Worldwide VAT, GST and Sales Tax Guide
Karachi GMT +5
EY
EY Ford Rhodes
Mail address:
Street address: Progressive Plaza Beaumont Road P.O. Box 15541 Karachi 75530 Karachi 75530 Pakistan Pakistan
Indirect tax contacts
Haider Ali Patel
+92 (21) 3565-0007 haider.a.patel@pk.ey.com
Muhammad Awais +92 (42) 3577-8402 (based in Lahore) muhammad.awais@pk.ey.com
Mansoor Saeed +9251-2344028 (based in Islamabad) mansoor.saeed@pk.ey.com
Saud Ul Hassan +92 (21) 3565-0007 (based in Karachi) saud.hassan@pk.ey.com
A. At a glance
Name of the tax
Sales tax (ST) (for services SST for Sindh, PST for Punjab, KST for Khyber Pakhtunkhwa and BST for Balochistan, ST and federal excise duty (FE) for Islamabad)
Local name Sales tax
Date introduced 1 November 1990
Trading bloc membership None
Administered by
Sales tax rates
Standard
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/)
18% for goods under the federal law. For services, 15% in Sindh, Islamabad, Khyber Pakhtunkhwa Balochistan, and 16% in Punjab.
Reduced Goods 1-16% and Services 1-15%
Other Zero-rated (0%), higher rates, fixed rates and exempt
Sales tax number format
Sales tax return periods
Thresholds
Registration
Manufacturers
National tax number format 1111111-1 with prefix S, P, K or B denoting Sindh, Punjab, Khyer Pakhtunkhwa and Balochistan
Monthly, quarterly and annual
PKR8 million
Retailers If retailer falls under the definition of Tier-1 Retailer
Importers
Exporters
Wholesalers, dealers and distributors
Recovery of sales tax by non-established businesses
B. Scope of the tax
None
None
None
No
Sales tax applies to the following transactions:
• Taxable supply of goods made in Pakistan during 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, provinces have the right 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 for Sindh Province
• Punjab Revenue Authority for Punjab Province
• Khyber Pakhtunkhwa Revenue Authority for Khyber Pakhtunkhwa
• Balochistan Revenue Authority for Balochistan
Islamabad Capital Territory, however, continues to empower the Federal Board of Revenue (FBR) to administer the tax on its behalf. In view of the separate provincial legislation in the four provinces, 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 services. However, 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
any input tax paid or payable on their purchases. However, a reduced rate of 15% 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” defined in the Income Tax Ordinance 2001 and “persons” registered as exporters
• Persons registered with the respective sales tax authority that consumes services from unregistered persons
• Persons registered for sales tax that are recipients of advertising services
• Registered persons manufacturing lead batteries
• Registered persons purchasing cane molasses
• Online marketplace
• Registered persons manufacturing cement
For further details 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 person 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.
Fixed establishment. In Pakistan, there is no legal definition of a fixed establishment for sales tax purposes. However, if a person owns, rents, shares or in any other manner occupies a space in Pakistan from where it carries on an economic activity whether wholly or partially; or carries on an economic activity through any other person such as an agent, associate, franchisee, branch, office or otherwise in Pakistan, or through virtual presence or a website or a web portal or through any other form of e-commerce, by whatever name called or treated, but does not include a liaison office, such place or presence would be treated as place of business in Pakistan and such person would be treated as resident.
In a case where such person is providing taxable services from a place of business in Pakistan, the person would be required to register for sales tax registration. Registration 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.
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 taxable under the provincial sales tax laws of certain provincial tax authorities. However, 1% 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 the active taxable person. This requirement became effective from 1 September 2021.
Registration procedures. The application for sales tax registration needs to be submitted online through the FBR web portal (http://www.fbr.gov.pk). The application requires data such as registered office address, email address, cell phone number, bank accounts, utility bills details, etc., 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 the Companies Act of 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 (e.g., 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 the case of nonmanufacturers)
• GPS-tagged photographs of machinery and industrial electricity or gas meters installed along with manufacturing premises (in the case of manufacturers)
The sales tax registration process with FBR has been simplified, and if all the documents have been furnished, the sales tax registration number is provided. After registration, the applicant or authorized person must visit a National Database and Registration Authority (NADRA) e-Sahulat Center immediately for biometric verification. In the case of manufacturers, the FBR may require post-verification through field offices, or a third party authorized by the FBR. Taxable persons who are already registered with the FBR and are applying for sales tax registration with provinces may opt for e-enrollment. Once 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 person obtains the sales tax registration number 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 of Inland Revenue having jurisdiction for cancellation of its registration on a prescribed form. The Commissioner of Inland Revenue, 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 of Inland Revenue 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. To update/change the registration profile, a registered person is required to file an online form on the respective portal of the federal tax authority or the relevant provincial tax authority. A registered person is required to indicate any change in particulars of registration within a period of 14 days to the federal tax authority and the Punjab Revenue Authority and within 15 days to the Sindh Revenue Board and the Balochistan Revenue Authority. There is no time limit mentioned for applying change and the particular applications prescribed for the Khyber Pakhtunkhwa Revenue Authority. Failure to update registration profile within the prescribed time limit may trigger penal implications.
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: 18%
• Reduced rates: 1%, 1.5%, 2%, 5%, 6%, 7%, 8%, 10%, 15%, 16%
• 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 18% 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 transaction value/trade price). Exported goods are zero-rated (i.e., 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 4% (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: 15%, 16%
• Reduced rates: 0%, 2%, 3%, 5%, 8%, 10%, 15%
• Other rates: 19.5% (telecommunication services)
Most services are taxed at 16% in Punjab, 15% in Islamabad, 15% in Sindh and 15% in Khyber Pakhtunkhwa and Balochistan. However, telecommunication services are taxed at 19.5% all over Pakistan.
Examples of zero-rated supplies of goods
• Exports
• Supplies to diplomats, diplomatic missions, privileged persons and privileged organizations
• Exercise books,
• Petroleum crude oil
• Local supplies of raw materials, components, commodities, parts and plant and machinery to registered exporters authorized under the Export Facilitation Scheme of 2021 notified by the board with such conditions, limitations and restrictions as specified therein
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 mechanism.
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 periods.
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 entrepreneur). 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 which states that a sales tax-registered person would make taxable supplies only to a person registered for sales tax 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 property
• 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 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 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 that are not registered for sales tax 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 board’s 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 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 mandatory in Pakistan, for certain taxable persons.
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 is mandatory in Pakistan for all taxable persons. The sales tax returns are filed on respective web portals of each tax authority. A registered person is required to upload all the sales invoices issued in a respective month on the tax authority portal by the 10th day of each month. After that, the registered taxable person selects the purchase invoices from the portal to claim input tax. If there is a liability of sales tax, the same is paid/deposited by generating challan from the web portal of the respective tax authority. After confirmation of payment, the return is submitted on the respective portal of the relevant tax authority.
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, 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 FBR 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 a 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 KIBOR +3% or 12%, whichever is higher 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 of Inland Revenue to conduct an audit of the taxable person’s records once in a year.
If an assessment order has been passed by the tax authorities and an appeal is filed before the Commissioner of Inland Revenue (Appeals), the taxable person has the option to protect 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 of 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 sales tax acts on services (this is made up of four provincial tax authorities and one for Islamabad, which also falls under the federal government’s domain). The Sindh province sales tax law states a penalty 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.
The late notification or failure to notify the tax authorities of changes to 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 Changes to sales tax registration details above.
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 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. However, note that they can be held liable and subject to imprisonment for other violations (see the subsection Penalties for fraud above).
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 effectively the preceding six financial years. Under the Provincial sales tax law of Sindh, the tax authorities can go back eight years.