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 Sales Tax in Pakistan?

• 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 cumulative electricity bill during the immediately preceding twelve consecutive months exceeds rupees twelve hundred thousand (1200,000);
  • 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 retailer, whose shop measures one thousand square feet (12000) in area or more [or two thousand square feet in area or more in the case of retailer of furniture];

• 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.
• A retailer who has acquired point of sale for accepting payment through debit or credit cards from banking companies or any other digital payment service provider authorized by state bank of Pakistan;
• A retailer whose deductible withholding tax under sections 236g or 236h of the income tax ordinance, 2001(xlix of 2001) during the immediately preceding twelve consecutive months has exceeded the threshold as may be specified by the board through notification in the official gazette;

A person engaged in supply of articles of jewelry, or parts thereof, of precious metal or of metal clad with precious metal excluding a person whose shop measures three hundred square feet in area or less;
Any other person or class of persons as prescribed by the board.

HOW TO APPLY FOR SALES TAX REGISTRATION IN PAKISTAN?

1. You need to register yourself with the Federal Board of Revenue (FBR) before filing your Sales Tax Return.
2. After registration with the FBR, they will provide you with a Sales Tax Registration Number which is also known as GST Registration Number or User ID and password. These credentials will allow you access to the efile portal, the online portal for filing a Sales Tax Return.
3. The Online Sales Tax Return can only be filed while logging into the efile portal.
4. 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.
5. Only those persons having active Iris Portal credentials can register themselves for Sales Tax.

Gladly, Befiler – a fintech platform, is here that files your sales tax on your behalf so that you don’t need to go through the hassles of it. You just need to simply download the Befiler app or visit Befiler Sales Tax page and rest their experts will take care.

Documents required for sales tax filing

An application through the computerized system along with the following document shall be submitted for registration of sales tax;

• Login Credentials ( ID & Password)
• Color copy of CNIC of Owner / Directors / Partners
• Business Letterhead
• Business activity and starting date
• Rent agreement/ownership docs of Office premises
• Latest Paid Electricity Bill of Office premises
• Bank Maintenance Certificate of Business Bank Account
• GPS tagged photos of Electricity Meter & Office premises (For GST registration only with FBR)
• GPS-tagged photographs of business premises and utility meter (in case of non-manufacturers)
• GPS-tagged photographs of machinery and industrial electricity or gas meters installed along with manufacturing premises (in case of manufacturer)

How to File Sales Tax Return In Pakistan

A Sales Tax return is the taxpayer’s document of declaration through which taxpayer not only furnishes the details of transactions during a tax period but also deposits his Sales Tax liability.

Monthly Return Payment

The payment of tax must be made by the 15th day of the following month in which taxable supplies is made. The taxable person must fill its tax payment details on the respective sales tax portals to generate a PSID (payment slip ID), which can then be used to pay the amounts due in any of the designated banks or through electronic payment methods.

Monthly Sales Tax Return Filing

The registered person under the standard procedure is required to file its Sales Tax Return by the 18th of every month following the period in which taxable supplies were made.

Annual Sales Tax Return Filing

Every private or public limited company that is registered for federal sales tax purposes is required to file an annual sales tax return. The return for a financial year must be filed by 30 September of the following financial year. The information included in the annual sales tax return is the supplies/services provided during the year, adjustments and summary of sales tax paid, refunded or adjusted in the monthly sales tax returns.

Sales Tax Payments

The payment of tax must be made by the 15th day of the following month in which taxable supplies is made. The taxable person must fill its tax payment details on the respective sales tax portals to generate a PSID (payment slip ID), which can then be used to pay the amounts due in any of the designated banks or through electronic payment methods.

What is a Sales Tax invoice?

 A taxable person must generally provide a sales tax invoice or cash memo for all taxable supplies made. Tier-1 retailers must integrate their retail outlets with the boards’ computerized systems for real-time reporting of sales. A sales tax invoice is generally necessary to support a claim for input tax credit

The Sales Tax invoice must contain the following information:

• A unique serial number
• Seller’s and buyer’s name and address
• Seller’s and buyer’s registration number
• Date of issue of invoice
• A description and quantity of the goods or services supplied to the customer
• Value exclusive of sales tax
• Amount of sales tax
• Value inclusive of sales tax.