Sales Tax Workshop - Determination of Tax Liability & Bookkeeping

1. WORKSHOP ON SALES TAX Pearl Continental Hotel, Karachi21 – 22 July2005

2. DETERMINATION OF TAX LIABILITY & BOOK KEEPING, RECORDS AND RETURNS By MEHMOOD A. RAZZAKPartnerMehmood Idrees Masood & Co.

3. DETERMINATION OF TAX LIABILITY (SECTION-7) • Basic Concept of VAT mode - deduction of tax paid (input tax) from the tax charged (output tax) and pay the difference to the ex-chequer. • Claim the refund (newly inserted concept) in case the difference is negative. • Only a registered person is entitled to such adjustment. A person who is liable to be registered but not registered shall not be so entitled. (section2(25)). • Both input tax paid or payable (accrued) shall be admissible. • Input tax should relate to goods used in supplies made or to be made.

4. DETERMINATION OF TAX LIABILITY (SECTION-7)(Contd…) • Out of tax period input tax adjustment allowed for preceding twelve tax periods - the reasons for delayed adjustment required to be specified in the revised return. • In order to claim adjustment, the registered person should hold. • Valid Tax Invoice - for locally purchased goods. • Bill of entry or Goods Declaration - for imported goods. • Treasury challan - for goods purchased in auction.

5. TAX CREDIT NOT ALLOWED – SECTION-8 • Input tax paid on goods used or to be used for any purpose other than for the manufacture or production or supply of taxable goods shall not be allowed. • Or any other goods which the Federal Government may so declare i.e., vehicles, food and beverages, garments, fabrics, consumption on entertainment, gifts and give-away acquired otherwise as stock-in-trade. • Certain prescribed items, if sold to un-registered persons, will not entitle the registered person to claim input tax e.g. polypropylene granules, artificial filament, sugar, air conditioning plant.

6. TAX CREDIT NOT ALLOWED – SECTION-8 (Contd…) • Extra tax charged under Section 3 (5) shall also not be allowed. • Input tax paid on fake invoices shall be inadmissible. • If the registered person fails to provide requisite information as prescribed by the Board, he will be barred from adjusting input tax. • Input tax relating to taxable supplies only shall be allowed - (Apportionment of Input Tax).

7. DEBIT AND CREDIT NOTES ADJUSTMENTS – SECTION-9 • Debit and credit note adjustments are allowed in cases of • Cancellation of supply • Return of goods • Change in the nature of supply • Change in the value of supply • Or in any event where the amount as per the tax invoice or the return needs to be modified • The time limit allowed for such adjustment is 180 days from the date of supply, extendable for further 180 days by the collector on specific request. • Goods unfit for consumption, returned by the buyer should be destroyed only after obtaining permission from the collector and yet under the supervision of sales tax officer. • The credit notes must be issued immediately upon receipt of the returned goods and the debit notes.

8. INADMISSIBLE TRANSACTIONS – SECTION-73 • This section is directly related to section 7. • Transaction value exceeding Rs. 50,000 should be made through Crossed banking instrument • It should evidence the transfer of the amount in favour of supplier from the business account of the buyer. • Online transfer of payment from the business account as well as payment through credit card will also be admissible. • Payments against utility bills are excluded. • Any payment made otherwise shall not be admissible. • Maximum period of settling the transaction is 180 days. • The amount so received should be deposited in supplier’s business account in order to enable the supplier to claim input tax adjustment. • These business accounts should be declared by the registered persons to their relevant collectors.

9. OTHER FEATURES OF THE REGIME – SECTION-73 • Supply to un-registered persons or that of exempt supply shall remain un-effected. • Settlement of credit balance in kind shall remain unaffected provided the legal documentation of the property should be transferred in the name of supplier, proper entry in books of accounts has been made and amount of sales tax is transferred as per the provision of this section. • This condition of 180 days is not applicable in case of imports and goods exported out of Pakistan.

10. SALES TAX ON ADVANCES • Time of supply is earlier of the delivery of goods or amount received. • Serially numbered “Advance Payment Receipt” should be issued and tax shall be levied at the time of receiving advance payment. • Sale tax invoice may be issued at the time of delivery. No tax shall be payable at the time of issuance of sales tax invoice. • Advance Payment Receipt shall be treated as a tax invoice. • Any subsequent adjustment can be incorporated through credit note and time limit of 180 days shall not apply.

11. RETURNS After having discussed the determination of tax liability, let us have a look at the prescribed format of monthly return.

12. RETURNS(Contd…)

13. Section Types of Returns 26 Monthly Return To be filed by importer, manufacturers, wholesalers, distributors and importers 26AA Retail Tax Return To be filed by a Retailer 27 Special Return To be filed by such person containing such information as specified by the Board or the Counter 28 Final Return To be filed by the person who has applied for de-registration NIL RETURNS Is a return indicating no sales tax is payable NULL RETURN Is a nil return indicating zero transaction and ultimately zero amount of tax payable or refundable TYPE OF RETURNS Nil returns may be filed in duplicate at Nil Return Receipt Counters in the collectorate, instead of designated banks. Summary of Sales & Purchases Every registered engaged in import or supply of goods other than specified zero-rated goods (i.e. blended or man-made cotton yarn, textile fabrics and made-ups, garments, leather goods and footwear, carpets, surgical and sports goods) shall furnish statement of sales and purchases in the prescribed format alongwith the return.

14. GENERAL REQUIREMENTS OF LAW Every registered person is required to maintain the following records at his business premises or registered office: • Supplies, indicating particulars of good supplied and that of the buyer(s). • Purchases with all the above particulars and details. • Zero - rated and exempt supplies. • Imports • Invoices, credit notes, debit notes, bank statement, banking instruments, inventory records, utility bills, payroll and wages records, rental agreements, sale-purchase agreements and lease agreements. • Any other records as specified by the Board.

15. TAX INVOICES – SECTION-23 Every tax invoice issued by the registered person at the time of supply should contain the following particulars: • Name, address and registration number of the supplier • Name, address and registration number of the recipient • Date of issue of invoice • Description and quantity of goods • Value exclusive of tax • Amount of sales tax • Value inclusive of sales tax

16. SALES TAX ON RETAIL PRICE SECTION-3 (2) (a) THIRD SCHEDULE • Following items as specified in the Third Schedule shall be subject to levy of 15% sales tax on ultimate retail price: • Fruit and vegetable juices • Ice cream • Aerated waters on beverages • Syrups and squashes • Cigarettes • Toilet and laundry soaps • Detergents • Shampoo • Tooth paste and shaving creams • Perfumes and cosmetics • Biscuits and confectionary • Tea • Power drinks and milky drinks • Footwears

17. SALES TAX ON RETAIL PRICE SECTION-3 (2) (a) THIRD SCHEDULE(Contd…) • Only a manufacturer is required to charge sales tax on retail price. • The amount of sales tax shall be prominently printed on each article package, container or label. • Manufacturers of biscuits shall levy 15% sales tax on ex-factory price plus 15% sales tax on minimum value addition of 12% in lieu of sales tax payable on the basis of retail price.

18. RETENTION OF RECORDS – SECTION-24 The records should be retained for a period of three years after the end of tax period to which they relate. However, the sales tax officer is still empowered u/s 36 to serve show cause notice within five years of the relevant date for the purpose of recovery of tax not levied, short levied or erroneously refunded.

19. MAINTENANCE OF E-RECORDS, FILLING OF E-RETURNS AND E-INVOICING • Maintenance of records on computer is allowed subject to accessibility, availability of hard copies and having parallel back up of softcopy. • Issuance of e-invoices is also allowed vide special procedure rule. • E-invoicing basically means absolute elimination of paper work as far as invoicing is concerned. • Prior approval from the relevant collector is mandatory. • Authenticity of the origin and integrity of the data should be guaranteed e.g. through electronic signature or electronic data interchange (EDI). • A copy of invoice should be simultaneously transmitted to the collector electronically. • A disaster recovery plan should be in place. • Both the buyer and seller should have adequate infrastructure to cater with the e-invoicing.

20. RETAILER – GENERAL – SECTION-3AA • A retailer having turnover of Rs. 5 million and above is required to be registered and charge sales tax @ 15%. • Minimum value addition should be 10% other than on supply of motorcycle, rubber tyres, mild steel products, domestic electrical appliances, sanitary wares etc., where it range between 3% to 4%. • Records to be maintained • Cash memos (to be issued if specifically required by the buyer). • Purchases • Audit once a year with exclusion of retailers declaring minimum 6% increase his total purchases.

21. RETAILER – GENERAL – SECTION-3AA(Contd…)

22. RETAILER OF SPECIFIED GOODS – SECTION-3AA • Specified goods means textile fabrics, textile made-ups, garments and articles of textile including house textile, articles of leather, carpets and surgical goods. • Threshold of Rs. 5 million turnover is applicable in this case also. (Turnover of specified goods). • The applicable rate under this scheme is 3% ad valorem (2% sales tax and 1% income tax) a final discharge of tax liability. • In case of corporate retailers 1/3 shall be treated as advance tax adjustable against final tax liability. • No adjustment of input tax is allowed. • Similarly tax charged by a retailer under this scheme shall also be disallowed as input adjustment in the hand of the buyer. • The question of a retailer falling under this scheme shall be decided by the collector or Board, as the case may be. • The rule is silent on the issue of audit.

23. RETAILER OF SPECIFIED GOODS - SECTION-3AA (Contd…)

24. COMMERCIAL IMPORTERS • Input tax is payable on assessed value @ 15% • Sales Tax @ 15% is payable on minimum value addition at the time of making payment of Custom Duty and Sales Tax as above. • Minimum value addition shall be taken as higher of 10% or that of preceding year. • Payment of Sales Tax on minimum value addition shall entitle exemption from audit. • The format of return for a commercial importer is prescribed which differs slightly from the normal return • In addition, he has to file a statement of value addition for imported and domestic purchases of at the end of the Financial Year • A separate challan is prescribed for a commercial importer for payment of sales tax on value addition.

25. COMMERCIAL IMPORTERS (Contd…)

26. JEWELLERS • Minimum threshold of Rs. 5 million is applicable. • Jewelers, other than zarqar, are required to pay sales tax on services only i.e. Sale Price minus cost of gold or silver. • Value addition on account of services should not be less than 10%. • Zarqar is a person who is engaged in the making process only and not in the sale of jewelry. • No adjustment of input tax is allowed. • Sales tax invoice, in case of jewelers, has also been prescribed. • The following records are prescribed to be maintained by a jeweler. • Register of goods dispatched / sold • Sales tax invoices • Utility bills, rent receipts, wage payment records and proof of all other business expenditures • Monthly returns • Purchase invoices / memos etc.

27. JEWELLERS (Contd…)

28. ELECTRIC POWER COMPANIES • Value of supply shall be the amount received by the company (IPP, HUBCO, KAPCO) on account of Energy Purchase Price only. • Value of supply for KESC, WAPDA etc., shall be price of electric power including charges, surcharges, late payment surcharges, rents, commissions, duties taxes etc.. • WAPDA and KESC shall deposit tax on collection basis. • WAPDA and KESC shall adjust input tax paid relating to purchases of previous tax period. • Others will follow the normal course.

29. ELECTRIC POWER COMPANIES (Contd…) • The registered consumer shall be entitled to claim input tax paid on electricity, evidenced by the electricity bill, which should contain registration number and business address of the consumer. • WAPDA and KESC are required to submit returns by 21st of the following month. • IPPs shall file returns by 25th of the following month • Other persons engaged in supply of electric power shall file returns by 15th of the following month • There are no specific requirements with respect to book keeping.

30. NATURAL GAS COMPANIES • The rule also applies to persons involved in the supply of CNG and LPG. • The return shall be filed by 15th of the following month except in case of companies supplying directly to consumers charging bill on monthly basis, the return shall be filed by 15th of the second following month. • The sales tax is chargeable at open market price even if supplied free of charge. • No specific conditions with respect to input tax adjustments in the hand of Gas Companies. • The consumer can adjust input tax on payment basis, irrespective of the tax period. • The bill should contain registration number and business address of the consumer in order to constitute a valid invoice. • No specific conditions with respect to record keeping. • Gas transmission and distribution companies are not required to maintain records of daily stocks and sales.

31. SUPPLY OF SUGAR TO TRADING CORPORATION OF PAKISTAN (TCP) • TCP will pay only value of sugar to the mills at the time of successful grant of tender. • The mill will issue a sales tax invoice at the time of actual delivery. At this time, TCP will pay the amount of Sales Tax to the mill. • In case of delivery for export, mill will issue zero-rated tax invoices. • The mill will disclose its activities in the month of issuing invoices. • This rule deviates from basic principles of charging sales tax, tax period and filing of return.

32. SUPPLY OF FOOD • This rule applies to: • Every person or establishment supplying food, drinks and other eatables to canteens, messes or to any organization, institution or person. • Clubs, caterer, hotel or restaurants (other than those located in hotels), etc.. • The rate of tax is 15% (tax fraction). • Minimum threshold of Rs. 5 million is applicable. • Due date for filing return is 15th of the next month. • In case of clubs charging bill on monthly basis, due date of filing returns is 15th of the second following month.

33. SUPPLY OF FOOD (Contd…) • No specific conditions with respect to input tax adjustment. • All prescribed records shall be maintained with addition of menu card showing prices of cash item or combination of food. • The price as per menu card shall be inclusive of sales tax. • Use of Fiscal Electronic Cash Register or issuance of computerized invoices also allowed. • Daily gross take should be recorded and maintained.

34. SUPPLY OF FOOD (Contd…)

35. TAXABLE SERVICES • This rule applies to advertisers, courier companies, custom house agents, hotels, ship-chandlers and stevedores. • No minimum threshold with respect to turnover is available. • Sales tax @ 15% is leviable. • Due date of filing return is 15th of the following month. • No specific conditions with respect to input tax adjustment. • No specific requirement with respect to maintenance of records. • Records are record should be retained for a period of 5 years.

36. SPECIFIC PROVISION • Value of supply for custom-house agent shall be the amount received for providing services only. It shall be exclusive of any amount received on account of transportation, demurrage, wharfage, duties, excise, etc., which the agent pays on behalf of his clients. • Minimum values of various services offered by custom house agents are prescribed ranging from Rs. 500 to Rs. 2000. • Sales tax numbers and licenses number should be quoted on Goods Declaration. • Photocopy of last month’s return should also be appended with Goods Declaration. • Sales tax charged by the agent is adjustable as input tax in the hand of the client.

37. SHIP-CHANDLERS • Value of supply shall be the amount received on account of services provided only. • It shall be exclusive of any amount received as re-imbursement of payments made on behalf of the client.

38. STEEL MELTERS AND RE-ROLLERS • Sales Tax @ 15% is leviable. • Production of steel melter shall be calculated at the rate of one metric ton ignotes or billets per 800 units of electricity consumed. • Minimum value addition shall be Rs. 3200 per metric ton where the sales tax invoice of local scrap is not available. • Minimum value addition shall be Rs. 2200 per metric ton where the sales tax invoices or GD (for imported) scrap is available. Adjustment of input tax u/s 7 is allowed.

39. STEEL MELTERS AND RE-ROLLERS (Contd…) • In case of combination of scrap (i.e. imported, with invoice and without invoice) the liability shall be determined proportionately. • Production of steel re-roller shall be calculated at the rate of one metric ton MS product per 130 units of electricity consumed. • Minimum value addition in case of re-rollers shall be Rs. 535 per metric ton. • No specific requirements with respect to maintenance of records or filing of return. • Detail of production in prescribed format is required to be submitted alongwith the return.