goods liable for excise duty subject to –

o registered person has a proof in the form of purchase invoice or goods declaration or
any other lawful document issued in his own name.

o registered person has a proof that he has paid the price of goods inclusive of duty
through banking channels including online payment.

o registered person has a proof that he had received the price of goods sold by him
inclusive of duty through banking channels including online payment.

CBR may disallow or restrict adjustment of FED, in whole or in part – Section 6(3).
Through SRO 650 dated 1.7.2005, CBR has disallowed adjustment of duty in respect of
Concentrates in all forms including syrup and flavors used in the manufacture of aerated
waters, including mineral water.

Application of Sales Tax Act, 1990. – Section 7

Section 7 explains that provisions of Sales Tax Act, 1990 shall be applied to the goods specified
in the Second Schedule of the Federal Excise Act i.e.

o Edible oil excluding expoxidized soyabean oil

o Vegetable ghee and cooking oil

Provisions of Sales Tax Act, 1990 shall also be applied to the services as specified by CBR.
Accordingly, CBR under SRO 550 dated 5.6.2006 specified services, which includes all services
highlighted in the Table II of First Schedule except insurance. Examples:

o Advertisement.
o Facilities for travel.
o Carriage of goods by air.
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 o Shipping agents.
o Telecommunication services.

It means that in terms of the said section the registered person, in respect of goods covered
under the Second Schedule or specified services, is entitled to adjust the amount of input tax
paid under the Sales Tax Act, 1990 against the excise duty payable by it under the Federal
Excise Act. Conversely, the amount of duty paid on such goods / services can be adjusted
against the output tax payable by the registered person under the Sales Tax Act, 1990.

Fixed tax on import of vegetable ghee, edible oil and cooking oil.
SRO 24(I)/2006 dated 7 January 2006

In lieu of FED leviable on the production / manufacture of edible oil excluding deoxidized
soybean oil,, vegetable ghee and cooking oil, fixed tax at rate of Rs. 1 per kg is collectable at
the import stage It is clarified that the tax so collected then constitute full and final discharge of
the tax liability of such manufacturers and producers.

Rebate of duty:

The CBR, via its various SROs has provided rebate of FED paid in respect certain items used in
the manufacture and export of the products made from such items, subject to the
condition that the applicant produces a proof of payment of FED in respect of such items. These
include:

 base oil used in the manufacture of motor lubricating oil. SRO 807(1)/2005 dated
August 12, 2005

 Cement used in the manufacture of fiber cement pipes and fiber cement flat sheets. –
SRO 808(I)/2005 dated 12 August, 2005.

Default surcharge. – Section 8. Default surcharge is chargeable @ 1% per month for the
first six month and @ 1 ½ percent thereafter. Default surcharge is computed from the day
following the day on which the duty is payable upto the day preceding the day on which
payment of duty is made.

Collection of excess duty, etc – Section 11

Every person who has collected any duty, which is not payable and the incidence of which has
been passed on to the consumer, shall pay the amount so collected to the Federal Government.

Registration – Section 13

Every person engaged in the excisable goods and services is required to obtain registration in
the prescribed manner regardless of his annual turnover or volume of such goods or services.

If a person is already registered for Sales Tax purpose he does not need to get registered
separately for excise.

Exemption – Section 16

All goods imported or manufactured in Pakistan and services provided or rendered shall be
exempt from whole of FED except those specified in the First Schedule.

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Goods and services specified in the Third Schedule shall also be exempt subject to conditions
specified therein.

However, no adjustment in terms of section 6 shall be admissible in respect of goods exempt

from duty.

Apportionment of adjustment – Rule 14

In case a registered person is manufacturing and selling both excisable and non-excisable goods
manufactured from duty-paid inputs, he shall be entitled to adjustment of duty only to the
extent of excisable goods.

Records (Section 17) Every person registered shall maintain and keep for a period of 3 years
at his business premises or registered office in English or Urdu language the following records of
excisable goods purchased, manufactured and cleared (including those cleared without payment of
excise duty):

(a) records of clearances and sales made indicating the description, quantity and value of
goods, name and address of the person to whom sales were made and the amount of
the duty charged;
(b) records of goods purchased showing the description, quantity and value of goods,
name, address and registration number of the supplier and the amount of the duty, if
any, on purchases;
(c) records of goods cleared and sold without payment of duty;
(d) records of invoices, bills, accounts, agreements, contracts, orders and other allied
business matters;
(e) records of production, stocks and inventory;
(f) records of imports and exports; and
(g) such other records as may be specified by the Board.

Invoices (Section 18) A person registered under this Act shall issue for each transaction a
serially numbered invoice at the time of clearance or sale of goods, including goods chargeable to
duty at the rate of zero per cent, or providing or rendering services containing the following
particulars, namely:–

(a) name, address and registration number of the seller;

(b) name, address and registration number of the buyer;
(c) date of issue of the invoice;
(d) description and quantity of goods or as the case may be, description of
services;
(e) value exclusive of excise duty;
(f) amount of excise duty; and
(g) value inclusive of excise duty.

In case a registered person is also engaged in making supplies taxable under the Sales Tax Act,
such person shall not be required to issue a separate invoice for excise purposes.

The Board may specify goods in respect of which a copy of the invoice shall be carried or
accompanied with the conveyance during their transportation or movement.

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The Banking companies are not required to issue an invoice in respect of their services.

Refund – Section 44

Refund is permissible only if it is claimed within one year of its accrual.

Special procedure for collection of excise duty on services provided by banking

companies, financial institutions and non-banking finance companies.
(Part II, First Schedule read with Rule 40A of FE Rules, 2005)

Every banking company, financial institution and non-banking finance company shall pay the
Federal excise duty levy able on the services rendered or provided by the company or institution
to any person. For the purpose of levy of excise duty under these rules, the services provided by
the banking companies, financial institutions and non-banking finance companies shall
represent:,–

(a) L/C commission;

(b) guarantee commission;
(c) brokerage commission;
(d) issuance of pay order and demand drafts;
(e) bill of exchange charges;
(f) transfer of money including telegraphic transfer, mail transfer and electronic
transfer;
(g) providing bank guarantees;
(h) bill discounting commission;
(i) safe deposit lockers fee;
(j) safe vaults;
(k) credit and debit card issuance, processing, operation charges; and
(l) commission and brokerage on foreign exchange dealings.

The rate of duty is 5%.

The Head Offices of the banking companies, financial institutions and non-banking financial
companies shall apply to the Central Registration Office located at Central Board of Revenue for
excise registration in the prescribed form.

The duty under these rules shall be paid by the banking company or financial institution or non-
banking finance company on the gross amount charged for service provided to the customers.

The duty due for each month shall be paid by the Head Office of the company or institution by
the 14th day of the following month in respect of the services provided upto the last working
day of each calendar month. For every month, the company or institution shall file a return
electronically in the prescribed form by the 15th day of the following month to the Collectorate
in whose jurisdiction it is registered.

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In case duty is not deposited by the company or institution by the due date, it shall, in addition
to the payment of duty and default surcharge, be also liable to penalty under the Act or the
Rules.

The Head Office of the company shall maintain records of the services provided or rendered
under these rules and the collection of duty thereon in such manner as will enable the distinct
ascertainment of payment of excise duty on each of the services mentioned in the scope of
these rules. The Head Office shall also submit a copy of annual audit report to the Collector of
Federal Excise within 15th day of its publication and any short payment of duty found out as a
result of such audit report shall be paid by the registered person within 15th day of the notice
received for such payment.

Application of FED in case charges are waived, for any item stated in Schedule
Of Charges (SOC).

An issue that is currently being raised by the banking companies is the application of FED
if the charges are not collected from the customer. In this connetion the general stand
point is as follows:

Rule 40A of Federal Excise Rules, 2005 provides in Sub rule 4 that:

“(4) the duty under these rules shall be paid by the banking company,
financial institution and non-banking finance company on the gross amount
charged for service provided to the customers”.

A plain reading of the above sub-rule clearly indicates that FED is to be levied on the
gross amount charged for service provided to the customer. It would therefore logically
follow that where no amount is charged or a lesser amount than what is listed in the
schedule of charges is charged, the FED is leviable accordingly.

However section 12 of the Federal Excise Act, 2005 while dealing with determination of
value for the purposes of duty, provides in Sub-section 2 thereof for determination of
value for services as under –

(2) Where any services are liable to duty under this Act at a rate dependent
on the charges thereof, the duty shall be paid on total amount of charges for the
services including the ancillary facilities or utilities, if any, irrespective whether
such services have been rendered or provided on payment of charge or free of
charge or on any concessional basis.

This means that if FED is leviable at a rate dependent on the service charges, FED is
payable irrespective of whether the charges are collected or not. However, if as a policy
the bank / financial institution is not charging any charges for a particular category of
service, there would be no FED in respect of such services. Hence, if for example a
banking company / financial institution is providing credit cards ‘free of charge’ to all
customers, there would be non FED as there are no charges for calculating FED.
However, if the company charges some fee for making a credit card but the same is

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 waived for some customer for one reason or the other, FED would be payable in respect
of such services, even though no charges are collected from the customer.

As such, if the bank s waiving charges of a particular item, we are of the opinion that
FED would be applicable on the same.
Special procedure for payment of Federal excise duty on franchise fee or technical
fee or royalty under a franchise agreement.
(Part II, First Schedule read with Rule 43A of FE Rules 2005)

Every person, firm or company, (hereinafter referred to as franchisee), using the right to deal
with the goods or services of the franchiser under a franchise agreement against a pre-
determined fee or royalty, if not already registered, shall obtain Federal excise registration from
the Collector of Federal Excise in whose jurisdiction the franchisee or as the case may be, his
head office is located:

Provided that where a franchisee is already registered under the Sales Tax Act, 1990, he shall
not be required to take separate registration for excise purposes and his Sales Tax registration
shall be deemed to be a registration for the purpose of the Act.

The duty shall be paid by the franchisee, or as the case may be, the head office of the
franchisee at the rate of five per cent of the value of taxable service , which shall be the
gross amount or the franchise fee or the deemed franchise fee or technical fee or royalty
charged by the franchiser from the franchisee for using the right to deal with the goods or
services of the franchiser.

The franchisee, or as the case may be, the head office of the franchisee shall pay the duty due
for a month on the last day of each month. (however, via General Order no. 5/2006 dated 5
August, 2006 the payment of duty is now linked when the fees / royalty is actually paid. See
below). For every month, the franchisee or the Head Office of the franchisee shall file a return
in the prescribed form by the 15th day of the following month to the Collectorate in
whose jurisdiction it is registered.

Failure to pay the duty by the due date, as specified in sub-rule (3), shall render the franchisee,
or as the case may be, the head office of the franchisee, liable to a penalty under the Act, in
addition to the payment of duty and default surcharge.

The Collector of Federal Excise having jurisdiction shall obtain from the State Bank of Pakistan
the statistics or data concerning payment of franchise fee or technical fee or royalty paid by a
franchisee to the franchiser, on a quarterly basis and shall use such statistics or data to
determine or verify the amount of duty paid by a franchisee during the said period.

An officer of Federal Excise as are deputed by the Collector of Federal Excise having jurisdiction,
shall have access to the records maintained by the franchisee, or as the case may be, the head
office of the franchisee.]

General Order no. 5/2006 dt. 05 August 2006

The Central Board of Revenue, in order to streamline the levy and collection of excise duty on
franchise services, issued the following instructions:

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 (i) In such cases where remittance/payment of the franchise fee or royalty or
technical fee is made under a proper agreement between a foreign or local
franchiser and a franchisee, the assessable value for the purpose of levy of 5%
excise duty shall be the gross amount remitted/paid to the franchiser of the
amount laid down in the franchise agreement;
(ii) In case where franchisers are foreign or local beverage companies, if there is no
formal agreement between the franchiser of franchisee, the assessable value for
the purpose of levy of excise duty shall be 5% of the value of concentrate
supplied by the franchiser to the franchisee. However, in such cases where
proper remittance/payment of fee or royalty is being made by the franchisee
beverage company to the local or foreign franchiser under a proper agreement,
the assessable value shall be the gross amount of fee or royalty remitted/paid to
the franchiser or the amount laid down in the agreement;

(iii) For the food sector, in case of a proper franchise or royalty agreement, the
assessable value for levy of excise duty shall be the gross amount of franchise
fee or royalty remitted/paid to the franchiser or the amount laid down in the
agreement. In case there is no formal agreement the assessable value for levy of
excise duty shall be 5% of the net sales of the franchisee;

(iv) In case where the franchiser and franchisee are both locally based, the
liability to deposit the franchise fee or royalty shall be upon the
franchiser; and

(v) The excise duty shall be payable on the 15 th day of the month, following the
payment month laid down in the franchise agreement. Where there is no date
prescribed in the agreement or in case of no agreement the duty shall be payable
on the 15th day on quarterly basis.

Toll Manufacturing – General Order No. 2 dated 15th August, 2005 (Same principles
as that for sales tax)

Under the new scheme, the toll manufacturers (vendors)  manufacturing or producing excisable
goods on behalf of their principals with the raw materials or inputs owned by such principals
shall be liable to pay excise duty on such goods, which shall be adjustable against the final
liability discharged by the principals. Such vendors shall not be entitled to any adjustment in
case of duty-paid raw materials or inputs owned by the principals. However, the principal shall
be entitled to adjustment on such raw materials or inputs. The vendors shall comply with all the
applicable provisions of the Federal Excise law and the principals will not be required to pay any
duty on the movement of such raw materials or inputs from their possession to the vendors for
the purpose of manufacture or production of excisable products on their behalf, though they will
properly account for such movements in their records. However, where a vendor adds any raw
material or input acquired by him on payment of excise duty, which he has used exclusively for
the manufacture or production of such products, he shall be entitled to adjustment of such duty
as admissible under the law

Important Definitions

Adjustment means deduction of amount of duty paid on goods used in the manufacture or
production of other goods from the amount of duty payable on such other goods.

Duty means any sum payable including default surcharge and zero-rate duty

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Factory means any premises including precincts where goods are manufactured or where any
manufacturing process connected with the production of goods is being carried.

Goods means goods leviable to excise duty, as specified in the First Schedule including goods
manufactured or produced in non-tariff area and brought for use or consumption to tariff area.

Manufacture includes –

o Any process incidental or ancillary to the completion of a manufactured product;

o Any process of re-manufacture, remaking, reconditioning and the processes of packing

or repacking of goods

o Preparation of cigarettes, cigars, cheroots, biris and similar products

o Any person who employs/hired labour in the production of goods

o Any person who engages in the production of goods on his own account if such goods
are intended for sale

o Any person dealing in goods shall be deemed to have manufactured, whether or not he
carries out any process of manufacture

Non-tariff area means Azad Jammu and Kashmir, Northern Areas and such other territories or
areas to which this Act does not apply.

Person includes a company, an association, a body of individual whether incorporated or not, a

public or local authority, a Provincial Government or Federal Government.

Services means services, facilities or utilities leviable to excise duty under the Act or specified
in the First Schedule read with Chapter 98 of the Pakistan Customs Tariff including the services,
facilities and utilities originating from Pakistan or its tariff area or terminating in Pakistan or its
tariff area.

Registered person means a person who is registered or is liable to be registered under the
Federal Excise Act. A person liable to be registered but not registered shall not be entitled to any
benefit available to a registered person, unless allowed by Board.

Zero rated means duty of Federal excise leviable and charged at the rate of zero percent under
section 5 of the Act.

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