Generally speaking, tax reforms are meant to reduce burden of taxes on poor and middle class, to attract investment, to increase burden on non-compliant taxable persons, to minimize discretionary powers of tax authorities, to remove sectoral distortions in domestic taxes, to broaden the tax base and to maximize the size of formal economy.
On 21st June 2017, in order to implement financial proposals for the financial year beginning on 1st July 2017, Finance Act, 2017 (hereinafter Finance Act), was published in the Official Gazette. The Finance Act has introduced various tax reforms in the Income Tax Ordinance, 2001, the Sales Tax Act, 1990, the Federal Excise Act, 2005, and the Customs Act, 1969.
Since imposition of sales tax can influence imports and domestic consumption, the government can change certain economic variables through sales tax reforms. Pursuant to the Finance Act, major sales tax reforms introduced in the Sales Tax Act, 1990 (Act) relate to reduced rates, exemptions, fixed rates, turnover sales tax, further tax and tax authorities.
Reduced rate of sales tax
Instead of paying tax at the standard rate of 17pc, businesses in five sectors including textile, leather, carpets and surgical and sports goods have been given the benefit of paying sales tax at the rate of 0pc. However, retail sales of these five export-oriented sectors will be taxable at the rate of 6pc instead of 5pc. Similarly, commercial import of fabric is taxable at the rate of 6pc plus 2pc value addition tax.
A reduced rate of 7pc is chargeable on import of seven type of poultry machinery including machinery for preparing feeding stuff, incubators, brooders, insulated sandwich panes, poultry sheds, evaporative air cooling system and evaporative cooling pad.
To end discrimination between local and imported Hybrid Electric Vehicles (HEVs), a reduced rate of 8.5pc is applicable on HEVs with engine capacity up to 1800CC and 12.75pc on HEVs with engine capacity ranging between 1801CC and 2500CC.
Exemption from sales tax
Sales tax will not be chargeable on import and supply of combined harvesters up to five years old. Previously, such imports or supplies were chargeable at the rate of 7pc ad valorem. The purpose seems to facilitate farming community to adopt mechanized farming to reduce post harvest losses.
Likewise, exemption from payment of sales tax has been provided on import of sunflower and canola hybrid seeds meant for sowing. Previously, imported oilseeds were chargeable to sales tax at the rate of 5pc.
Domestic supply of single cylinder agriculture diesel engines of 3 to 36HP is exempted from the whole of sales tax.
To promote renewable sources of energy, exemption has been provided on import and supply of systems or items for use with solar energy such as solar power systems. Likewise, supplies of goods in the Gwadar Free Zone (GFZ) will be exempt from sales tax for 23 years.
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