Sales Tax (Module C) Short notes by Kashif Nawaz.pdf

SALES TAX

SHORT NOTES OF Sales TAX By: Kashif Nawaz

Topics Covered:  Numerical Portion  Theoretical portion

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By: Kashif Nawaz Jakhar

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SALES TAX

PREFACE Al-Hamd-O-Lillah, the 1st 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 Module -c

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SALES TAX

SALES TAX Gross Sales Tax @ 17 % Example : Sr. No.

Particular

Value

GST (%)

GST

Value Increase GST

1

Fans

50,000

17%

8500

58500

2

AC

50,000

17%

8500

58500

100,000

17,000 117,000

NOTE : Tax on sale = Output Tax Tax on Purchase = Input Tax

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.

Output Tax paid

Mr. Kashif purchases 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

By: Kashif Nawaz Jakhar

Kashif

Rameez

NBP 0331-4791167

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SALES TAX Example : Mr. Y purchased good worth Rs. 100,000 from Mr. Z. He paid input Tax Rs. 17000. He sold these goods to Mr. X for Rs. 120,000 and collect output tax Rs. 20,400 . Calculation of Tax liability of Mr. Y Purchase. Rs.100,000

Z

Sale. Rs. 120,000

Y

Amount Paid. Rs.117,000 to Z

X

Amount Received. Rs.140,400 From X

Calculation Of amount received and paid. Purchase Price = 100,000 Tax ( 17% ) = 17,000 Amount to be Paid 117,000

Sale Price = 120,000 Tax ( 17% ) = 20,400 Amount to be received 140,400

Calculation of Tax Liability : Sale ( out put Tax ) = 20,400 Purchase ( input Tax ) = (17,000) Tax Liability 3400

20,000 X 17% = 3400 = Sale – purchase = 120,000-100,000 = 20,000

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SALES TAX Example : { sale by one person is the purchase of other person } Assume Custom duty is included

Persons

Purchase Input Tax ( 17% )

Sale

Output Tax ( collect )

NBP

Importer (X) Wholesaler (Y) Retailer (Z) Consumer (K)

10,000

1700

12,000

2040

12,000

2040

15,000

2550

1700 2040 510

15,000

2550

20,000

3400

850

20,000

3400

3400

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 17% = 3400  Inclusive of Sales tax = 20,000 X 0.17/1.17 = 2906

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SALES TAX

!!!!!!!! IMPORTANT RULES OF SALES TAX !!!!!!

1. Sales Tax Liability = Output Tax – input Tax 2. Tax Fraction Formula = Amount X 17 / 117 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 )

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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 # 616 )

how to get register

Rules For Registration : 1. Compulsory Registration 2. Voluntary Registration

1. Compulsory Registration :

( Ref. book page # 617 )

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.

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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 .  De-registration :  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. By: Kashif Nawaz Jakhar

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SALES TAX

 Taxable Activities:

( Ref. book page # 603 )

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:

( Ref. book page # 601 )

Land , building , Intangible asset , cash and shares are not goods.

GOOGS Taxable Goods

Exempt Goods No Tax

17%

Zero Rated ( 0% )

 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 # 604 ) 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

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SALES TAX

 Fixed Assets : The fixes asset must be used in the production of taxable goods.

 Exempt Goods:

o o o o

By: Kashif Nawaz Jakhar

( Ref. book page # 607 )

Live animals Holy Quran and other holy books computer software Imported samples

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SALES TAX

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

Example :

( Assumed Figures )

Supplies Taxable Zero rated Exempt

Amount

Common Input Tax

1000 500 1000

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

Common Input Tax

800 400 800

840 420 840

2000

2100

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

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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 1000 500 1000

2500 Requirement: Apportionment of common input Tax.

Solution : Apportionment of common input Tax Supplies Taxable Zero rate Exempt

(1000-500)

Amount

Common Input Tax

500 500 1000

525 525 1050

2000

2100

Apportionment of Common input Tax. Taxable supplies = Zero Rated

500 X 2100 = 525 2000 500 X 2100 = 525

= 2000

Exempt Supplies = 1000 X 2100 = 1050 2000

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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 1000 500 1000

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 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

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SALES TAX ( W-I ) Calculation of margin on sale : S=C+SX% assume : % = X 2500 = 400 + 2500X 2500X = 2500 – 400 2500X = 2100 X = 0.84% or 0.0084 ( W-II ) Calculation of the sale prices of the purchases from unregistered person. S=C+SX%

x = 600 + 0.0084x 0.9916x = 600 x = 605 So now , = Taxable supplies – Sale price of purchases from unregistered person = 1000 – 605 = 395 Apportionment of common input Tax Supplies Taxable Zero rate Exempt

(1000-605)

By: Kashif Nawaz Jakhar

Amount

Common Input Tax

395 500 1000

438 554 1108

1895

2100

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SALES TAX !!!!!!!!!!! General format of Sales Tax Numerical !!!!!!!!!! Computation of Tax Liability Output Tax Supplies to registered person ( xxx X 17% ) Supplies to un-registered person ( xxx X 17% ) Input Tax Common input tax ( w-1 ) or 90% of out put Tax

Rs.(000) xxxx xxxx xxxx

xxxx xxxx

Lower

(xxxx) xxxx

Tax Liability 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)

Taxable Zero Rated Exempt

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 17% = xxxx By: Kashif Nawaz Jakhar

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SALES TAX

Debit and Credit Note( Ref. book page # 612 ) Example : In June Mr. X sales goods to Mr. Y worth Rs.100,000 and receive Rs.117,000( where 17000 is sales Tax ) . But in July Mr. Y return goods worth Rs.50,000. So Mr. X will return Rs. 58,500 { 50,000 + ( 17000 X 50% ) }. Information given:

Mr. Y

Mr. X Issue credit note ( sales return )

Issue Debit note ( purchase return )

Output Tax = Rs. 100,000 Input Tax = Rs ( 50,000 )

Output Tax = Rs. 200,000 Input Tax = Rs ( 80,000 )

Requirement : Calculate Tax payable by both persons.

Solution : Mr. X Output Tax = 100,000 less: credit note = ( 8,500 ) 91,500 Less: input Tax = (50,000) Tax Payable = 41,500

Mr. Y Output Tax = 200,000 Input Tax Debit Note

= ( 80,000 ) = 8,500 . ( 71,500 )

Difference is tax payable

Tax Payable = 128,500

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SALES TAX

Theoretical Portion of Sales Tax General terms : 1. Sales Tax is a multi stage tax : ( Ref. book page # 598 ) 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 # 599 ) 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 # 599 ) 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 :

( Ref. book page # 599 )

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

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SALES TAX

Exemptions provided to small manufacturer and small retailer

Importer / wholesaler / Distributor/ Retailer

Sales tax @ 17% on value of taxable supplies

Total turnover upto Rs.5 million during Exempt supplies as per 6th schedule. the last 12 months. Total turnover exceeds Rs.5 million Fixed sales tax as per special during the last 12 months. procedure rule

Manufacturer Cottage industry Other than Cottage industry

Exempt supplies as per 6th schedule. Sales tax @ 17% on value of taxable supplies.

IMPORTANT DEFINITIONS: 1. Arrears:

( Ref. book page # 600 )

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 # 601 )

Means a person who fails to pay the arrears.

Person is a ;    

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proprietor a partner in case of a firm a director in case of a company and also includes a guarantor or successor

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SALES TAX

3. Distributor:

( Ref. book page # 601 )

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 # 601 )

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 # 601 )

6. Input Tax:

( Ref. book page # 601 )

Includes every movable property other than actionable claim , money, stocks and shares and securities . 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 # 601 )

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

8. Manufacturer or Producer:

( Ref. book page # 602 )

Means a person who engages in the manufacture or production of goods whether or not the raw materials are owned by him.

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SALES TAX

9. Open market price:

( Ref. book page # 602 )

Consideration in money which that supply or similar supply would generally fetch in an open market .

10. Output Tax :

( Ref. book page # 602 )

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 # 603 )

Means;  The tax ,  additional tax,  default surcharge,  fine ,  penalty,  fee ,  or any other sum under the sales tax laws.

12. Supply:

( Ref. book page # 603 )

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. 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 By: Kashif Nawaz Jakhar

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SALES TAX

13. Taxable Activity:

( Ref. book page # 603 )

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 # 603 )

% of sales Tax . X Value % of sales Tax + 100

15. Taxable Supplies :

( Ref. book page # 603 )

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 # 604 )

17. Time of Supply :

( Ref. book page # 604 )

One month or other period as the Federal government may specify . Time of supply depend upon different situations : Situations

Time of Supply

Normal

Time at which the goods are delivered or made available to the recipient of the goods Date of agreement

Supply under hire purchase agreement Services By: Kashif Nawaz Jakhar

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SALES TAX

18. Value of supply :

( Ref. book page # 604 )

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

2

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

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

6

Special nature of transaction and ascertainment of value is difficult Exempt goods supplied to a registered person for processing

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

7

19. Tax rates:

( Ref. book page # 605 )

Sales Tax rate is 17%. 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 . By: Kashif Nawaz Jakhar

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SALES TAX

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 # 607 )

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 606.

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 # 612 )

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SALES TAX

23. Drawing of Samples :

( Ref. book page # 616)

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

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