Sales Tax: Special Regime for Digitally Delivered Goods

Concept

Regarding the supply of taxable goods ordered digitally via online marketplaces, websites, and software applications from within Pakistan during e-commerce:

  1. The responsibility to collect and remit tax rests with the payment intermediary (including banks, financial institutions, licensed exchange companies, or payment gateways) if payment is digital. It falls on the courier delivering the goods if supplied on a Cash on Delivery (CoD) basis.
  2. Entities supplying digitally ordered goods from Pakistan through online platforms will be taxed at 2% of the gross value of supplies. This tax is final for retailers (excluding Tier 1) and cottage industries as defined by law. Other suppliers must pay the remaining tax.
Retailers Subject to 2% Final Sales Tax

The following retailers, not classified as Tier 1, qualify for the reduced sales tax rate:

  • Retailers not part of a national or international chain.
  • Retailers not operating in air-conditioned malls, plazas, or centers (excluding kiosks).
  • Retailers whose cumulative electricity bill for the preceding twelve months does not exceed Rupees twelve hundred thousand.
  • Entities not engaged in wholesale-cum-retail, involved in bulk import and wholesale supply of consumer goods to retailers and retail supply to consumers.
  • Retailers who have not acquired point-of-sale systems for debit/credit card payments from banks or authorized digital payment providers.
  • Retailers whose withholding tax under sections 236G or 236H of the Income Tax Ordinance, 2001, for the preceding twelve months does not exceed a threshold specified by the Board.
  • Any other person or class of persons prescribed by the Board.

The current definition lacks specificity. Clear criteria should be established for those eligible for the final sales tax regime.

Cottage Industry Definition

A “Cottage industry” is defined as a manufacturing entity meeting all the following criteria:

  • No industrial gas or electricity connection.
  • Located in a residential area.
  • A total labor force of no more than ten workers.
  • Annual turnover from all supplies not exceeding eight million rupees.
Definitions
  • “Courier” includes any entity involved in delivery services, including logistics and ride-hailing.
  • “E-commerce” refers to the sale or purchase of goods over computer networks through methods designed for order placement via websites, mobile apps, or online marketplaces with digital ordering features.
  • “Online marketplace” refers to online platforms facilitating direct interaction between multiple buyers and sellers via digital orders for goods, with or without the platform taking economic ownership.
Market Impact

This signifies a complete shift in the taxation framework for digitally delivered goods for retailers beyond Tier 1 and cottage industries. The sales tax rate is reduced from 18% to 2%.

While representing a notable shift, this change is expected to enhance the documentation of the economy in business-to-consumer transactions due to the significant reduction in sales tax.

Embargo on Economic Transactions on Non-Registration

Concept

The Commissioner, and in specific instances, a Committee that includes a Trade Bodies member, now possesses the authority when goods are supplied without proper registration to:

  1. Instruct banking companies, scheduled banks, and financial institutions to temporarily suspend the operation of the person’s bank account for three working days.
  2. Instruct banking companies, scheduled banks, and financial institutions to permanently restrict operation of the person’s bank accounts.
  3. Bar the transfer of immovable property.
  4. Seal the business premises.
  5. Seize moveable property.
  6. Appoint a receiver for the management of the taxable activity.

Actions (d), (e), and (f) will follow actions (a), (b), and (c), subject to Committee approval.

Definition of ‘Tax Fraud’

The definition of ‘tax fraud’ has been broadened to include:

  • Using or preparing false, forged, or fictitious documents, including returns, statements, annexures, and invoices.
  • Tampering with or destroying material evidence required to be maintained.
  • Generating fake input through manipulation of the Board’s return filing system.
  • Making fictitious compliance with section 73, including routing payments back to the registered person through a supplier’s bank account.
  • Suppression and nonpayment of withholding tax beyond three months from the due date.

The use of forged documents, even if prepared by another party, can now be considered tax fraud, potentially creating challenges in establishing intent. Similarly, broadened definitions of ‘false claim’ for input tax may lead to difficulties in proving unintentional errors.

An earlier ambiguous provision in the Finance Bill has been removed, and the attempt to include causing loss of tax in the definition has been omitted.

Further refinement of the ‘tax fraud’ definition is necessary, considering the increased rigor of penal prosecutions.

The full definition of ‘tax fraud’ is as follows:

(37). “tax fraud” means knowingly, intentionally, or dishonestly doing any act or abetting any action to cause loss of tax under this Act, including:
  • Using or preparing false, forged, and fictitious documents, including returns, statements, annexures, and invoices;
  • False claim of input tax credit based on fictitious transactions;
  • Issuance of any tax invoice without supply of goods;
  • 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 of supplies that are chargeable to tax under this Act;
  • Making taxable supplies of goods without issuing any tax invoice;
  • Suppression and nonpayment of withholding tax in the prescribed manner beyond a period of three months from due date of payment of tax;
  • 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
  • Making of taxable supplies without getting registration under this Act.“

Streamlining the Process of Prosecution and Arrest

The rewritten provisions concern the arrest of individuals accused of tax fraud.

The powers to arrest and prosecute are explicitly stated as being separate from Section 11E of the Sales Tax Act, 1990.

Arrest is permissible only if:

  1. The accused intentionally fails to cooperate with the investigation after three notices.
  2. The accused attempts to flee.
  3. There are sufficient grounds to believe the accused will tamper with evidence.

The law now considers two scenarios:

  1. Arrest via a warrant issued by the Commissioner following approval from a Committee constituted by the Chairman FBR, involving:
    1. Inquiry by the officer.
    2. Commissioner approval based on inquiry results.
    3. Investigation within three months.
    4. Approval from a Three-Member Committee constituted by the Chairman.
  2. Arrest without Committee involvement via a warrant issued by a Special Judge.

Arrests are primarily made when individuals do not cooperate. Additionally, arrests can occur if authorities suspect flight or evidence tampering.

If an officer arrests a person under Section 37A, they must inform the Special Judge, who may direct the officer to produce the person at a specified time, place, and date. Any person arrested under the Sales Tax Act must be presented before the Special Judge or, if unavailable, the nearest Judicial Magistrate within twenty-four hours, excluding travel time, with custody not exceeding fourteen days.