advance taxation refresher course

7/22/2019 Advance Taxation Refresher Course

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By

Mirza Munawar ussainLLB, FPA, FCIS, FCMA

President - PIPFA

Member National Council - ICMAP


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Success in Examinations

1. Planning Course Material

Select the book which adequately covers the topic you are studying. Youmay also select different books for different topics

The key to selecting the right text book is consulting your teachers /

senior students. You may also refer the list of recommended readingavailable on the website The All Essential Plan

Panic makes you think less clearly, so avoid it by starting work early. Lecturers/tutors assume that you will decide for yourself what and when

to revise and may give little direction.

A Good Plan Helps You: Identify if you are spending too much time on a topic Know what you have already done. Know what still needs to be done Prioritize things for effective studying.


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1. Planning Factors be Considered When Planning

Study Sessions should be from one to three hours

Have a definite break every hour

Avoid late hours Revision for other papers at the same time

Family commitments, relationships, friendships

Contingencies such as illness

How much sleep you need

Plan recreation and relaxation into your time table Monitoring Your Plan

Check your plan regularly to see how well you are doing. You mayneed to amend your plan, e.g. if something unexpected happens or ifsome revision takes longer than expected.


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3. Attempting the Paper QuestionsHow to Answer Them Possibilities for organizing your information in an exam include: First plan your answer as to how you want to go ahead with your answer Give a clear opening paragraph, present information in a clear order, a final paragraph

drawing conclusions/summarizing. The opening paragraph should be linked with final

conclusions through one of the following ways: - step by step points where there is a sequence or stage - a main initial point to make an impact which you then develop - Putting different sides of an argument - Grouping theories/concepts through a theme Present your work well. Headings and a good layout make your work easier to read Tables and graphs need to be clear with correct labeling Use practical examples to illustrate the points made subject to the availability of time and

requirements of the question. It may not be practical to give examples where only briefanswers are required

As far as possible give answers in pointers showing the main heading and then describingit in appropriatedetails as per the requirements of the question. Just by giving pointersyou can at least secure some marks and convey your knowledge to the examiner.


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3. Attempting the Paper Scenario Type Questions How to Answer Them It has been noted that most students only give the conclusions in such

type of questions The most important aspect of giving such questions is to test if you

have understood the concepts Therefore the key to such questions is the reasoning and not the

conclusion The examiner is interested in the thought process that went into the

conclusion. You can conclude correctly without any reasoning, by sheer guessing

you have a fifty percent chance of getting it right. The examiner knowsthis and therefore no marks are allowed for guessing the conclusion you must support it.

If you have proper reasoning that forms the basis for your conclusionsyou can at least get pass marks even if your conclusion does not matchwith that of the examiner.


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3. Attempting the Paper Most Commonly Made Mistakes

Not resting adequately before the paper General instructions given on the answer scripts and sent with the

admit card are often ignored Questions are not read carefully Not planning before attempting the question Getting stuck over a single question Not clearly stating the assumptions used Not being quick enough

Presentation and workings not clearly shown Students do not complete the paper more due to selective studies

and not because of the length of the paper Students tend to repeat points Irrelevant points are given


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3. Attempting the Paper Coping with Nerves Stress can be good - it can make you mentally alert. You will do better if you see

stress as positive and the exams as a chance to show what you can do, not as away of tripping you up.

Work out what to do if you panic. Take deep breaths Do good revision/preparation. Find out in advance as much as possible about the examination centre or the

exam room. Identify what to do in the first 5 minutes of the exam in what order and stick to

it. Make yourself comfortable for the exam (e.g., warm/cool clothes,

handkerchiefs, etc) Calm yourself beforehand (e.g., visualize a pleasant scene, distract yourself) Avoid being overtired (is it worth staying up late to cram in extras?). Avoid last minute revision. Trying to remember facts then may block out 'deep

learning' (i.e. of concepts and principles).


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Examiners Comments It was noted that the students suffer from lack of

practice and presentation skills. Moreover, a largenumber of candidates fail to comprehend the exactrequirement of the question and do not know how toapproach the questions logically. (Summer-2006)

It was noted in majority of the scripts that studentslacked knowledge and practice on the subject.Furthermore, effective presentation which is essentialfor attempting an advanced stage paper was alsolacking in most of the scripts. (Winter-2006)


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Examiners Comments Overall performance of the candidates was poor. It was

observed that instead of explaining what the law hasprescribed, the students formulated their answers

according to their general understanding of the subject.For example, many students believed that since the liabilityof shareholders of a private limited company is limited,they shall not be required to contribute anything if thecompany is unable to pay its tax liability. Further, many

students tried to stretch the answer by providing irrelevantdetails and explanations. The students are once againadvised that marks are only awarded for the portion ofanswer which is relevant and it is a waste of time to displayknowledge of other irrelevant areas. (Summer-2007)


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Examiners Comments The overall performance in this paper was again very poor. It was seen that the

students tried to answer according to the general understanding of the subject,and not according to the specific requirements of the question and the law.(Winter-2007)

The performance in most cases was far below the level expected in a

professional examination. An analysis of this low performance reveals that itwas mainly attributed to lack of knowledge, inability to deal with practicalsituations and the tendency to rush to a conclusion and thereby failing to graspthe exact requirements of the question.

Further, it has also been noticed that the tendency to write the word assumedhas increased manifold without any reason as factually very few of thequestions required an answer based on any assumption. Some of the students

make such assumptions which change the meaning of the question altogether.Such assumptions make the question unduly complicated and result in poorperformance. The students are advised to make assumptions only when it isnecessary. They would also ensure that such assumptions do not contradict thesituation given in the question or its requirements.(Summer-2008)


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Income TaxIncome

Any bonus or bonus shares declared, issued or paidby a company with a view to increase its paid-up share

capital shall not be an income in the hands of theshareholder.

Deductible Allowance

WWF

WPPF Zakat paid under the Zakat and Ushr Ordinance, 1980.

Zakat privately paid shall not be treated as deductibleallowance.


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Income Tax Employment Employmentincludes:

A directorship or any other office involved in the

management of a company; A position which entitles its holder to a fixed or ascertainableremuneration; or

The holding or acting in any public office.

Gratuity & commutation of pension is exempt to anemployee to the extent provided in clause (13) of Part-I ofSecond Schedule, but this exemption shall not be availableto any payment received from a company by a director ofsuch company who is not a regular employee of suchcompany.


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Income Tax Kibor

KIBOR means Karachi Inter-Bank Offered Rateprevalent on the first day of each quarter of the financial

year.

Minor Child Minor Child means an individual who, at the end of a

tax year is under the age of eighteen (18) years. [2(33)] For the purpose of section 90 (i.e., transfer of property)

Minor Child shall not include a married daughter.[90(8)]


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Schemes of Taxation Normal Tax Regime (NTR)

Income and tax liability are computed under normalprocedure by allowing admissible deductions, deductibleallowance, adjustment of losses, tax credits and tax rebates,

etc Separate Taxation

Certain incomes and transactions are not included in totaland taxable income; rather, are kept separate and charged totax at special rates

Final Tax Regime (FTR) Certain transactions are presumed as income and tax

deducted/collected at source is treated as full and finaldischarge of tax liability in respect of income from suchtransactions.


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Permanent Establishment

of Non-Resident The PE shall be treated as a distinct and separate entity from the non-resident of which it is a PE. Its profit

shall be computed on the basis of this principle. Deduction on account of expenses (including executive and administrative expenses) shall be allowed as per

normal procedure. A PE shall not be allowed a deduction for any amount paid or payable by it to its head office or to another PE

on account of the following expenses: Royalties, fees or other similar payments for the use of any tangible or intangible asset. Compensation for any services (including management services). Profit on debt on money lent to the PE, except in connection with a banking business.

While determining the income, any amount which is received or receivable by a PE from its head office orfrom another PE on account of the following incomes shall not be taken into account: Royalties, fees or other similar payments for the use of any tangible or intangible asset. Compensation for any services (including management services). Profit on debt on money lent by the PE except in connection with a banking business.

Head office expensesshall be allowed as deduction equal to an amount which is computed as below: Total head office expenses of non-resident Turnover of PE

Total world wide turnover of non-resident Any excess amount allocated to PE shall not be allowed as deduction. A PE shall not be allowed a deduction on account of the following expenses paid or payable by the non-

resident; Any profit on debt to finance the operations of PE; or Any insurance premium in respect of the above stated debt.


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Thin Capitalization Thin capitalization is a situation wherein a company has a very lesser

amount of capital as compared to its debts. A foreign-controlledresident companyshall not be allowed a deduction for the profit ondebt paid by it on that part of the debt as exceeds the prescribed ratio.The provisions in this regard are as below: The company has a foreign debt to foreign equity ratio in excess of

three to one at any time during the tax year. Profit on debt shall be allowed as deduction if the debt-equity ratio

remains up to three to one. As and when it exceeds this ratio, anyamount paid as profit on that part of the debt as exceeds three to oneratio shall not be allowed.

The above provisions do not apply to: (i) A financial institution; (ii) A banking company; or (iii) A branch of a foreign company operating in Pakistan.


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Modarabas Income from Non-Trading Activities According to clause (100) of Part-I of the Second Schedule the income of a Modaraba from non-

trading activities shall be exempt from tax for any assessment year commencing on or after 01-07-1999. In order to avail this exemption, it shall have to fulfill the following conditions: Minimum 90% of the total profit (after transfer to mandatory reserve) is distributed among the

certificate holders; and

For the purpose of determining the distribution of 90% profits, the profits distributed through bonuscertificates or shares shall not be taken into account. Incomes from Trading Activities [Clause (18) of Part-II of Second Schedule] Currently, a Modaraba is taxable for such incomes, which are generated through trading activities. It

shall be taxable at the rate of twenty five percent (25%) of its total trading income excluding thefollowings: Dividend incomes; Incomes to which section 153 applies (i.e., supply of goods, rendering of services or execution of

contracts).

Incomes to which section 154 applies (i.e., exports). Non-application of Minimum Tax u/s 113 [Clause (11A)(xiii) of Part-IV of Second Schedule] The provisions of sections 113 regarding payment of minimum tax are not applicable to a Modaraba

registered under the Modaraba Companies and Modaraba (Flotation and Control) Ordinance, 1980.


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Banking Companies Capital Gain/Loss

capitalgains on sale of shares of listed companiesshall be taxed at therate of ten per cent

Where the shares of listed companies are disposed of within one year of

the date of acquisition, the gain shall be taxed at the normal rate Loss on sale of shares of listed companies, disposed of within one yearof the date of acquisition, shall be adjustable against business incomeof the tax year. Where such loss is not fully set off against businessincome during the tax year, it shall be carried forward to the followingtax year and set off against capital gain only. No loss shall be carriedforward for more than six years immediately succeeding the tax year for

which the loss was first computed. Dividend Income

The income under the head dividendshall be taxed at the rate of tenper cent

Income from Business Taxable @ 35%


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Salary Income Loan from Employer:

Interest-free: Interest at BMR shall be salary income

Interest-bearing: BMR less interest charged shall be salary

income Interest exceeding BMR: No benefit to employee

BMR for tax year 2011 is 13% per annum

Loan Used in Acquiring Asset Generating Taxable Income:

Interest-free or interest up to BMR: Interest at BMR shall beallowed as deduction against such income

Interest exceeding BMR: Actual interest charged to theemployee shall be allowed as deduction against such income


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Salary Income Medical Facility:

Medical allowance with no other medical facility -Exempt up to 10% of basic salary. Any excess amount

shall be taxable

Hospitalization or Reimbursement of Medical Expenses:

Provided as per terms of employment Exempt

Provided without entitlement as per terms of employment

Fully taxable

Medical allowance as well as Free medical facility:

Medical allowance shall be taxable and facility shall be treatedas per general rule


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Salary Income Employee Share Option Scheme:

Value of right/option in itself is not taxable

If option exercised FMV of shares less price paid shallbe salary income

If option is renounced disposal consideration less pricepaid for the option, if any, shall be salary income

FMV of the shares at the time of acquisition or when freeright to transfer those shares is granted shall be the costof acquisition of such shares. This shall be used forcomputing capital gain


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Income from Business Incomes may fall under following categories: Local Supplies made out of:

Own-Manufactured goods - NTR Locally purchased goods - FTR

Imported goods - FTR Goods manufactured for exports and its scrap (maximum up to 20% of

such production) May be treated as Export (circular 20/92)

Exportsmade out of: Own-Manufactured goods - FTR Locally purchased goods - FTR

Imported goods Shall be excluded from exports, as tax u/s 148 shall befinal tax in respect of such goods.

Duty Draw-Backs Shall not be considered as additional receipt. The exports already

included it and was subject to tax deduction u/s 154. (circular 14/93)


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Income from Business Deductions Not Admissible [21]

Any tax, cess or rate (including income tax) levied on the profits or gains of thebusiness.

Any amount of tax deducted at source from an amount received by the person. Any payment made to any person without deducting tax at source (under

section 149 to 158 & 232), if applicable. A person is required to deduct tax atsource in respect of the following payments: Salary; Rent; Brokerage or commission; Profit on debt; Payment to non-resident;

Payment for services; or Fee.

Any payment on which tax at source was deducted but has not been paid. Any payment made by an association of persons to its partners or members on

account of profit on debt, brokerage, commission, salary or any otherremuneration.


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Income from Business Any expenditure under a single account head exceeding Rs. 50,000 in aggregate

shall be inadmissible if the payment is not made through a crossed cheque or abank draft. However, this provision shall not be applicable to: Utility bills. Postage.

Single transactions not exceeding Rs. 10,000. Payments on account of freight charges. Any amount credited by direct transfer to an employees bank account for

reimbursement of expenses incurred on behalf of the taxpayer. Payments made to discharge any statutory obligation (such as duties, taxes,

octroi, export tax, fines, fee, cess, etc.). Note: Online transfer of payment from the business account of the payer

to the business account of the payee as well as payment through credit card shallbe treated as transactions through the banking channel, if such transactions are

verifiable from the bank statements of the respective payer and the payee. Any payment on account of salary exceeding Rs. 15,000 per month if not made

through a crossed cheque or transfer to the employees bank account.


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Income from Business Bad Debts:

Actual allowed; provision for doubtful debts, inadmissible

Losses:

Normal admissible Abnormal admissible (net-off any claim)

Non-payment of a liability: Income if not paid within three years. Expense if paid thereafter

ConsumersLoan by HBFC/NBFCs: Provision equal to 3% of income from such loan shall be

deduction on account of bad debts If actual bad debts are more, those shall be carried forwarded

to next year for adjustment of provision for that year


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Income from Business Assets:

Depreciable asset Normal depreciation (DBM) Eligible depreciable asset Initial allowance plus normal

depreciation (DBM) Intangible Amortization for lesser of useful life of the asset

of 10 years (SLM) Pre-commencement expenditure Amortized @ 20% of cost

(SLM)

Acquisition of an Asset: A person shall be treated as having acquired an asset at any of

the following times: When he begins to own an asset; When he is granted any right to own an asset; or When a personal asset is applied for business use.


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Income from Business Consideration of a Leased Asset

The residual value received by a leasing company on maturity of a leaseagreement shall be taken as consideration for disposal of such asset.

However, it should be noted that the residual value plus total amount receivedby the leasing company towards the cost of the asset (i.e. the principal part of

the lease rentals realized by to the leasing company) should not be less than theoriginal cost of the asset to the leasing company.

Consideration of Assets Sold in Bulk Where different assets are disposed off through a single transaction and the

consideration of each asset is not determined / specified separately, the totalconsideration received shall be apportioned amongst all assets so disposed off.

This apportionment shall be on the basis of fair market value of assets at thetime of the transaction. In other words the disposal consideration shall becomputed with the help of the following formula:

Total Consideration Received FMV of an asset FMV of all assets


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Income from Business Exceptions Regarding Cost & Disposal Consideration

Passenger transport vehicle not plying for hire: The cost of such vehicle shall be lesser of the actual cost of the vehicle or

Rs. 1,500,000. In other words the maximum cost for depreciationpurpose shall be Rs. 1,500,000 if the vehicle is purchased at a price higherthan this amount.

For gain or loss on disposal of a passenger transport vehicle not plyingfor hire the ConsiderationReceived on Disposalshall be computedaccording to the following formula

A B C

A = Amount received on disposal of vehicle B = Cost determined for depreciation purpose (i.e., lesser of actual cost

of the vehicle or Rs. 1,500,000) C = Actual cost of acquiring the vehicle.

Assets given on lease by leasing company, etc:


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Income from Business Disposal of immovable property:

Any consideration received on disposal of an immovableproperty shall be treated as cost of the property if theconsideration exceeds the original cost of the asset. Under

such a case the total amount allowed as deduction on accountof depreciation allowance (accumulated depreciation) onsuch asset shall become the gain on disposal of the asset.

Export of depreciable asset: The cost of the asset shall be treated as the consideration

received on disposal of an asset if: It is a depreciable asset;

It has been used in Pakistan by the person; and

It is exported or transferred by the person out of Pakistan


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Capital Gains Tax on Capital Gains [Clause (5B)]

Capital gain is included in taxable income and taxed underNTR

Where a capital asset is disposed of after one year of itsacquisition then the gain for income tax purposes shall betaken as 3/4th (i.e., 75%) of the actual gain on disposal.Remaining 1/4th (i.e., 25%) of the gain shall be treated asexempt.

Disposal within one year of acquisition total capital gain intaxable

Tax @ 10% of the capital gain shall be charged if the gain isfrom the sale of shares or assets by a private limited companyto Private Equity and Venture Capital Fund


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Capital Gains Capital Gain on Disposal of Securities [37A]

From 1st day of July, 2010 capital assets have been split intotwo categories for taxation purposes. A new category termedas securities has been introduced. Security means the

following capital assets: Share of a public company; Voucher of Pakistan Telecommunication Corporation; Modarba certificate; An instrument of redeemable capital: Participation Term Certificates (PTCs); Term Finance Certificates (TFCs); Musharika Certificates; and Any other security (other than shares) not based on interest; and Derivativeproducts (e.g., treasury bonds).


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Capital Gains Taxation of Gain of Securitiesfor Tax Year 2011

From 01-07-2010 any capital gain arising from disposal of securitiesheldfor a period of less than a year shall be treated as a separate block of incomeand charged to tax depending upon the holding period of security Less than 6 months 10% More than 6 months but less than 12 months 7.5% More than a year 0%

Loss on Disposal of Security Any loss sustained by a person on disposal of securities shall be treated

separately from any other loss sustained by him. This loss shall be dealt

with as below: Any loss sustained on disposal of a securityin a tax year shall be set-off

only against any gain of the person from any other securitydisposed offduring that tax year; and

Loss on disposal of a security shall not be carried forward to thesubsequent tax year.


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Tax Credits Foreign Tax Credit Salary income Any other income

Donations to Approved Institutions/Funds Specified under clause (61) of Part-I of Second Schedule Others Maximum limit of 20% or 30% not applicable in case of donations

to Agha Khan Hospital and Medical College

Investment in Shares

Lesser of cost, 10% of taxable income or Rs. 300,000 Contribution to Approved Pension Fund

Lesser of contribution, 20% of taxable income or Rs. 500,000

Mark-up on Loans for Houses Lesser of profit of debt, 50% of taxable income or Rs. 750,000


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Tax Credits Tax Credit For Investment In Plant And Machinery [65B]

A tax credit equal to 10% of the amount invested by a company in purchase ofplant and machinery shall be allowed against the tax payable by it. Otherprovisions in this regard are: The plant and machinery is purchased by the company for the purposes of Balancing,

Modernization and Replacement (BMR) of the plant and machinery already installed. The plant and machinery is for an industrial undertaking set up in Pakistan and is

owned by the company making the investment. The plant and machinery should be purchased between 01-07-2010 and

30-06-2015. Amount of tax credit shall be deducted from the tax payment in the tax year in which

plant or machinery is purchased and installed. Where there is no tax payable for the year in which plant or machinery is installed or

tax payable for that year is less than the amount of tax credit, the unadjusted tax creditshall be carried forward and deducted against tax payable for following tax years. The amount of unadjusted tax credit may be carried forward maximum up to two (2)

tax years. The Commissioner may re-compute the tax payable for the relevant tax years if

subsequently it is found by the CIR that any of the above-referred conditions was notfulfilled. Under this case it shall be deemed that tax credit was wrongly allowed.


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Tax Credits Tax Credit For Enlistment [65C]

A tax credit @ 5% of tax payable shall be allowed to acompany for the tax year in which it is enlisted in anyregistered stock exchange in Pakistan.

Priority Of Tax Credits [4(3)] Where a person is entitled to more than one tax credit, the tax

credit shall be allowed in the following order:

First of all foreign tax credit; then Tax credit for investment, donations, etc., allowable u/s 61-64; and

then

Tax already deposited by or on behalf of the taxpayer.


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Withholding Tax Imports u/s 148 Final discharge except under certain specified cases

Salary u/s 149 Adjustable against final tax liability

Dividend u/s 150 Final discharge except in case of a company receiving it

Profit on debt u/s 151 Final discharge except received on Government securities, where it

is adjustable

Non-Residents u/s 152 FTR if deducted against Royalty, Fee for technical services,

construction, services or advertisement contracts, insurance or re-insurance premium

NTR in case of all other payments to non-residents


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Withholding Tax Goods u/s 153

If on Supplies then under FTR

On own manufactured goods NTR

Services u/s 153

For companies NTR

For AOPs Minimum tax on such income

For Individuals Minimum tax on such income Contracts u/s 153

Covered under FTR


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Withholding Tax Exports u/s 154

FTR

Rent u/s 155

Adjustable

Prizes u/s 156

FTR


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Sales Tax Cottage Industry Cottage industry means a manufacturer who fulfills any of the

following conditions: Whose annual turnover from taxable supplies during last twelve (12)

months does not exceed Rs. 5,000,000; or Whose annual utility bills (i.e., electricity, gas and telephone)during last twelve (12) months do not exceed Rs. 700,000.

Goods Goods means every kind of movable property excluding the

following: Actionable claims; Money; Stocks; Shares; and Securities.


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Sales Tax Input Tax

In relation to a registered person, the inputtaxmeans: The tax levied under Sales Tax Act, 1990 on the supply of goods to the person; The tax levied under Sales Tax Act, 1990 on import of goods by the person; In relation to goods or service acquired by the person, excise duty levied under Federal

Excise Act, 2005 in sale tax mode on the manufacture or production of goods, orrendering or providing of services;

The Provincial Sales Tax levied on services rendered or provided to the person; and The tax levied under Sales Tax Act, 1990 of Pakistan as adapted in the State of Azad

Jammu and Kashmir on the supply of goods received by that person;

Output Tax In relation to a registered person output tax means the following taxes and

duties payable by that person: Tax levied under the Sales Tax Act, 1990 on supply of goods made by that person; Excise duty levied under the Federal Excise Act, 2005 in sales tax mode on manufacture

or production of goods or the rendering or providing of the services by the persons; and The Provincial Sales Tax levied on services rendered or provided by the person.


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Sales Tax Retail Price

It means a price fixed by the manufacturer, inclusive of all duties,charges and taxes (other than sales tax) at which any particular brandor variety of any article should be sold to the general consumer.

Where more than one such price is fixed for the same brand or variety,

the highest of such prices shall be taken as retail price. Supply

Supply means sale or other transfer of the right to dispose of goods asowner. It also includes the following: Sale or transfer under a hire purchase agreement; Putting to private, business or non-business use of the goods

acquired, produced or manufactured in the course of taxable activityfor purposes other than those of making a taxable supply;

Auction or disposal of goods to satisfy a debt owed by a person; and Possession of taxable goods held immediately before a person ceases

to be a registered person.


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Sales Tax Time Of Supply

Timeof supplyis defined separately for supply of goods andrendering of services.

Supply of Goods Timeof supply, in relation to a supply of goods (other than under

hire purchase agreement) means the time at which the goods aredelivered or made available to the recipient of the supply.

Supply under Hire Purchase Agreement Where goods are supplied under hire purchase agreement, time of

supply means the time at which agreement is entered into. Rendering of Services

Timeof supply,in relation to services, means the time at which theservices are rendered or provided.


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Sales Tax

Value in Case of Supply on Installment Basis

Where a taxable supply is made to a consumer from general

public on installment basis and the price includes a mark-upor surcharge, then the value of supply shall be the openmarket price (excluding the amount of tax on such supply).

Value of Supply for Imported Goods

Where the goods are imported the value determined undersection 25 of the Customs Act, 1969 will be the value of thesupply. The amount of customs duties and Federal excise dutylevied thereon will also be included in the value of the supply.


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Sales Tax Zero Rated Supply

It means a supply, which is charged to tax at the rate of zeropercent under section 4 of the Sales Tax Act, 1990.

According to section 4, the following goods shall be chargedto tax at the rate of zero percent: Goods exported out of Pakistan;

Goods specified in the Fifth Schedule;

Supply of stores and provisions for consumption aboard aconveyance proceeding to a destination outside Pakistan;

Such other goods as the Federal Government may notify; and Such other goods as may be specified by the Board through a general

order as are supplied to registered persons engaged in manufactureand supply of zero-rated goods.


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Sales Tax Sales Tax The Sales Tax is charged, levied and paid at the rate of

seventeen per cent (17%) of the value of taxable supplies madeby a registered person and of the value of goods imported intoPakistan. The sales tax, being an indirect tax, is ultimatelyshifted towards the ultimate consumers of the goods. Tax inrespect of imported goods is paid at the time of clearance ofgoods from the Customs authorities. Tax for the taxable goodssupplied in Pakistan is paid at the time of filing of return.

Under this case tax for a tax period is computed as under: Output tax XXX

Less: Input tax (adjustable against output tax) XXX

Tax payable / (Refundable) for the tax period XXX


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Sales Tax Conditions for Claiming Credit of Input Tax A registered person can deduct input tax from output tax only

if:

He holds a tax invoice in respect of taxable supplies made inPakistan,

He holds a goods declaration duly cleared by the Customs, in case ofimported goods, or

He holds a treasury challan showing payment of sales tax, in respect

of goods purchased in auction. The challan shall bear the name andregistration number of the person. [7(2)]

Note: All above referred documents (i.e., tax invoice, goodsdeclaration or treasury challan) should bear the name and Sale Taxregistration number of the person claiming the credit of input tax.


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Sales TaxApportionment of Input Tax Rules-24 and 25 of the Sales Tax Rules, 2006 deal with the

apportionment of input tax. The provisions of these Rules aresummarized below. These rules are applicable to such registered persons who maketaxable and exempt supplies simultaneously. Input tax paid on raw materials relating wholly to the taxable

supplies shall be admissible. Input tax paid on raw materials relating wholly to the exempt

supplies shall not be admissible.

Input tax incurred for making both exempt and taxable suppliesshall be apportioned and admissible amount shall be calculated asbelow: Residual Input Tax Value of Taxable Supplies Value of Taxable + Exempt Supplies


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Assessment of Tax Under the following circumstances an authorized officer of Inland

Revenue shall make an order for assessment of tax, includingimposition of penalty and default surcharge: Where a person who is required to file a return has failed to file it by the due date;

Where a person, due to some miscalculations, pays a lesser amount than actuallypayable; Where a person has not paid the tax due on supplies made by him; and Where a person has claimed a credit or refund of an input tax which was not

admissible under the Sales Tax Act, 1990.

The officer of Inland Revenue shall give a show-cause notice (withinfive (5) years) and provide an opportunity of being heard to a person

before making an order for assessment of tax, etc. Where a person filesthe return after due date and pays the amount of tax payable along withthe default surcharge and penalty, the show-cause notice and the orderof assessment shall abate.


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Sales Tax Sale Of Taxable Activity, Etc. Transfer to Non-Registered Person [49(1)]

If the taxable activity is terminated or transferred to a non-

registered person, the stock of taxable goods shall be deemedas supply and the tax on such goods shall be recovered fromthe registered person.

Where the tax could not be recovered from the transferor, itshall constitute a first charge on the assets of the business andshall be recovered from the transferee.

Transfer to Another Registered Person [49(2)] If the taxable activity is sold or transferred to another

registered person as an ongoing concern, the tax chargeableon stocks of goods shall be paid by the transferee.


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Sales Tax Tax Paid on Stocks Acquired Before Registration [59] Where a person has purchased from a registered person or has

imported certain goods before his registration under the Sales Tax Act,1990, the sales tax paid by him on such purchases or imports shall bedeemed as input tax if the following conditions are fulfilled: In Case of a Purchase From a Registered Person

The goods were purchased within thirty (30) days before the date of compulsoryregistration or the date of application for registration.

The person holds a proper tax invoiceissued by the seller. The goods are verifiable as unsold or un-consumed stocks on the date of

compulsory registration or the date of application for registration.

In Case of an Import of Goods The goods were imported within ninety (90) days before the date of compulsory

registration or the date of application for registration. The person holds a billof entryin respect of such import. The goods are verifiable as unsold or un-consumed stocks on the date of

compulsory registration or on the date of application


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Provincial Sales Tax Ordinances Scope of Tax The sales tax on services is payable @ 17% of the value of

taxable services rendered or provided in a province.

Applicability of Provisions of Sales Tax Act, 1990 The sales tax on services under the Provincial Sales Tax

Ordinances is levied and collected under the Sales Tax Act,1990. The provisions of the Act and Rules, etc., made underthe Act shall apply in respect of the following matters: Manner, time and mode of payment; Registration and de-registration; Keeping of records and audit; Enforcement and adjudication; Penalties and prosecution; and All other allied and ancillary matters.


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Federal Excise Duty Dutiable Goods [2(8b)] Dutiablegoodsmeans all excisable goods specified in the

First Schedule except those which are exempt u/s 16 of theFederal Excise Act, 2005.

Dutiable Supply [2(8c)] DutiableSupplymeans a supply of dutiable goods made

by a manufacturer. Supply of exempt goods shall not bedutiable supply.

Dutiable Services [2(8d)] Dutiableservicesmeans all excisable services specified in

the First Schedule except those which are exempt u/s 16 ofthe Federal Excise Act, 2005.


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FED Franchise [2(12A)] Franchisemeans an authority given by a franchiser under which the franchisee

is contractually or otherwise granted any right to produce, manufacture, sell ortrade in or do any other business activity in respect of goods or to provideservice or to undertake any process identified with franchiser against a fee orconsideration including royalty or technical fee, whether or not a trade mark,

service mark, trade name, logo, brand name or any such representation orsymbol, as the case may be, is involved.

Goods [2(13)] Goodsmeans the goods leviable to excise duty under the Federal Excise Act,

2005 or as specified in the First Schedule and includes the goods manufacturedor produced in non-tariff area and brought into the tariff area for use orconsumption.

Non-tariff area means Azad Jammu and Kashmir, Northern Areas and suchother territories or areas to which the Federal Excise Act, 2005 does not apply.[2(17)]

Tariff areameans the areas other than the non-tariff area. [2(24)]


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FED Manufacture [2(16)] General Meanings

It means and includes any process incidental or ancillary to thecompletion of a manufactured product and any process of re-manufacture, remaking, reconditioning or repair and the process of

packing or re-packing such product. Meanings in Relation to Tobacco

Manufacture includes the preparation of: Cigarettes, Cigars, Cheroots (cigars with both end open), Biris, Cigarette, pipe or hookah tobacco, Chewing tobacco, or Snuff (powdered tobacco taken into the nose by snuffing).


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FED Value For The Purposes Of Duty [12] The Federal excise duty is generally levied on the value of the goods or services.

Under such a case, the determination of the value of goods or services is veryimportant. Legal provisions in this regard are discussed below:

Value of Goods [12(1), (3), (4) & (5)] Where any goods are liable to duty under the Federal Excise Act at a rate dependent

on their value, duty shall be assessed and paid on the basis of value as determinedunder section 2(46) of Sales Tax Act, 1990, excluding the amount of duty payable onthese goods.

Where the excise duty is chargeable on the goods at the import stage, the value forexcise duty shall be the value as determined under section 25 of the Customs Act,1969 for customs duty or increased by the amount of customs duty payable in respectof such goods. [12 (3)]

Where the excise duty on any goods is chargeable on the basis of Retail Price,thevalue of such goods shall be the retail price fixed by the manufacturer at which aparticular brand or variety of such goods should be sold to the general body ofconsumers. This price shall include all duties, charges and taxes other than the salestax. Where more than one retail price is fixed for the same brand or variety, thehighest of such price shall be taken for charging the excise duty. [12(4)]


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