Important Definitions of Sales Tax

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IMPORTANT DEFINITIONS: (Section 2)

1) Associated persons: (Q-9(a) Sp-05) means where two persons shall be associates where the relationship between them is such that one person is in a position to influence the other and it is reasonably expected that the transaction between them will be non-arm length transaction. Where the concept of Fair Market Value (FMV) or Fair Market Rate (FMR) is not applied the existence of Non Arms Length Transaction (NALT) is always suspected. It is expected that one person may act in accordance with the intentions of the other or both persons may act according to the intentions of the third person whereby the third person will be benefited.  Such collusion may result in evasion of tax. Hence the Commissioner has the right to disregard such transaction and adopt the value on the basis of FMV. 

Such relation ship can be measured with the following factors: 

(a) An individual and his relative    
(b) Members of AOP 
(c) A member and AOP where it controls 50% or more share of            income or capital of AOP.
(d) Trust and trustees                      
(e) A shareholder and a company where the shareholder alone or           along with his associates controls 50% or more share capital of         the company.
(f) Two companies where a person either alone or with associate          controls 50% or more of the voting power, rights to dividend or        capital of the both companies.

1A) Cottage Industry: means a manufacturer whose annual turnover from taxable supplies made  during last 12 months ending any tax period does not exceed Rs 5 millions or whose annual utility (electricity, gas and telephone) during last 12 months ending any tax period do not exceed Rs 700,000


2) Defaulter: (Q-9 Sp-04) means a person who fails to pay the arrears which means up-paid tax, default surcharge, fines, penalties, fee as have been assessed. Such person includes every director or partner or proprietor.
3) Distributor: (Q-11 Aut-04) means person appointed by manufacturer or importer to purchase goods from him and further supply and who is also engaged in supply as wholesaler or retailer.

4)Due Date:)  (Q-9 Sp-04) in relation to filing of return means 15th day of month next following the end of tax period or any date notified by Federal Govt.

5) E-intermediary: means a person appointed as e-intermediary for filing of electronic returns or any prescribed documents. The documents include any electric data, computer program, computer taps, computer disk, micro film etc.

6) Input Tax: (Q-11 Aut-04) means tax levied on supply, on import of goods and tax chargeable as duties of excise on excisable goods & services and tax levied under Provincial Sales Tax Ordinances on goods and services; paid or payable by the RP purchaser and importer of goods or receiver of services. 

7) Output Tax: tax charged in respect of supply of goods or tax chargeable as duties of excise on excisable goods & services and tax levied under Provincial Sales Tax Ordinances on goods and services by the supplier of goods or provider of services to the purchaser of goods or receiver of services.
Output tax of supplier will be the input tax of the buyer

8) Manufacture; Manufacturer or Producer:(Q-9 sp-05, Q-11 Aut-04, Q-10 Aut-03, Q-10 Sp-03)

Manufacture is process in which an article single or in combination of other articles or material is either converted into other distinct article or product OR is so changed or transformed or reshaped that it can put to use differently and distinctly.  Suppose if piece of wood is reshaped and converted in a cricket bat; the process through which that piece of wood converted into bat is called manufacturing.
The manufacturing includes any process of assembling, mixing, cutting, diluting, bottling, packaging, repackaging, printing, publishing and engraving.

 A manufacturer is person who is engaged in production or manufacture of goods either as owner of goods or as maker or fabricator for others. Except that manufacturer -cum-exporter can only claim refund if he owns manufacturing facility to manufacture the goods for export.
The manufacturer in bankruptcy or liquidation includes an assignee, trustee or liquidator.
 The manufacturer may use patents or right for his own or on behalf of the owner of the patent or right.

9) Registered Person (RP): means person who is registered or is liable to be registered; however the person who is liable to be registered cannot claim benefit of registered person unless he is registered. For example he cannot claim credit of input tax on his purchases but he shall be liable to output tax on his sales. 

10) Retail price; Retailer: (Q-11 Sp-04)

 Retail price is the price fixed by manufacturer at which it is sold to general public. It includes profit margin of the retailer as well. According to 3rd schedule sales tax is to be charged at such value on certain specified goods. 

Retailer means a person supply goods to general public for the purpose of consumption. 

11) Supply; Similar supply; Exempt supply; Taxable supply; Time of Supply; Value of Supply; Zero rated supply:     

Supply: (Q-11 Sp-03) includes:-


  • sale, lease or other disposition of goods, carried out for consideration and also includes putting business, acquired, produced or manufactured goods to private use OR
  • auction or disposal of to satisfy any debt OR
  • possession of goods immediately before a person ceases to be registered person. The Federal Government can notify any transaction as supply or not supply.

Similar Supply: (Q-11 Aut-04, Q-9 Sp-04) means supply of goods closely or substantially resemble the characteristics, quantity, components in relation to open market price of goods.  

The open market price means the consideration of supply or similar supply that would fetch in open market.

Exempt Supply: Supply which is exempt from tax as per 6thSchedule or goods specified by Federal Govt through SROs. The supplier is neither liable to be registered nor shall pay sales tax on such goods.

Taxable Supply: (Q-9 Sp-05, Q-2 Sp-07) means supply of goods made by importer, manufacturer, wholeseller, distributor or retailer other than a supply which are exempt and also includes Zero rate supply.  

Time of Supply:(Q-7 Aut-07) is very important to determine the exact time of accrual of sales tax liability. 
  • The supply shall be deemed to have been taken place at the time of delivery of goods or when these goods are made available to the recipient of supply; no matter whether they remove the goods or not.
  • Time of supply for goods supplied under hire purchase agreement (lease) shall be time when agreement is entered into. 
  • Time of supply for services shall be when it is rendered or provided.
Taxable activity: (Q-7 Sp-02), Q-10 Aut-03) 

  • any activity whether for profit or not, carried on in the form of business, trade or manufacture; 
  • any activity which is carried on by any person for supply of taxable goods or rendering of taxable services to another person; 
  • an one-off adventure or concern in the nature of trade.
  • It also includes any activity which is carried on by any person in the form of a business, trade or manufacture.                                                                                                                   
But it does not include: 
  • the activity of an employee providing services in the capacity of employer; and 
  • an activity carried out as private recreational hobby.  

Value of Supply: (Q-13 Sp-05).The quantum of sales tax is determined on the basis of value of taxable supply; but the liability to pay would arise only when such supply is made in furtherance of a taxable activity. The value of supply is determined as under:
  • In respect of taxable supply; it is consideration received by the supplier including all federal and provincial taxes but excluding sales tax.
  • In case:-

            (i) taxable supply is in kind or partly in kind and partly in                      money;   OR  
            (ii) supply to associates for no consideration or                                        consideration lower than open market OR
       (iii) supply is made to a consumer on installments OR
       (iv) In case where for any special nature of transaction it is                 difficult to ascertain the value; 

the value of supply shall be open market price of supply exclusive of sales tax.

·       In case of trade discount; discounted price exclusive of sales tax shall be value of supply provided that the discount is in accordance with normal business practices.

·       In case of imported goods the value shall be as determined for custom duty and shall be included the custom duty and federal excise.

·       In case there is sufficient reason that the value of a supply hasnot been declared correctly in the invoice; the Valuationcommittee comprising of representative of trade bodies shall determine the value of supply.

·       In case goods produced by vendor from raw material supplied by the principal; the vendor shall charge sales tax on consideration / conversion charges that may constitute value of supply by vendor. However in case of processing of non-taxable goods; the value of supply shall be the open market price of finished goods and not processing charges alone.

·       In case of retail tax the price of taxable goods excluding retail taxwhich as supplier will charge at the time of making taxable supply shall be value of supply.

·       The Board has unfettered power to assign any value to any supply or import

Zero rated supply: means taxable supply charged to tax at rate of Zero percent.

Whole seller / Dealer: is a person who carries on business of buying and selling goods by wholesale or supplying or distributing goods directly or indirectly by wholesale or for commission. It includes who supply taxable goods to a person who deducts income tax at source.

Tax Fraud: means knowingly, dishonestly or fraudulently and without lawful excuse (the burden of proof of excuse lies on the accused) do all or any of the following acts with the intention of evasion of tax liability or overstating the entitlement of tax credit or tax refund to cause loss of tax shall constitute tax fraud:

·       Doing any act or omitting to do or causing to do or omit any act in contravention of the duties or obligation imposed under the Sales Tax Act or Rules

·       Falsifying or causing falsification sales tax invoice and underpaying the tax liability for two consecutive tax periods. And Making taxable supply without being registered.


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    Indirect taxes are those where the incidence of taxation is passed on to ultimate consumer/buyer, for example Custom duty, Sales Tax, Federal Excise duty.


    Direct taxes are those which are paid and suffered by the same person. Like income tax, wealth tax, capital value tax etc. It is also called “progressive tax”. Because it is based on the principal of equity and justice.

    SALES TAX ACT 1990
    This is the classic example of Indirect tax where the incidence of taxation is passed on to ultimate consumer/buyer. Sales tax law relates to levy of tax on sale, importation, exportation, production, manufacture or consumption. Sales tax law consist of Sales Tax Act 1990, Sales Tax Rules 2007, Sales Tax procedures Rules 2007 and Provincial Sales Tax Ordinances. Also it includes Notifications by Federal Government Finance Ordinance / Act, Circulars by CBR, Circular letters by CB and Tax case laws issued by Income Tax appellate Tribunal (ITAT), High Court (HC), Supreme Court (SC) to interpret any provision of the law.


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