GMT
EYEY Ford Rhodes
Mail address: Street address: Progressive Plaza Beaumont Road P.O. Box 15541 Karachi 75530 Karachi 75530 Pakistan Pakistan
Indirect tax contacts
Aamir Younas
+92 (42) 3577-8402 (resident in Lahore, Pakistan) aamir.younas@pk.ey.com
Haider Ali Patel +92 (21) 3565-0007 (resident in Karachi, Pakistan) haider.a.patel@pk.ey.com
A. At a glance
Name of the tax Sales tax
Local name Sales tax
Date introduced 1 November 1990
Trading bloc membership None
Administered by
Federal Board of Revenue (http://www.fbr.gov.pk)
Sindh Revenue Board (http://www.srb.gos.pk/)
Punjab Revenue Authority (https://pra.punjab.gov.pk)
Khyber Pakhtunkhwa Revenue Authority (https://kpra.kp.gov.pk/)
Balochistan Revenue Authority (http://bra.gob.pk/)
Sales tax rates
Standard
17% for goods and for telecommunication services under the federal law. For services, 16% for Islamabad and Punjab, 15% for KPK and Balochistan and 13% for Sindh
Reduced Goods 0-12% and Services 0-10%
Other
Sales tax number format
Sales tax return periods
Thresholds
Registration
Manufacturers
Zero-rated (0%), higher rates, fixed rates and exempt
Sales tax registration number format 11-11-1111-111-11 and national tax number format 1111111-1 with prefix S, P, K or B denoting Sindh, Punjab, Khyer Pakhtunkhwa and Balochistan
Monthly, quarterly and annual
Annual turnover exceeding PKR8 million
Retailers: None
Importers: None
Exporter: None
Wholesaler, dealer or distributor: None
Recovery of sales tax by non-established businesses No
B. Scope of the tax
Sales tax applies to the following transactions:
• Taxable supply of goods made in Pakistan in the course of a taxable activity carried on by a registered person
• Taxable import of goods into Pakistan
• Rendering of services specified by federal or provincial laws to be taxable
In Pakistan, the provinces have the rights to impose sales tax on services. All four provinces of Pakistan have set up their own revenue board/authority and enacted legislation regarding the administration, levy and collection of sales tax on services. The provincial tax authorities are as follows:
• Sindh Revenue Board
• Punjab Revenue Authority
• Khyber Pakhtunkhwa Revenue Authority
• Balochistan Revenue Authority
Islamabad Capital Territory, however, continues to empower the Federal Board of Revenue to administer the tax on its behalf. In view of the separate provincial legislation in the four prov inces, many service providers are required to file five separate sales tax returns and make five separate sales tax payments.
The following services are listed in the federal and provincial legislation as being taxable ser vices. However, please note that the following list is not exhaustive. Most of the following are similar in all jurisdictions:
• Telecommunication
• Advertisements
• Banking companies and nonbanking financial institutions
• Insurance companies
• Services provided or rendered by persons engaged in the contractual execution of work or furnishing supplies
• Construction services
• Shipping, customs and freight forwarding agents, stevedores and ship chandlers
• Services rendered by money exchangers
• Airport services
• Management services, including fund and asset management services
• Property developers
• Services provided by accountants and auditors and legal practitioners
• Technical, scientific and engineering consultants
• Rent a car and automobile rental services
• Surveyors
• Call centers
• Business support services
• Program producers and production houses
• Event management services
• Labor and manpower supply
• Public bonded warehouse
• Fumigation service
• Maintenance or cleaning service
• Janitorial service, etc.
• Hotels, restaurants, marriage halls, lawns, clubs and caterers
• Franchise services
• Services provided in the matter of manufacturing or processing for others on toll basis
• Services provided by architects or town planners
• Services provided by management consultants, etc.
• Taxicab aggregator services/ride hailing services
C. Who is liable
A taxable person is a business that is required to register for sales tax. Taxable persons include the following:
• Manufacturers
Who have an industrial gas or electricity connection Who are not located in a residential area
Whose taxable turnover in the preceding 12 months exceeded PKR8 million and has a total labor force exceeding 10 workers
• Retailers that are liable to pay sales tax excluding retailers that do not meet the requirement for registration and must pay sales tax through their electricity bills
• Importers
• Wholesalers dealers or distributors
• Exporters who intend to obtain a sales tax refund against their zero-rated supplies
• Businesses that provide taxable services.
Sales tax registration is required for every taxable person. Supplying taxable goods or rendering of taxable services without sales tax registration is tax fraud.
Importers must pay additional sales tax at a rate of 3% above the normal sales tax rate payable at the import stage. The 3% tax is considered as a minimum value addition tax and can be claimed as input tax and may be carried forward in the subsequent tax periods. However, it is not refundable, except if used for making of zero-rated supplies. The 3% tax does not apply to the following goods:
• Raw materials and intermediary goods imported by a manufacturer for in-house consumption.
• The petroleum products falling in Chapter 27 of Pakistan Customs Tariff as imported by a licensed Oil Marketing Company for sale in the country
• Registered service providers importing goods for their in-house business use for furtherance of their taxable activity and not intended for further supply
• Cellular mobile phones or satellite phones
• Liquefied natural gas (LNG)/re-gasified liquefied natural gas (RLNG)
• Secondhand and worn clothing or footwear (PCT Heading 6309.000)
• Gold in unworked condition
• Silver in unworked condition
• Goods as specified in the Third Schedule (i.e., goods subject to retail price mechanism)
• Plant, machinery and equipment falling in Chapters 84 and 85 of the First Schedule to the Customs Act, 1969 (IV of 1969), as are imported by a manufacturer for in-house installation or use
• Electric vehicles (four-wheelers), CKD kits for small cars/SUVs, with 50 kWh battery or below and LCVs with below 150 kWh battery (with effect till 30 June 2026)
• Electric vehicles (four-wheelers) small cars/SUVs, with 50 kWh battery or below and LCVs with below 150 kWh battery in CBU condition (with effect till 30 June, 2026)
• Electric vehicles (two- and three-wheelers and heavy commercial vehicles) in CBU condition (with effect till 30 June 2025)
• Motor cars of cylinder capacity up to 850cc
Tier-1 retailers. Retailers who meet any of the following conditions are required to register for sales tax as “Tier-1 Retailers,” and are also required to integrate their retail outlets with the tax department’s systems for real time reporting:
• Retailers operating as a unit of a national or international chain of stores
• Retailers operating in air-conditioned shopping malls, plaza or center excluding kiosks
• Retailers whose cumulative electricity bill in the preceding 12 consecutive months exceeds PKR1.2 million
• 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 1,000 sq. feet in area or more or 2,000 sq. feet in area or more in the case of retailer of furniture
•
A retailer who has acquired point-of-sale equipment for accepting payment through debit or credit cards from banking companies or any other digital payment service provider authorized by the 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 12 consecutive months has exceeded the threshold as may be specified by the board through notification in the official gazette. At the time of preparing this chapter, this is proposed to be added but subject to final legislation.
• Any other persons or class of persons as prescribed by the board
Tier-1 retailers are required to charge sales tax at standard rate, i.e., 17% on their taxable sup plies, and are required to file the monthly sales tax return. Such retailers are entitled to adjust any input tax paid or payable on their purchases. However, a reduced rate of 12% is available on supplies of finished articles of textile, textile made-ups, leather and artificial leather.
Retailers who do not meet the above conditions are not required to be registered for sales tax purposes; however, sales tax is charged/and collected through monthly electricity bills, issued by the electric companies for such retailers, at the rate of 5% of their total electricity bill, where the monthly bill does not exceed PKR20,000 and where the bill exceeds the limit, at the rate of 7.5%. Such retailers are not entitled to adjust any input tax, nor are they required to file the monthly sales tax return.
Sales tax withholding agents. Sales tax withholding rules apply to taxable goods and services supplied to the following persons, which are referred to as withholding agents:
• Federal and provincial government departments
• Autonomous bodies
• Public sector organizations
• “Companies” as defined under the Income Tax Ordinance 2001 and “Persons” registered as exporters
• Persons registered with the respective sales tax authority that consumes services from unregis tered persons
• Persons registered for sales tax that are recipients of advertising services
For further details please see the Sales tax withholding subsection below, under Section I Returns and payment.
Exemption from registration. Persons who are involved in the supply of exempt goods are not required to register for sales tax. However, a person involved in the supply of goods or services that are subject to sales tax at the 0% (zero) rate are required to register for sales tax.
Voluntary registration and small businesses. The federal sales tax law in Pakistan does not contain any provision for voluntary sales tax registration.
However, under the provincial sales tax laws in Pakistan, a person who is not required to be registered may apply for voluntary registration with the relevant provincial sales tax authorities and may obtain registration. In the case of voluntary registration, the voluntarily registered per son is obliged to fulfill all the applicable requirements that are applicable for all registered persons, such as filing a sales tax return, etc.
Group registration. Group sales tax registration is not allowed in Pakistan.
Non-established businesses. Non-established businesses (i.e., those who do not have a physical presence/place of business in Pakistan) are not required to register for sales tax. Generally, for services, the recipient pays the respective sales tax under the reverse-charge mechanism (see below) and for goods, sales tax is paid at import stage by the importer on record. However, if it is confirmed that such a person has a place of business in Pakistan (either physically or virtually) and is conducting taxable activity, they would be required to register for sales tax. The registra tion requirements would be the same as outlined below. For registration for an office address located in Pakistan, a national tax number and a local bank account in Pakistan are mandatory. However, at the time of preparing this chapter, no mechanism for registering non-established busi nesses involved in rendering services had yet been introduced by the tax authorities.
Tax representatives. Tax representatives must be authorized by a taxable person to represent them before the tax authorities.
Only the following persons are authorized to represent a taxable person:
• Tax practitioners registered under Income Tax rules, Sales Tax rules and Customs Act
• A person who has retired or resigned after putting in satisfactory service in the sales tax or customs or federal excise departments for a period of not less than 10 years in a post(s) not inferior to that of an assistant commissioner
• Advocates practicing under the Legal Practitioners and Bar Councils Act, 1973
• A person holding a bachelor’s or master’s degree in commerce
• An accountant
• A person working in the employment of the taxable person on a full-time basis and holding at least a bachelor’s degree
Reverse charge. A resident service recipient receiving taxable services from a nonresident, unregistered service provider is liable to pay the applicable sales tax via the reverse-charge mechanism with the respective provincial tax authority. Payment of sales tax under the reverse-charge mechanism is the liability of the resident service recipient. However, it can otherwise be agreed between service provider and service recipient. Adjustment of sales tax paid under the reversecharge mechanism is specifically barred under the provincial tax laws, except in Sindh, where subject to certain conditions, the adjustment of input tax paid under the reverse-charge mecha nism is allowed. In the Islamabad Capital Territory, payments to nonresident person in respect of franchise services only are subject to the reverse-charge mechanism.
Domestic reverse charge. The reverse-charge mechanism as mentioned above may also be appli cable on interprovincial transactions, i.e., where service provider is a nonresident/unregistered person in the jurisdiction where service recipient is located.
Digital economy. Under the provincial sales tax laws, where a taxable person is carrying on an economic activity through a virtual presence or a website or a web portal or through any other form of e-commerce, etc., in the respective provincial jurisdictions is treated as having a place of business in the respective provinces of Pakistan.
This means that nonresident providers of electronically supplied services for both business-tobusiness (B2B) and business-to-consumer (B2C) supplies are required to register and account for sales tax on supplies made in Pakistan, under the provincial sale tax laws.
There are no other specific e-commerce rules for imported goods in Pakistan.
Online marketplaces and platforms. Services provided through online marketplaces are cur rently taxable under the provincial sales tax laws of certain provincial tax authorities. However, 2% of the gross value of supplies is required to be withheld under the Sales Tax Act 1990, provided that the supplier is a person other than active taxable person. This requirement became effective from 1 September 2021.
Registration procedures. Application for sales tax registration needs to be submitted online through the FBR web portal (http://www.fbr.gov.pk). An online application is required to be filed providing data such as the registered office address, email address, cell phone number, bank accounts, utility bills details, etc., through the computerized system, along with supportive documents such as the following, as applicable:
• Computerized National Identity Card (CNIC) of all owners, members, partners and directors
• CNIC of the representative, if any
• Passports of nonresidents
• Registration or Incorporation Certificate, along with Form III or Form A as prescribed under Companies Act, 2017
• Partnership deed
• Bank account certificate issued by the bank in the name of the business
• Lease or rent agreement, along with CNIC of the owner of the premises
• Ownership documents of the premises, such as registered sale deed or registered transfer deed, latest utility bills (electricity, gas, landline telephone and post-paid mobile phones)
• List of machinery
• Maintenance of bank account certificate
• Distribution certificate from the principal showing distributorship or dealership
• Balance sheet/statement of affairs/equity of the business
• Particulars of all branches
• Particulars of all franchise holders
• GPS-tagged photographs of business premises and utility meter (in case of nonmanufacturers)
• GPS-tagged photographs of machinery and industrial electricity or gas meters installed along with manufacturing premises (in case of manufacturer)
The sales tax registration process with FBR has now been simplified, and if all the documents have been furnished, the sales tax registration is provided. After registration, the applicant or the authorized person must visit a National Database and Registration Authority (NADRA) center within a month for biometric verification. In the case of manufacturers, the board may require post-verification through field offices or a third party authorized by the board. Taxable persons who are already registered with the FBR and are applying for sales tax registration with provinces must opt for e-enrollment. Once the process of e-enrollment is completed automatically, the entire data of the taxable person that is present in the FBR database is transferred to the provincial tax authorities and the taxable persons obtains sales tax registration with the respective provincial tax authority.
However, taxable persons who are not registered with FBR and are applying for sales tax registration with the provincial tax authorities must fill out an online application on the web portal, and after submitting it, a designated user ID and password are issued to the taxable person via email.
Deregistration. A business that ceases operations or whose supplies become exempt from sales tax must apply for cancellation of its sales tax registration. The business should apply to the Commissioner Inland Revenue having jurisdiction for cancellation of its registration on a prescribed form. The Commissioner, consequent upon the filing of deregistration application, may conduct a detailed audit and scrutiny of the taxable person’s records and create tax demand if applicable. Upon satisfaction that there is no due tax liability unpaid by the taxable person, the Commissioner may issue an order of deregistration or cancellation of the registration of such business.
Changes to sales tax registration details. Every registered taxable person is required to update their particulars as stated in the registration profile.
D. Rates
The term “taxable supplies” refers to supplies of goods and services and to imports that are liable to a rate of sales tax, including the zero rate.
The sales tax rates for goods are:
• Standard rate: 17%
• Reduced rates: 1%, 1.5%, 2%, 5%, 6%, 7%, 8%, 10%, 12%
• Zero-rate: 0%
• Other rates: 16% FED on goods in sales tax mode
In certain cases, a fixed amount of sales tax is levied on a supply of goods, e.g., on import and local supply of mobile phones and bricks. The standard tax rate of 17% is imposed on the value of the supply of goods or at the import stage. However, in certain cases, the value of the supply of certain goods is based on the manufacturer/importer’s maximum retail price (not the transac tion value/trade price). Exported goods are zero-rated (that is, taxed at 0%). For businesses operating in certain export-oriented sectors, the reduced rate applies to goods they import and to local supplies of goods provided to them.
A further tax at the rate of 3% (with certain exceptions) is chargeable on the supply of goods to persons who have not obtained sales tax registration.
The sales tax rates for services are:
• Standard rates: 13%, 15%, 16%
• Reduced rates: 0%, 2%, 3%, 5%, 8%, 10%, 15%
• Other rates: 17% and 19.5%
Most services are taxed at 16% in Punjab and Islamabad, 13% in Sindh and 15% in Khyber Pakhtunkhwa and Balochistan. However, telecommunication services are taxed at 17% in Islamabad and 19.5% in the remaining provinces.
Due to COVID-19, the federal government temporarily exempted sales tax on import and further supply of oxygen gas, oxygen cylinders, cryogenic tanks and specified medical and testing equip ment, such as real-time PCR systems, biosafety cabinets and vortex machines. This exemption was in place until 31 December 2021.
Examples of zero-rated supplies of goods
• Exports
• Supplies to diplomats, diplomatic missions, privileged persons and privileged organizations
• Supplies of stores and provisions for consumption aboard a conveyance proceeding to a desti nation outside Pakistan
• Certain stationery goods such as erasers and exercise books, subject to certain conditions and limits
• Pharmaceuticals (at the time of preparing this chapter, this is proposed to be added to the list of zero-rated goods, but this measure is subject to final legislation)
• Petroleum crude oil (at the time of preparing this chapter, this is proposed to be added to zerorated goods, subject to final legislation)
Examples of goods taxed based on the manufacturer’s retail price
• Fruit juices and vegetable juices
• Ice cream
• Aerated water or beverages and drink syrups
• Cigarettes
• Toilet soap, detergents, shampoo, toothpaste and shaving cream
• Perfumery and cosmetics
• Powder drinks and milky drinks
• Tea
• Toilet paper and tissue paper
• Spices sold in retail packaging bearing brand names and trademarks
• Shoe polish and shoe cream
• Fertilizers
• Cement sold in retail packaging
• Mineral/bottled water
• Household electrical goods, including air conditioners, refrigerators, deep freezers, televisions, recorders and players, electric bulbs, tube lights, electric fans, electric irons, washing machines and telephone sets
• Household gas appliances, including cooking range, ovens, geysers and gas heaters
• Foam or spring mattresses and other foam products for household use
• Paints, distempers, enamels, pigments, colors, varnishes, gums, resins, dyes, glazes, thinners, blacks, cellulose lacquers and polishes sold in retail packing
• Lubricating oils, brake fluids, transmission fluid and other vehicular fluids sold in retail pack ing
• Storage batteries excluding those sold to automotive manufacturers or assemblers
• Tires and tubes, excluding those sold to automotive manufacturers or assemblers
• Motorcycles
• Auto rickshaws
• Biscuits in retail packing with brand name
• Tiles
• Auto parts in retail packing, excluding those sold to automotive manufacturers or assemblers
• Sugar, except where it is supplied as an industrial raw material to pharmaceutical, beverage and confectionery industries (at the time of preparing this chapter, this is proposed to be removed from the list of goods that are taxed based on the manufacturer’s retail price, but this measure is subject to final legislation)
Examples of goods taxable at the reduced rates (1%-16%)
• Plant and machinery not manufactured locally and having no comparable local substitutes
• Gold in unworked condition
• Re-importation of foreign-origin goods that were temporarily exported out of Pakistan
The term “exempt supplies” refers to supplies of goods that are not liable to sales tax and that do not qualify for input tax deduction.
Examples of exempt supplies of goods
• Agricultural products, including eggs, meat of bovine animals, sheep and goat, and fresh veg etables (except ware potato and onions)
• Pharmaceuticals (at the time of preparing this chapter, this is proposed to be removed from the list of exemptions, but the measure is subject to final legislation)
• Newspapers and books (at the time of preparing this chapter, this is proposed to be removed from the list of exemptions, but the measure is subject to final legislation)
• Educational and scientific materials (at the time of preparing this chapter, this is proposed to be removed from the list of exemptions, but the measure is subject to final legislation)
• Supplies (excluding electricity and natural gas) made to hospitals run by the federal or provincial government or charitable operating hospitals of 50 beds or more, or to teaching hospitals of statutory universities of 200 or more beds
• Various items of machinery and equipment for marble, granite and gemstone extraction, and processing industries
Option to tax for exempt supplies. The option to tax exempt supplies is not available in Pakistan.
E. Time of supply
The time when sales tax becomes due is called the “time of supply” or “tax point.” In general, the time of supply is when goods are delivered, or services are performed.
In the case of services in the provinces of Sindh, Punjab, Khyber Pakhtunkhwa and Balochistan, the time of supply is when the service is provided to the recipient, an invoice is raised, or consid eration is received, whichever is earlier.
Deposits and prepayments. There are no special time of supply rules in Pakistan for deposits and prepayments. As such, the general time of supply rules apply (as outlined above).
Continuous supplies of services. The Provincial Sales Tax on Services Act stipulates that where a service is provided over a period of time and payment for the service is made on a periodic basis, it shall be treated as comprising two or more separate and distinct services, each corresponding to the part of the service to which each separate part of the consideration relates.
Even though the Sales Tax on Goods Act is silent on continuous supplies of goods, the same procedure as stated above is also applied in practice. Accordingly, sales tax, invoices and payments should be made on a monthly basis for a continuous supply (e.g., electricity and telecom munications).
Goods sent on approval for sale or return. Goods delivered or made available to the recipient would be considered to be a taxable supply. In the case of a return of taxable goods, there is a procedure for issuing debit/credit notes by the seller and buyer so as to adjust the sales tax charged and reported on such goods in the sales tax return.
Reverse-charge services. Under the provincial sales tax law on services, the liability to pay the applicable tax on services under the reverse-charge mechanism falls on the person receiving the service. The applicable sales tax is required to be paid in the month when the services were received.
Leased assets. Taxable goods that are supplied on lease terms, without transfer of ownership and risks and rewards attached to the goods, are not considered as a supply for sales tax purposes, and as such no sales tax is due.
Imported goods. The time of supply for imported goods is the date of importation or the date on which the goods leave a duty suspension regime.
F. Recovery of sales tax by taxable persons
A taxable person may recover input tax, which is sales tax charged on taxable goods and taxable services supplied to it for business purposes. A taxable person generally recovers input tax by deducting it from output tax, which is sales tax charged on supplies made. For manufacturers and service providers (with certain exceptions), the registered person may not claim input tax greater than 95% of the output tax for that tax period. However, any excess may be carried forward.
Input tax includes sales tax paid on goods and services purchased in Pakistan and on goods imported into Pakistan, and federal excise duty levied and collected using the sales tax mecha nism.
The provincial sales tax laws provide certain restrictions on the adjustment of sales tax. Input tax must generally be claimed in the month in which the invoice is issued. However, for electricity and gas supplies, the input tax must be claimed in the month in which the invoice is paid. A separate refund claim should be made for input tax that is not claimed in the aforesaid tax peri ods.
The time limit for a taxable person to reclaim input tax in Pakistan is any of the six succeeding tax periods.
A valid tax invoice or customs documents must generally accompany a claim for input tax.
Nondeductible input tax. Input tax may not be recovered on purchases of goods and services that are not used for business purposes (for example, goods acquired for private use by an entrepre neur). In addition, input tax may not be recovered for some items of business expenditure.
Through the amendments to the federal sales tax law, a new provision has been added in Section 73 of the Sales Tax Act that states that a sales tax-registered person would make taxable supplies only to a person who has obtained registration under the Act. If the following assigned sales limits are exceeded, any sales made to the customers who have not obtained sales tax registration but are required to would be subject to disallowance of related input tax as attributable to such excess sales, i.e., exceeding the below threshold:
• Supplies to unregistered customers PKR100 million in a financial year
• Supplies to unregistered customers PKR10 million in a month
However, the above provision would not apply on supplies made to government bodies not engaged in making of taxable supplies, foreign missions, diplomats, privileged persons and any person not engaged in supply of taxable goods.
Moreover, input tax attributable to supplies made to non-registered persons, on a pro rata basis, for which sale tax invoices do not bear the national identity card number or national tax number of the recipient, as stipulated under the tax invoice requirement, would also be disallowed.
Examples of items for which input tax is nondeductible
• Purchases used for nonbusiness purposes
• Business gifts
• Business and staff entertainment
• Purchase of vehicles and parts of such vehicles
• Building and construction materials (excluding prefabricated materials), paints, electrical and sanitary fittings, pipes, wires and cables used in or permanently attached to immovable prop erty
• Electrical and gas appliances, furniture, furnishings, office equipment (excluding electronic cash registers) but excluding such goods acquired for sale or resale
• Goods or services on which sales tax has not been deposited by the respective supplier
• Services subject to a reduced rate of sales tax or fixed amount of tax
Examples of items for which input tax is deductible (if related to a taxable business use)
• Purchases of goods or services used or consumed for making taxable supplies
• Purchase of plant and machinery
• Insurance
• Advertisements
• Other goods and services consumed for business activities
Partial exemption. Goods or services utilized in supplying both taxable and exempt goods/services must be apportioned using a tax fraction formula (i.e., the value of taxable supplies over the value of total supplies), to the extent that only the input tax relating to taxable supplies can be claimed in any given tax period. This adjustment is provisional, and the taxable person is required to make a final adjustment at the end of each financial year based on taxable and exempt supplies made during the course of that year.
Approval from the tax authorities is not required to use the partial exemption standard method in Pakistan. Special methods are not allowed in Pakistan.
Capital goods. Under the federal sales tax law, input tax incurred on capital goods/fixed assets is claimable in the relevant tax period. However, under certain provincial sales tax laws, input tax
paid on capital goods is recoverable in 12 equal monthly installments. There are no special input tax recovery rules for capital goods.
Refunds. If the amount of input tax in a sales tax period exceeds the output tax in the same period, the excess credit is refundable. In practice, refunds are generally available to taxable persons that are engaged in making zero-rated supplies.
Pre-registration costs. Sales tax paid on stocks acquired prior to registration are claimable. Local purchase of taxable goods acquired during a period of 30 days before making an application for registration are treated as input tax. In the case of imports, the tax paid during a period of 90 days before making an application for registration shall be treated as input tax.
Bad debts. In the case of bad debts, the sales tax charged and deposited by the supplier can be adjusted through the issuance of debit/credit notes by stating that the supply has been canceled, if the note is issued within 180 days from the date of the relevant supply.
Noneconomic activities. Input tax incurred on purchases that are used for noneconomic activities is not recoverable in Pakistan.
G. Recovery of sales tax by non-established businesses
Input tax incurred by non-established businesses in Pakistan is not recoverable.
H. Invoicing
Sales tax invoices. 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.
Credit notes. A credit note may be used to reduce the sales tax charged and reclaimed on a supply of goods or services if a valid adjustment is made. The document must be clearly marked “credit note,” and it must detail the reason for the adjustment and must refer to the original sales tax invoice for the supply.
Electronic invoicing. Electronic invoicing is allowed in Pakistan, but is not mandatory. Special procedures for the issuance of electronic sales tax invoices between buyers and sellers are in place, whereby a registered person can opt to issue electronic invoices after approval from the relevant tax authority. However, in practice, electronic invoices are not generally issued.
Retailers are required to integrate their point of sale (POS) systems with the Federal Board of Revenues system for real-time reporting of retails sales.
Simplified sales tax invoices. Simplified sales tax invoicing is not allowed in Pakistan. As such, full sales tax invoices are required.
Self-billing. Self-billing is not allowed in Pakistan.
Proof of exports. Exports of goods are zero-rated for sales tax. However, to qualify as tax-free sales, export supplies must be supported by evidence that the goods have left Pakistan. The required evidence includes the following documents:
• A copy of the goods declaration for export authenticated by customs
• Copy of house and master bill of lading and airway bill or railway receipt
• The original invoices
• A stock or inventory statement
• Any other business records related to the exported goods
Foreign currency invoices. If a sales tax invoice is issued in a foreign currency, the amounts must be converted to the domestic currency, which is the Pakistani rupee (PKR). The conversion must be calculated in accordance with the open market exchange rate.
Supplies to nontaxable persons. Every registered person is required to issue a valid sales tax invoice, regardless of whether the recipient is a registered or unregistered entity or is the final consumer.
Records. A taxable person is required to maintain and keep records of goods purchased, import ed and supplied (including zero-rated and exempt supplies) at their business premises or regis tered office. These records include, but are not limited to, tax invoices for both purchases and sales, credit/debit notes, double entry sales tax accounts, bank statements and utility bills, etc.
Tax records can be held in and outside of Pakistan. Wherever they are held, the records must be available at any time by the request of the tax authorities.
Record retention period. The record retention period varies between each jurisdiction. However, a taxable person is required to retain the records for 5 to 10 years.
Electronic archiving. In addition to paper records, electronic archiving of the records is allowed in Pakistan.
I. Returns and payment
Periodic returns. All taxable persons other than specific retailers must file monthly returns. The return must be filed by the 18th day of the month following the end of the return period.
Periodic payments. Periodic payments against provision of services on a periodic basis are treated as separate and distinct payments. Accordingly, the payment of tax must be made by the 15th day of the following month in which the payment 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 elec tronic payment methods.
Sales tax withholding. Special rules have been prescribed with respect to sales tax withholding by the federal and provincial tax authorities. The federal withholding rules apply to the purchase of goods and services (acquired in the Islamabad Capital Territory). The provincial withholding rules apply to the taxable services acquired within the territorial jurisdiction of the respective province. These rules apply to taxable goods and services that are supplied to the following per sons, which are referred to as withholding agents:
• Federal and provincial government departments
• Autonomous bodies
• Public sector organizations
• “Companies” as defined under the Income Tax Ordinance, 2001 and “Persons” registered as export ers
• Persons registered with the respective sales tax authority that consumes services from unregis tered persons
• Persons registered for sales tax that are recipients of advertising services
The withholding agents listed in the first three bullets above withhold one-fifth (20%) of the sales tax with respect to acquired taxable goods or services as shown in the sales tax invoice and make payment of the balance to the registered person. Under federal law, the supplier/service provider needs to be an “active taxable person,” i.e., should have an active status on the FBR system. Otherwise, 5% of the gross value of supplies should be withheld by the withholding agent.
Sales tax registered persons who are recipients of advertising services from persons based in Pakistan or abroad must withhold sales tax and pay the balance to the service provider. The sales tax withheld is the amount indicated in the sales tax invoice issued by the service provider. If the sales tax amount is not indicated, the withheld amount must be calculated by applying the tax rate.
Withholding agents are required to withhold 20% of the sales tax amount mentioned on the invoice for taxable services acquired from the provinces of Sindh and Balochistan. The federal withholding provisions are not applicable when the registered supplier, being an active taxable person, has supplied goods or rendered services (except for advertisement services) to another registered customer.
The Punjab law requires withholding agents to withhold the entire amount of sales tax from the payments made for taxable services received from taxable persons whether registered or unreg istered. However, Punjab law further implies that no sales tax withholding is required in cases where taxable services in the province of Punjab have been acquired from corporate, PRAregistered persons who are active taxable persons. Nonetheless, under the provincial sales tax laws, where taxable services have been acquired from an unregistered person, then sales tax is required to be withheld at the applicable rate.
Under Khyber Pakhtunkhwa law, a withholding agent is required to withhold 50% of the sales tax as shown on the sales tax invoice issued by a service provider (KPRA registered or other wise). One hundred percent withholding is required on services of advertising, reduced rate services, services provided to federal or provincial government departments or public sector institutions and services provided by unregistered and non-active but KPRA-registered service providers. Generally, when a registered person fails to submit sales tax returns for a consecutive two tax periods, such a person would be considered as a non-active taxable person.
Electronic filing. Electronic filing of sales tax returns is mandatory in Pakistan for all taxable persons.
Payments on account. Payments on account are not required in Pakistan.
Special schemes. A special sales tax regime applies to Tier-1 retailers. For further details, please see the Tier-1 retailers subsection above, under Section C. Who is liable). No other special schemes are available in Pakistan.
Annual returns. 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.
Supplementary filings. No supplementary filings are required in Pakistan.
Correcting errors in previous returns. A taxable person may, subject to approval of the relevant tax authority, file a revised return within 120 days of filing of a return to correct any omission or wrong declaration made. The tax authority, after verifying the records, may allow the taxable person to file the revised sales tax return. In the provincial sales tax return, approval for filing a revised sales tax return is generally not required in the case where the payable amount is more than the amount already paid.
Digital tax administration. Real-time reporting. The federal government requires Tier-1 retailers to integrate their systems with that of the Federal Board of Revenue (i.e., the federal tax
authority) to monitor their sales on a real-time basis. All sales are to be reported through an accredited electronic fiscal device (EFD). However, such retailers are still required to maintain/ retain records as required by law.
J. Penalties
Penalties for late registration. A penalty of PKR10,000 or 5% of the tax due, whichever is greater, is assessed for failure to register for sales tax. Failure to register within 60 days after beginning a taxable activity may be punishable by a term of imprisonment of up to three years, if the person is convicted by a special judge; or by a fine of up to the amount of tax involved, or both.
A penalty of up to PKR1 million can be levied if a person fails to register under the Act and if registered fails to integrate its business for monitoring, tracking, reporting or recording of sales, production and similar business transaction with the board or its computerized system.
Penalties for late payment and filings. A penalty of PKR10,000, under both federal and provincial sales tax laws, is assessed for the late submission of a sales tax return. However, if the return is filed within 10 days after the due date, a penalty of only PKR200 or 300 per day applies.
A penalty is assessed for the late payment of sales tax for the greater of PKR10,000 or 5% of the tax due, but the penalty is restricted to PKR500 per day for each day of default if paid within 10 days after the due date. Failure to pay the tax within 60 days after a notice for payment is issued by a sales tax officer may be punished by imprisonment for up to three years if the person is convicted by a special judge; or by a fine of up to the amount of tax involved, or both.
In addition to any penalty, interest (the default surcharge) is chargeable for the following offenses:
• Late payment of sales tax
• Overclaimed input tax
• Incorrect claim for a sales tax refund
• Incorrect application of the zero rate
The rate of the default surcharge is currently fixed at 12% in the federal jurisdiction. It remains the same (i.e., the Karachi Interbank Offered Rate (KIBOR) plus 3% per annum) under the respective provincial sales tax laws. However, for tax fraud, the default surcharge is payable at a rate of 2% per month.
Under the federal sales tax law, the tax officer is authorized by the Commissioner to conduct an audit of the taxable person’s records once in a year.
In case an assessment order has been passed by the sales tax authorities and an appeal is filed before the Commissioner (Appeals), the taxable person has the option to protect its bank accounts from any coercive recovery proceedings by the tax officials (known as “obtaining automatic stay”) and does this by depositing 10% of the amount of tax due with the tax authorities. Where the automatic stay is granted to the taxable person, the tax officials cannot issue any recovery notice to the taxable person until the appeal is decided by the Commissioner Inland Revenue (Appeals). Similar options also exist under the Provincial Sales Tax Law of Sindh and Punjab, however, the amount to deposit at the time of filing an appeal is 25% instead of 10% of the tax due amount as assessed by the provincial tax officers.
Penalties for errors. The following defaults are subject to penalties:
• Failure to issue a sales tax invoice: PKR5,000 or 3% of the tax due, whichever is greater.
• Unauthorized issuance of a sales tax invoice: PKR10,000 or 5% of the tax due, whichever is the greater.
• Failure to notify changes related to the taxable person’s details or taxable activity: PKR5,000.
• Repeated erroneous calculation in the return of sales tax: PKR5,000 or 3% of the tax due, whichever is greater.
• Failure to maintain records: PKR100,000, PKR10,000 or 5% of the tax due, whichever is greater. This range of penalties is based on the differences in the province sales tax laws. Under the Pakistan sales tax law, the federal government has the jurisdiction of sales tax on goods, whereas the provinces have the jurisdiction of sales tax on services. There are five provincial sales tax acts on services. The Sindh province sales tax law states a penalty of which may extend to PKR100,000 or 5%, whichever is higher on a failure to maintain records, whereas the Punjab province sales tax law states for the same offense a penalty of PKR10,000 or 5%, whichever is higher.
Failure to notify or late notification of a change in a taxable person’s sales tax registration details may attract a penalty in the range of PKR5,000 under federal law and up to PKR100,000 under relevant provincial laws. For further details see the subsection above Changes to sales tax regis tration details.
Penalties for fraud. A penalty of PKR50,000 or PKR25,000 or 100% of the tax due, whichever is greater, is assessed for tax fraud, falsifying records, making false statements and declarations, denial or obstruction of access to records and similar offenses. In addition, a person may be punished by imprisonment for up to three years if convicted by a special judge or may be liable for a fine of up to the amount of tax involved, or both.
A penalty of PKR500,000 or 200% of the amount of tax involved (whichever is higher) can be levied on any person who is integrated with the board or its computerized system but conducts transactions so as to avoid monitoring or tracking, reporting or recording of such transactions.
Personal liability for company officers. Company officers cannot be held personally liable for errors and omissions in sales tax declarations and reporting in Pakistan.
Statute of limitations. The statute of limitations in Pakistan is five to eight years. The time limit is five years from the end of the financial year in which the relevant date falls. This is effec tively the preceding six financial years. Under the Provincial sales tax law of Sindh, the tax authorities can go back eight years.