Navigating the Sales Tax Act, 1990: A Detailed Overview

The Sales Tax Act, 1990 governs the imposition and collection of sales tax in Pakistan. It outlines the mechanisms for levying, collecting, and administering sales tax on goods and certain services. This guide provides an easy-to-understand breakdown of the key sections and provisions.

Chapter I: Preliminary

This chapter stablishes te short title, extent, and commencement of the Act while defining key terms like "goods," "services," "taxable supply," and "taxable person," laying the foundation for the interpretation of the subsequent provisions.

• Section 1: Short title, extent, and commencement This section provides the name of the Act and states that it extends across Pakistan. It also specifies the date from which the law comes into force. serves as the foundational basis for interpreting the rest of the Act. Any legal discussions surrounding the sales tax will refer back to this section for understanding the scope and purpose of the law.
• Section 2: Definitions A crucial part of the law, this section defines the key terms used throughout the Act, including terms like "taxable supply," "output tax," "input tax," and "person." Understanding these definitions is essential for applying the law correctly.

Chapter II: Scope and Payment of Tax

This chapter outlines the imposition of sales tax on taxable supplies, detailing the tax rates and identifying the liable parties, forming the core obligation for businesses to collect and remit sales tax..

• Section 3: Scope of tax This section establishes the general rule for levying sales tax on taxable goods in Pakistan at the standard rate (currently 18%). It also mentions special rates for specific goods and situations. Section 3 plays a vital role in the overall legal framework for taxation in Pakistan. It sets the tone for subsequent sections that deal with exemptions, refunds, assessments, and enforcement, ensuring that businesses understand their role within the sales tax ecosystem.
• Section 3A-3AAA: Omitted Sections These sections have been omitted and are no longer applicable.
• Section 3B: Collection of excess sales tax If any sales tax is collected in excess of the actual liability, it must be deposited with the tax authorities.
• Section 4: Zero rating This section discusses zero-rated supplies, primarily dealing with exports. Zero-rated supplies are taxed at 0%, and the taxpayer can still claim input tax credit on these supplies.
• Section 5: Change in the rate of tax Whenever there is a change in the tax rate, this section provides guidelines on how it should be applied to transactions.
• Section 6: Time and manner of payment This section explains when and how the tax is to be paid, detailing deadlines for submission.
• Section 7: Determination of tax liability Outlines how a person’s tax liability is calculated, including provisions for input tax adjustments.
• Section 7A: Levy and collection of tax on specified goods on value addition This section addresses specific goods where sales tax is imposed based on the value added during each stage of production.
• Section 8: Tax credit not allowed Lists circumstances where businesses are not allowed to claim input tax credit, such as when goods are used for personal purposes or exempt from tax.
• Section 8A: Joint and several liability of registered persons in supply chain If any party in the supply chain fails to pay the sales tax, all registered persons in the chain may be held liable.
• Section 8B: Adjustable input tax This section limits the amount of input tax that can be adjusted in a given tax period, especially for businesses with turnover below a certain threshold.
• Section 9: Debit and credit note Provides rules for issuing debit or credit notes in cases where the original invoice was incorrect, allowing for adjustments in tax liability.
• Section 10: Refund of input tax Describes conditions under which businesses can claim a refund of input tax, particularly in cases of zero-rated or exempt supplies.

Chapter III: Registration

This chapter mandates the registration of taxable persons and outlines the procedures for obtaining registration certificates, emphasizing the importance of compliance with tax regulations.

• Section 14: Registration Mandates that businesses exceeding a certain turnover must register for sales tax. Registered businesses are required to charge, collect, and remit sales tax.
• Section 14AB: Discontinuance of gas and electricity connections Explains that utilities may be disconnected if a business fails to comply with registration requirements.
• Section 21: De-registration, blacklisting, and suspension of registration Discusses the conditions under which a business may be de-registered, blacklisted, or have its registration suspended.
• Section 21A: Active taxpayers list This section talks about maintaining a list of active taxpayers, which is updated regularly to ensure compliance.

Chapter IV: Bookkeeping and Invoicing Requirements

This chapter emphasizes the need for maintaining accurate records and issuing tax invoices, which are essential for effective tax administration. It ensures transparency and accountability, enabling both taxpayers and tax authorities to track sales and tax liabilities accurately.

• Section 22: Records Requires businesses to maintain proper records of all transactions for at least six years, including invoices and receipts.
• Section 23: Tax invoices Specifies the format and content of tax invoices, which must include details like the buyer’s name, description of goods, and amount of tax.
• Section 24: Retention of record and documents for six years Records must be kept for six years to ensure compliance with tax audits and investigations.
• Section 25: Audit of sales tax affairs Grants the tax authorities the power to audit the sales tax records of businesses to ensure compliance.

Chapter V: Returns

This chapter outlines the requirements for filing sales tax returns, including timelines and special return provisions. It is vital for maintaining compliance and ensuring that tax authorities receive timely and accurate information for assessment and auditing purposes.

• Section 26: Return Requires registered persons to file monthly sales tax returns, providing details of their taxable transactions and tax liability.
• Section 27: Special returns Some taxpayers may be required to file special returns in addition to their monthly returns under specific circumstances.
• Section 28: Final return When a business is de-registered or ceases to operate, it must file a final return.

Chapter VI: Appointment of Officers of Sales Tax and Their Powers

This chapter discusses the appointment of tax authorities and their powers, delineating the structure of tax administration. It is important for ensuring that qualified personnel enforce tax laws effectively, thereby enhancing compliance and tax collections.

• Section 30: Appointment of authorities Provides for the appointment of officers to enforce the sales tax law and perform audits and investigations.
• Section 30A-30E: Special Directorates and Powers These sections discuss the creation of specialized directorates for tasks such as fraud investigation, audit, and valuation, with officers empowered to carry out these functions.

Chapter VII: Offences and Penalties

This chapter specifies the offences related to non-compliance and the penalties for such violations. Its significance lies in deterring tax evasion and promoting adherence to the tax laws by outlining the consequences of non-compliance.

• Section 33: Offences and penalties Lists the various offences under the Act, such as non-filing, underreporting, or tax evasion, and the corresponding penalties.
• Section 34: Default surcharge Businesses that fail to pay their tax on time must pay a default surcharge.

Chapter VIII: Appeals

This chapter provides a framework for appeals against decisions made by tax authorities, ensuring that taxpayers have a recourse for addressing grievances. Its importance is in promoting fairness and justice within the tax system, allowing for disputes to be resolved in an orderly manner.

• Section 45B: Appeals Provides the procedure for filing appeals against tax authorities' orders, first at the Commissioner Appeals level and then at the Appellate Tribunal.
• Section 47: Reference to the High Court Allows businesses to escalate disputes to the High Court in case they are dissatisfied with the decisions of the lower appellate bodies.

Chapter IX: Recovery of Arrears

This chapter details the processes for recovering unpaid sales tax, ensuring that tax authorities have the means to enforce compliance and collect due revenues. It is crucial for maintaining the integrity of the tax system and ensuring that public finances are safeguarded.

• Section 48: Recovery of arrears Provides methods for recovering unpaid taxes, such as attaching bank accounts or selling off assets of the defaulter.

Chapter X: Miscellaneous

This chapter contains various provisions related to the administration of the Act, including the power to make rules and procedures for various scenarios. Its importance lies in providing flexibility and adaptability to the Act, allowing it to evolve with changing circumstances and needs in the taxation landscape.

• Section 50: Power to make rules Grants the government the power to issue rules to implement the Act.
• Section 51: Tax Adjustment - This provision allows taxpayers to adjust their tax liabilities, ensuring that they only pay the correct amount of sales tax based on actual transactions, thus enhancing compliance and fairness.
• Section 52: Appearance by authorized representative Explains that taxpayers can appoint authorized representatives to handle tax matters on their behalf.
• Section 52A: e-Intermediaries to Be Appointed - This provision enhances efficiency by allowing electronic intermediaries to assist in tax processes, streamlining communication between taxpayers and authorities.
• Section 53: Estate of Deceased Person - This section ensures that the tax obligations of deceased individuals are properly addressed, maintaining integrity in the tax system.
• Section 54: Estate in Bankruptcy - This provision clarifies how sales tax liabilities are managed in bankruptcy situations, ensuring fair treatment of creditors.
• Section 55: Removal of Difficulties - This section grants authority to resolve unforeseen issues in tax administration, allowing for a flexible and responsive system.
• Section 56: Service of Order, Decisions, etc. - This provision ensures transparent communication of orders and decisions to taxpayers, promoting clarity in rights and obligations.
• Section 56A: Agreement for the Exchange of Information - This section enhances cooperation between tax authorities and other entities through information sharing, improving compliance.
• Section 56AB: Real-Time Access to Information and Databases - This provision enables tax authorities to monitor transactions effectively through real-time access, enhancing compliance enforcement.
• Section 56B: Disclosure of Information by a Public Servant - This section promotes transparency by allowing public servants to disclose relevant tax information, enhancing accountability.
• Section 56C: Prize Schemes to Promote Tax Culture - This provision encourages the establishment of prize schemes to foster a positive tax culture among the public.
• Section 57: Rectification of Mistake - This section allows taxpayers to correct genuine errors in tax documents, promoting fairness within the system.
• Section 58: Liability for Payment of Tax in the Case of Private Companies or Business Enterprises - This provision ensures that all business entities are held accountable for their tax liabilities.
• Section 58A: Representatives - This section clarifies the role and responsibilities of representatives in tax matters, ensuring accountability.
• Section 58B: Liability and Obligations of Representatives - This provision holds representatives accountable for their actions, enhancing integrity in tax administration.
• Section 59: Tax Paid on Stocks Acquired Before Registration - This section allows businesses to reclaim taxes on inventory purchased before registration, ensuring fairness.
• Section 60: Powers to Deliver Certain Goods Without Payment of Tax - This provision facilitates trade by allowing the delivery of specific goods without immediate tax payment.
• Section 61: Repayment of Tax in Certain Cases - This section promotes fairness by allowing taxpayers to reclaim taxes paid under specific circumstances.
• Section 61A: Repayment of Tax to Persons Registered in Azad Jammu and Kashmir - This provision ensures equitable treatment in tax refunds across regions.
• Section 62: Drawback Allowable on Re-Export - This section promotes international trade by allowing tax drawbacks on re-exported goods.
• Section 63: Drawback on Goods Taken into Use Between Importation and Re-exportation - This provision regulates drawbacks to prevent abuse while facilitating trade.
• Section 64: Power to Declare What Goods Are Identifiable and to Prohibit Drawback in Case of Specified Foreign Territory - This section maintains control over tax revenue by regulating which goods qualify for drawback.
• Section 65: Exemption of Tax Not Levied or Short Levied as a Result of General Practice - This provision ensures taxpayers are not penalized for common industry practices that may result in tax errors.
• Section 66: Refund to Be Claimed Within One Year - This section promotes timely compliance by setting a one-year limit for tax refund claims.
• Section 67: Delayed Refund - This provision protects taxpayer rights by addressing the issue of delayed tax refunds.
• Section 67A: Payment of Refund Through Sales Tax Refund Bonds - This section provides flexibility in how refunds are issued, improving taxpayer experience.
• Section 68: Liability of the Registered Person for the Acts of His Agent - This provision holds registered persons accountable for their agents' actions, promoting responsible practices.
• Section 69: Issuance of Duplicate of Sales Tax Documents - This section facilitates the re-issuance of lost or damaged tax documents, supporting compliance.
• Section 70: Computation of Limitation Period - This provision clarifies the computation of limitation periods for tax matters, providing certainty for compliance.
• Section 71: Special Procedure - This section allows for special procedures to address unique circumstances within the tax framework.
• Section 72: Officers of Sales Tax to Follow Board's Orders, etc. - This provision ensures uniformity in tax administration by mandating adherence to Board directives.
• Section 72A: Reference to the Authorities - This section outlines the structured process for referring tax matters to authorities.
• Section 72B: Selection of Audit by the Board - This provision ensures effective targeting of audits, enhancing compliance monitoring.
• Section 72C: Reward to Inland Revenue Officers and Officials - This section incentivizes tax officials for their performance, promoting efficiency in tax administration.
• Section 72D: Reward to Whistleblowers - This provision encourages reporting of tax evasion, enhancing transparency and accountability.
• Section 73: Certain Transactions Not Admissible - This section prevents abusive practices by specifying inadmissible transactions for tax purposes.
• Section 74: Condonation of Time-limit - This provision allows for relaxation of time limits in genuine cases of hardship, promoting fairness.
• Section 74A: Validation - This section ensures legal continuity for past actions that may be challenged, providing stability in tax administration.
• Section 75: Application of the Provisions of Act IV of 1969 to Sales Tax - This section maintains coherence by applying older provisions to the current Sales Tax Act.
• Section 76: Fee and Service Charges - This provision allows the imposition of fees related to tax administration, providing a revenue stream for operational costs.
• Section 77: Uniform - This section ensures uniform application of tax laws, promoting fairness and equal treatment of all taxpayers.

Schedules

The schedules provide additional details on tax rates, exemptions, and classifications of goods.

First Schedule

The First Schedule, omitted by Finance Supplementary (Amendment) Act, 1997, with effect from March 28, 1997, previously detailed categories of goods and services subject to sales tax. Its legal importance lay in clarifying taxable items, aiding businesses in determining their tax liabilities and compliance requirements.

Second Schedule

Like the First Schedule, the Second Schedule has been omitted by Finance Supplementary (Amendment) Act, 1997, with effect from March 28, 1997 but historically included exemptions and zero-rated supplies. Its legal significance was to specify goods and services that were not subject to sales tax, ensuring fair treatment and encouraging specific sectors.

Third Schedule

The Third Schedule delineates a list of goods and products that are subject to sales tax in Pakistan, along with their corresponding classification under the Customs Act of 1969. It includes a variety of consumer items such as fruit juices, ice cream, aerated beverages, and toiletries like toilet soap and shampoo, reflecting a broad range of everyday products that are impacted by sales tax. The schedule also encompasses household electrical goods, automotive parts, and retail-packaged items like biscuits and tiles. A distinctive feature of the Third Schedule of the Sales Tax Act, 1990, is its comprehensive categorization of consumer goods and services subject to sales tax, which not only encompasses a wide array of everyday products—ranging from food and beverages to personal care items—but also includes detailed classifications according to their respective headings in the Customs Act of 1969. This structured approach facilitates clarity and compliance for businesses and consumers alike, ensuring that specific products are easily identifiable within the regulatory framework. Additionally, the schedule is regularly updated to reflect changing economic conditions and market dynamics, allowing for responsive adjustments in taxation policy.

Fourth Schedule

The Fourth Schedule has also been omitted by Finance Act, 1998, but it historically outlined exemptions related to specific sectors or types of transactions.

Fifth Schedule

The Fifth Schedule of the Sales Tax Act, 1990, outlines various exemptions and zero-rated supplies applicable under Pakistani tax law. It specifically addresses transactions related to diplomats, privileged individuals, and organizations, ensuring that certain supplies to these entities are exempt from sales tax, in line with international agreements and diplomatic practices. Additionally, the schedule includes provisions for raw materials, components, and goods supplied for further manufacturing in Export Processing Zones (EPZs) and the Gwadar Free Zone, promoting industrial development and export activities. Other notable entries involve supplies made to exporters under specific rules, emphasizing the government's commitment to facilitating trade and investment in these areas.

Sixth Schedule

The Sixth Schedule of the Sales Tax Act, 1990, is crucial in determining the exemptions and zero-rated supplies within the framework of sales tax in Pakistan. This schedule identifies specific goods and services that are exempt from sales tax or subject to a zero percent tax rate, thereby promoting various sectors of the economy, such as agriculture, exports, and essential commodities.

The schedule is divided into multiple tables, each detailing different categories of goods and their respective treatment under the sales tax law. For instance:

• Table I outlines goods that are exempt from sales tax, such as certain agricultural products, basic food items, and raw materials used in manufacturing.
• Table II lists items that are zero-rated, particularly those related to exports, allowing exporters to claim refunds on input taxes paid, thereby enhancing their competitiveness in international markets..

Seventh Schedule

The seventh schedule omitted by the Finance Act, 1997, previously provided additional exemptions or special provisions applicable to particular goods or services, further refining the tax landscape and ensuring targeted relief.

Eighth Schedule

Introduced by the Finance Act of 2014, outlines specific goods subject to sales tax, detailing their respective rates and conditions. This schedule serves as a regulatory framework, specifying items categorized under various headings from the First Schedule to the Customs Act, 1969. While several entries have been omitted in subsequent amendments, the schedule retains relevance by including items such as second-hand and worn clothing or footwear, which are taxed at a reduced rate of 5%.

Ninth Schedule

Enacted through the Finance Act of 2015 and revised in 2020, delineates the sales tax obligations specifically concerning cellular mobile phones and Subscriber Identification Module (SIM) cards. According to Table-I, a sales tax of Rs. 250 was initially imposed on SIM cards; however, this provision ceased to apply from July 1, 2020. Table-II outlines the tax rates for cellular mobile phones, categorizing them based on their import value: an 18% ad valorem tax for phones valued under $500 and a 25% ad valorem tax for those exceeding this threshold. The responsibility for tax payment varies: Cellular Mobile Operators (CMOs) are liable for SIM card taxes, while importers and local manufacturers bear the tax liabilities for cellular phones, ensuring a structured and efficient tax collection process at various stages of the supply chain. The schedule aims to regulate the mobile phone market while facilitating compliance and revenue generation for the government.

Tenth Schedule

As referenced in sub-section (1B) of section 3, establishes fixed tax rates for bricks and cement or concrete blocks, categorizing them based on the region and product type. For bricks classified under PCT heading 6901.0000, the tax varies by district, with rates set at Rs. 12,500 for Lahore, Rawalpindi, and Islamabad, Rs. 10,000 for several districts in Punjab, and Rs. 7,500 for other regions, including parts of Sindh, Khyber Pakhtunkhwa, and Baluchistan. Additionally, the schedule outlines specific tax rates for various cement products, such as Rs. 2 per square foot for pavers and Rs. 3 to Rs. 10 per piece for hollow and solid blocks, depending on size. Notably, the schedule prohibits input tax adjustments against taxes paid under its provisions, emphasizing a simplified taxation mechanism aimed at promoting compliance while ensuring a stable revenue stream for the government..

Eleventh Schedule

As referenced in sub-section (7) of section 3, outlines the rates for withholding tax applicable to various categories of suppliers and withholding agents. It specifies the extent of deduction required from the sales tax as shown on invoices, establishing different rates based on the type of withholding agent and the supplier's status as an Active Taxpayer or not. For instance, federal and provincial government departments, along with public sector organizations, are required to withhold 1/5th or 1/10th of the sales tax depending on whether the supplier is classified as an Active Taxpayer. The schedule also includes provisions for other categories, such as companies and registered persons, emphasizing the need for compliance with tax obligations.

Twelfth Schedule

As referenced in sub-section (2) of section 7A, establishes a framework for the imposition of a value addition tax on imported goods. Specifically, this Schedule specifies that all imported goods, with certain exclusions outlined in the accompanying conditions and procedures, are subject to a 3% ad valorem sales tax. This tax is levied at the import stage and is collected from importers on all taxable goods that fall under section 3 of the Act. However, it excludes raw materials and intermediary goods imported by manufacturers for in-house consumption, except for specific types of scrap (compressor scrap, motor scrap, and copper cable cutting scrap).

Thirteenth Schedule

It specifically addresses the minimum production requirements for steel products. This provision is established under sub-section (9AA) of section 3, which provides criteria for determining the minimum production levels necessary for steel products to qualify for specific tax treatments or exemptions.

Conclusion

The Sales Tax Act, 1990 serves as the foundation for Pakistan’s sales tax regime. Understanding its structure and provisions is essential for compliance, whether you're a business owner, tax professional, or student of tax law. By breaking down the key sections, we hope this guide provides an easier path to understanding how sales tax works in Pakistan.