Karachi, February 12, 2025 – The Federal Board of Revenue (FBR) has introduced a detailed procedure governing zero-rated supplies to duty-free shops (DFS) across Pakistan.
This initiative aims to streamline tax regulations and ensure compliance with existing laws while facilitating international travelers who purchase goods from DFS outlets.
According to the FBR, the procedure for zero-rated supplies is already outlined in Rule 164 of the Sales Tax Rules, 2006. The FBR emphasized that DFS operators must adhere to the prescribed guidelines to benefit from tax-free procurements.
Procedure for Zero-Rated Supplies
Under the newly reiterated framework, DFS entities licensed by the Customs authorities and eligible for zero-rated supplies under serial No. 3 of the Fifth Schedule to the Sales Tax Act must follow these essential steps:
1. Registration and Compliance: Duty-free shops must be registered under the Sales Tax Act and are required to submit monthly returns while maintaining comprehensive records in accordance with the law.
2. Application for Authorization: The DFS must apply to the relevant Commissioner of Inland Revenue to obtain authorization for tax-free purchases. The application should specify details such as the exact description and quantity of goods, as well as the sales tax registration number of the manufacturer. Only goods intended for sale under duty-free allowances as per baggage concessions will be considered.
3. Indemnity Bond Submission: Along with the application, DFS must submit an indemnity bond in the prescribed format. This bond ensures that if the goods procured under zero-rated status are misused or sold outside the duty-free allowances, the DFS will be liable to pay the applicable sales tax along with additional tax as per Section 34 of the Sales Tax Act, 1990.
4. Zero-Rated Invoice and Delivery: Once authorization is granted by the Commissioner of Inland Revenue and the indemnity bond is accepted, the manufacturer can deliver the goods to the DFS under a zero-rated invoice. The invoice must reference the authorization number and display the value of goods in both Pakistani Rupees and US Dollars. Moreover, all such goods must bear a permanent sticker stating that they are exclusively meant for DFS sales under customs baggage rules.
5. Foreign Currency Payments: The DFS must pay for the goods in US dollars, which will be surrendered to the State Bank of Pakistan. The manufacturer, in turn, will receive payments in Pakistani Rupees as per the prevailing foreign exchange regulations.
6. Receipt Certificate and Customs Verification: Upon receipt of goods, DFS is required to issue a certificate confirming delivery, which must be attested by customs staff. Copies of this certificate must be sent to the manufacturer and the Commissioner of Inland Revenue.
7. Record Maintenance and Inspection: Both the DFS and the manufacturer are obligated to maintain detailed records of all zero-rated transactions. These records must include full particulars of passengers purchasing goods under baggage concessions and should be available for inspection by sales tax authorities as required.
8. Refund Process: Refund claims related to zero-rated supplies will be processed as per Chapter V of the Sales Tax Rules, 2006. The manufacturer will be treated as a manufacturer-cum-exporter for refund purposes.
9. Limit on Procurement Period: Duty-free shops can only procure goods under this framework for a period not exceeding three months. The FBR has mandated that DFS must ensure these goods are not diverted into the local market. If any such goods are found being sold domestically, DFS will be responsible for paying applicable sales tax along with penalties.
10. Release of Indemnity Bond: The indemnity bond will only be released after the Commissioner of Inland Revenue is satisfied—either through an audit or other verification methods—that all goods were sold in compliance with duty-free allowances.
FBR’s Commitment to Tax Regulation
The FBR reiterated its commitment to ensuring transparency and adherence to tax regulations while facilitating the duty-free retail sector. By reinforcing these procedural requirements, the FBR aims to curb potential misuse of tax exemptions while supporting legitimate duty-free operations. The regulatory body has also urged DFS operators to strictly comply with these provisions to avoid penalties and maintain smooth operations.
With this newly reaffirmed procedure, the FBR continues its efforts to enhance regulatory efficiency and foster a more transparent tax environment for duty-free businesses in Pakistan.