Sardar Khan & Co | Sales Tax Law Services - Pakistan

Sales Tax Refund

Recovery Procedures If a registered business pays more sales tax than necessary due to a clerical or calculation error, they have the right to file a claim to get that money back.

Sales Tax Law Returns

Guidelines and Submission Anyone registered under the Sales Tax Act, 1990, or the Federal Excise Act, 2005, is legally obligated to submit a Sales Tax Return.

Sales Tax Law Practice in Pakistan

Sales tax is a consumption tax paid to the government whenever goods or services are sold. As an indirect tax, it is usually collected at the moment of purchase. The amount is calculated as a specific percentage of the product’s price.

Because tax policies change depending on the government’s economic goals, these rates can shift. However, the system is generally designed for easy calculation and collection. Essentially, it is the extra cost you pay on top of the base price when buying something.

At Sardar Khan & Co, our legal team specializes in the complexities of the taxation landscape. Tax laws are like living organisms they constantly evolve and grow. Keeping up with these changes can be exhausting for business owners, which is why our consultants are here to guide you. Almost every business deal triggers a tax obligation that funds the national treasury. For the state, sales tax is a primary source of revenue. If your business imports goods, supplies products, or provides services, you likely have a tax liability. Our firm assists with everything from initial registration to resolving high-stakes disputes with the FBR. Whether it involves tax assessments, penalty disputes, recovering overpaid funds, or addressing violations of the Sales Tax Act, 1990, we protect your interests.

Understanding Sales Tax Law

A sales tax functions as a value-added tax on transactions. It only applies when a “taxable supply” occurs during a “taxable activity.” The tax is based on the value of the items provided. Because it is an indirect tax, the end consumer ultimately pays the bill. The registered business simply acts as a middleman, collecting the funds and handing them over to the state. The government uses the Inland Revenue department to manage these funds under the Sales Tax law 1990.

Sales tax is split into two main areas: goods and services. The Federal Government handles the tax on goods, which has been set at 17% since 2013, though some items have lower rates. Conversely, the Provincial Governments manage taxes on services. Each province has its own specific law:

• Islamabad: The Islamabad Capital Territory (Tax on Services) Ordinance, 2001.
• Sindh: The Sindh Sales Tax on Services Act, 2011.
• Punjab: The Punjab Sales Tax on Services Act, 2012.
• Khyber Pakhtunkhwa: The Khyber Pakhtunkhwa Finance Act, 2013.
• Balochistan: The Balochistan Sales Tax on Services Act, 2015.

Distinction between indirect and direct taxes

In the case of direct taxes, the person or company named on the bill pays the tax directly to the government. With indirect taxes, the legal responsibility to collect the tax lies with the seller or importer, but the financial cost is passed on to the final buyer. The law strictly defines these roles; attempting to shift the tax burden in a way that contradicts these statutes is illegal.

Liability to Pay the Tax

When goods are supplied within the country, the consumer is responsible for the tax. However, for imported items, the legal liability rests with the importer, as per Section 3 of the Sales Act 1990.

Sales Tax Registration

If you provide taxable goods or services as part of your business, you must register with the Commissioner of Inland Revenue. This requirement applies to:

• Manufacturers (excluding small “cottage” factories)
• Retailers meeting specific tax thresholds
• Importers and wholesalers
• Exporters seeking refunds on zero-rated items
• Distributors and dealers
• Anyone required by other federal or provincial laws to collect tax as if it were sales tax.

Sales Tax Deregistration

The tax authorities have the power to remove a person from the registry or “blacklist” them. This happens if a person no longer needs to be registered or if they are caught committing fraud, such as using fake invoices or operating a “shell” company. Once blacklisted, that entity can no longer claim tax refunds or credits.

Record keeping and maintaining of books

Registered businesses must keep detailed records using a double-entry accounting system at their main office. You can manage these books yourself or hire a professional agent. You must document every purchase and sale, including descriptions, quantities, and values. These records must be clear enough for a tax officer to easily calculate your total tax liability for any given period.

Sales Tax Returns

At the end of each tax window, you must submit an accurate return using the official FBR forms. This is done through designated banks or digital platforms. The return must detail your total purchases, sales made, tax owed, and tax already paid.

Sales Tax Law: Rates in Distinct Categories

Retail Price Items

Under the Third Schedule of the Sales Tax Act 1990, certain goods are taxed based on their retail price—the price the final consumer pays at a store. This is different from the wholesale prices used earlier in the supply chain. The standard rate is 17%. There are currently 49 items in this category. Examples include:

Zero-Rated Goods

These are technically taxable items, but the rate is currently set at 0%. This allows the government to track the trade of these goods without adding cost, while reserving the right to tax them in the future if revenue is needed. Key examples include:

• Supplies to diplomats and international organizations.
• Sales to duty-free shops.
• Raw materials for manufacturers located in Export Processing Zones.
• Local machinery sold to oil and gas exploration firms.
• Crude petroleum oil.

Amendments in Zero Rated Goods

Recent updates have added more categories to this list:

• Raw materials and components used by manufacturers in the Gwadar Free Zone.
• Locally made plant and machinery sold to Gwadar-based manufacturers (including control gears, electrical equipment, and specific parts).

Zero Rating for Gwadar Port and Gwadar Free Zone

New entries regarding Gwadar were added to the Fifth Schedule starting June 1, 2020. These incentives are designed to boost the port’s economy, provided businesses follow specific filing procedures.

Exempted Goods

Under the Sixth Schedule, some items are completely exempt from sales tax. This means they are outside the tax net entirely. Notable examples include:

• Edible eggs and hatching eggs.
• Sugar beet and sugarcane.
• Physical currency, stocks, and bonds.
• Relief goods and gifts for disaster victims (like Afghan or Palestine refugee funds).
• Medical equipment donated to government hospitals or non-profit schools.
• Unbranded flavored milk, butter, and desi ghee.
• Bicycles and wheelchairs.

Amendments in Gwadar Free Zone

As of June 1, 2020, machinery and materials imported specifically for use within the Gwadar Free Zone are exempt from sales tax. However, if these goods are moved out of the zone into other parts of Pakistan for reasons other than export, the importer must pay the full tax.

Extension of Period of Exemptions

The tax exemption for ships and floating vessels (like dredgers and tugs) operated by Pakistani companies was originally set to end in 2020. The law has now extended this exemption all the way to 2030 to support the local maritime industry.

New Exemptions [Table 1]

• Metabolic Disorder Foods: Specific dietetic products for children, provided the Ministry of Health approves the quota.
• Agriculture: Oil cake and solid residues.
• Electric Vehicles: CKD kits for local assembly of electric tractors, buses, rickshaws, and motorcycles.

New Exemptions [Table III]

Exemptions are now available for the plant and machinery needed to build electric vehicle assembly lines. This is a one-time benefit for new setups or expansions, provided the Engineering Development Board (EDB) certifies the equipment.

Substitutions of Exemptions

The rules for LED lighting have changed. The following parts are exempt if the importer is a registered LED manufacturer:

• Shell covers, housings, and base caps.
• Circuit boards (MCPCB) specifically for LEDs.
• Power supplies (1-300W) and specialized lenses.

Goods At Reduced Tax Rate [Sec. 3(2)(aa), 8th Schedule]

Certain essential goods are taxed at rates lower than 17%. There are 70 items in this category, including:

Amendments in Reduced Rates

• Potassium Chlorate: The rate shifted to 17% plus 80 rupees per kg (up from 70).
• Integrated Retailers: Shops that link their systems to the FBR for real-time reporting now enjoy a reduced rate of 12% (down from 14%).

New Items in Reduced Rates

To encourage green energy, locally made electric vehicles (tractors, buses, rickshaws, and trucks) are now taxed at just 1%.

Cellular Mobile Phones (CMOs) Taxed [Sec. 3(3B), 9th Schedule]

Mobile phones are taxed based on their state (unassembled CKD, partially assembled SKD, or ready-to-use CBU). Unassembled kits are cheaper to import because they require local labor, which saves on duties and transport costs.

SIM Cards: Taxed at a flat rate of Rs. 250.

Mobile Phone Rates :

• Value under $30: Rs. 130 (Standard) or Rs. 200 (Smart).
• $100 – $200: Rs. 1,680.
• Above $500: Rs. 9,270.

Fixed Rate Items [Sec. 3(1B), Tenth Schedule]

For industries like brick kilns, the tax is a fixed monthly amount based on location:

• Lahore/Islamabad: Rs. 12,500/month.
• Sargodha/Faisalabad: Rs. 10,000/month.
• Multan/Balochistan: Rs. 7,500/month. New fixed rates also apply to concrete blocks (ranging from Rs. 2 to Rs. 10 per piece).

Sales Tax Withholding Provisions [Sec. 3(7), Eleventh Schedule]

The buyer of goods is often required to withhold a portion of the tax and pay it directly to the government. The rules now distinguish between “Active Taxpayers” and others:

• Government/Public Orgs buying from Active Taxpayers: Withhold 1/5th of the tax.
• Buying from Non-Active Taxpayers: Withhold the entire tax amount.
• Advertisement services: Withhold the total tax.

Value Added Tax [Sec. 7A(2), Twelfth Schedule]

VAT usually applies to imports. However, the law has been relaxed: manufacturers importing raw materials for their own factory use are now exempt from this specific tax.

Sales Tax Law on Services

Each region in Pakistan has its own service tax structure :

• Islamabad: 16% standard; 17% for call centers. Construction is taxed by area (sq. yard/sq. foot).
• Sindh: 13% standard; 19.5% for telecom. Race clubs pay per entry.
• Punjab: 16% standard; 19.5% for telecom. Specific fixed rates apply to builders and freight agents.
• Balochistan: 19.5% for telecom; 15% for hotels, restaurants, and property deals.
• Khyber Pakhtunkhwa: A tiered system ranging from 2% (IT/Ride-hailing) to 15% (Hotels/Consultants).

Operating across multiple provinces? We specialize in inter-provincial tax coordination. Book a meeting with our tax partners to streamline your operations