Notes on Sales Tax

Short Notes On SALES TAX

Topics Covered:

Numerical Portion

Theoretical portion

BY : Kashif Nawaz Jakhar

Contact No# 0331-4791167

Tax Year 2012

SALES TAX

By: Kashif Nawaz Jakhar Page 2

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 Marks

Sales Tax Numerical 10-15

Conceptual queries 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

SALES TAX


SALES TAX

Gross Sales Tax @ 16 %

Example :

Sr. No. Particular Value GST (%) GST Value Increase GST

1 Fans 50,000 16% 8000 58,000

2 AC 50,000 16% 8000 58,000

100,000 16,000 116,000

NOTE : Tax on sale = Output Tax Collect Tax on Purchase = Input Tax Paid Income Tax Direct Tax Sales 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, Kashif Rameez NBP

Point to Remember

Outp

ut

Tax p

aid

Input Tax paid

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 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. Purchase Price = 100,000 Sale Price = 120,000 Tax ( 16% ) = 16000 Tax ( 16% ) = 19200 Amount to be Paid 116,000 Amount to be received 139,200

II. Calculation of Tax Liability : Sale ( out put Tax ) = 19200 Purchase ( input Tax ) = (16000)

Tax Liability 3200 .

Z Y X

Purchase. Rs.100,000 Sale. Rs. 120,000

Amount Paid. Rs.116,000 to Z

Amount Received. Rs.139,200 From X

20,000 X 16% = 3200 = Sale – purchase = 120,000-100,000

= 20,000

SALES TAX


Example : { sale by one person is the purchase of other person }

Persons Purchase

Input Tax ( 16% )

Sale Output Tax ( collect )

NBP

Importer (X)

10,000 1600 12,000 1920 1600 1920

Wholesaler ( Y )

12,000 1920 15,000 2400 480

Retailer ( Z )

15,000 2400 20,000 3200 800

Consumer ( K )

20,000 3200

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

Assume Custom duty is included

= 2400 - 1920

= 3200 - 2400

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 )

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

Registered Person: ( Ref. book page # 598 ) how to get register

Rules For Registration :

1. Compulsory Registration 2. Voluntary Registration

1. Compulsory Registration : a) For the followings, registration is compulsory

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.

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.

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 .

De-registration :( Ref. book page # 612 )

Black listing: 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 .

A person can claim only if he already paid the tax.

Note. ( in Urdu )

SALES TAX


Taxable Activities: ( Ref. book page # 599 ) e.g.

Bought Tissue box for

car

office use only 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.

Goods must be taxable: Land , building , Intangible asset , cash and shares are not goods.

GOOGS

Valid invoice of Tax: ( Ref. book page # 604 ) 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

Taxable Goods

Zero Rated ( 0% )

No Tax

Exempt Goods

16%

SALES TAX


Fixed Assets : The fixes asset must be used in the production of taxable goods. Exempt Goods: ( Ref. book page # 602 )

o Live animals

o Holy Quran and other holy books

o computer software

o Imported samples

SALES TAX


Example : ( Assumed Figures )

Supplies Amount Common Input Tax

Taxable 1000 840

Zero rated 500 420

Exempt 1000 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.


Taxable (1000-200) 800 840

Zero rate (500-100) 400 420

Exempt (1000-200) 800 840

2000 2100

In both cases Total of common input tax will be same.

CONCEPT About „‟goods purchased from unregistered suppliers are exclusively used for making Taxable supplies" „‟

SALES TAX


From sale only the Sale price of , purchases from un-registered 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 Amount

Taxable 2000

Zero rated 300

Exempt 200

2500

Requirement: Apportionment of common input Tax.

Solution : Apportionment of common input Tax


Taxable (2000-500) 1500 1575

Zero rate 300 315

Exempt 200 210

2000 2100

Apportionment of Common input Tax. Taxable supplies = Zero Rated = Exempt Supplies =

NOTE

1500 2000

X 2100 = 525

300 2000

X 2100 = 315

200 2000

X 2100 = 210

SALES TAX


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 Amount

Taxable 2000

Zero rated 300

Exempt 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

NOTE

Formulas for calculating the gross profit ratio.

S = C + S X %

OR

C = C + C X % where , S = Total sales of the Company

C = Total cost ( purchases ) of the company

In both steps same formula should be used .

HINT

SALES TAX


Step.1 : Calculation of margin on sale :

S = C + S X %

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 + S X % 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


Taxable (2000-1667) 333 839

Zero rate 300 757

Exempt 200 504

833 2100

SALES TAX


!!!!!!!!!!! General format of Sales Tax Numerical !!!!!!!!!! Computation of Tax Liability Output Tax Rs.(000) Supplies to registered person ( xxx X 16% ) xxxx Supplies to un-registered person ( xxx X 16% ) xxxx xxxx Input Tax Common input tax ( w-1 ) xxxx or 90% of out put Tax xxxx (xxxx) Tax Liability xxxx Tax Refundable ( w-1 ) = xxxx Note : 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 Rs.(000) Common input Tax Rs.(000)

Taxable xxx xxx

Zero Rated xxx xxx ( refundable )

Exempt xxx xxx ( not refundable )

xxxx xxxx

( W-I ) Common input Tax or Residual Tax. Net purchases from registered person X 16% = xxxx

Lower

= Taxable supplies Total supplies

X total input tax

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 Mr. Y Issue credit note (sales return) Issue Debit note ( purchase return )

Output Tax = Rs. 100,000 Output Tax = Rs. 200,000 Input Tax = Rs ( 50,000 ) Input Tax = Rs ( 80,000 ) Requirement : Calculate Tax payable by both persons.

Solution :

Mr. X Mr. Y

Output Tax = 100,000 Output Tax = 200,000 less: credit note = (8000) 92000 Input Tax = (80000) Less: input Tax = (50000) Debit Note = 8000 . Tax Payable = 42000 (72000) Tax Payable = 128,000

Difference is

tax payable

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

SALES TAX


Importer / wholesaler / Distributor

Sales tax @ 16% on value of taxable supplies

Retailer

Total turnover up to Rs.5 million during the last 12 months.

Exempt supplies as per 6th schedule.

Total turnover exceeds Rs.5 million during the last 12 months.

Fixed sales tax as per special procedure rule

Manufacturer

Cottage industry Exempt supplies as per 6th schedule.

Other than Cottage industry Sales tax @ 16% on value of taxable supplies.

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.

2. Defaulter: ( Ref. book page # 597 ) Means a person who fails to pay the arrears. Person is a ;

proprietor

a partner in case of a firm

a director in case of a company

and also includes a guarantor or successor

Exemptions provided to small manufacturer and small retailer

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: ( Ref. book page # 597 ) 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.

5. Goods: ( Ref. book page # 597 ) Includes every movable property other than actionable claim , money, stocks and shares and securities .

6. Input Tax: ( Ref. book page # 597 ) In relation to registered person means , the tax levied on :

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

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 : ( Ref. book page # 598 ) In relation to registered person means , the tax levied on :

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.

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 . % 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 .

X Value

SALES TAX


17. Time of Supply : ( Ref. book page # 600 ) Time of supply depend upon different situations :

18. Value of supply : ( Ref. book page # 600 ) 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. Situation Value of supply 1 Consideration is partly or fully in kind Open market price

excluding sales tax

2 Sale is made on installment basis where the price includes markup on surcharge

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 ]

3 Supply between associated persons Value as in the normal case or open market price excluding sales tax whichever is higher

4 In case of imported goods Value determined under the custom act including custom and excise duty levied thereon

5 If there is a reason to believe that the value is under declared in the tax invoice

Value determined by the valuation committee comprising representative of trade and the sales tax department

6 Special nature of transaction and ascertainment of value is difficult

Open market price excluding sales tax

7 Exempt goods supplied to a registered person for processing

Market price excluding sales tax

Situations Time of Supply Normal Time at which the goods are delivered or made

available to the recipient of the goods

Supply under hire purchase agreement

Date of agreement

Services Time at which services are provided

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 Live animals o Agriculture produce o Holy Quran o computer software o imported samples

Some more examples are given at book page 601.

SALES TAX


22. Debit and credit Note and destruction of goods; ( Ref. book page # 607 ) 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 ]

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.

Important definitions are giving in the book at page no.600

THE END

NOTE

Notes on Sales Tax

Documents

bought tissue

kashif nawaz

common input

sales tax

sales tax

pay sales

registered

input tax