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Sales Tax: Its Fundamental Concepts, Those Who Are Required to Register for Sales Tax, and Basics of Sales Tax Registration.
Sales Tax in Pakistan was regulated even before the formal establishment of Pakistan; for decades, the Sales Tax was based upon a very general concept, but in the late ’90s, some amendments had been made. Sales Tax then changed into Value Added Tax (VAT).
The VAT system had been very successful in the UK; then, attempts had been made to implement and execute it in Pakistan. So, while observing the VAT System according to Pakistani culture and surrounding environment, the VAT System then modeled accordingly with the scenarios. And many changes have been made to the Act; the dilemma is that now the original Act looks very different comparatively.
Sales Tax is a tax imposed by the Federal Board of Revenue FBR on the sales, supply, and import of goods into Pakistan.
The sales tax on services is imposed by all four provinces, Islamabad Capital Territory, Gilgit-Baltistan, Azad Jammu, and Kashmir, at rates ranging from 13% to 16%.
Let’s talk about the Basic Concepts of Sales Tax; which is also known as Value Added Tax:
- The item you purchase or import and then the tax you paid on it is called Input Tax. The tax which is paid on availing the service is also called Input Tax.
- If you have any business in which you sell your product to your customers, then the tax you charge on the goods sold out to customers is called Output Tax.
- Every month you have to file the sales tax return. As a business entity, you are dealing with a service-oriented business, so you have to file your returns with your respective provincial tax regulatory body.
- There is a possibility, suppose you make high purchases in any month, but you have low sales. Hence, in this case, you have high input tax and low output tax; following this, we call it Excess Input Tax.
- In many cases of Sales Tax, Statutory Regulatory Order (SRO) occurs eventually on the ground of making any considerable change in the tax law, so in this scenario, if a seller charged extra sales tax on the goods and also the end consumer paid additional tax charges, then the seller should return the consumer the extra tax charges and also pay the due tax charges to the FBR. This condition is called Excess Tax Collection.
- We are probably purchasing raw material and then utilizing it to manufacture two different products. Either a product may be exempted from tax, or the other is taxable. Suppose we purchase a paper and produce a book and a calendar. So the thing is that; the calendar is exempted from tax.
As you may have learned about the basic concepts of Sales Tax, let’s take a step ahead towards the scenarios related to the sales tax culture in Pakistan.
In the VAT System, where every person in the supply chain is supposed to be a registered person, but that is very difficult in Pakistan due to specific problems:
e.g., a chips manufacturer may be a company for which registration, record keeping, input and output adjustment, etc., are not a big issue. However, a chips manufacturer may be an individual running a small bakery who cannot be expected to comply with 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 a 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 limit, e.g., books, pharmaceutical products.
Who is required to register for the Sales Tax?
- All the importers, wholesalers (including dealers), and distributors.
- Manufacturers are not falling in the cottage industry. Cottage industry means a manufacturer whose annual turnover from taxable supplies made in any tax period during the last twelve months ending any tax period does not exceed Rs.10million or whose annual utility (electricity, gas, and telephone) bills during the previous twelve months ending any tax period do not exceed Rs. 800,000.
- Retailers (Tier-1 retailers) means:
- A retailer operates a unit of a national or an international chain of stores.
- A retailer operates in an air-conditioned shopping mall, plaza, or shopping center.
- A retailer whose collective electricity bill during the past twelve months exceeds Rs. 600,000.
- A wholesaler-cum-retailer, engaged in bulk import and supply of consumer goods on wholesale basis to the retailers as well as on retail basis to the general body of the consumers.
- A person who is required to be registered for the purpose of any duty or tax collected or paid under any Provincial or Federal Law as if it was an imposition of sales tax, e.g., service providers like hotels, clubs, caterers, customs agents, ship chandlers, courier services, etc.
- Those persons who are making zero-rated supplies, including commercial exporters who intend to obtain sales tax refunds against their zero-rated supplies.
- A person, who is required to be registered based on upcoming criteria, but still avoids registration, can be essentially registered by the department after a proper inquiry under sub-rule 1 of Rule 6 of Sales Tax Rules, 2006.
Essential Points in Registering for Sales Tax:
- You need to register yourself with the Federal Board of Revenue (FBR) before filing your Sales Tax Return.
- After registration with the FBR, they will provide you with a Sales Tax Registration Number (STRN) or User ID and password. These credentials will allow your access to the efile portal, the online portal for filing Sales Tax Return.
- The Online Sales Tax Return can only be filed while logging into the efile portal.
- The Automated System for Sales Tax Registration has been effective since July 1st, 2019, allowing for registration of the person for Sales Tax through the Iris Portal.
- Only those persons having active Iris Portal credentials can Register themselves for Sales Tax.