Karachi, December 15, 2024 – Pakistan has maintained its regular sales tax rate at 18% for the tax year 2025. This decision aligns with the Federal Board of Revenue’s (FBR) directive, following the increase in the sales tax rate from 17% to 18% introduced through the Finance (Supplementary) Act, 2023.
The sales tax framework is governed by Section 4 of the Sales Tax Act, 1990, which outlines the scope and applicability of this tax. It stipulates that the tax is charged, levied, and paid at the rate of 18% on:
1. Taxable supplies made by a registered person in the course or furtherance of any taxable activity.
2. Goods imported into Pakistan, irrespective of their final destination within the country.
Additional Tax for Unregistered Entities
An additional tax of 4% is levied on taxable supplies made to entities or individuals who are not registered taxpayers, as outlined in subsection (1A). However, the Federal Government retains the authority to exempt certain taxable supplies from this additional tax via official notifications.
Specialized Tax Provisions
Section 4 also includes provisions for specific goods and industries. For instance:
1. Tenth Schedule: Tax on goods listed under this schedule can be levied based on production capacity or on a fixed basis, depending on the nature of the business. Different rates may apply across regions or industries.
2. Third and Eighth Schedules: Goods specified in these schedules are taxed at varying rates. For items in the Third Schedule, an 18% tax is levied on the retail price, which must be prominently displayed on packaging by manufacturers or importers. Items in the Eighth Schedule may have varying rates subject to conditions and limitations.
The Act grants the Federal Government authority to adjust tax rates, collection methods, and applicability through notifications in the official Gazette.
Tax Liability and Collection
Tax liability is assigned as follows:
1. For the supply of goods: The supplier is responsible for tax payment.
2. For imported goods: The importer bears the tax liability.
In certain cases, such as goods specified in the Ninth Schedule, the liability to charge, collect, and pay tax is explicitly outlined, including special rates and procedures.
Special Rules for Retailers
The Sales Tax Act imposes unique conditions on retailers:
1. Electricity Billing: Non-Tier-1 retailers are taxed via their monthly electricity bills at rates of 5% (bills under PKR 20,000) and 7.5% (bills exceeding PKR 20,000). These rates are in addition to standard electricity supply taxes. Tier-1 retailers must integrate their retail systems with the FBR’s computerized system for real-time sales reporting.
2. Minimum Production Requirements: The Thirteenth Schedule mandates minimum production levels for certain goods. If actual production falls short, the minimum production is treated as the taxable quantity for the month.
Sector-Specific Applications
The Federal Government exercises significant flexibility in implementing sales tax provisions for specific sectors. For instance, natural gas supplied to CNG stations is taxed at 18% of the value supplied, while the electricity provider is tasked with collecting tax from CNG stations based on consumption levels.
Policy Implications
By maintaining the sales tax rate at 18%, the government aims to ensure steady revenue generation amidst fiscal challenges. This rate adjustment reflects the broader goals of tax rationalization and compliance improvement. However, the impact on inflation and consumer spending will require careful monitoring.
The FBR has emphasized its commitment to streamlining tax collection mechanisms and broadening the tax base. Through a combination of policy clarity and technological integration, the board aims to improve compliance and reduce tax evasion. Notifications and exemptions granted under the Act provide flexibility but also necessitate vigilant oversight to prevent misuse.
In conclusion, the decision to retain the 18% sales tax rate underscores Pakistan’s efforts to stabilize its fiscal framework while balancing the needs of businesses and consumers. The detailed provisions of the Sales Tax Act, 1990, provide a robust structure for tax administration, ensuring consistency and adaptability in a dynamic economic landscape.