Going through the intricacies of any country’s tax system can be challenging for businesses. In Pakistan, the General Sales Tax (GST) is a key part of its taxation system. It was introduced as a broad-based consumption tax after the passing of the Sales Tax Act of 1990 by the parliament.
This tax is one of the most significant types of indirect taxes in Pakistan. It is levied on the supply of goods and services at varying rates. These rates are dependent on the nature of the goods and services supplied in the country.
GST has established a profound impact on many things, ranging from pricing strategies to supply chain management. Understanding its working mechanism is not just an issue of compliance but a key to financial planning and profitability.
In this article, we will explore what GST is, how it works in Pakistan, and what its widespread effects are on businesses across the country (from small and medium enterprises to multinational corporations).
Understanding General Sales Tax (GST)
What is GST? It is a value-added tax. It was introduced in Pakistan to replace various kinds of other indirect taxes. This tax applies to the value added at each stage of production or distribution of goods and services.
The government collects GST on most goods and services sold within the country through the Federal Board of Revenue (FBR). Businesses need to understand this tax’s calculation to ensure proper compliance and avoid penalties.
Understanding this tax is helpful. It helps SMEs understand their nature and make accurate calculations and tax payments to avoid punitive action by the state authorities.
Formula for Calculation of GST
The following formula is used for calculating GST:
GST Amount = (GST Rate/100) x Original Price of Good(s) or Service(s)
Here is the formula to determine the final price of goods or services, including GST:
Final Price = Original Price + GST Amount
Now, suppose the GST rate is 17% and the original price of a product is PKR 10,000; the GST amount will be calculated in the following manner:
- 17% tax is calculated as 17/100 = 0.17
- And since it will be added to the amount, it will be 0.17 + 1.00 = 1.17
- As the tax increases the price, 1.17 x 10,000 = 11,700
- The GST amount is determined by 11,700 – 10,000 = 1,700
Now with the GST amount determined, the final price for the good(s)/service(s) purchased is calculated as
10,000 + 1,700 = PKR 11,700
Understanding GST Rates in Pakistan
The GST rate in Pakistan for most goods and services is 17%. Yet there are certain exemptions and special categories where differing rates apply. The FBR can determine these rates, and they are subject to change depending on fiscal policies.
Some products can be subject to either a lower or a higher tax rate. Others can be exempt from GST altogether. Here are the essential items that are exempt from GST:
- Basic food items (flour, vegetables, meat, and the like).
- Educational services.
- Healthcare services.
- Agricultural produce and products.
As the exemptions vary, it is wise to check the latest updates in this regard from FBR.
How does GST work?
Here is a breakdown of how GST works in Pakistan.
Understanding key concepts
- Input Tax is the GST businesses pay on the goods/services they purchase for their own operations. An example would be a retailer paying GST on the products they purchase from a wholesaler.
- Output Tax is the GST that businesses charge their customers for the goods/services they sell to them.
How does it work?
How GST works? It operates on a ‘value-added tax’ model. At each stage of the production or distribution of goods or services, businesses only pay tax on the value they add to the product.
Then businesses calculate their GST liability by subtracting the input tax paid on purchases from the output tax collected on sales. It prevents a cascading effect where the same item is taxed many times.
Steps required for calculating GST for Small and Medium Businesses
Understanding the calculation of GST for small business is necessary. It involves numerous steps, which we will explore now:
Determining Goods and Services on which GST is applicable
Not all goods and services are subject to GST. It is best to refer to guidelines set forth by the FBR to determine if the goods/services fall under the category of taxable items.
Determining the GST rate
The general rate of GST is 17%. Yet, it is wise to check if the specific goods and services are taxed at a different rate.
Calculating the GST Amount
The formula mentioned previously can calculate the GST on the goods/services’ sale price.
Adding GST to the Sale Price
Once the GST amount has been calculated, adding it to the product’s/service’s sale price helps determine the total price payable by customers.
Filing the Returns
Businesses are required to file GST returns with the FBR. It must be ensured that they are filed within the mentioned deadlines. All payments should be made accordingly.
Types of GST returns
Different types of gst returns fall under the category of sales tax returns. As per different categories of taxpayers, the returns can be filed on FBR’s prescribed format as under:
Monthly Return
Under the standard procedures, a registered person is required to file a monthly return, Annexure C, on the 10th of each month. The payment will be made on the 15th, and the return is to be filed by the 18th day of the month. This is done following the period where payments for procurement/supplies were made. Payments should be submitted in the designated branches of the National Bank of Pakistan.
Quarterly Return
Taxpayers falling in the category of CNG must file the return quarterly.
Annual Return
A manufacturer can file an annual General Sales Tax Return for a given financial year by the 30th September of the following financial year.
Final Return
If a taxpayer applies for de-registration, then they must furnish a final return to the appropriate commissioner having jurisdiction in the matter. They should do so on the same commissioner’s instructions.
How does GST impact businesses in Pakistan?
Here is how GST affects businesses in the country:
- Registration: Businesses meeting a certain sales turnover threshold should register themselves for GST. It gives them a Sales Tax Registration Number (STRN). This should be used in all their invoices.
- Record-Keeping: Businesses need to maintain properly detailed records of all their purchases and sales (including proper tax invoices). This helps them properly calculate and file their returns.
- Pricing: The tax is indirect. Businesses usually pass the expense on to the consumer by including it in the final price of the goods s)/services they buy. This is how GST affects pricing in Pakistan.
- Imports: Goods imported into the country are subject to the tax at the time of their import and arrival at the port.
Steps for Filing the Returns
Businesses that are registered for paying this tax are required to file monthly returns with the FBR. The return details their total sales (output tax), total purchases (input tax), and the net amount of GST they owe to the government. Here are the steps for filing these returns:
- Registering with the FBR.
- Preparing invoices for sales and purchases.
- Logging into FBR’s portal using the STRN and password to enter the GST return section.
- Submission of data on sales tax.
- Payment of GST at NBP and confirming it on the FBR portal.
- Submission of returns within the stipulated deadline.
Conclusion
The general sales tax (GST) is a consumption tax applied at each stage of the supply chain, i.e., from import or production to the final sale to consumers. It is an important source of revenue for the government. The Federal Board of Revenue (FBR) manages it for goods. At the same time, the provincial revenue boards do it for services.
