Advanced Taxation

Assignment
By: Amir Hamza Sikandar (01-
112171-002
To: Ma’am Amal Khan

SALES TAX

Q1. What is the Sales Act 1990? How was the Sales Tax Rules 2006 formulated?
How is it applied in the society?

Ans. A) (1) This Act may be called the Sales Tax Act, 1990.

(2) It extends to the whole of Pakistan.

(3) It shall come into force on such date as the Federal Government may, by
notification in the official Gazette, appoint.

In this Act, unless there is anything repugnant in the subject or context,

(1) Appellate Tribunal means the Customs, Excise and Sales Tax Appellate Tribunal
constituted under section 194 of the Customs Act

(2) ‘appropriate officer’ means an officer of Sales Tax authorised by the Board by
notification in the official Gazette to perform certain functions under this Act

B) In exercise of the powers conferred by sub-section (I) of section 4, 2 [section 40

and section 45A] of the Federal Excise Act, 2005, section 219 of the Customs Act,
1969 (IV of 1969), section 50 of the Sales Tax Act, 1990, read with subsection (2) of
section 8 3 [, 4 [clause (b) of sub-section (1) of section 8], clause (ii) of sub-section
(2) of section 8B, sections 9, 10, 14, 21 5 [, 21A] and 28, clause (c) of sub-section (1)
of section 22, 6 [first proviso to sub-section (1) of section 23], section 26, 7 [section
33] 8 [, section 40C], sub-section (6) of section 47 A, sections 48, 9 [ 50A, 52, 52A]
and 66 thereof, the 10[Federal] Board of Revenue is pleased to make the following
rules, namely.

These Rules may be called the Sales Tax Rules, 2006.

They shall be applicable to such persons or class of persons.

They shall come into force on the first day of July, 2006.

In these Rules, unless there is anything repugnant to the subject.

"Act" means the Sales Tax Act, 1990.

a Chartered Accountant within the meaning of the Chartered Accountants Ordinance,

1961 (X of 1961).

(b) a Cost and Management Accountant within the meaning of the Cost and
Management Accountants Act, 1966 (XIV of 1966).

(c) a member of any association of accountants recognized in this behalf by the

Federal Government.

"adjudicating authority" means any officer appointed to Adjudicate and decide cases
under section 179 of the Customs Act, 1969 (IV of 1969), section 45 of the Sales Tax
Act, 1990, and section 31 of the Federal Excise Act, 2005.

C) Conventional or retail sales taxes are only charged to the end user of a good or
service. Because the majority of goods in modern economies pass through a number
of stages of manufacturing, often handled by different entities, a significant amount of
documentation is necessary to prove who is ultimately liable for sales tax.

For example, say a sheep farmer sells wool to a company that manufactures yarn. To
avoid paying the sales tax, the yarn maker must obtain a resale certificate from the
government saying that it is not the end user. The yarn maker then sells its product on
to a garment maker, which must also obtain a resale certificate. Finally, the garment
maker sells fuzzy socks to a retail store, which will charge the customer sales tax
along with the price of said socks.

Different jurisdictions charge different sales taxes, which often overlap, as when
states, counties, and municipalities each levy their own sales taxes. Sales taxes are
closely related to use taxes, which applies to residents who have purchased items from
outside their jurisdiction. These are generally set at the same rate as sales taxes but are
difficult to enforce, meaning they are in practice only applied to large purchases of
tangible goods.

In general, sales taxes take a percentage of the price of goods sold. For example, a
state might have a 4% sales tax, a county 2%, and a city 1.5%, so that residents of that
city pay 7.5% total. Often, however, certain items are exempt, such as food, or exempt
below a certain threshold, such as clothing purchases of less than $200. At the same
time, some products carry special taxes, known as excise taxes.

Q2. Choose any one company and discuss the implications of Sales tax on its
profit and loss over 3 years.

Ans. Since sales tax increases the price of goods, it causes the equilibrium price to
fall. This may mean that it becomes more difficult for businesses to profit from selling
goods, or that consumers change their buying behavior to purchase less of the more-
expensive goods.

The biggest advantage to sales taxes are how economically efficient they are in

collecting a single dollar of revenue for the government - that is, they have the
smallest negative impact on the economy per dollar collected.

Sales Tax is a tax levied by the Federal Government under the Sales Tax Act, 1990, o
n sale and supply of goods and on the goods imported into Pakistan. Sales Tax on serv
ices is levied by the Federal Government under The Islamabad Capital Territory (Tax 
on Services) Ordinance, 2001.

Engro Foods: 1 In 2013, the income tax department, in respect of the tax year 2011,
determined additional income tax liability of Rs. 218,790 and raised a demand of Rs.
139,575 whereby the Deputy Commissioner Inland Revenue (DCIR) - Audit
disallowed allocation of expenses against interest income and apportioned expenses
against dividend income and capital gains. The Company filed an appeal with the
Commissioner Inland Revenue (CIR) - Appeals who maintained the apportionment of
expenses against dividend income and capital gains but allowed the allocation of
administrative expenses against interest income, thereby reducing the income tax
liability to Rs. 184,191 and revised the demand to Rs. 104,976. The Company paid
Rs. 53,250 thereagainst and simultaneously filed an appeal against the CIR - Appeals
decision with Appellate Tribunal Inland Revenue (ATIR) which granted a stay to the
Company. During 2014, the ATIR issued an order whereby the aforementioned
appeal was remanded back to the assessing officers for denovo proceedings, thereby
accepting the Company’s contention. The income tax department, in response
thereagainst, had filed an appeal with ATIR, which was dismissed during 2016.

2 In 2014, the income tax department in respect of tax year 2012, amended the
assessment and raised an additional demand of Rs. 250,773 on similar grounds as
above. The Company filed an appeal against the said order with CIR - Appeals, who
based on ATIR’s order for tax year 2011, has remanded back the order to assessing
officers for denovo proceedings.

3 During 2015, in respect of pending tax assessments for tax year 2011 and tax year
2012, the Company received notices of demand amounting to Rs. 105,955 and Rs.
250,773, respectively, whereby the Deputy / Additional Commissioner Inland
Revenue - Audit again disallowed allocation of expenses against interest income and
apportioned expenses against dividend income and capital gains. The Company filed
appeals thereagainst with the CIR - Appeals and also obtained stays from the High
Court of Sindh from initiating any recovery proceedings in respect of both tax years.
During 2016, in respect of tax year 2011 and tax year 2012, the CIR - Appeals
accepted the Company’s plea and annulled the order passed by the DCIR. In response,
the DCIR filed appeals before the ATIR for rectification of the orders passed by the
CIR - Appeals for both tax years, which were subsequently dismissed. In 2017, the
Company has reversed excess provision of Rs. 168,896 in respect of tax years 2011
and 2012 consequent to denovo proceedings after which the amended orders were
passed in respect of the aforementioned tax years, wherein, the Commisioner has
maintained the classification of income from interest on bank deposits and from
subordinated loans as “income from other sources”. In response, the Company has
filed an appeal challenging this contention and the Company is confident of
favourable decision based on earlier ATIR judgment.

Q3. What has been the economic effect on the economy of the application of
Sales Tax strictly on businesses, discuss in light of 3 governments (with statistical
effects)

1) PPP
2) PML-N
3) PTI

Ans. Sales Tax Rate in Pakistan averaged 16.27 percent from 2006 until 2020, reachin
g an all time high of 17 percent in 2014 and a record low of 15 percent in 2007. This p
age provides - Pakistan Sales Tax Rate - actual values, historical data, forecast, chart,
statistics, economic calendar and news. Pakistan Sales Tax Rate - Sales Tax - values,
historical data and charts - was last updated on April of 2020

In Pakistan, the sales tax rate is a tax charged to consumers based on the purchase
price of certain goods and services. The benchmark we use for the sales tax rate refers
to the standard rate. Revenues from the Sales Tax Rate are an important source of
income for the government of Pakistan.

Sales Tax Rate in Pakistan is expected to reach 17.00 percent by the end of 2020,
according to Trading Economics global macro models and analysts expectations. In
the long-term, the Pakistan Sales Tax Rate - Sales Tax is projected to trend around
17.00 percent in 2021, according to our econometric models.

Sales tax rates in Pakistan

The standard sales tax rate in Pakistan is 17%.

Exporters and certain providers of financial services may apply for a Sales Tax suspen
sion. Imports of some basic foodstuffs and agricultural supplies are exempt from impo
rt Sales Tax.

Calculated at 20% of the sales tax withholding regime, there is an anti-fraud measure
which may be applied for certain customers – generally public authorities paying their
customers. The same is applicable for advertising services, including for non-resident
suppliers. In these cases, the taxpayer must be a registered Withholding Agent.