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Sales tax is a form of tax paid to a governing body for the sale of goods and services. It is an indirect tax, generally charged at the point of purchase or exchange of certain taxable goods, as a percentage of the value of the product.
The sales tax rate depends on the government in power and the individual policies it enforces, generally making it simple to calculate and collect. In simple terms, the sales tax is an additional amount paid while purchasing goods or services.
Kakakhel Law Associates provides a team of specialists focused on taxation law. Tax laws are constantly evolving, making it difficult to stay updated. Our experts are here to help you understand and comply with them. Nearly all business transactions generate taxes that contribute to state revenue, with sales taxes being one of the major types of taxes that generate income for the state. Businesses involved in supplying or importing goods or providing services are liable to pay sales taxes. Kakakhel Law Associates can assist with registering as taxpayers, settling disputes between taxpayers and taxation authorities, and handling various matters, such as tax assessments, penalties, recovery of erroneously refunded tax amounts, and violations under The Sales Tax Act, 1990, and its rules.
A sales tax is a value-added tax levied on sales. It is only levied and paid when the taxable supply is made during a "taxable activity." The value of the goods or services supplied is taxed. Since sales tax is an indirect tax, the burden is generally borne by the consumer, with the registered supplier acting as a collector who passes it on to the government tax authorities. The government has established the Inland Revenue to manage the collection and assessment of taxes, subject to the Sales Tax Act, 1990, and its subsequent amendments.
Sales tax is divided into two categories: sales tax on goods and sales tax on services. The federal government legislates on sales tax for goods, setting the rate at 17% since 2013, with certain items taxed at reduced rates. Provincial governments legislate on sales tax for services through the following acts:
Direct taxes are those whose burden is borne by the person to whom the tax is levied. In contrast, indirect taxes are borne by the end consumers, not the seller or importer. The distinction between these two types of taxes is outlined by statutes, and any unlawful shift of tax burden is prohibited.
The liability to pay sales tax on goods supplied lies with the consumer, while the liability for sales tax on imports falls on the importer, according to Section 3 of the Sales Tax Act, 1990.
Any person involved in making taxable supplies must register with the Commissioner Inland Revenue. The following categories are required to register:
The Board or any authorized officer may deregister or blacklist individuals who should not be registered as taxpayers or are suspected of fraudulent activities. In such cases, requests for tax refunds or input tax credits will not be entertained.
Registered persons making taxable supplies must maintain extensive records using a double-entry system at their business premises or registered office. These records, which may be maintained by the person or an agent, must detail goods purchased and supplied, including their description, value, and quantity. The records must be organized to allow for easy determination of tax liability during a tax period.
At the end of each tax period, taxpayers must submit a correct return in the prescribed form through a designated bank or office. This return should include details of purchases, supplies made, taxes due and paid, and other required information.
The Third Schedule to the Sales Tax Act, 1990, applies sales tax at retail prices. A retail price refers to the price paid by final consumers at retail outlets, as opposed to intermediate prices in the supply chain. The tax rate is 17% on retail price items, which includes 49 specific items.
Zero-rated goods and services are taxable but set at a 0% rate. These goods are taxed only when the government decides to apply a rate. Some of the goods falling under this classification include items listed in the Fifth Schedule.
The Act has introduced amendments for Gwadar Port and Gwadar Free Zone, effective from June 1, 2020, under the Tax Laws (Amendment) Ordinance, 2019.
Goods specified in the Sixth Schedule are exempt from tax under the Sales Tax Act. Exempted goods or services are not taxable, meaning the government does not impose sales tax on them. Items under this category are also listed in the Sixth Schedule.
Exemptions applicable to the Gwadar Free Zone have been updated in the Sixth Schedule, effective from June 1, 2020, under the Tax Laws (Amendment) Ordinance, 2019.
Sales tax is an indirect tax levied on goods and services in Pakistan. The rate varies depending on the nature of the goods or services and the jurisdiction in which they are sold. Our firm, Zafar & Associates - LLP, specializes in helping businesses comply with sales tax laws, ensuring they are registered correctly, and addressing any disputes with tax authorities.
Businesses that deal with taxable goods or services must register with the Commissioner Inland Revenue.
Specific goods and services may be exempt or subject to reduced tax rates. For example, the import of ships and floating crafts was exempt from sales tax until 2020, with an extension to 2030
Sales tax on services is handled by provincial governments, with varying rates in Islamabad, Sindh, Punjab, Balochistan, and Khyber Pakhtunkhwa.
Violations of sales tax regulations can result in penalties, which may include fines or legal action. Specific offences are detailed under Section 33 of the Sales Tax Act.
Further tax is levied when taxable goods are sold to an unregistered buyer. This tax is applied at a rate of 3% of the value of the goods, in addition to the standard sales tax rate. The further tax is applicable to all taxable goods, except for zero-rated and exempted goods.
Applicability: This tax is applied across Pakistan.
Who it applies to: It is only applicable to unregistered buyers.
Tax Rate: A 3% additional tax is charged to unregistered buyers.
Exemptions: The further tax does not apply to zero-rated or exempted goods.
Extra tax is a special tax applied to specific goods, including electricity and natural gas. This tax applies under the Sales Tax Special Procedure Rules 2007 and is particularly relevant for industrial and commercial connections.
Every person supplying electric power or natural gas, shall charge and collect extra tax at the rate notified by the Federal Government, from every consumer having an industrial or commercial connection, where the bill for a month is in excess of rupees fifteen thousand, and the consumer’s name does not appear on the Active Taxpayer’ List.
The amount of extra tax shall be shown separately in the bill or invoice for electric power or natural gas issued by the supplier.
The supplier shall collect and pay the amount of extra tax in the manner given in section 6 of the Act.
Extra amount of sales tax at the rate of [2]% of value of supplies shall be levied and collected on the supplies of all specified [ ] goods by manufacturers and importers in addition to the tax payable under sub-sections (1) and (2) of section 3 of the Act.