What is GST and How Does it Impact Businesses

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 had a profound impact on many areas, 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 its 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%. However, certain exemptions and special categories have different rates. The FBR sets these rates, and they can change with fiscal policy.

Some products may be subject to a lower or 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.

Because exemptions vary, it is wise to check the latest updates 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. For example, a retailer pays GST on products they buy from a wholesaler.

Output Tax is the GST businesses charge customers on the goods/services they sell.

How does it work?

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 how to calculate GST for small businesses 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 GST rate is 17%. Yet, it is wise to check if the specific goods and services are taxed at a different rate.

Calculating the GST Amount

You can use the formula mentioned earlier to calculate the GST on the goods/services’ sale price.

Adding GST to the Sale Price

Once you calculate the GST amount, add it to the product’s/service’s sale price to determine the total price payable by customers.

Filing the Returns

Businesses are required to file GST returns with the FBR. Ensure they are filed within the specified 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 standard procedures, a registered person must file a monthly return (Annexure C) on the 10th of each month. Payment will be made on the 15th, and the return must be filed by the 18th of the month. This is done following the period where payments for procurement/supplies were made. Submit payments at the designated branches of the National Bank of Pakistan.

Quarterly Return

Taxpayers in the CNG category 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 must maintain detailed records of all purchases and sales (including proper tax invoices). This helps them calculate and file their returns correctly.
• 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 total sales (output tax), total purchases (input tax), and the net GST amount owed to the government. Here are the steps for filing these returns:

1. Registering with the FBR.
2. Preparing invoices for sales and purchases.
3. Logging into FBR’s portal using the STRN and password to enter the GST return section.
4. Submission of data on sales tax.
5. Payment of GST at NBP and confirming it on the FBR portal.
6. Submission of returns within the stipulated deadline.

Conclusion

General sales tax (GST) is a consumption tax applied at each stage of the supply chain, from import or production to the final sale to consumers. It is an important source of government revenue. The Federal Board of Revenue (FBR) manages it for goods. At the same time, the provincial revenue boards do it for services.

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