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Sales Tax: History & Issues

By Dr. Ikramul Haq*


The imposition of sales tax in Pakistan is not new. It has its origin in pre-partition era under the Government India Act of 1935. In recent years, the complexities have arisen in its implementation as the Federal Government, in the name of “documentation of economy”, decided to extend its scope and nature. The off-repeated goal of “documentation of economy”, through imposition of value-added tax  (VAT) at all stages (particularly at retail outlets), sounds convincing. But the way it is being implementation (through bureaucratic highhandedness and with corrupt machinery) is bound to instigate a tax revolt. This article examines in detail the history of sales tax in Pakistan, the issues relating to its implementation and repercussions of a possible non-compliance threatened by the traders and retailers.


A.        Pre-partition Provisions

Section 100(1) of the Government of India Act, 1935, provided that the Federal legislature had, notwithstanding anything in sub-sections (2) and (3) of the said section, and a provincial Legislature had not, power to make laws, with respect to any of the matters enumerated in the Federal Legislative list. Section 100(3) provided that subject to two preceding sub-sections Provincial Legislature had, and the Federal Legislature had not, power to make laws for a province or any part thereof with respect to any of the matter enumerated in the Provincial Legislative List. Entry 48 of the List was as follows:

“Taxes on the sale of goods and on advertisements”.

Even though the entry mentioned taxes on sales of goods that head was construed to mean in reality a power to tax the transaction and the power to tax the transaction carried with it the power to tax either party thereto. The expression “tax on sale” was, therefore, construed to include also a tax on purchases of goods, as the transaction resulted in change of ownership from one person to another and was from its very nature a bilateral transaction with a seller on the one hand and the purchaser on the other.

B.        Historic Evaluation and Present Structure

a.         Sales tax at time of independence was a provincial subject. In 1948 it was made a federal subject by the Constituent Assembly of Pakistan through the Pakistan General Sales Tax Act, 1948 enacted on 31st March 1948. The standard rate under this Act was six pies (sub-division of a rupee called a pie) per rupee at every stage whenever a sale was affected. Every dealer with an annual turnover of more than Rs. 5000/- was assessable with certain exceptions provided under this Act.

b.         There were strong representations against the stipulated low turnover liable to sales tax and also against the levy of sales tax at multiple stages, which culminated in the enactment of the Sales Tax Act, in 1951. It levied sales tax only on consumption. However, the sale, purchase, consumption, importation, exportation, production and manufacture of goods were also subjected to sales tax by the Taxation of Goods (Sales and Purchase) Order, 1960.

c.         The Sales Tax Act, 1951, applied to whole of Pakistan. Although the levy and collection of sales tax in respect of goods produced or manufactured in Pakistan was made under section 3 of the Sales Tax Act, 1951, the administrative machinery utilised for this purpose has been changing from time to time. At first, exclusive tax authorities vis Sales Tax Officers and Assistant Sales Tax Officers were appointed for the execution of this Act, but later through amendment in the Act, various officers of Income Tax exercised the power of tax authority under the Sales Tax Act, 1951, in relation to the same area and cases as they exercised under the Income Tax Law.

d.         A radical change was brought about on 25th April 1981 through an amendment in the Sales Tax Act, 1951, the collection of sales tax on non-excisable goods was also entrusted to the Central Excise Department and the provisions of the Central Excises & Salt Act, 1944 and the rules made thereunder were made applicable in this regard. Necessary amendments were also made in the Sales Tax Act in June 1981 and again in June 1982.

e.         In order to remove the distortions in sales tax and to facilitate the taxpayers, a new system was formulated and introduced in the country in the shape of the Sales Tax Act, 1990 from first of November 1990. The Act prescribed a value added tax (VAT) type system in which the value added component at each stage of business transaction could be taxed. The sales tax is chargeable from a registered person at import and manufacturing stage. Tax credit on input tax is allowed when the registered person keeps proper record of claim regarding tax invoice and bill of entry. The goods meant for export are termed as zero-rated. The new system is based on self-assessment/clearance procedure and the payment of tax is deferred by the 15th of the following month. The tax paid on raw materials and other goods purchased in the course of business is deducted automatically while determining the tax liability.

f.          The scope of chargeability has been widened in recent years. A present, sales tax is charged at the rate of 15% on the value of: –

(i)         “taxable supplies made in Pakistan by a “registered person” in the course of furtherance of any “taxable activity” carried on by him.

            (ii)        goods imported into Pakistan.

(iii)       From 1st July, 1998 to30th June 2000 in case taxable supplies are made to non-registered persons a further 3% (in total 18% sales tax is chargeable except by a person registered as retailer or to a person where income is not liable to tax under the Income Tax Ordinance, 1979 [but he has deducted tax u/s 50(4) of the said Ordinance]. With effect from 1st July 2000, Rate of additional sales tax has been reduced to 1.5%.

(iv)       With effect from 16th August 1999 on the supply of electrical energy, natural gas, petroleum gases including liquified petroleum gas, and petroleum products.

  • There are number of exempt supplies as enumerated in the Sixth Schedule to the Act or otherwise notified by the Federal Government.
  • Taxable supplies specified in the Third Schedule to the Act are charged to tax on retail price and not on value of supply.


            The Federal Government derives powers from the Federal Legislative List, Part I, Fourth Schedule to the Constitution of Pakistan for the levy of sales tax:

1.         Taxes on the sales and purchases of “goods” [See Article 260 for definition] imported, exported, produced, manufactured or consumed. [Entry 49]

2.         Offences against laws with respect to any of the matters in this Part. [Entry 56]

3.         Matters which under the Constitution are within the legislative competence of Majlis-e-Shoora (Parliament) or relate to the Federation. [Entry 58]

4.         Matters incidental or ancillary to any matter enumerated in this Part [Entry 59].

5.         The expression “goods” as per definition in Article 260(1) includes all materials, commodities and articles.

            The main entry in Federal List of Constitution is Entry No. 49 under which the sales tax is levied. This Entry when read in conjunction with Article 260 gives power to the Federal Government to levy tax on “goods” imported, exported, produced, manufactured or consumed which includes all materials, commodities and article. The expression “goods” thus not only includes its generally accepted meaning but under the Constitution also gets a wider scope covering all kinds of materials, commodities and articles.

            The honourable Supreme Court of Pakistan in Noorani Cotton Corporation & other v. STO (1965) 11 TAX 184 (S.C. Pak) upheld the constitutional competence of the Federal Legislature to enact the Sales Tax Act. The same effects are the following judgements of the various courts:

1.         Commissioner of Sales Tax v. Hunza Central Asian Textile Mills Ltd. & Other NLR 2000 Tax 20

2.         CIT v. Gulam Rasool A. Baluch (1967) 15 TAX 69

            3.         Sharif Cotton Factory v. Sales Tax Officer (1963) 7 TAX 180 (H.C. Kar)

4.         S. Haji Mohammad Saeed & Co. v. Sales Tax Officer (1963) 7 TAX 213 (H.C. Lah).


            The sales tax collection exhibited a notable surge during the last five years. It increased from Rs.30, 379 million in 1993-94 to Rs. 53,942 million in the year 1997-98, reflecting an increase of 78% during the period. The collection however, dropped from Rs. 55,668 million in 1996-97 to Rs. 53,942 million or down by 3.1% in 1997-98. In 1993-94, the target was achieved to the extent of 94.6%. In 1995-96, the target was exceeded by 1.3%, followed by a shortfall of 1.6% in 1995-96 and one percent in 1996-97. In the year 1997-98 the target was achieved by almost 100%.

            The following Tables show the collection, growth and share of sales tax in total Federal Tax Collection during the last two decades i.e. 1980 to 1999:

Table – 1

SALES TAX COLLECTION FROM 1980-81, 81-82 & 1986-87

(Rupees in million)


Table – 2


(Rs. in billions)


Table – 3


(1993-94 to 1997-98)

(Rs. in million)

YEARTarget (R.E)CollectionAchievement of Target% Growth

Note:   In 1997-98, the standard rate of sales tax was 12.5% as against 18% in the previous year.

Source: CBR’s Year Books for the relevant periods


            In Pakistan various rates of sales tax have been in operation in different time periods. The rates have been in the range of 7.5 to 30 percent of the value of goods subject to Sales Tax. Presently sales tax is levied at the standard rate of 15%. The annual compound growth rate of the collections from sales tax varied with move over from one tax rate to the other. An increase in the standard tax rate, to increase revenue, resulted in high growth rates when the rate was increased from 10% to 12.5%, from 12.5% to 15% and from 15% to 23%. The exception to this pattern was the move over from 12.5% to 15% in the late sixties. In this period the annual compound growth rate was only 0.56%. In the ’80s after the tax was transferred to Customs and Excise Department, the rate was reduced from 20% to 12.5%. In this period the highest annual compound growth rate of nearly 20% was witnessed.

From 1.7.9915.0040.20%

A summary of Sales Tax Rates in Pakistan ranging from lower to high and reduced is as under: –


UPTO 1980

1.         Standard rate                          =          20%

2.         Higher rates                             =          25% and 30%

3.         Reduced rates                         =          5%, 7.5% and 15%

FROM 1981 TO 1993

1.         Standard rate                          =          12.5%

FROM 1993 TO 1996

1.         Standard rate                          =          15%

2.         Lower rate                               =          10% (on 14 items only)

3.         Higher rate                              =          20% (on 21 items only)

FROM 01.07.1996 TO 30.06.1998

1.         Standard rate                          =          18%

2.         Higher rate                              =          23%

3.         Lower rate

            a)                                             =          10% (export oriented goods, foodstuff and health care items).

            b)                                             =          2% turnover tax in respect of business whose turnover does not exceed rupees one million during the last 12 months.

FROM 01.07.1999

1.         Standard rate                          =          15%

2.         Higher rate                              =          18% when supplies are made to non-registered persons.

3.         Lower rate                               =          0% on exports

4.         Additional rate                        =          3% on supplies to unregistered persons with certain exception.


            Sales tax as a federal tax has a great potential, firstly, because of its access to almost every commodity and secondly, because of its ad valorem nature. There is also a provision of its expansion and extension down to retail stage. Furthermore, it is more flexible than the central excise duty.

            A number of studies have been carried out with a view to examine the entire tax structure and to suggest ways to improve the present tax system and for generating additional revenue. It is observed by the study groups that sales tax was the levy that could, with comparative ease, achieve both the above objectives. It is flexible in nature and can be developed further to yield more revenues.

            The successive governments have, therefore, decided that sales tax should be broadened and gradually be extended to the wholesale and retail stages. It is also proposed that except for a few items where the tariff of central excise duty is very high, the rest of the central excise duties be replaced by sales tax.

            From the 1st of July 1990, the system of general sales tax is based on the concept of VAT. It will have has now a real broad base with the minimum of exemptions. It was initially levied at the import and the local manufacturing stage only but gradually was extended to wholesale. The Government at present is facing a tough challenge to extend it to retail stages as well.


            The present Government has announced that a “simplified” system of GST would be announced at retail stage from July 1, 2000. The Finance Minister, while announcing it on 4th February 2000, did not give any details regarding new “simplified” (sic) GST but claimed “[New] GST mechanism would be practical, understandable and something that the small traders can live with”. Press reports indicate that Tax Reform Committee, headed by Dr. Hafeez A. Pasha and CBR’s senior member Mr. Riaz Malik (acting as chief negotiator with the traders on GST) so far formulated the following proposals:

1. Increase in the ceiling of taxable turnover for retailers from Rs. 5 million.

2. Delinking of GST documentation for the purposes of income tax

3. Postponement of compulsory use of electronic cash register for at least a year.

4. Condition of declaration of annual turnover will be kept in tact.

5. VAT-mode of GST at retail stage will be implemented.

6. Relaxation in the rate of tax and the method of documentation may be given for a reasonable period of time.

7. Procedural invasion by the Income Tax Department through GST documentation mechanism will be eliminated but the retailers will have to pay Income Tax, for which only reduction in rate will be considered.

            In recent years, the CBR experimented with different modes of retail GST. These included: Trade Enrolment Certificates (TECs), Turnover Tax and the Development Tax. None of them worked. The CBR failed to collect the desired revenue despite the tall promises by the traders/retailers that through these schemes the State would get enormous amounts.

            It is really strange why traders oppose the GST on retail stage when its burden is squarely to be shifted on consumers. The small traders and retailers, having about 2.2 million outlets, have so far frustrated every effort of CBR to introduce retail GST through their “Shutter Power”. The process of documentation is their real worry.  Once GST is levied on each and every retail transaction, their quantum of business will get crystallized leaving them with no option but to pay actual income tax.

The present government has promised to ensure documentation of the economy by extending sales tax net to all the exempted areas of the economy. This is not an easy job and may lead to tax revolt in the country. The traders/retailers have consistently been maintaining that they would not pay sales tax on each and every transaction and for this they are even ready to confront the armed forces. The Finance Minister, Mr. Shaukat Aziz, however, assured the small traders and retailers to make this process less painful. The Minister has claimed that consultations with the business community had gone well.  He has promised that genuine concerns of the taxpayers would be fully taken care of.

Pakistan’s tax to GDP ratio is just 10.4 percent against an average of around 20 percent for other developing countries. This is matter of utter disgrace for the entire society. We have to improve this situation before it is too late; already the country had suffered irreparable loss due to policies of appeasement by the successive governments towards the traders in tax matters just to keep their vote bank in tact.

 The nation at this critical juncture of its history is struggling hard to survive as independent economic entity. We are facing the worst ever economic crisis where the very survival of the country is at stake. In these circumstances, the opposition to GST at retail stage is totally unjustified. The genuine fear of traders/retailers relates to its implementation through oppressive and corrupt tax machinery must be addressed by the Government, but at the same time the traders should also stop resisting this levy on the one pretext or the other. They rightly apprehend the highhandedness of tax officials, but this alone cannot be a basis to refuse the collection of GST at the retail stage, though the Government must also reform its tax apparatus without any further waste of time.

The government must provide such a fair, equitable and simple mechanism for imposition of GST on retail stage where the traders/retailers pay sales tax honestly and without fear from any administrative highhandedness. One hopes that new financial year will bring a new dawn of tax culture for Pakistan where taxes will be collected and spent fairly, diligently and productively, and people will pay them as their national and human duty.

*Dr Ikramul Haq, a leading International Tax Counsel, specialises in international tax, corporate and constitutional laws. He is Chief Partner of Lahore Law Associates (Email irm@brain.net.pk). He is member of Visiting Faculty of Institute of Direct Taxes in Lahore.  He studied law, journalism and English literature at the University of Punjab and Government College Lahore.  From 1984 to 1996 he was associated with Civil Services of Pakistan as Deputy Commissioner of Income Tax. He is author of numerous books on Pakistani Tax Laws, some of which are co-authored with his wife, Mrs. Huzaima Bukhari. He has recently been conferred Doctorate of Law for his research on Tax Reform in Quasi-Constitutional Perspective.

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