SALES TAX

SALES TAX

Sales Tax

Provisions & Registration & Records &

Definitions Numerical
Rules Deregistration Audit
 SALES TAX

Sales Tax

Taxable Exempt
 SALES TAX

Taxable
Supplies

Zero Rated
Normal (17%) 8th Schedule 9th Schedule Capacity Tax
(0%)
OVERVIEW OF SALES TAX
 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
(including dealers and 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;
- Goods imported into Pakistan; and
- Specified taxable services
VAT is a percentage tax levied or the price each registered person charges for goods supplied or taxable services rendered by him.
VAT normally utilizes 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 persons other than the final consumer) from any tax burden
 This is ideal supply chain where every one is paying tax
VAT EXPLANATION
It is assumed in this example that every person in the supply chain is a registered person for sales tax purpose and subject to sales tax @ 17%
(restriction on input tax and special provisions for commercial importers and retailers are not considered for this example):
S. No. Transactions Input Output Pay to
Tax Tax FBR
1 Importer's import value Rs.9,200 1,564 1,564
Importer sells to a wholesaler of raw materials for Rs.11,000 + 1,870 sales tax =
margin is Rs.1,800 1,564 1,870 306
2 Wholesaler of raw materials buys at Rs.11,000 + 1,870 input tax and sells to a
manufacturer for Rs.11,600 + 1,972 sales tax =margin is Rs.600
1,870 1,972 102
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 = margin is Rs.3,000 1,972 4,012 2,040

4 Wholesa.er 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 = margin is Rs.400
4,012 4,080 68
5 Retailer buys at Rs.24,000 + 4,080 input tax and sells to consumer at Rs.24,600
+ 4,182 sales tax = margin is Rs.600 4,080 4,182 102
Total 4,182
 SALES TAX EXPLANATION
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 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 lima e.g. books, pharmaceutical products
 SALES TAX EXPLANATION
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
However, commercial importers shall pay sales tax as per 12th Schedule.

Wholesaler / Distributor 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 as per serial 3, Table 2, 6th Schedule
Other than cottage industry Registration is required and sales tax shall be charged on value of taxable supply

List the persons who are required to be registered?

 COTTAGE INDUSTRY
Definition of Cottage Industry

means a manufacturing concern which fulfills each of the conditions:

(a) does not have an industrial connection of gas or electricity;
(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 Rs10 million.

Q.6(a) (i) March 2019 ICAP CAF

Briefly discuss the situations under which a cottage industry is required to be registered under the Sales Tax Act, 1990 and Rules made thereunder.
(Marks 2)
 COTTAGE INDUSTRY
A commercial importer shall pay sales tax © 17% on import value in the normal manner However, sales tax on account of minimum value addition
shall be collected at import stage @ 3% of the value of goods imported in addition to the sales tax paid in the normal manner.
The commercial importer shall charge sales tax © 17% from his customers. The value addition tax paid at import stage shall form part of input tax
and claimable against output tax for determining his net liability.
The excess of input tax, if any, over output tax shall be carried forward to the next tax period. However, the refund of excess input tax over output
tax in respect of such commercial imports shall not be allowed to a registered person.

Example:
- sales tax rate 17%
- import value for the purpose of sales tax Rs 100,000
- sales tax paid at import stage Rs.20,000 © 17% + 3%
- value of supply on subsequent sale Rs.106,000
- output tax @ 17% on Rs.106,000 = Rs.18,020
- excess of Rs.1,980 (i.e. Rs.20,000 — 18,020) can only be c/f and is not refundable
An importer importing goods for his own manufacturing / use will pay sales tax @ 17% on import stage.
 SALES TAX AS GST / INDIRECT TAX
Manufacturer and retailer may be unregistered:
Assumption in this example is that the seller can change sale price to maintain his margin as in example no.1.
Sales tax rate is 17% in normal case. 3% shall also be charged where the supplies are made to an unregistered person with few exceptions.
 (This is practical supply chain)
VAT EXPLANATION
S. Transactions Input Output Pay to
No. Tax Tax FBR

1 Importer's import value Rs.9,200

Margin is Rs.1,800
A commercial importer is required to pay 17% normal sales tax plus 3% of import value and no refund can be claimed by him of this
amount (refer provisions for commercial importers) 1,840 1,870 30
Importer sells to a wholesaler of raw materials for
Rs,11,000 + 1,870 sales tax @ 17%

2 Wholesaler of raw materials buys at Rs.11,000 + 1,870 input tax and sells to an unregistered manufacturer for Rs.11,600 + 1,972
sales tax @ 17% + 348 further tax @ 3%
Further tax payable 1,870 1,972 102
= margin is Rs.600 348
3 Manufacturer buys at Rs.13,920 (his (his other manufacturing expenses are Rs.9,000) and sells to a wholesaler of finished product at
Rs.25,920 Nill Nill Nill
= margin is Rs.3 000
4 Wholesaler of finished product buys at Rs.25,920 and sells to an unregistered retailer at Rs.26,320 + 4,474 sales tax © 17% + 790
further tax © 3% Further tax payable Nill 4,474 4,474
= margin is Rs.400 790
5 Retailer buys at Rs.31,584 and sells to consumer at Rs.32,184
= margin is Rs.600 Nill Nill Nill
TOTAL 7,584
 CHANGE IN THE TAX RATES
1) Taxable supply in Pakistan shall be charged to tax at such rate as is in force at the time of supply.

2. Import of goods shall be charged at such rate as is in force at the time of declaration is presented whether for home consumption or for
clearance from warehouse as the case may be except:
a) Where goods declaration is presented in advance of the arrival of conveyance, the tax shall be charged at the rate as is in force on
the date of the manifest of the conveyance is delivered.
b) In case of clearance from warehouse if the tax is not paid within 7 days of declaration, the tax shall be charged at the rate in force on
the date of actual payment
 CHANGE IN THE TAX RATES
Q.8(c) Dec 2004 ICAP CFAP
State with reasons in brief, how the following matter can be analyzed under the Sales Tax Act?
Sales tax rate on goods entered for home consumption and in case of import where bill Of entry is presented in advance. (Marks 2)

Q.5(a)(11) Sept 2014 ICAP CAF

Describe the provisions under the Sales Tax Act, 1990 for change in rate of tax during a tax period (Marks 4)
SALES TAX RATES AND WHO IS LIABLE TO PAY
SALES TAX
 TAX RATES
Sales tax rate is 17%.

Further tax 3% shall also be charged when the goods are supplied to unregistered persons. It means that the tax rate is 17% + 3% on supplies of
goods to unregistered persons.
 TAX RATES
further tax shall not be charged in the following cases:
- Supplies to Government, semi-government and statutory regulatory bodies
- Supply of goods directly to end consumers including supplies by a retailer
- Items falling under 3rd Schedule i.e. items on which sales tax is chargeable on retail price
- Electric supplied to domestic and agricultural consumers
- Natural gas supplied to domestic consumers and CNG stations
- Supply of second hand worn clothing and other worn articles
- Goods falling under zero rating;
- Foam products including spring mattresses; and
- White crystalline sugar, fertilizers, jet fuel etc.
Further tax shall not become part of output tax which means that further tax is payable to the FBR as a bottom line figure.
 TAX RATES
Important: Sales through factory's outlets means sales to end users and therefore further tax is not chargeable.
Likewise, sales to employees, educational institutions, hospitals, government departments and so on will not be subject to further tax being end
users.

Q.6(a) March 2018 ICAP CAF

List the exceptions to the following general rules under the provisions of the Sales Tax Act, 1990:
Where the taxable supplies are made to a person who has not obtained registration number, there shall be charged, levied and paid a further tax @
3% of the value in addition to the normal rate of 17%. (Marks 3)

The FBR has power to fix a lower or higher rate on specified items
 TAX RATES
8th Schedule specifies import or supply of certain goods on which sales tax is chargeable at reduced rates subject to certain conditions. Few
examples are:
- 2% on fertilizers
- 10% on flavored milk, cheese, butter etc if sold in retail packing under a brand name
- 1% on silver and gold in unworked condition
- Articles of jewelry: 1.5% of value of gold + 2% of value of diamond + 3% of making charges. No Input tax allowed except input tax paid on gold
10% on import of plant and machinery not manufactured locally and having no compatible local substitutes.
 TAX RATES
Import by a registered manufacturer for its own use: A post dated cheque equal to the amount of differential sales tax (i.e. 17% — 10./0 = 7%)
shall be submitted to the custom authorities which shall be returned back on filing of first sales tax return after import. Subsequent supply of plant
to a commercial regime or to an unregistered manufacturer shall be liable to tax at the normal sales tax rate;

Import by a commercial importer: Cash, cheque, pay order or bank guarantee shall be submitted at import stage for the differential sales tax
which shall beg returned back after providing evidence of next supply to a registered person. Supply by such commercial importer to an
unregistered person shall be liable to tax at the normal sales tax rate.
 TAX RATES
The FBR has 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].

Fixed tax on monthly basis on bricks - Section 3(1B) and 10th Schedule
Fixed tax on bricks has been levied on monthly basis irrespective of actual production or actual value of supply as under:

- Rs.7, 500 per month in Sindh, KPK, Baluchistan and specified areas of Punjab such as Mianwali, Multan etc.
- Rs.10, 000 per month in specified area of Punjab such as Jhelum, Sargodha, Sialkot etc.
- Rs.12,500 per month in Lahore, Islamabad and Pindi

Fixed tax on mobile phones etc. — section 3(3B) and 9th Schedule
9th Schedule specifies import or supply of certain goods on which sales tax is charged on fixed basis. Fixed sales tax has been imposed on
activation of SIM card and on mobile phones and satellite phones and the purchaser is not entitled to claim input tax of such fixed sales tax paid by
him.
 WHO IS LIABLE TO PAY SALES TAX

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 [It means that the purchaser, who pays sales tax, does not pay sales tax to FBR instead he
pays sales tax to the supplier and the supplier pays sales tax to FBR after making his input tax adjustment];
o Importing the goods, in the case of goods imported into Pakistan; and
o Providing taxable services.
 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
ZERO RATED SUPPLIES
 ZERO RATED SUPPLIES — SECTION 4, 5TH SCHEDULE

Taxable
Supplies

Zero Rated
Normal (17%) 8th Schedule 9th Schedule Capacity Tax
(0%)
 ZERO RATED SUPPLIES — SECTION 4, 5TH SCHEDULE
Goods falling under this category are chargeable to sales tax at 0%. It means that they output tax is 0% however, their corresponding purchases
may not necessarily zero rated and therefore, input tax would be suffered which is reclaimable as input tax.

General Rule: Exports are charged at 0%

Export of goods falls under this category other than the following: (Exceptions to above rule)
• Export to any country as notified by the Federal Government [examples are: certain specified goods vide (i) SRO 1232 dated 1.12.1990 for
export to Afghanistan, Iran or China; and (ii) SRO 190 dated 2.4.2002 export to Afghanistan by land route]
• Export intended to be re-imported into Pakistan

Q.6 (a) March 2018 ICAP CAF

List the exceptions to the following general rules under the provisions of the Sales Tax Act, 1990:
Goods exported shall be charged to tax at the rate of zero permit. (Marks 3)
 ZERO RATED SUPPLIES — SECTION 4, 5TH SCHEDULE
Examples of other items under this category:
➢ supply to diplomats, diplomatic missions and privileged persons
➢ supply of raw materials and components for further manufacture of goods in Export Processing Zone (EPZ)
➢ supply of locally produced plant and machinery in EPZ subject to certain conditions
➢ imports or supplies made to Gwadar Special Economic Zone excluding vehicle
➢ Supply to duty free shops
➢ Supply of stores and provisions for consumption aboard conveyance proceeding outside Pakistan e.g. international flight or ship
➢ Packing materials used for zero rated supplies
➢ Electric and gas consumed by manufacturer-exporters
➢ Other specified items subject to certain conditions including bicycles, pencils, pens etc.
 REFUND OF INPUT TAX ON ZERO RATED SUPPLY
(i) Refund of input tax on zero rated supplies shall be made within 45 days of return

(ii) If a registered person is liable to pay any tax, default surcharge or penalty payable under any law administered by the FBR, the refund of input
tax shall be made after adjustment of unpaid outstanding amount of tax, default surcharge and penalty.

(iii) Where there is reason to believe that a person has claimed incorrect input tax credit or refund, the proceedings against him shall be completed
within 60 days may be extended up to 120 days by an officer not below the rank of an Additional Commissioner and may be extended by the
Board up to 9 months for reasons to be recorded in written.

(iv) In case of delayed refund, the FBR shall pay an additional amount to the registered person @ Karachi Inter-bank Offered Rate (KIBOR) per
annum if there is no dispute it the claim of the refund.

Important: Additional amount, if any, received on delayed refund from the sales tax department is taxable for income tax purpose under the head
"income from other sources".
EXEMPT SUPPLIES
 EXEMPT SUPPLIES: SECTION 13, 6TH SCHEDULE
6th Sshudule
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, journals and newspapers [serial 32, Table 1, 6th Schedule] where paper purchases suffer sales tax but their
supply does not and in this case input tax can not be reclaimed
 EXEMPT SUPPLIES: SECTION 13, 6TH SCHEDULE
Other important exempt items are:

➢ Live animals
➢ Agricultural produce not subject to any further manufacture
➢ Holy Quran and other holy books or recorded in audio or video cassettes
➢ Imported samples [local samples of taxable goods are subject to sales tax]
➢ Goods imported by diplomats, diplomatic missions or privileged persons
➢ Personal baggage imported by overseas Pakistanis
➢ Import of machinery and materials for EPZ Export Processing Zone
➢ Goods imported temporarily for subsequent export
➢ Import of replacement goods supplied free of cost in lieu of defective goods imported
➢ Goods produced in and exported from Pakistan which are subsequently imported in Pakistan within one year of their export
➢ Goods imported by or donated to government hospitals and non-profit educational and research institutions
➢ Goods excluding electricity and natural gas supplied to government hospitals, charitable hospitals of 50 beds or more or the teaching
hospitals of statutory universities of 200 or more beds.
➢ Promotional and advertising material including technical literature, pamphlets, brochures and other give-aways of no commercial value,
distributed free of cost by the exhibitors
 EXEMPT SUPPLIES: SECTION 13, 6TH SCHEDULE
Inventory
➢ Supply of fixed assets otherwise than stock in trade against which input tax adjustment is not available e.g. resale of vehicles, furniture or office
equipment being a depreciable asset
➢ Specified goods including:
- Energy saver lamps
- Pharmaceutical raw materials and finished products with few exceptions
- Laptops, computers and notebooks including import of parts for assembling or manufacturing of laptops and computers
➢ Specified machinery and capital goods subject to certain conditions such as:
- equipments for coal firing system; -
- machinery for power generation;
- networking equipment's for educational and training institutions
➢ Raw materials or intermediary goods produced (or services provided) by a registered Person used by himself in the manufacture of taxable
goods. Such in-house consumption is a supply as per the definition and shall itself be a taxable supply if used for any, purpose other than
taxable supply.
(In house consumption is exempt if final product is taxable)
 EXEMPT SUPPLIES: SECTION 13, 6TH SCHEDULE
Example 1: If a manufacturer of cars [taxable product] also manufactures wheels [taxable product] within his premises for use in the cars then in-
house consumption of wheels is exempt. However, the wheels shall not be exempt if acquired from outside or provided to any other entity.

Example 2: Books are exempt and paper is taxable.

If a books publishing house sets up a paper manufacturing unit then paper used in-house shall not be exempt and thus chargeable to sales tax.

Example 3: A manufacturer of tea uses the tea manufactured to serve the employees in the canteen. This is a 'supply' for sales tax purposes. On the
other hand, if a distributor of stationery uses stationery in-house for office purpose does not constitute a 'supply' because stationery is being
'purchased' and not 'manufactured'.

Export of exempt goods:

Serial 9 of the 5th Schedule specifically provides that export of exempt goods by a manufacturer shall be zero rated. Therefore input tax paid, if any,
can be reclaimed.
 EXEMPT SUPPLIES: SECTION 13, 6TH SCHEDULE
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.

Differences between zero rated supplies and exempt supplies in detail are as under:
(Very important)

Zero rated supply Exempt Supply

Definition "Zero rated" supply Exempt supply Definition "Zero rated supply" "Exempt supply" means a supply which is not chargeable to
means a taxable supply which is chargeable to sales tax at 0%. sales tax.
Goods Goods exported or goods listed in 5th Schedule Goods specified by FBR through i notifications and goods
listed in 6th Schedule

Invoice Tax invoice shall be raised but sales tax shall be charged at 0% No sales tax invoice is required
Input tax credit Input tax on zero rated supplies is refundable from FBR Input tax on exempt supplies is , not adjustable nor
refundable
Registration Sales tax registration is required where a person wants to claim Sales tax registration is not required where a person is
refund engaged exclusively in exempt supplies
 EXEMPT SUPPLIES: SECTION 13, 6TH SCHEDULE
Q.8(c) June 2003 ICAP CFAP
Distinguish the concept of Zero Rating with exemption from tax as laid down in the Sales Tax Act 1990.
(Marks 5)

Q.6(b) Sept 2016 ICAP CAF

Under the provisions of the Sales Tax Act, 1990 enumerate any four features distinguishing the concept of 'Zero rating' from 'Exempt supply'.
(Marks 4)

Q.6(a)(ii) Sept 2018 ICAP CAF

Under the Sales Tax Act, 1990 and Rules made thereunder, briefly describe differences between rules applicable to exempt and zero rated supplies.
(Marks 4)
THIRD SCHEDULE (RETAIL ITEMS)
 THIRD SCHEDULE —SECTION 3(2)(A)
Sales tax is charged @ 17% (or at a reduced rate as specified in 8thSchedule) in respect of goods falling under this category 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.

Retail Price: means the price fixed by the manufacturer or importer in case of imported goods inclusive of all charges and taxes excluding sales tax at
which a particular variety of items should be sold to the general body of consumers or, if more than one price is so fixed for the same variety, the highest
of such prices.
The FBR may specify areas or zones for determination of high retail price of any brand or variety of goods.
Note: The definition retail price is important specially in the case of 3rd Schedule items.

Retailer: means a person supplying goods to general public for consumption provided that if he combines the business of import and retail or
manufacture with retail he shall notify and advertise wholesale price and retail price separately and declare the address of his retail outlets.
THIRD SCHEDULE —SECTION 3(2)(A)
 SALES TAX

Types of Retailers

Tier-1 Retailers Retailers other than tier -1

 TIER-1 RETAILERS
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 retailer operating in an air-conditioned shopping mall, plaza or centre, excluding kiosks;
c. A retailer whose cumulative electricity bill during the immediately preceding 12 months exceeds Rs.600, 000;
d. A wholesaler-cum-retailer, engaged in bulk import and supply of consumer goods or wholesale basis to the retailers as well as on retail basis
to the general body of the consumers; and
e. Whose shop measures 1,000 square feet or more. [2000 square feet or more in case of retailer of furniture]
f. A retailer who has acquired POS accepting payment through debit or credit cards or any other digital services
g. Any other person as prescribed by FBR

Q.6 (a) (ii) March 2019 ICAP CAF

Briefly discuss the situations under which a retailer is required to be registered under the Sales Tax Act, 1990 and Rules made thereunder. (Mark 1)
 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.
From such date as may be notified by FBR, all Tier-1 retailers shall integrate their retail outlets with FBR's computerized system for real time
reporting of sales. In case of default, his input tax claim would be reduced by 60%.
A registered retailer is required to issue a serially numbered tax invoice containing specified particulars including name, address and NIC / NTN of
unregistered recipient of supply where value of transaction exceeds Rs. 100, 000.
 RETAILERS OTHER THAN TIER-1
2. Retailers other than Tier 1 retailers

Retailers other than Tier 1 retailers

Retailers other than Tier 1 retailers are not required to be registered and they shall pay sales 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. Monthly sales tax
return is not required to be filed and they are not subject to audit.
The above sales tax in case of unregistered retailer with electric bill is in addition to the sales tax otherwise chargeable with electric bills which is
17% normal sales tax + 3% further tax + 5% extra tax.
THIRD SCHEDULE EXPLANATION
 THIRD SCHEDULE
Items covered under this category are:
o Cigarettes
o Juices, ice cream, syrups, aerated water and beverages
o Mineral / bottled water
o Detergents, Shampoo, soap, toothpaste, shaving cream, cosmetics, shoe polish / cream
o Tea, powder drinks, milky drinks
o Toilet paper and tissue paper
o Spices sold in retail packing with brand name and trade mark
o Cement sold in retail packing
o Fertilizers
o Household electrical goods, including ACs, refrigerators, deep freezers TV, recorder; and players, bulbs, tube-lights, electric fans and irons,
washing machines and telephone sets.
o Household gas appliances, including cooking range, ovens, geysers and gas heaters
o Foam products including spring mattresses.
o Paints, lubricating oils, brake fluids etc. sold in retail packing
o Auto-parts in retail packing, storage batteries, tyres and tubes excluding those sold to automotive manufacturers or assemblers
o Motorcycles and Auto rickshaws
o Biscuits in retail packing with brand name
o Tiles

Note for students: Further tax is not applicable on 3rd Schedule items.
ADJUSTMENT OF INPUT TAX
 ADJUSTMENT OF INPUT TAX
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 or in case of supply of electricity or gas, a bill bearing his registration number and the address where
the connection is installed;
ii. Goods declaration (i.e. bill of entry) in case of goods imported by him;
iii. In case of goods purchased in auction, treasury challan in his name bearing his NTN
 ADJUSTMENT OF INPUT TAX
Input tax can be claimed on accrual basis subject to payment within a prescribed period.

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 for sales tax purposes provided the bill contains NTN and address of the business premises declared to the
Commissioner of such consumer.

Where the electric or gas connection is not in the name of such person, NTN of such person is mentioned on such bill along with the address of
such person as given by him in the application for registration for the purpose of sales tax.

Q.7(b)(i) June 2001 ICAP CFAP (Important)

Please explain whether sales tax can be claimed in respect of sales tax paid on electricity bills which are not in the name of the company being a
tenant. (Marks 3)
 ADJUSTMENT OF INPUT TAX
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.
Alternatively, the registered person may apply for the refund within one year u/s 66. The Commissioner has power to grant extension of these time
limits in special cases.

Q.8(a) June 2003 ICAP CFAP

Explain the procedure for the admissibility of the input tax which is not claimed by omission in the relevant tax period.
(Marks 5)
 CIRCUMSTANCES IN WHICH I/P TAX CANNOT BE CLAIMED
In the following cases a registered person is not entitled to reclaim/ deduct his input tax
1 Supply of exempt goods and services
3 Sales tax on services in respect of which input tax adjustment is
barred under the respective provincial sales tax laws.
5 Goods in respect of which sales tax has not been deposited into
the government treasury by the supplier
2 Goods and services not related to taxable supplies or acquired for
personal or non-business use e.g. tissue papers purchased by a
manufacturer for his own use. In this case he will be a direct
consumer of such goods who cannot reclaim input tax.
4 Input tax on fake invoices
6 Purchases in respect of which a discrepancy is indicated by the
CREST or input tax of which is not verifiable in the supply chain.
CREST (i.e. COMPUTERISED RISK-BASED EVALUATION of SALES
TAX) is the computerized program of the sales tax department for
analyzing and cross-matching of sales tax returns.
 CIRCUMSTANCES IN WHICH I/P TAX CANNOT BE CLAIMED
7 Goods and services, may be specified by the FBR, which have not 8 Input tax paid on purchases if he fails to furnish the information
been declared by the supplier in his return at the time of filing of required by the FBR
return by the buyer
9 Extra tax paid cannot be adjusted as input tax — section 3(5) 10 Vehicles other than stock in trade
[Fork lifting vehicle is treated as machinery as per appellate
authorities' decision and therefore input tax can be claimed on
fork lifting vehicle]
11 Building material including cement, paints, electric and gas 12 Import or purchase of agricultural machinery subject to sales tax
appliances, pipes sanitary fitting etc. otherwise than stock in at reduced rate under 8th Schedule
trade. However, input tax can be claimed on pre-fabricated
buildings.
13 Input tax related to supplies to unregistered person for which 14 Any goods which the FBR may specify.
sales invoices do not bear NIC or NTN of the recipient

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
reclaimed:

➢ Food, beverages, garments and consumption on entertainment

➢ Gifts and give-aways including dairies and calendars
➢ Supply of electricity and gas to residential colonies
➢ Office equipments (excluding electronic fiscal cash registers), furniture and fixtures Crockery, cutlery etc.
 CIRCUMSTANCES IN WHICH I/P TAX CANNOT BE CLAIMED
Important Points
Input tax is not allowed where a discrepancy is indicated by the automated system of FBR i.e. computerized system for cross-matching of input tax
However, a discrepancy would be allowed on provisional basis and the registered person would be advised by the FBR to contact the supplier and
persuade him to disclose his relevant output tax.
If the supplier did not declare his relevant output tax then input tax allowed earlier provisionally would be adjusted or recovered.

Important point
If a registered person does not have tax invoice then provisional adjustment would not be allowed as existence of tax invoice bearing his name
and NTN is a basic condition for claiming input tax.
It means that if a registered person has tax invoice for his purchases and a discrepancy is indicated by the computerized system then provisional
adjustment of input tax would be allowed
 CIRCUMSTANCES IN WHICH I/P TAX CANNOT BE CLAIMED
EXTRA TAX:
The Federal Government may collect extra tax on any specified item up to a maximum of 17% in addition to the normal sales tax.

Example of extra tax:

Extra tax is levied © 5% on supplies of electric power and natural gas to unregistered or to the persons not included in the Active Taxpayers List
(ATL) having industrial or commercial connections and whose bill in any month exceeds Rs.15,000.
However, extra tax © 5% shall not be charged in case of supply of natural gas to CNG stations.

Q.6(a) June 2009 ICAP CFAP

Narrate the provisions of Sales Tax Act, 1990 relating to extra tax. (Marks 4)
 CIRCUMSTANCES IN WHICH I/P TAX CANNOT BE CLAIMED
Q.13(a) June 2002 ICAP CFAP (Marks 5)
Q.8(a)(i) March 2017 ICAP CAF (Marks 6)
Under what circumstances can input tax not be allowed to a registered person? (Marks 5)
Q.8 Dec 2003 ICAP CFAP
The Sales Tax Act, 1990 specifies the principle for determining the tax liability whereby the eligible input tax is deducted from the output tax on
taxable supplies of a registered person. Does the law specify any departure from the said principle relating to the levy of tax on taxable supplies?
Please discuss by narrating the relevant provisions of law. (Marks 6)

Q.7 Dec 2004 ICAP CFAP

A registered person is entitled to deduct input tax paid or payable during the tax period from the output tax subject to compliance of section 7 and
73 of the Sales Tax Act. Section 8 of the Act however places certain restrictions on goods on which input tax is not deductible.

You are required to specify those goods on which input tax is not allowable under section 8. (Marks 8)
 PAYMENT THROUGH BANKING CHANNEL
Payment for a transaction exceeding value of Rs.50, 000 (other than utility bills) must be –

• made by a crossed banking instrument

• made within 180 days of the date of the issuance of the tax invoice this period may be extended by the Commissioner on any reasonable
ground]
• from the business bank account of the buyer to the business bank account of the supplier

If above conditions are not met -

• The buyer would not be allowed any input tax credit, zero rating etc.
• The supplier will not be allowed input tax credit, zero rating etc. if the amount received on account of supply is not deposited in his
business bank account already declared to the sales tax department
 PAYMENT THROUGH BANKING CHANNEL
Input tax can be claimed on accrual basis. 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.

On-line transfer of payment as well as payments through credit card is also allowed.

This section is not applicable on the registered person supplying goods to unregistered person. However, supplier is required to deposit cash in his
business bank account to claim input tax
 PAYMENT THROUGH BANKING CHANNEL
Limit on Supplies to unregistered person

1) A register person shall make all taxable supplies to a person who has obtained sales tax registration number. However, supplies upto:
➢ Rs. 10 million per person per month
➢ Rs.100 million per person in a financial year
Can be made to unregistered persons.

2) In case of non-compliance the supplier shall not be entitled to claim input tax attributable to such excess supplies to unregistered persons.

3) The above provisions shall not apply to supplies made to:

➢ Federal/provincial/local Government departments, authorities, etc. not engaged in making of taxable supplies’
➢ Foreign Missions, diplomats and privileged persons.
➢ Registered persons engaged in manufacturing and supply of fertilizer upon submission of required documents.
➢ All other persons not engaged in supply of taxable goods.

4) It is clarified that the above limits is applicable on goods supplied to one specific person
INPUT TAX CREDIT
 APPORTIONMENT OF INPUT TAX RULES
These rules apply to the registered person supplying taxable and exempt goods simultaneously, Input tax relating wholly to taxable supplies is fully
adjustable / reclaimable. If it relates wholly to exempt supplies it is not admissible.

Sales tax on goods and services including utilities used for both taxable and exempt supplies shall be apportioned according to the following
formula:
Residual input tax credit =
Value of taxable supplies x Residual input tax
Value of taxable + exempt supplies

Residual input tax is sales tax on raw material and capital goods being used for taxable as well as exempt supplies but does not include sales tax
paid related wholly to taxable supplies or wholly to exempt supplies.

Monthly apportionment of input tax shall be treated as provisional adjustment and at the end of each financial year the registered person shall
make final adjustment on the basis of taxable and exempt supplies of that year.
 APPORTIONMENT OF INPUT TAX RULES
According to the above rule, apportionment formula is applied where input tax is common for two categories i.e. taxable supplies and exempt
supplies.
However, in practice there are three categories i.e. taxable at normal rate, taxable at zero rate and exempt supplies.
Zero rate supplies is a separate category due to the following reasons:

- a separate refund application is processed for zero rated supplies; and

- Restriction on input tax is not applicable for zero rated supplies.
 APPORTIONMENT OF INPUT TAX RULES
Value of Supply Input Tax Input tax on Fixed Asset
Taxable Supplies [Net] XXX [e] aaa bbb
Zero rates Supplies [Net] XXX [f] aaa’ bbb’
Exempt Supplies [Net] XXX [g] aaa’’ bbb’’

Total XXX [Y] AAA [Q] BBB [W]

𝑄 𝑄 𝑄 𝑊 𝑊 𝑊
∗ 𝑒 = 𝑎𝑎𝑎 ∗ 𝑓 = 𝑎𝑎𝑎’ ∗ 𝑔 = 𝑎𝑎𝑎’’ ∗ 𝑒 = 𝑏𝑏𝑏 ∗ 𝑓 = 𝑏𝑏𝑏’ ∗ 𝑔 = 𝑏𝑏𝑏’’
𝑌 𝑌 𝑌 𝑌 𝑌 𝑌

For Input Tax Against Supplies For Input Tax Against Fixed Assets
 EXAMPLES
Case # 1
Purchases from registered Supplier Rs. 500,000
Supplies to Registered Person Rs. 880,000

Calculate Sales Tax payable

 EXAMPLES
Case # 2
Purchases from registered Supplier Rs. 1,500,000
Supplies to Registered Person Rs. 1,880,000
Exempt Supplies Rs. 200,000

Required:-
Calculate Input Tax claimable
 EXAMPLES
Case # 3
Purchases from registered Supplier Rs. 1,500,000
Supplies to Registered Person Rs. 1,880,000
Exempt Supplies Rs. 200,000
Export of Goods Rs. 330,000

Required:-
Calculate Input Tax claimable
 EXAMPLES
Case # 4
Purchases from registered Supplier Rs. 1,500,000
Supplies to Registered Person Rs. 1,880,000
Exempt Supplies Rs. 200,000
Zero Rated Supplies Rs. 730,000

A Machine for Rs. 1,300,000 is purchased and is used to make the Exempt and Zero Rated Supplies.
Required:-
Calculate Input Tax claimable/Refundable
 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, in case of
lower profit margin he is required to pay 10% of his output tax to FBR.
➢ It means that if his input tax during a tax period exceeds his output tax as a result of loss or overbuying (closing stock), he is not entitled to get
refund instead he will pay 10% of his output tax to FBR.
➢ 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.
➢ Input tax on acquisition of fixed assets or capital goods, if any, is claimable in the same tax period and restriction of the said 90% is not
applicable in this case.
➢ FBR has power to increase the limit from 90% to 95% in any particular case, Including Tier-1 retailers who have integrated all their POS with
FBR
 RESTRICTION ON INPUT TAX
Exceptions:
This restriction of 90% is not applicable in the following cases i.e. they can adjust input tax from output tax without any restriction:
1. Persons registered in electrical energy sector and gas distribution companies
2. Oil marketing companies, petroleum refineries and Pakistan Steel Mills
3. Fertilizers manufacturers
4. Distributors excluding wholesalers
5. Commercial importers provided the value of imports subjected to 3% value addition tax exceeds 50% of value of all taxable purchases in a tax period.
6. Persons making zero rated supplies provided value of such supplies exceeds 50% of value of all taxable supplies during a tax period.
7. Telecommunications
8. CNG dealers and petroleum dealers
9. Registered Persons other than the manufactures, making supplies of 3rd schedule items on which sales tax has been paid on retail price, provided that
value of such supplies exceeds 80% of all taxable supplies
 RESTRICTION ON INPUT TAX
Excess input tax [first proviso to section 10]
Input tax disallowed due to restriction u/s 8B or excess input tax where the said restriction is not applicable may be carried forward to the next tax
period and treated as input tax of that period.
Note for students: Refund of zero rated items including exports may be claimed at the time of filing of return and need not be carried forward
DEBIT AND CREDIT NOTE
 DEBIT AND CREDIT NOTE
Where a registered person has issued a tax invoice and the tax return or tax invoice needs to be modified as a result of:
o cancellation of supply;
o return of goods;
o change in the nature of supply;
o change in the value of supply; or
o any other such event

Important
Where tax liability increases as a result of issuance of debit note then the time limit of 180 days shall not apply.

General Rule: debit and credit note will be issued by buyer or seller with in 180 days of issuance of tax invoice.
 DEBIT AND CREDIT NOTE

EXAMPLE: Mr. A, a registered person, supplied goods of Rs.100, 000 to Mr. B who is also a registered person and received Rs.117, 000 from Mr. B
(including sales tax of Rs.17, 000). Goods returned to Mr. A. Mr. B will now issue a debit note.
Mr. A: Mr. A has already received Rs.17, 000 from Mr. B and paid to FBR as his output tax now he will pay back Rs.17, 000 to Mr. B and reclaim
this amount from FBR.
In the case, Mr. A is allowed to deduct Rs.17, 000 from his output tax.

Mr. B: Mr. B has already paid Rs.17, 000 to Mr. A and reclaimed this amount from FBR ash, input tax. Now he will receive Rs.17, 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.17, 000 from his input tax.

0.10(a) March 2014 ICAP CAF:

Under the provisions of Sales Tax Act, 1990, identify the situations under which a debit or credit note may be issued by a registered person.
(Marks 3)
 DEBIT AND CREDIT NOTE
The debit / credit note shall show the following particulars:
i. Name and NTN of the recipient and the supplier
ii. Number and date of the original sales tax invoice including quantity, Value and the amount of sales tax
iii. The reason of issuance of the note
iv. Signature and seal of the authorized person issuing the note
v. Quantity being returned or the supply of which has been cancelled (in case of return of goods or cancellation of supply)
vi. Original, revised and difference in the value and sales tax (in case of change of value)
 DEBIT AND CREDIT NOTE
Where the buyer and supplier both are registered persons and sales tax liability is reduced as a consequence of credit note then the adjustment is
allowed only where the other party accepts the credit note by issuing corresponding debit note.
However, if a corresponding debit note is not issued by the other party then provisional adjustment would be allowed to the registered person by
the automated system of FBR and he would be advised by the FBR to contact and persuade the other party to issue corresponding debit note. If it is
not done then input tax allowed earlier provisionally would be adjusted or recovered.

If the other party is unregistered then adjustment shall be made only by the registered person on the basis of credit / debit note issued by him.
Where such goods are subsequently supplied then sales tax shall be charged in the normal manner
MISC. AREAS
 DESTRUCTION OF GOODS
Goods need to be destroyed: Where such goods are returned by the buyer on the ground that the same are unfit for consumption and are
required to be destroyed then the same shall be destroyed under the supervision of the sales tax department and the input tax credit in respect of
goods so destroyed shall not be admissible.
However, in case of companies manufacturing perishable food items having an expiry date, if such items are returned on account of being unfit for
consumption and are then destroyed, the credit note may be issued with 15 days of the return of goods and adjustment may be made accordingly.
 DESTRUCTION OF GOODS
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.
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.

Q.5(b) Sept 2014 ICAP CAF

There are certain food items in the inventory of XY Ltd (XYL) which were returned by the customers after the expiry date. Specify the procedure
which must be followed under the Sales Tax Rules, 2006 if XYL wishes to destroy these items.
(Marks 3)
 Read Only
SUPPLY TO UNREGISTERED PERSON
The Federal Government has power to specify any goods which can not be supplied by a registered person to any unregistered person. It means
that if a registered person makes such supplies then he shall not be allowed to take credit of input tax.

The specified goods that can not be supplied by a registered person to an unregistered person:

i. Polypropylene granules;
ii. Artificial filament tow;
iii. Filter rods for cigarettes; and
iv. Air-conditioning, chilling and humidification plants, cranes, propane storage tank, heat exchanger and gas separator.
 Important
PURCHASE OF STOCKS BEFORE REGISTRATION
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.

Mr. Lal, an unregistered person, is engaged in the supply of imported and locally purchased good. He has received a notice from a local registration
office of the sales tax for compulsory registration.
Before submitting the application for registration, he wants to know whether he will be able to claim the input tax paid on the unsold stocks
purchased before registration.
Required: Explain the legal provisions of the Sales Tax Act, 1990 regarding tax paid on stocks before registration. (Marks 6)
 EXCESS TAX COLLECTION
If any person collected output tax which was not collectable or collected excess output tax by mistake and the incidence of such tax has been
passed on to the consumer, he shall pay the amount of such tax to the Government and no claim for refund in respect of such amount shall be
admissible.
The burden of proof that the incidence of tax has not been passed to the consumer shall be on the person collecting the tax.

Q.6(a) June 2007 ICAP CFAP

DEF Ltd supplied goods valuing Rs.1, 000,000 to one of its distributor, Mr. Pink who is also registered for sales tax purposes. Sales tax invoice was
issued for the said amount plus sales tax at the prescribed rate. The transaction was recorded in the monthly sales tax return for the month of
January 2007. In February 2007 the internal auditor of the Company observed that the accountant had app incorrect selling prices. As a result, the
Company will have to refund the excess amount to Mr. Pink.
Required: Advise the procedure to be adopted by the Company and the distributor to adjust the excess amount of sales tax. (Marks 5)

Q.6(a)(iii) Sept 2018 ICAP CAF

Under the Sales Tax Act, 1990 and Rules made thereunder, briefly describe the provisions related to excess / additional amount of sales tax
collected by a registered person. (Marks 3)
 SUPPLY OF PARTS FREE OF COST UNDER WARRANTY
(a) Price charged to the customers for the vehicle includes the cost of warranty period related claims.
(b) Replacement of spare parts is not a sale but in-house use / business use which is al, included in the definition of supply. However, if the final
product is taxable then such in-house, business use is exempt.
(c) The FBR also clarified that in such cases, where the final product is taxable, and no sales tax payable except on supply of final product.
Therefore, no sales tax should be charged on replacement, free of charge, of the defective parts under warranty.

Q.8 June 2004 ICAP CFAP:

K Ltd is a manufacturer of vehicles. In view of the warranty given on vehicles sold, K Ltd is under obligation to remove any defects in the vehicle
including replacement of parts free of cost during the warranty period.
Discuss the sales tax implication on the replacement of parts during the warranty period. (Marks 5)
 JOINT & SEVERAL LIABILITY OF REGISTERED PERSON IN SUPPLY
CHAIN WHERE TAX UNPAID.
A registered person receiving taxable supply from another registered person is in the knowledge or has reasonable grounds to suspect that some or
all tax payable in respect of that supply or any previous or subsequent supply of the goods would remain unpaid [burden to prove this fact is on the
tax department], then such person, as well as the person making the taxable supply shall be jointly and severally liable for payment of such unpaid
tax.
However, FBR may exempt any transaction from the provisions of this section.

Q.9 June 2008: Zohaib & Co., a partnership firm, plans to purchase raw material from Mr. SA who has the reputation of evading sales tax. Mr. K, the
managing partner of the firm, however is of the view that failure to deposit sales tax by SA would not have any bearing for his firm.
Required: Offer your comments on the views expressed by Mr. K. (Marks 3)
 Summery:
1. Sales Tax Overview
2. Sales tax rates and who is liable to sales tax
3. Zero rated supplies
4. Exempt supplies
5. 3rd schudule (Retail items)
END 6. Adjustment of input tax
7. Input tax credit
8. Debit and Credit note
9. MISC. Concepts