Pakistan’s tax system largely depends on indirect taxation to collect tax revenues for balancing the budgets. Unlike most developed countries, where more than 60% tax receipts are raised through direct taxes viz. income tax, property tax, inheritance tax, wealth tax, etc., more than 60% of Pakistan’s federal tax receipts are collected through indirect taxes including sales tax, customs duty and federal excise duty. If 40% of income tax collection through presumptive taxation is also accounted for, then the figure for indirect tax revenue surges to more than 70%. In the given taxation system, the Finance Bill 2016 is crucial in order to examine as to what changes are being made to the sales tax system, which is the leading source of tax revenue as more than 44% federal tax receipts comes from this levy.
The federal budget for FY2016-17, which was presented in the parliament by the Finance Minister on 3rd June 2016, proposes to implement the following sales tax measures with effect from 1 July 2016:
SRO 1125(I)/2011 of 31 December 2011 which provides for reduced sales tax rates of 3% and 5% on importation and supply of goods by persons who are doing business in the five export-oriented sectors (textile (including jute), carpets, leather, sports and surgical products, is going to be amended under a new SRO with the intention of no-tax, no-refund regime. This new SRO will introduce a sales tax at the rate of zero percent on the import and supply of those goods and the purchase of energy (electricity, gas, furnace oil, and coal) by these sectors. However, sales tax rate is imposed on the supply at the retail level of locally-manufactured finished goods of these sectors at a rate of 5%.
The Finance Bill proposed to exempt from sales tax the import and supply of following items:
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- Pesticides and their ingredients in order to promote agriculture sector.
- Vitamins, premixes, minerals and micronutrients (food grade to combat growth stunting).
- Laptops and personal computers to promote Information and Communication Technology (ICT) through genuine imports and to render informal and illegal imports as uncompetitive.
- Dump Trucks for Thar Coalfield.
- A 40-year exemption on the import and supply of materials, equipments, ship bunker oils brought and sold to ships visiting Gwadar Port for the development of Gwadar Port and Gwadar Free Zone.
- A 23-year exemption on sales /supplies to the businesses to be established in Gwadar Free Zone.
- Silos used for the development of grain handling and storage facilities.
- Stationery items, such as pencils, pens, markers, geometry boxes, pencil sharpeners, exercise books, erasers, etc.;
- Milk; and
- Fat-milled milk.
Reduced Sales Tax Rates
The following items are proposed to be subject to the following reduced sales tax rates:
- Sugar will be subject to the rate of 8%. Currently, sugar is subject to federal excise duty at the rate of 8%. This proposal will ensure payment of sales tax by downstream wholesalers and retailers as well as further tax under section 3(1A) of the Sales Tax Act, 1990.
- Urea will be subject to 5% rate. Fertilizers are Third Schedule items and are currently subject to the standard sales tax rate of 17%.
- Certain ingredients of poultry feed will be subject to the rate of 10%. Currently, these ingredients are subject to the reduced sales tax rate of 5%.
Fixed Sales Tax
Under the Finance Bill, new options to tax certain transactions have been proposed. The proposed options are as follows:
- to provide option to Tier-1 retailers to pay sales tax at a fixed rate of 2% of their total turnover without any input tax deduction. Under the current sales tax regime, these retailers are subject to standard sales tax rate and are allowed to deduct input tax.
- to charge sales tax, a fixed amount of PKR 1.25 per kilowatt hour (KWH) of electricity consumed from marble industry to encourage registration under the Sales Tax Act, 1990. The proposed tax shall be in addition to standard sales tax rate of 17% on supply of electricity as well as extra tax of 5%.
- to increase the fixed sales tax rate on steel sector, ship-breakers and steel-melters.
- to include mineral water in the Third Schedule to the Sales Tax Act 1990 so that the tax is charged on the basis of retail price instead on the 17% of the value of the supply.
- to increase sales tax on import of mobile phones from PKR 300, PKR 500 and PKR 1,000 based on their features to PKR 300, PKR 1000 and PKR 1500, respectively.
The Finance Bill has proposed to increase the registration threshold from PKR 5 million to PKR 10 million for manufacturers. The reason for increase in the thresholds is that low threshold has been causing undue hardships and registration requirements for small manufacturers who are making minimal contributions to revenues.
It is good to see that there is considerable reduction in the sales tax rate on petroleum products, which must be considered as relief for the public.
By SRO 471(I)/2016 of 31 May 2016, the federal government has further amended SRO 57(I)/2016 of 29 January 2015, and SRO 268(I)/2016 of 31 March 2016, reducing the sales tax on the import and supply of petroleum products with effect from 1 June 2016:
- PKR 9.36 from PKR 12.89 per litre motor spirit excluding HOBC;
- PKR 10.58 from PKR 13.90 per litre HOBC;
- PKR 5.58 from PKR 4.76 per litre kerosene;
- PKR 18.47 from PKR 29.57per litre high speed diesel oil; and
- PKR 1.86 from PKR 4.72 per litre light diesel oil.