Karachi, December 24, 2023 – The Federal Board of Revenue (FBR) in Pakistan has recently released a detailed procedure for making zero-rated supplies to duty-free shops, aiming to streamline and regulate transactions in this sector.
The updated guidelines, embedded in the Sales Tax Rules of 2006, are set to take effect for the tax year 2024.
According to the FBR, these guidelines fall under Rule 164, specifically addressing the mechanism for making zero-rated supplies to duty-free shops. The provisions are designed to facilitate duty-free shops, licensed by Customs authorities and entitled to zero-rated supplies under serial No. 3 of the Fifth Schedule to the Act.
The comprehensive procedure outlined by the FBR includes the following key points:
(a) Registration and Reporting: Duty-free shops (DFS) must register under the Act, submit monthly returns, and maintain records as per the Act’s stipulations.
(b) Authorization Application: DFS must apply to the respective Commissioner Inland Revenue for authorization to make zero-rated purchases. The application should specify the description and quantity of goods, along with particulars such as the sales tax registration number of the manufacturer.
(c) Indemnity Bond: DFS is required to submit an indemnity bond with the application, ensuring that goods purchased tax-free will only be used for supplying against duty-free allowances under different baggage concessions. The bond includes a commitment to pay the sales tax and additional tax if the goods are used for other purposes.
(d) Delivery and Invoice: Upon authorization, the manufacturer delivers the goods against a zero-rated invoice in the name of DFS, referencing the authorization details. The invoice displays the value of goods in both rupees and US dollars, with irremovable stickers indicating exclusivity for supply under customs baggage rules.
(e) Payment in Foreign Currency: DFS pays for the goods in US dollars, which the manufacturer then surrenders to the State Bank of Pakistan. The manufacturer receives the payment in Pak rupees following prevailing State Bank procedures and foreign exchange regulations.
(f) Certificate of Receipt: DFS issues a certificate of receipt, attested by customs staff at duty-free shops, indicating the authorization reference, date, and invoice details. Copies are sent to the manufacturer and Commissioner Inland Revenue.
(g) Record-keeping: DFS and the manufacturer maintain separate records of zero-rated purchases and sales. These records, inclusive of passenger particulars, are subject to inspection or audit by sales tax staff.
(h) Refund Process: Documents are furnished to the officer-in-charge of the Refund Division of the Regional Tax Office (RTO) for verification and endorsement. Refund processing follows Sales Tax Rules of 2006, treating the claimant as a manufacturer-cum-exporter.
(i) Limitation on Procurement: DFS is limited to procuring goods for a period not exceeding three months and must ensure that these goods do not enter the local market. Any breach leads to DFS being liable for sales tax and additional tax.
(j) Indemnity Bond Release: The Commissioner Inland Revenue releases the indemnity bond only after verifying, through audit or otherwise, that DFS has sold goods solely against duty-free allowances under relevant baggage concessions.
These guidelines aim to enhance transparency, accountability, and compliance in the duty-free sector, ensuring that zero-rated supplies contribute to the intended purpose of serving passengers under customs baggage rules.
