Sales Tax Laws – Technical and Other Lacunas

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

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