Accounting Article

Sales Tax Laws - Technical and Other Lacunas

by Syed Imtiaz Abbas Hussain | Published on 5/14/2004


Sales Tax was a provincial subject at the time of partition. It was being administered in the provinces of Punjab and Sind as provincial levy. Sales Tax was declared a federal subject in 1948 through the enactment of General Sales Tax Act 1948. In 1952 this levy was transferred permanently to the Central Government and was being levied at the standard rate of 6 pies per rupee at every stage whenever a sale was effected.

In the late eighties the government of Pakistan decided to replace Sales Tax with the Value Added Tax (VAT) in the country as a part of its structural adjustment program. Accordingly new enactment titled SALES TAX ACT 1990 replaced Sales Tax Act 1951 with effect from 1 November 1990.

Until now, The Sales Tax Act 1990 comprised of 10 chapters covering 75 sections with 3 uneven numbered schedules namely The Third Schedule, The Fifth Schedule and The Sixth Schedule.

The above cited sales tax law has not yet answered the following questions properly:

  1. Can same Sales Tax Law be imposed by Federal and Provincial Government?

Taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed can be levied under Federal Legislature as mentioned in Part I of Fourth Schedule attached to the Constitution of Pakistan 1973.

Since Sales Tax has been transferred permanently to the Federal Government so what is the justification of levying sales tax at Provincial Government levels through Sales Tax Ordinance 2000 in parallel to sales tax levied at Federal Government level. Is it legally to do so? Further such way of collecting sales tax can not be strategically managed, monitored and controlled in its real sense.

  1. How can “Services” be covered under the umbrella of “Sales”?

According to International Accounting Standards (IASs) and Generally Acceptable Accounting Principles (GAAP), the transaction of absolute and permanent delivery of goods is referred to sale and the transaction of performance is referred to rendering of service. Both are different in nature and are not identical.

It is difficult to digest that services are covered under the umbrella of sales and is subject to levy of sales tax under the Provincial Sales Tax Ordinance 2000 and as covered under the definition of taxable activity under section 2 (35) of Sales tax Act 1990.

Further it will defeat the very basic objective and principle of VAT regime because the output sales tax levied on goods can be adjusted against input sales tax  paid on goods purchased to produce such taxable finished goods but how can be the output sales tax levied on rendering of service can be adjusted and against what.

  1. Why is Sales Tax Act 1990 camouflaged and in condensed form and not properly elaborated and clearly defined?

Unlike Income Tax Ordinance 2001 which has 240 well defined sections with a series of attached elaborated schedules and Companies Ordinance having 514 well defined sections with a series of attached elaborated schedules, Sales Tax Act 1990 is quite briefed, condensed, not properly elaborated in a way it should be and it is widely scattered. As a result, one will have to infer and assume and may be subject to errors and omissions as he/she will have to move around to search for relevant, active and valid rules, special procedures, General Orders  etc. otherwise he will be penalized and prosecuted.

Why Sales Tax Act 1990 is confined to 75 sections with the shrinkage three attached schedules and its clarification, explanation and further elaboration need to be done through so many scattered SROs protected under section 50, section 55 and section 71 of the Sales Tax Act 1990.

Just on account of lesser in quantity of sections, briefed, condensed in size and quantum we can not say that the Sales tax Act 1990 is simple and is not complicated. In fact it is not simplified and is very complicated as compared to other legislatures. Just like a lengthy question in an examination is apparently and psychologically seem to be difficult but it uses to be easy because every related things are clearly well defined whereas short and condensed question seems to be easy but it uses to be very difficult because many things need to be inferred, assumed and ultimately the answer uses to be doubtful.

  1. Why are there no proper Rules with Sales Tax Act 1990 in contrast with other similar Laws?

Unlike Income Tax Ordinance 2001, Companies Ordinance 1984, labour laws and other laws, Sales Tax Act 1990 is not properly supported with updated Sales Tax Rules contained in one place to make the law efficient, effective and timely.

Many sections including the following significant sections are subject to “ifs” and “buts” and so are not self explanatory and can not be easily, quickly and confidently act upon. As a result one need to be read these sections with relevant active and valid scattered SROs with different uneven numbers in the shape of Rules, notification, special procedures, General Orders,  circulars, rulings, instructions etc which are protected under section 50, section 55 and section 71 of the Sales tax Act 1990. These SROs sometimes supercedes each other and some SROs become redundant, inactive and invalid so one have to keep track for these changes also otherwise he will be lost and subjected to penalties and prosecutions and I swear and bet that even professional accountants and tax consultants are not moment-to-moment updated to that extent:

    1. Section 3 (1A) Subject to section 8(6) or “any notification issued thereunder”.
    2. Section  3 (2) (b) “The Federal Government (FG) may by notification in the official Gazette”
    3. Section  3 (3A) “The FG may by notification
    4. Section  3 (4) “The FG may levy upto 5% in addition to or in lieu of 15% sales tax on any supply of textile goods upto 30 June 2003 in such mode, manner etc as it may specify by notification
    5. Section  3 (5) “The FG may levy extra amount of tax upto 15% in addition to tax levied under section 3 (1), 3 (1A), 3 (2) and 3 (4) in such mode, manner etc as it may by rules prescribed”
    6. Section  3 (6) “The FG or Central Board of Revenue (CBR) may levy and collect such amount of tax in lieu of tax of 15% as it may deem fit on any supplies or any good and may also specify the mode, manner etc of such tax by notification in the official Gazette ”
    7. Section 3A Subject to the provision of this section and section 8(7) or “any notification issued thereunder”. Provided further the FG may by notification fix any amount of annual total turnover”
    8. Section 3A (4) “Subject to such modifications as the CBR may specify
    9. Section 3AA Subject to the provision of this section and such conditions and procedures regarding the mode, manner etc and from such date as may be specified by the FG
    1. Section 3AA (2) “Subject to such modifications as the CBR may specify
    2. Section 4 (c) such other goods as the FG may by notification specify.
    3. Section 4 (c) Provision (iii) has been exported to a country specified by the FG by notification. Provided further that the FG may by a notification restrict the amount of credit for input tax ….
    4. Section 6 (2) Provided that the CBR may by a notification
    5. Section 6 (3) (ii) through such other mode and manner as may be specified by the CBR.
    6.  Section 7 (3) notwithstanding anything in section 7(1) and 7 (2), the FG may by a special order.
    7. Section 7A notwithstanding anything contained in this Act or the rules made thereunder, the FG may specify by notification.
    8. Section 8 (1) (b) any other goods which the FG may by a notification specify.
    9. Section 8 (2) in such manner as may be specified by the CBR.
    10. Section 8 (6) notwithstanding anything contained in any other law or any provision of this Act, the FG may by notification specify ….
    11. Section 8 (7) Notwithstanding anything contained in any of the provisions of this Act, the FG may by notification specify ….
    12. Section 9 subject to such conditions and limitations as the CBR may impose.
    13. Section 10 under First Proviso, unless otherwise directed by the CBR under exceptional circumstances be refunded to the registered person as may be prescribed.
    14.  Section 10 under Second Proviso, subject to the conditions that he shall within the period specified by the CBR by notification.
    15. Section 10 (2) subject to the conditions as the CBR may by notification specify.
    16. Section 11 (5) subject to such conditions as specified by the CBR
    17. Section 13 (1) Notwithstanding the provisions of section 3, supply of goods or import of goods specified in the Sixth Schedule shall subject to such conditions as may be specified by the FG be exempt from tax under this Act.
    18. Section 13 (2) (a) Notwithstanding the provisions of Section 13(1), the FG may by notification ….
    19. Section 13 (2) (b) Notwithstanding the provisions of Section 13(1), the CBR may by special order exempt any supply ….
    20. Section 15 (2) an application to register shall be made to such Collector as the CBR may by notification specify.
    21. Section 17 in such form as the CBR may by notification specify.
    1. Section 18 in such form and manner as the CBR may by notification specify.
    2. Section 22 (1) (e) such other records as may be specified by the CBR. Under Proviso, such record as may be specified by the CBR.
    3. Section 22 (2) The CBR may by notification specify for ….
    4. Section 22 (2a) The CBR may by notification specify for ….
    5. Section 22 (3) The CBR may by notification prescribe the procedure …
    6. Section 23 under First Proviso, The CBR may by notification specify such modified invoice for ….
    7. Section 26 (1) every registered person shall furnish …. Return in the prescribed form to a designated bank specified by the CBR indicating the purchases …… and such other information as may be prescribed.
    8. Section 26A (1) every person required to pay turnover tax shall furnish …. Return in the prescribed form …… and such other information as may be prescribed.
    9. Section 26A (6) Notwithstanding the provisions of this section, the retailer ….. in the prescribed form to the designated branch of the bank specified by the CBR.
    10. Section 26AA (1) every registered retailer making taxable supplies shall furnish …. Return in the prescribed form to a designated branch of the bank specified by the CBR.
    11. Section 27 (a) a person registered …. As the CBR may by a notification specify.
    12. Section 30 The CBR may by notification appoint ….
    13. Section 31 under Proviso, notwithstanding anything contained in this Act or the rules, the CBR may by general or special order impose such …..
    14. Section 32, the CBR may by notification …..
    15. Section 32A the CBR may by notification appoint a Chartered Accountant …. For conducting special audit ….
    16. Section 34A, the FG may by notification or CBR by a special order ….
    17. Section 37B (13) The FG may by notification authorize ….
    18. Section 45 under First Proviso the CBR may by notification vary the jurisdiction ….
    19. Section 47A (6) The CBR may by notification make rules for carrying out the purposes of this section.
    20. Section 52 ….. having such qualifications as may be prescribed ….
    21. Section 60 the FG may authorize the import of goods ….
    22. Section 61 the CBR may authorize the repayment in whole ….
    23. Section 64 The FG may from time to time by notification prohibit the payment …..
    24. Section 65, the FG may by notification direct that ….
    1. Section 73 … if the payment of the amount of sales tax is made or received otherwise than in the manner herein prescribed.
    2. Section 75 The FG may by notification declare that ….

One can observe from the above cited list of 56 that Sales Tax Act 1990 is nothing by itself but just comprises of only notifications and not a single section is readable in isolation and without referring to relevant SROs in the shape of notifications etc.

I suggest that instead of keeping tax payers confused with such complicated and cumbersome existing Sales Tax Act 1990 with lot of scattered SROs, these notifications etc should be placed as a part of Sales Tax Act 1990 in the shape of Schedules (so long as rates and exemptions are concerned ) and Sales Tax Rules in one place ( so long as procedures and methods for carrying out the purpose of the Sales Tax Act 1990) as was done in other legislatures like Income Tax Ordinance 2001 and Income Tax Rule 2002. The said Sales Tax Act and Rules should be complete in all respect and should be updated with all subsequent changes taking place and their users should not required to move around to hunt and collect relevant and applicable SRO.

  1. How can sales tax be applied on sole-proprietorship business under section 3(1) while the individual is not covered under the definition of “person” under section 2 (21) of Sales tax Act 1990?

The scope of sales tax has been defined under section 3(1) of the Sales tax Act 1990 as “subject to the provisions of this Act, there shall be charged, levied and paid a tax known as sales tax at the rate of 15% of the value of (a) taxable supplies made by a registered person in the course or furtherance of any taxable activity carried on by him and (b) goods imported into Pakistan”.

Taxable Supply has been defined under section 2 (41) as taxable supply means a supply of taxable goods made by an importer, manufacturer, wholesaler (including dealer, distributor or retailer ) other than a supply of goods which is exempt under section 13 and includes a supply of goods chargeable to tax at the rate of zero per cent under section 4.

Person has been defined under section 2 (21) as Person includes a company, an association, a body of individuals whether incorporated or not, a public or local authority, a Provincial Government or the federal Government.

Taxable activity has been defined under section 2 (35) as taxable activity means any activity which is carried on by any person whether or not for a pecuniary profit, and involves in whole or in part the supply of goods or rendering of services on which sales tax has been levied under the respective ordinance and use of goods acquired for private purposes or for the manufacture of exempt goods without making supply to any other person whether for any consideration or otherwise and includes any activity carried on in the form of a business, trade or manufacture.

It is very clear from the above cited definitions that sales tax is levied only on persons as defined and includes under section 2 (21) of the Sales Tax Act 1990 which is exhaustive but does not includes “individual” categorically. The individual means and includes sole proprietorship and general public in their individual capacity.

Consequently all the tax payers covered under the definition of person other than individual under section 2 (21) will have to pay turnover tax if  their turnover is at benchmarks as defined under section 3A (1) and 14(1) and if exceeds benchmark then sales tax has to be paid subject to the conditions as laid down in the Act.

  1.  How can TRADING GOODS be subjected to sales tax as these are not MADE (produced or manufactured) as per section 3 (1) (a) of Sales tax Act 1990?

The scope of sales tax has been defined under section 3(1) of the Sales tax Act 1990 as “subject to the provisions of this Act, there shall be charged, levied and paid a tax known as sales tax at the rate of 15% of the value of (a) taxable supplies made by a registered person in the course or furtherance of any taxable activity carried on by him and (b) goods imported into Pakistan”.

It is very clear in the above cited definition that sales tax is levied only on taxable supplies which was made (produced or manufactured) which is also confirmed by the definition of taxable supply cited in question no.5 above. Further the term retailer defined under section 2(28) as retailer means a person supplying goods to general public for the purpose of consumption. Provided that any person who combines the business of import and retail or manufacture or productionwith retail” shall notify and advertise wholesale prices and retail prices separately and declare the address of retail outlets and his total turnover per annum shall be taken into account for the purpose of registration under section 14.

Further under section 3AA there shall be charged, levied and paid retail tax at 15% by a retailer who is making taxable supplies in the course or furtherance of any taxable activity carried by him. It means that if the retailer is confined his business to trading goods only and not making or producing trading goods then he is not subjected to retail tax. If the retailer combines his business of retail with manufacturing etc then his supplies will be subjected to retail tax. Further consumption referred to persons who consumed taxable goods “not individual”.

  1.  Why have powers been delegated in duplicate to Federal Government and Central Board of Revenue?

Under section 50 and section 55 the power has been delegated to the CBR to make rules and to give instructions or directions through General Order but it is not clear that why power to make special procedure has been delegated to Federal Government under section 71 which seems to be in duplication with that of CBR, because CBR is doing everything including the nature of work cover under section 71.

Since the powers and duties are not clearly defined separate for each Federal Government and Central Board of Revenue in Sales Tax Act 1990, both are busy in doing duplicate work. For instance the Retail Tax Rules 1998 has been made by Federal Government while Turnover Tax Rules 1999 was made by Central Board of Revenue with almost the same parameters.

  1. Why the low benchmark of Rs. 0.5 Million and Rs. 2.5 Million for manufacturer, which seems to be irrational?

Under clause 42 of the Sixth Schedule attached to the Sales Tax Act 1990, supplies made by manufacturers whose annual turnover from taxable supplies made in any tax period during the last 12 months ending any tax period does not exceed Rs.0.5 Million are exempt from sales tax. While supplies made by retailer whose annual turnover from supplies whether taxable or otherwise for the same 12 months does not exceed Rs. 1.0 Million are exempt from sales tax.

Under section 3A and section 14, total turnover of manufacturer and retailer does not exceed Rs. 2.5 Million of taxable supplies and Rs. 20 Million of supplies whether taxable or otherwise respectively are subject to turnover tax and if exceed these benchmark then sales tax or retail tax respectively to be levied.

A question is arises that how come such a lowest benchmark of Rs. 0.5 million and Rs. 2.5 Million has been allocated to tax payer engaged in manufacturing activities while it is universally accepted that manufacturer produces much more and has no comparison with retailer. These benchmarks seem to be academic.

  1. Why was the word “month” used in place of “tax period” under section 21(4) of Sales tax Act 1990?

The term “Tax Period” has been defined in Sales Tax Act 1990 but not the term “Month”. Further the term Tax Period is usually used in said Act and Rules so why the term month has been used as “six consecutive months” under section 21 (4) of the Sales tax Act 1990. Is there any significance to this change and if so why the term month has not been defined and elaborated in the said Act.

  1. How to calculate the amount for the percentages mentioned for penalties under section 33 (2) (c), 33 (3) and 33 (4) of Sales Tax Act 1990?

Under section 33 (2) (C) any person who fails to notify the changes of material nature in the particulars of registration or taxable activity shall pay a penalty of Rs.5,000/- or 3% of the amount of the tax involved which ever is higher. Same type of penalty with different percentages and amount have been mentioned under section 33 (3) and 33 (4).

My question is how we could calculate 3% and “on what” to determine penalty for the higher of the two figures in above cited instance.

  1. Why is punishment of 5 years imprisonment for tax fraud as mentioned under section 37A not covered under the list of punishment for imprisonment under section 37C of the Sales Tax Act 1990?

Under section 37C, the punishment for imprisonment with different duration has been listed each for not to pay the amount of tax due in time, fail to get registered his business, refuses to allow access to the premises, stocks, accounts or record etc and fail to file the return for two consecutive tax periods. So why the punishment for imprisonment for tax fraud has been mentioned separately and covered under section 37A.

  1. Why have zero rated items under section 4 (b) been mentioned under section 4 instead of under the fifth schedule?

Under section 4(b) supply of stores and provisions for consumption aboard a conveyance proceeding to a destination outside Pakistan as specified in section 24 of the Customs Act 1969 are subject to zero rating sale tax. Can not it be covered and include in the Fifth Schedule attached to the said Act. Is there any logic behind it?

  1. How effective are 30 days as mentioned under section 10 (2) in presence of Sales Tax Refund Rules 2002 which talks of different days?

What is the rationale in mentioning two different periods of days for the same issue as under section 10(2) the input tax incurred in connection with a zero rated supply shall be refunded not later than 30 days of filing of return. While under Sales Tax Refund Rules 2002, the manufacturer cum exporter, refund on zero rated supplies in the tax period shall be sanctioned and paid within a maximum period of 15 days of furnishing of the supportive documents.  

Is it necessary to mention different days in Act and Rules for the same issue with other differences like 30 days of filing of return or 15 days of furnishing of the supportive documents for the same issue? Isn’t it tantamount to creating deliberate tension and confusion among tax-payers?

  1. Why is the two years restriction for de-registration not been deleted under section 13 (4) while it was done under section 18 of the Sales tax Act 1990?

“A person registered in pursuance to application made under section 18(1) shall not be de-registered before expiry of two years from the date of registration” has been removed by deleting section 18 (2) but the same was retained under section 13 (4) of the Sales Tax Act 1990. Is there any reason behind retention of this condition in section 13 (4).

  1. Does section 37B (10) of Sales Tax Act 1990 for maintenance of register of arrests and detention also apply for Chartered Accountants etc appointed under section 32A of the said Act?

Under section 32A (3) an auditor appointed under section 32A (1) shall have the powers of an officer of sales tax under section 25, section 37 and section 38. So should auditor appointed under section 32A need to maintain register of arrests and detention.

Further since under section 37A (1) an officer of sales tax can not arrest tax payer rather he may cause arrest of such tax payer. So how far section 37B (10) is still workable.

  1. Who will sign the debit notes/credit notes as authorized person while the term 'authorized representative' as defined under section 52 has not covered it?

Appearance by authorized representative under section 52 of the Sales Tax Act 1990 is restricted to appear of authorized representative before the Appellate

 Tribunal or an officer of sales tax in connection with any proceedings under this Act. So who will be the authorized person to sign and deal with tax authority for other affairs including signing of debit note, credit note and other correspondence.

  1. Who will be the “agent” as mentioned under section 56 and section 68 of the sales Tax Act 1990 and how will he differ from authorized person?

Under what circumstances a registered person should expressly or impliedly authorized his agent and in what manner. Is there any difference between agent as explained under section 68 and the authorized person mentioned in different return and forms attached to Rules.

  1. Why isRs. 1 million benchmark mentioned instead of Rs.2.5 million under clause 5 of Registration, Voluntary Registration and De-registration Rules 1996?

Is it an error or deliberately done. If deliberately done then what is the reason behind it.

  1. Why ship breakers have not been covered under section 14 while Annexure A and B attached to Registration, Voluntary Registration and De-registration Rules 1996 and Filing of Monthly Return Rules 1996 have mentioned about it?

Section 14 has mentioned all the categories of tax payers but has not included ship breakers while the forms attached to the Rules have mentioned about it. Is there any reason not to include ship breakers under section 14 of the sales tax Act 1990.

  1. With the omission of the words “determined on the basis of the value of supply as shown in the tax invoice issued by the supplier” under clause 2 (3) of The Debit and Credit Note and Destruction of Goods Rules 1996, the amount and other particulars of both Debit Note and Credit Note will not be the same. Isn’t it?

Is this omission of the words “determined on the basis of the value of supply as shown in the tax invoice issued by the supplier” under clause 2 (3) of The Debit and Credit Note and Destruction of Goods Rules 1996 has some significance if so then please let us know the reason behind it.

  1. Why isn't there any illustration or example to explain determination of input tax under clause 3 of Apportionment of Input Tax Rules 1996 while there is punishment for incorrect application of formula under clause 5 of the said Rules?

Keeping in view the importance of determination of input tax due to penalty clause attached to the said Rules, it is advisable to elaborate further through example or illustration the determination of input tax as done under Special Procedure for supply of food Rules 1999 and other Rules.

  1.  Annexure A attached to The Tax Payer’s (Authorized Representatives) Rules 2001 has not mentioned specimen signature of Authorized Representative

It is advisable to add with sufficient space for specimen signature of Authorized representative in the said Rules 2001.

  1. The word “in Pakistan” was deleted in all relevant sections so why does it still exist for requirement of registration under section 14(1) of the Sales tax Act 1990?

Is there any reason behind it.

  1. Why there is bar of suit, prosecution or other legal proceeding against any public servant against any order under section 51 of Sales Tax Act 1990? Who will judge the level of good faith?

If I am not mistaken the sales tax officers as covered under section 45 are also public servants, so how come no suit, prosecution or other legal proceeding shall lie against any public servant in respect of any order passed in good faith under this Act, then what is the use of Chapter VIII of Appeal covering section from 45 to 47 A. Who will determine the level of good faith of public servant. This section need to be further elaborated.

  1. When will be the tax payers supposed to pay fee for processing of return etc under section 50 of the Sales Tax Act 1990?

According to section 50 of the Sales tax Act 1990, the CBR may by notification make rules for charging fee for processing of returns, claim and other documents and for preparation of copies thereof.

This shows that CBR has intention to privatize sales tax collection and its processing systems to increase the sales tax revenue many folds as being done in USA and Europe countries.

  1. How can a lot of typographical mistakes occur in Sales Tax Act 1990 while it is a sensitive legislative document?

There is a universal understanding that every legislature is a sensitive legal document which even comma and full stop has significance, so it should be drafted and promulgated carefully and after due diligence. It is a point of concerned to every stakeholder of this Sales Tax Act 1990 that how come this Act and relevant Rules have been drafted carelessly as a result there is a lot of typographical mistake in it which includes:

· Section 3 (1A) it should have been “sub sections” instead of “such sections”.

· Section 10(3) word “be” is missing.

· Section 14, there is no sub section so section 14 (1) need to be deleted.

· Section 21 (2) (b) should have been “enrollment” and “enroll” respectively should be mentioned instead of enrolment and enroll respectively.

· Section 26 (1) should be “designated branch of the bank” instead of designated bank.

· Section 30 (d) should be “a Deputy Collector of Sales Tax” instead of a Deputy Collectory of Sales tax.

· Section 47A should be “appoint” instead of may appoint.

· Section 47A (3) should be “sub sections (1) and (2)” instead of sub section (10 and (2).

· Section 47A (3) ( C ) should be “sub section (3) of section 7” instead of sub section (30 to section 7.

· Section 57 should have been “affected” instead of effected.

· Clause 2 (1) of the Sales Tax recovery Rules 1992, “Government dues with detailed definition” appears twice by mistake and “(vi)” was shown instead of (iv) by mistake.

· Clause 4 (b) of Special Procedure for Spinning Industry Rules 1999, should be “daily production and finished goods register” instead of daily production register and finished goods register.

Note: The views expressed in this article are solely of the author and Accountancy may or may not agree with them.

The author, Syed Imtiaz Abbas Hussain is a fellow member of the Institute of Chartered Accountants of Pakistan. He can be contacted at inahat@cyber.net.pk 

Article courtesy of Syed Imtiaz Abbas Hussain


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