Sales Tax
Special Regime for Digitally delivered goods:
Concept
The supply of digitally ordered taxable goods by online market place, website and software application from within Pakistan during the course of e-commerce,
a. the liability to collect and pay tax shall be of payment intermediary including a banking company, a financial institution, licensed exchange company or payment gateway in case the payment is made digitally and of the courier delivering the goods where those are supplied on Cash on Delivery (CoD) basis
A comment on Finance Act 2025—I
b. Persons supplying digitally ordered goods from within Pakistan through online market place, website, software applications at the rate of 2% of gross value of supplies. This tax shall be the final tax in case of retailers other than Tier 1 retailers and supplies by cottage industry as defined in the law. For others, the remaining tax is to be paid by the supplier.
Retailers subject to 2% final sales tax
Following retailers who are not treated as Tier 1 retailers will be entitled to reduced rate of sales tax.
(a) a retailer not operating as a unit of a national or international chain of stores;
(b) a retailer not operating in an air-conditioned shopping mall, plaza or centre, excluding kiosks;
(c) a retailer whose cumulative electricity bill during the immediately preceding twelve consecutive months does not exceed Rupees twelve hundred thousand;
(d) a person not engaged in wholesaler-cum-retailer, engaged in bulk import and supply of consumer goods on wholesale basis to the retailers as well as on retail basis to the general body of the consumers
A comment on Finance Act 2025—II
(f) a retailer who has not acquired point of sale for accepting payment through debit or credit cards from banking companies or any other digital payment service provider authorized by State Bank of Pakistan;
(g)]a retailer whose deductible withholding tax under sections 236G or 236H of the Income Tax Ordinance, 2001(XLIX of 2001) during the immediately preceding twelve consecutive months do not exceed the threshold as may be specified by the Board through notification in the official Gazette; and
(h) any other person or class of persons as prescribed by the Board.
The definition as prescribed is not correct. A specific criterion may be laid down for people who are to be allowed the final tax regime for sale tax.
Cottage industry
“Cottage industry” means a manufacturing concern, which fulfils each of following conditions, namely:
(a) does not have an industrial gas or electricity connection;
(b) is located in a residential area;
(c) does not have a total labour force of more than ten workers; and
(d) annual turnover from all supplies does not exceed eight million rupees.
Definitions
“Courier” means any entity engaged in the delivery of including logistic and ride-hailing services.
A comment on Finance Act 2025—III
“E-commerce” means sale or purchase of goods conducted over computer networks by methods specifically designed for the purpose of receiving or placing of orders either through websites, mobile applications or online marketplace having digital ordering features by using mobile phones, automated computer-to-computer ordering system or any similar device;“;
“Online marketplace” means online interfaces that facilitate, for a fee, the direct interaction between multiple buyers and multiple sellers via digital orders for supply of goods, with or without the platform taking economic ownership of the goods that are being sold;
Distortion and disruption
This means that the whole regime of taxation for digitally delivered goods has been changed for retailers other than Tier 1 retailers and cottage industry. Now instead of 18% such goods would be subject to 2% sales tax.
Although it is a major disruption and distortion, this will add substantially to the documentation of the economy in transactions relating to business to consumers where the charge for sales tax has been substantially reduced from 18% to 2%.
Embargo on economic transaction on non-registration
Concept
The Commissioner, and in certain cases after the approval of a Committee including a member of Trade Bodies, has been given the following powers when there is a supply of goods without seeking registration under the law to:
a. direct banking companies, scheduled banks and other financial institutions to intermittently suspend operation of the bank account of such a person for three working days.
b. direct the banking companies, scheduled banks and other financial institutions to permanently bar operation of the bank accounts of the person.
c. bar on transfer of immovable;
d. seal the business premises;
e. seize moveable property; or
f. appoint a receiver for the management of the taxable activity of a person.
The actions as per (d), (e) and (f) will be undertaken after the actions referred to in (a), (b) and (c) and there is an approval of the Committee.
Definition of ‘Tax Fraud’
The scope of the term ‘tax fraud’ has been enlarged. Now, in addition to other acts prescribed in subsection (37) of Section (2) following acts would specifically be considered as tax fraud:
using or preparing false, forged, and fictitious documents, including returns, statements, annexures, and invoices;
tampering with or destroying of any material evidence or documents required to be maintained under this Act or the rules made thereunder;
generating fake input through manipulation of return filing system of the Board and making fake entries in the sales tax returns or in the annexures;
making fictitious compliance of section 73, including routing of payments back to the registered person, or for the benefit of the registered person, through a bank account held by a supplier or a purported supplier;
suppression and nonpayment of withholding tax in the prescribed manner beyond a period of three months from due date of payment of tax
The main problem which is expected to arise with respect to the action referred to in (1) above on account of introduction of the word ‘using’ any forged, falsified or fictitious document’. ‘Use’ means that such documents have been prepared by another person. This is expected to create problems in the business environment as a third party’s action may lead to a charge for tax fraud. It would be extremely difficult to prove that the action was intentional or otherwise. An example may be a forged, falsified invoice.
Furthermore, the definition has been broadened with regard to ‘false claim’ of input tax to include all cases. Earlier, it was limited to false claims of input tax on account of fictitious invoices. Again difficulties would arise to prove that the ‘false claim’ is not intentional or otherwise.
An ambiguous provision contained in the definition proposed earlier, in the Finance Bill, has been removed. It was:
“falsification or causing falsification of invoice or substitution of financial records or production of fake accounts or documents or furnishing of any false information through human, mechanical or electronic means with an intention to evade tax due or claim inadmissible refund”
In the Finance Bill, 2025, an attempt to cause loss of tax was also included in the definition of tax fraud. It has been rightly omitted in the final version.
There is still a need to refine the definition of ‘tax fraud’ as penal prosecutions on account of tax fraud have been made substantially rigorous.
Full definition of ‘tax fraud’ is as under:
“(37). “tax fraud” means knowingly, intentionally, or dishonestly doing any act or abetting any action to cause loss of tax under this Act, including:
(a) using or preparing false, forged, and fictitious documents, including returns, statements, annexures, and invoices;
(b) false claim of input tax credit based on fictitious transactions;
(c) issuance of any tax invoice without supply of goods;
(d) tampering with or destroying of any material evidence or documents required to be maintained under this Act or the rules made thereunder;
(e) generating fake input through manipulation of return filing system of the Board and making fake entries in the sales tax returns or in the annexures;
(f) making fictitious compliance of section 73, including routing of payments back to the registered person, or for the benefit of the registered person, through a bank account held by a supplier or a purported supplier;
(g) suppression of supplies that are chargeable to tax under this Act;
(h) making taxable supplies of goods without issuing any tax invoice;
(i) suppression and nonpayment of withholding tax in the prescribed manner beyond a period of three months from due date of payment of tax;
j) acquisition, possession, transportation, disposal or in any way removing, depositing, keeping, concealing, supplying, or purchasing or in any other manner dealing with, any goods in respect of which there are reasons to believe that these are liable to confiscation under this Act or the rules made thereunder; or
(k) making of taxable supplies without getting registration under this Act.“
Streamlining the process of prosecution and arrest
The provisions have been rewritten. These provisions relate to the arrest of a person accused of tax fraud.
It has been specifically stated that powers to arrest and prosecute are notwithstanding the provisions of Section 11E of the Sales Tax Act, 1990 to clarify the position that both the provisions can interact concurrently.
It has now been specified that an arrest can only be made if:
a. the accused is intentionally or willfully not joining the investigation after three notices;
b. the accused is attempting to abscond; or
c. there are sufficient grounds that the accused would tamper with the evidence
The law now conceives two situations:
a. An arrest by a warrant issued by the Commissioner after getting approval from a Committee constituted by the Chairman FBR. This would include the following process:
i. Enquiry by the officer;
ii. Commissioner approving the investigation on the basis of results of enquiry;
iii. Investigation within three months;
iv. A Three-Member Committee constituted by the Chairman to approve the action of arrest.
b. An arrest without involving Committee by a warrant issued by a Special Judge.
To summarise, an arrest can only be made when an alleged person does not cooperate with the authorities. Furthermore, notwithstanding the above an arrest can also be made where the authorities have the apprehension that the accused is attempting to abscond; or there are sufficient grounds that the accused would tamper with the evidence.
Where an officer of Inland Revenue arrests a person under Section 37A, he shall immediately intimate the fact of the arrest of that person to the Special Judge, who may direct such Officer to produce that person at such time and place and on such date as the Special Judge considers expedient. Such Officer shall act accordingly.
Any person arrested under the Sales Tax Act shall be produced before the Special Judge or, if there is no Special Judge within a reasonable distance, to the nearest Judicial Magistrate, within twenty-four hours of such arrest, excluding the time necessary for the journey from the place of arrest to the Court of the Special Judge or, as the case may be, of such Magistrate.
Provided that in no case shall the period of such custody exceed fourteen days.
(Concluded)
Copyright Business Recorder, 2025
