Sales Tax & Federal Excise

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Sales Tax & Federal Excise — Key ACCA/CA Pakistan Facts

Governing Laws:

• Sales Tax Act, 1990 (STA 1990) — Federal sales tax on goods and services
• Federal Excise Act, 2005 (FE Act 2005) — Excise duty on specified goods/services

Sales Tax:

• Standard rate: 18% ad valorem (on most goods/services)
• Reduced rates: 0%, 3%, 5%, 15% for specified goods
• Zero-rated: Exports (0% with refund of input tax)

Key Concepts:

• Output Tax: Tax charged to customers on sales
• Input Tax: Tax paid on purchases/inputs
• Net Tax Payable = Output Tax − Input Tax
• Input Tax Credit: Available if the buyer is a registered person and the goods/services are for taxable supplies

Federal Excise:

• Applies to: Cement, cigarettes, beverages, telecom services, foreign-made motor vehicles, etc.
• Rates: Specific (per unit) or ad valorem (up to 100% for luxury items)

⚡ Exam Tip: The key test in sales tax questions is whether input tax credit is available. Credit is denied for: goods/services used for personal purposes, exempt supplies, or non-registered activities.

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Sales Tax & Federal Excise — ACCA/CA Pakistan Study Guide

1. Sales Tax Act, 1990 — Overview

Chargeability: Sales tax is levied on the supply of goods and rendition of services made in Pakistan by a registered person.

Registration Threshold:

• Goods: Annual turnover exceeding PKR 5 million
• Services: Annual turnover exceeding PKR 3 million
• Voluntary registration: Available for persons below the threshold

Registered Person:

• Has a STRN (Sales Tax Registration Number)
• Required to charge sales tax on all taxable supplies
• Entitled to claim input tax credit

2. Rates and Categories

Standard Rate — 18%: Applies to all goods and services unless a specific rate is notified.

Zero-Rated Supplies (0%):

• Exports of goods and services (input tax is refundable)
• Supplies to diplomatic missions (with conditions)
• Supplies under international agreements (with FBR approval)

Reduced/Concessional Rates:

Rate	Goods/Services
0%	Exports, basic food items, medicines
3%	Milk, ghee, cooking oil, fertilizers
5%	Sugar, cement, beverages
15%	Certain luxury items, automobiles

Exempt Supplies: Some goods/services are exempt from sales tax (e.g., fresh fruits, vegetables, live animals, unprocessed food). No tax is charged and no input tax credit is available.

3. Input Tax and Output Tax — Core Mechanism

Output Tax: The tax a registered person charges on sales/supplies made by them.

Input Tax: The tax a registered person pays on purchases/inputs used in making taxable supplies.

Net Tax Payable:

Net Tax = Output Tax − Input Tax

If Output Tax > Input Tax → Payable to FBR If Input Tax > Output Tax → Refundable from FBR

Input Tax Credit Rules: Input tax can be credited only if:

1. The buyer is a registered person
2. The goods/services are for making taxable supplies (not personal use or exempt supplies)
3. The tax is invoiced correctly (with STRN, invoice number, date, etc.)
4. The goods have been received or services rendered

⚡ Common Mistake: Students confuse “zero-rated” with “exempt.” Zero-rated supplies: You charge 0% but can claim input tax credit (it’s refundable). Exempt supplies: You charge no tax AND cannot claim input tax credit on the inputs used for exempt supplies.

4. Federal Excise — Overview

Governing Law: Federal Excise Act, 2005 (FE Act 2005)

Distinction from Sales Tax:

• Sales tax is on supply (stage of supply chain — manufacturer, wholesaler, retailer)
• Excise duty is on production/manufacture or specific services — but in Pakistan, it is often collected at the same point as sales tax (at the manufacturer/importer stage)

Excisable Goods (Selected):

• Cement
• Cigarettes and tobacco products
• Alcoholic beverages
• Soft drinks (carbonated beverages)
• Motor vehicles (above certain engine capacity)
• Steel (in some categories)

Excisable Services:

• Telecom services
• Banking and financial services (some categories)
• Advertising services

Excise Rates:

Category	Rate
Cement	PKR 1.5/kg or ad valorem whichever is higher
Cigarettes	Specific + ad valorem
Motor vehicles (>2000cc)	Up to 30% ad valorem
Telecom services	20% of gross revenue

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Sales Tax & Federal Excise — Comprehensive ACCA/CA Pakistan Notes

1. Detailed Sales Tax Framework

Chargeability — Section 3 of STA 1990: Sales tax is levied on:

• Goods manufactured in Pakistan (including by a trader who is registered)
• Goods imported into Pakistan
• Services rendered in Pakistan

Supply — Definition: “Supply” includes:

• Sale of goods
• Transfer of goods (gift, barter)
• Rendering of services for a consideration
• Export of goods/services

Time of Supply: The tax point is the earlier of:

• Date of delivery of goods or rendition of services
• Date of invoice (for goods: 30 days from delivery; for services: invoice date)

2. Comprehensive Input Tax Credit Rules

Section 8B — Input Tax Credit: A registered person can claim credit for input tax paid on:

• Goods purchased for resale
• Goods used as raw materials/components in manufacturing
• Services used for making taxable supplies

ITC Denial — Section 8B(3): Input tax credit is NOT available if:

1. Goods/services are used for personal purposes
2. Goods/services are used for making exempt supplies
3. The registered person is not registered for sales tax
4. The invoice is not compliant (missing STRN, incorrect details)
5. The goods have not been received or services not rendered
6. The tax has not been paid to the supplier (credit is available only when tax is paid)
7. Goods are written off as lost or stolen

⚡ Special Rule — Blocked Credit (Schedule): The Second Schedule to the STA 1990 lists items where input tax credit is blocked:

• Motor vehicles (personal use)
• Food and beverages (unless for resale)
• Membership of clubs
• Gifts and free samples
• Assets not used for taxable supplies

3. Returns and Compliance — Sales Tax

Filing Returns (Section 26): Every registered person must file a monthly sales tax return by the 15th of the following month.

Return Contents:

• Total taxable sales (output tax)
• Zero-rated sales
• Exempt sales
• Total purchases (input tax)
• Net tax payable or refundable
• Details of major suppliers and customers

Sales Tax Invoice (Section 23): A valid sales tax invoice must contain:

1. Seller’s name and STRN
2. Buyer’s name and STRN (if buyer is registered)
3. Invoice number and date
4. Description of goods/services
5. Quantity and value
6. Rate of tax and tax amount
7. Total invoice value including tax

Without a valid invoice, the buyer cannot claim input tax credit.

4. Federal Excise — Detailed Rules

Section 3 of FE Act, 2005: Excise duty is levied on:

1. Goods manufactured or produced in Pakistan
2. Imported goods specified in the First Schedule
3. Services specified in the Third Schedule

Collection Mechanism: Excise duty on goods is generally collected at the manufacturing stage through a ** excise duty invoice**. The manufacturer pays the excise duty and can claim input tax credit (subject to the same rules as sales tax for manufacturers).

Excise on Services: For excisable services (telecom, banking, advertising), the service provider levies excise duty and pays it to FBR. The duty is charged to the customer as part of the service fee.

Example — Cement Manufacturer:

Cement produced: 10,000 bags @ PKR 500/bag = PKR 5,000,000
Excise duty @ PKR 1.5/kg = (say 50 kg/bag) = PKR 75 per bag
Total excise: 10,000 × 75 = PKR 750,000
Invoice value: PKR 5,000,000 + PKR 750,000 = PKR 5,750,000
The manufacturer charges this to the wholesaler and deposits 
the excise with FBR.

5. Special Situations

A. Sales Tax on Imports: Sales tax on imports is paid at the port of entry (customs). The importer:

• Pays sales tax on the ** customs value + customs duty + FED**
• Can claim this as input tax credit if the goods are for resale or use in making taxable supplies (if the importer is a registered person)

B. Sales Tax on Services — Output Tax: Services are generally taxed at the location where they are performed/rendered. Telecom and IT services: Taxed at the location of the service provider.

C. Composite Supplies: If a supply contains both goods and services (e.g., a computer with software installation), the tax treatment depends on what is the dominant element. If the dominant element is a good, the whole supply is treated as a supply of goods; if services, it is a supply of services.

D. Sales Tax Refunds: Registered persons who export goods or make zero-rated supplies can claim refund of input tax that exceeds output tax. Refunds must be claimed within 12 months of the relevant tax period.

⚡ Common Mistake: In computation questions, students sometimes forget to deduct the sales tax amount from the gross value when computing profit. The correct approach: Revenue is stated inclusive of sales tax (unless the question specifies otherwise). If the question asks for the value of sales tax, it is Output Tax minus Input Tax (net). The actual outflow to FBR is the net amount.

6. Practical Computation Example

Scenario — Manufacturing Company: Company XYZ manufactures cement bags. In a month:

• Purchased raw materials: PKR 10,000,000 + PKR 1,800,000 (ST @ 18%)
• Produced cement bags sold: PKR 20,000,000 + Sales tax @ 5% (FED also applicable, but simplified here) = PKR 21,000,000
• Sold 50% locally, 50% exported (zero-rated)

Computation:

Output Tax (Local sales 50%):
  PKR 10,000,000 × 18% = PKR 1,800,000

Input Tax on Raw Materials:
  PKR 1,800,000 (full input tax available as all 
  cement production is taxable/zero-rated)

Net Tax Payable:
  PKR 1,800,000 − PKR 1,800,000 = PKR 0

Note: For zero-rated exports, input tax is refundable. 
Since net is zero, full refund of PKR 1,800,000 can be claimed.

⚡ Exam Tip: In sales tax computations, always determine whether all inputs are used for taxable supplies. If some inputs are used for exempt supplies, the input tax credit must be apportioned — only the portion attributable to taxable supplies is creditable.

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