Tax Year 2012Short Notes On SALES TAX Topics Covered: Numerical Portion Theoretical portion BY : Kashif Nawaz Jakhar Contact No# 0331-4791167 SALES TAX PREFACE Al-Hamd-O-Lillah, the 2nd addition of “Short Notes on Sales Tax” has been completed. These notes have been prepared under the senior guidance of my dearest teacher Mr. Imran Shehzad (ACA), who guided me through the way in the preparation of such quality notes for the students of Module-C. In these note, I covered almost all the material areas covering upto 20 to 30 marks in the paper including numerical calculations and fair presentations of the conceptual queries frequently asked by the ICAP-Examiner. I try to retain the focus of the ICAP-examiner in paper construction relative to the marks allocation as: Topics Sales Tax Numerical Conceptual queries Marks 10-15 10-20 I recommend to study these notes with reference to “ INCOME TAX & SALES TAX ” Khalid Petiwala‟s Notes. I hope my efforts will help you to retain maximum marks in your examination. Utmost efforts have been made to make these notes free from errors, yet there is always a room for improvement. Any suggestion from you will highly be appreciated. Kashif Nawaz By: Kashif Nawaz Jakhar Page 2 SALES TAX SALES TAX Gross Sales Tax @ 16 % Example : Sr. No. Particular Value 50,000 50,000 GST (%) 16% 16% GST 8000 8000 Value Increase GST 58,000 58,000 1 2 Fans AC 100,000 NOTE : Tax on sale = Output Tax Tax on Purchase = Input Tax 16,000 116,000 Collect Paid Point to Remember Income Tax Sales Tax Direct Tax Indirect Tax Paid by other person Note : Except consumer every person pays two times tax. e.g. Mr. Kashif purchased goods from Mr. Rameez. Kashif paid input tax to Mr. Rameez. He also sold goods to Mr. Haseeb and collect output tax . which he paid into NBP. so, Input Tax paid Output Tax paid Kashif Rameez NBP Page 3 By: Kashif Nawaz Jakhar SALES TAX Example : Mr. Y purchased good worth Rs. 100,000 from Mr. Z. He paid input Tax Rs. 16000. He sold these goods to Mr. X for Rs. 120,000 and collect output tax Rs. 19200 . Calculation of Tax liability of Mr. Y Purchase. Rs.100,000 Sale. Rs. 120,000 Z Y X Amount Paid. Rs.116,000 to Z Amount Received. Rs.139,200 From X Requirement : I. Calculate amount to be paid and amount to be received . II. Calculate Tax liability of Mr. Y Solution: I. Calculation Of amount received and paid. Sale Price = 120,000 Tax ( 16% ) = 19200 Amount to be received 139,200 Purchase Price = 100,000 Tax ( 16% ) = 16000 Amount to be Paid 116,000 II. Calculation of Tax Liability : Sale ( out put Tax ) = 19200 Purchase ( input Tax ) = (16000) Tax Liability 3200 20,000 X 16% = 3200 . = Sale – purchase = 120,000-100,000 = 20,000 By: Kashif Nawaz Jakhar Page 4 SALES TAX Example : { sale by one person is the purchase of other person } Assume Custom duty is included Persons Importer (X) Wholesaler (Y) Retailer (Z) Consumer (K) Purchase Input Tax ( 16% ) 10,000 12,000 15,000 20,000 1600 1920 2400 3200 Sale 12,000 15,000 20,000 Output Tax ( collect ) 1920 2400 3200 NBP 1600 1920 480 800 = 2400 - 1920 = 3200 - 2400 3200 EXAM FOCUS POINT : There are two possible ways in which the data will be given in Exam. Then calculation of sales Tax ( assume figures ) Excluded sales Tax = 20,000 X 16% = 3200 & Inclusive of Sales tax = 23,200 X 0.16/1.16 = 3200 By: Kashif Nawaz Jakhar Page 5 SALES TAX !!!!!!!! IMPORTANT RULES OF SALES TAX !!!!!! 1. Sales Tax Liability = Output Tax – input Tax 2. Tax Fraction Formula = Amount X 16 / 116 3. The Person must be a registered person 4. He has paid the Tax 5. The activities must be Taxable 6. Goods Must be taxable 7. Input tax can be claimed for last 6 tax periods 8. Input tax on fixed assets shall be claimed in 12 tax periods 9. He holds invoice of Tax 10. No input tax on the fake invoice 11. No input tax on vehicle ( otherwise as an inventory ) 12. Input Tax can be claimed on accrual basis ( must be paid with in 180 days ) 13. All payments > Rs. 50,000 must be through banking channel 14. No input Tax on exempt goods 15. Common Tax shall be allowed in proportion to sale 16. Input Tax is restricted upto 90% of output Tax 17. Tax also be payable on drawings , taken up by the employees 18. No input Tax , if Tax is not paid by the supplier . ( To whom you have paid the Tax ) By: Kashif Nawaz Jakhar Page 6 SALES TAX Explanation of the Rules : Person: A person can be a Individual AOP Company But he must inform that from which category he belongs. Categories : Retailer importer Exporter wholesaler Manufacturer ( Ref. book page # 598 ) Registered Person: how to get register Rules For Registration : 1. Compulsory Registration 2. Voluntary Registration a) For the followings, registration is compulsory 1. Compulsory Registration : without any condition. o Importer o Distributor o Wholesaler b) For Manufacturer & Retailer : Voluntarily: If turnover of 12 months is less than (<) 5 million. Compulsory: If turnover of 12 months exceeds (>) 5 million. By: Kashif Nawaz Jakhar Page 7 SALES TAX 2. Voluntary Registration : If a person wants , he can be a registered person. Note : A unregistered person can’t claim or collect the tax. He can’t issue the invoice. But he can pay the sales Tax. Process of Registration : If a person wants to be a person the he should follow the following procedure. Assume he lives in Lahore, Application for registration will be submitted to LRO ( local registration office) LRO will send this application to CRO ( central registration office ). They can directly inform the person about registration or rejection. Note. ( in Urdu ) aik person, aik waqt main aik say ziada jaga per register ho sakta hai. means As a wholesaler As a importer etc. usy for each category separately , sales tax number issue kiye ja sakty hain. aor aik single Sales tax number for all categories bhi issue kia ja sakta hai . A person will be de-recognized on the following basis and he will be added in black list on the web. No tax submit Issue fake invoice Voluntarily . Black listing: De-registration :( Ref. book page # 612 ) A person can claim only if he already paid the tax. By: Kashif Nawaz Jakhar Page 8 SALES TAX Taxable Activities: e.g. ( Ref. book page # 599 ) then it is not a taxable activity , because these are personal nature . Bought Tissue box for Sale For use in manufacturing process. it’s a taxable activity. Bought Tissue box for car office use only Goods must be taxable: Land , building , Intangible asset , cash and shares are not goods. GOOGS Taxable Goods Exempt Goods No Tax 16% Zero Rated ( 0% ) ( Ref. book page # 604 ) Valid invoice of Tax: An invoice must not be o Fake Invoice o Issued by a black listed Information given in Invoice ( Ref. book page # 599 ) o Name , address , and registration number of supplier and recipient o Date of issue o Description and quantity of goods o value exclusive of Tax o Amount of sales Tax By: Kashif Nawaz Jakhar Page 9 SALES TAX Fixed Assets : The fixes asset must be used in the production of taxable goods. Exempt Goods: ( Ref. book page # 602 ) o o o o Live animals Holy Quran and other holy books computer software Imported samples By: Kashif Nawaz Jakhar Page 10 SALES TAX CONCEPT About „‟goods purchased from unregistered suppliers are exclusively used for making Taxable supplies" „‟ Example : Supplies Taxable Zero rated Exempt ( Assumed Figures ) Amount 1000 500 1000 Common Input Tax 840 420 840 2500 2100 Adjustment : Purchases from unregistered person Rs.500 are equally contributed to supplies . Solution : We can’t claim tax on these purchases. So we must deduct it from our sales. Supplies Taxable (1000-200) Zero rate (500-100) Exempt (1000-200) Amount 800 400 800 Common Input Tax 840 420 840 2000 2100 In both cases Total of common input tax will be same. By: Kashif Nawaz Jakhar Page 11 SALES TAX NOTE From sale only the Sale price of , purchases from unregistered person will be deduct. Question : Purchases from unregistered person of Rs.400 whose sale price is Rs.500. These goods were used in the Taxable supplies. Common input Tax is Rs.2100 Supplies Taxable Zero rated Exempt Amount 2000 300 200 2500 Requirement: Apportionment of common input Tax. Solution : Apportionment of common input Tax Supplies Taxable Zero rate Exempt Amount (2000-500) 1500 300 200 Common Input Tax 1575 315 210 2000 Apportionment of Common input Tax. Taxable supplies = 1500 X 2100 = 525 2000 2100 Zero Rated = 2000 300 X 2100 = 315 Exempt Supplies = 200 X 2100 = 210 2000 By: Kashif Nawaz Jakhar Page 12 SALES TAX Note If sale price of purchases from unregistered person is not given. EXAMPLE : Purchase price of goods from unregistered person is Rs.400 and these goods were used in the taxable supplies. Purchases from registered person is Rs. 200. Common input tax is Rs. 2100. Supplies Taxable Zero rated Exempt Amount 2000 300 200 2500 Requirement: Apportionment of common input Tax. Solution : IF purchase price not given then the following procedure should be adopted. I. Calculate the gross profit ratio II. Apply the ratio on purchases (from unregistered person) and calculate the sale price of the purchases. NOTE Formulas for calculating the gross profit ratio. S=C+SX% OR C=C+CX% where , S = Total sales of the Company C = Total cost ( purchases ) of the company In both steps same formula should be used . By: Kashif Nawaz Jakhar Page 13 HINT SALES TAX Step.1 : Calculation of margin on sale : S=C+SX% assume : % = x where: S = Total Supplies C = Total purchases 2500 = 600 + 2500x 2500x = 2500 – 600 2500x = 1900 x = 0.76% Step.2 : Calculation of the sale prices of the purchases (from unregistered person). S=C+SX% assume : S = x where: S = Sale price of purchases from unregistered person (required to calculate) C = Purchases from unregistered person x = 400 + 0.76x 0.24x = 400 x = 1667 So now , = Taxable supplies – Sale price of purchases from unregistered person = 2000 – 1667 = 333 Apportionment of common input Tax Supplies Amount Taxable (2000-1667) 333 300 Zero rate 200 Exempt 833 Common Input Tax 839 757 504 2100 By: Kashif Nawaz Jakhar Page 14 SALES TAX !!!!!!!!!!! General format of Sales Tax Numerical !!!!!!!!!! Computation of Tax Liability Output Tax Supplies to registered person ( xxx X 16% ) Supplies to un-registered person ( xxx X 16% ) Input Tax Common input tax ( w-1 ) or 90% of out put Tax xxxx xxxx Lower Rs.(000) xxxx xxxx xxxx Tax Liability Tax Refundable ( w-1 ) = xxxx Note : (xxxx) xxxx if the 90% of output tax is less than the common input tax then the balance will be carry forward. e.g. common input tax = 1000 90% of output tax = 800 Balance c/f = 200 it would be the input tax of the next month Working : ( W-I ) Apportionment of common input tax. Supplies Taxable Zero Rated Exempt Rs.(000) xxx xxx xxx xxxx Common input Tax Rs.(000) xxx xxx ( refundable ) xxx ( not refundable ) xxxx = Taxable supplies X total input tax Total supplies ( W-I ) Common input Tax or Residual Tax. Net purchases from registered person X 16% = xxxx By: Kashif Nawaz Jakhar Page 15 SALES TAX Debit and Credit Note( Ref. book page # 607 ) Example : In June Mr. X sales goods to Mr. Y worth Rs.100,000 and receive Rs.116,000( where 16000 is sales Tax ) . But in July Mr. Y return goods worth Rs.50000. So Mr. X will return Rs. 58000 { 50,000 + ( 16000 X 50% ) }. Information given: Mr. X Issue credit note (sales return) Mr. Y Issue Debit note ( purchase return ) Output Tax = Rs. 100,000 Input Tax = Rs ( 50,000 ) Requirement : Output Tax = Rs. 200,000 Input Tax = Rs ( 80,000 ) Calculate Tax payable by both persons. Solution : Mr. X Output Tax = 100,000 less: credit note = (8000) 92000 Less: input Tax = (50000) Tax Payable = 42000 Mr. Y Output Tax = 200,000 Input Tax Debit Note = (80000) = 8000 (72000) Difference is tax payable . Tax Payable = 128,000 By: Kashif Nawaz Jakhar Page 16 SALES TAX Theoretical Portion of Sales Tax General terms : 1. Sales Tax is a multi stage tax : ( Ref. book page # 594 ) The Sales tax is a multistage tax payable on the value of : Taxable supplies by a registered person in respect of any taxable activity carried on by him ; Goods imported in Pakistan ; and Specified taxable services 2. Who is liable to pay Sales Tax : ( Ref. book page # 595 ) Liability to pay the sales tax to the sales tax department shall be : of the person making the supply , in case of supply of goods ; of the person importing the goods , in case of goods imported in Pakistan; and of the person providing taxable services. 3. When to pay Sales Tax : ( Ref. book page # 595 ) Sales tax shall be paid at the time of: payment of custom duty in case of import of goods ; Filing of sales tax return in case of supplies made or services provided in Pakistan. 4. Definition of Cottage industry : Means a manufacturer whose annual taxable turnover during the last 12 months , ending any tax period , does not exceeds Rs.5 million or whose annual utility ( electricity , gas, and telephone ) bills during the last 12 months , ending any tax period, do not exceed Rs.700,000 In Short: I. Taxable turnover of last 12 months < Rs.5 million II. Utility bills of last 12 months < Rs. 700,000 By: Kashif Nawaz Jakhar Page 17 SALES TAX Exemptions provided to small manufacturer and small retailer Importer / wholesaler / Distributor Retailer Total turnover up to Rs.5 million during the last 12 months. Total turnover exceeds Rs.5 million during the last 12 months. Sales tax @ 16% on value of taxable supplies Exempt supplies as per 6th schedule. Fixed sales tax as per special procedure rule Exempt supplies as per 6th schedule. Sales tax @ 16% on value of taxable supplies. Manufacturer Cottage industry Other than Cottage industry IMPORTANT DEFINITIONS: 1. Arrears: ( Ref. book page # 596 ) Means unpaid sales Tax including; additional tax default surcharge fine penalty fee or any other sum under the sales tax laws at any particular day. ( Ref. book page # 597 ) 2. Defaulter: Person is a ; Means a person who fails to pay the arrears. proprietor a partner in case of a firm a director in case of a company and also includes a guarantor or successor By: Kashif Nawaz Jakhar Page 18 SALES TAX 3. Distributor: ( Ref. book page # 597 ) Means a person appointed by a manufacturer, importer , or any other person for a specified area to purchase goods from him for further supply and includes a person who is also engaged in supply as a wholesaler or retailer. 4. Due Date: In relation to the furnishing of a return means the 15th day of the month , following the , end of the tax period or such other date as the FBR may specify. ( Ref. book page # 597 ) 5. Goods: ( Ref. book page # 597 ) Includes every movable property other than actionable claim , money, stocks and shares and securities . 6. Input Tax: levied on : ( Ref. book page # 597 ) In relation to registered person means , the tax supply of goods to the person Goods imported and cleared under the custom act. taxable services under the provincial ordinance rendered to the person Federal excise duty in sales tax mode on goods or services to the person. 7. Manufacture or Produce: ( Ref. book page # 597 ) Includes : o any process in which an article is converted into another distinct article o any process in which an article is so changed or reshaped that it becomes capable of being put to use differently o any process incidental to the completion of a manufactured product By: Kashif Nawaz Jakhar Page 19 SALES TAX 8. Manufacturer or Producer: ( Ref. book page # 598 ) Means a person who engages in the manufacture or production of goods whether or not the raw materials are owned by him. 9. Open market price: ( Ref. book page # 598 ) Consideration in money which that supply or similar supply would generally fetch in an open market . 10. Output Tax : levied on : ( Ref. book page # 598 ) In relation to registered person means , the tax supply of goods by the person taxable services under the provincial ordinance rendered by the person Federal excise duty in sales tax mode on goods or services by the person. 11. Sales Tax: ( Ref. book page # 598 ) Means; The tax , additional tax, default surcharge, fine , penalty, fee , or any other sum under the sales tax laws. 12. Supply: ( Ref. book page # 598 ) Means the sale or other transfer of the right to dispose off goods as owner, including such sale or transfer under a hire purchase agreement , and also includes : a. putting to private , business or non business use of goods manufactured in the course of taxable activity other than those of making a taxable supply. By: Kashif Nawaz Jakhar Page 20 SALES TAX b. auction or disposal of goods to satisfy debt owed by a person c. possession of taxable goods held immediately before a person ceases to be a registered person 13. Taxable Activity: ( Ref. book page # 599 ) means any economic activity whether or not for profit , and includes ; I. any activity in the form of business , trade or manufacture ; II. supply of goods or providing of services to another person; III. a one-off adventure or concern in the nature of a trade ; and IV. any thing done or undertaken during the commencement or termination of the economic activity 14. Tax Fraction ( Formula ): ( Ref. book page # 599 ) % of sales Tax . X Value % of sales Tax + 100 15. Taxable Supplies : ( Ref. book page # 599 ) A supply of taxable goods by an; importer manufacturer wholesaler / dealer / distributor or retailer including zero rated supply but excluding exempt goods. 16. Tax period: ( Ref. book page # 600 ) One month or other period as the Federal government may specify . By: Kashif Nawaz Jakhar Page 21 SALES TAX 17. Time of Supply : Situations Normal Supply under hire purchase agreement Services ( Ref. book page # 600 ) Time of supply depend upon different situations : Time of Supply Time at which the goods are delivered or made available to the recipient of the goods Date of agreement Time at which services are provided ( Ref. book page # 600 ) 18. Value of supply : Value of taxable supplies is the consideration in money including all federal and provincial duties which the supplier receives in respect of the supply excluding the amount of sales tax. SR. no. 1 2 Situation Consideration is partly or fully in kind Sale is made on installment basis where the price includes markup on surcharge Value of supply Open market price excluding sales tax Open market price excluding sales tax. [ mark up or surcharge included in credit sales or sale on installment basis is not subject to sales tax ] Value as in the normal case or open market price excluding sales tax whichever is higher Value determined under the custom act including custom and excise duty levied thereon Value determined by the valuation committee comprising representative of trade and the sales tax department Open market price excluding sales tax Market price excluding sales tax Page 22 3 Supply between associated persons 4 In case of imported goods 5 If there is a reason to believe that the value is under declared in the tax invoice Special nature of transaction and ascertainment of value is difficult Exempt goods supplied to a registered person for processing 6 7 By: Kashif Nawaz Jakhar SALES TAX 19. Tax rates: ( Ref. book page # 601 ) Sales Tax rate is 16%. however , the Federal Government has power to fix a lower or higher rate on specified items. 22% on various items such as jelly, plastic waste, paper and aluminum 19.5% on various items such as certain steel items . 20. Zero Rates Supplies : ( Ref. book page # 606 ) Goods falling under this category are chargeable to sales tax @ 0%. Examples of items under this category : o Supply to diplomats , diplomatic mission and privileged persons o supply of raw material o supply to exporters under duty and tax remission rules ( DTRE ) o Supplies against international tenders Some more examples are given at book page 606. 21. Exempt Supplies: ( Ref. book page # 601 ) Certain imports and supply of goods falling under this category are outside the scope of sales tax and there for not subject to sales tax. Examples of items under this category : o o o o o Live animals Agriculture produce Holy Quran computer software imported samples Some more examples are given at book page 601. By: Kashif Nawaz Jakhar Page 23 SALES TAX 22. Debit and credit Note and destruction of goods; Where a registered person has issued a tax invoice and the tax return or tax invoice needs to be modified as a result of : o cancellation of supply ; or o return of goods ; or o change in the nature of supply ; or o change in the value of supply. With in 180 days , then the registered person may issue a debit/ credit note indicating specified information including reason for the issuance of debit/ credit note and make adjustments accordingly. [ Period of 180 days may be extended for any special person ] ( Ref. book page # 607 ) 23. Drawing of Samples : ( Ref. book page # 611) For the purpose of determining sales tax liability or for the purpose of establishing value of any taxable goods, an authorized officer can take minimum quantity of goods or raw materials against a proper receipt, a copy of which shall be kept in record by the registered person and the commissioner. NOTE Important definitions are giving in the book at page no.600 THE END By: Kashif Nawaz Jakhar Page 24