Sales tax is a form of indirect tax that is levied on the sale of goods and services at each stage of the supply chain. It is one of the major sources of revenue for the government of Pakistan. However, understanding the concepts of sales tax can be quite complex. In this article, we will break down the key terms related to sales tax in Pakistan and provide a comprehensive understanding of how it works.
Input tax is the sales tax that is paid by a business on its purchases of goods or services. It is important to note that input tax is not always admissible. For instance, if the business purchases goods for personal use or non-business purposes, then the input tax paid on those purchases cannot be claimed.
Output tax is the sales tax that is charged by a business on its sales of goods or services. The rate of output tax in Pakistan varies depending on the type of product or service being sold. For instance, the standard rate of sales tax in Pakistan is 17%, while some goods such as petroleum products are subject to a higher rate of tax.
Sales Tax Payable
The sales tax payable is the net difference between the output tax and input tax. In other words, it is the amount of sales tax that a business owes to the government after deducting the input tax that it has already paid. If the input tax exceeds the output tax, then the business is entitled to a refund of the excess input tax.
Withholding of Sales Tax
Withholding of sales tax is a mechanism through which the government collects tax revenue from businesses and individuals. It is done by requiring the withholding agent to deduct a certain percentage of the sales tax from the payment made to the supplier of goods or services. The withheld amount is then deposited with the government as sales tax.
There are three main categories for sales tax withhold in Pakistan:
If both the service providing company and the service receiving company are registered for sales tax, then there will be no withholding of sales tax. The company will only withhold sales tax if it is registered for sales tax and is inactive. In such a case, the sales tax will be withheld at the rate of 20% of sales tax. If the registered company is not active, then one fifth of the gross amount of the invoice will be withheld as sales tax.
- Government Entities
In the case of government entities, 20% of the sales tax amount is withheld by the sales tax withholding agent.
- Individuals/Association of Persons
Individuals and associations of persons cannot withhold sales tax when buying goods. They can only withhold sales tax in case of services, where 100% of sales tax will be withheld.
In conclusion, sales tax is an important source of revenue for the government of Pakistan. As a business owner or consumer, it is important to understand the key terms related to sales tax such as input tax, output tax, and sales tax payable. Moreover, the withholding of sales tax is an essential mechanism to ensure compliance with tax laws in Pakistan. By understanding these concepts, you can ensure that you are meeting your obligations and avoiding any penalties or legal issues.