Withholding of Sales Tax in Finance Act, 2020 – Changes with a Confusion

Rizwan Kamali 4 years ago

Sales Tax Withholding in Finance Act 2020

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Eleventh Schedule of the Sales Tax Act, 1990 provides information about withholding agents and rates of deduction of sales tax for different categories of suppliers. In Finance Act, 2020, the Federal Government has made some changes in the Schedule. Although made with good intentions, these changes assume unregistered persons to make compliance of withholding provisions – a fantasy in fact.

Eleventh Schedule was first introduced in Finance Act, 2019. In Finance Act, 2019, Eleventh Schedule provided three categories of suppliers and related rates of deduction. These categories were: (1) Active Taxpayers (2) Other than Active but Registered Suppliers (3) Un-registered Suppliers.

Withholding of sales tax was not applicable to supplies made by an Active Taxpayer (Supplier) to a registered person. Supplies made by Registered Suppliers (other than Active Taxpayers) were subject to deduction at 10% and 20% depending upon supplier category. Similarly, supplies made by Un-registered suppliers were subject to deduction at 5% of gross value of supplies or whole of applicable sales tax was liable to be deducted, depending upon supplier category.

Now, through Finance Act, 2020, this differentiation between Active Taxpayer and Other than Active Taxpayer (Registered) has been done away with. There are only two categories of suppliers now: (1) Suppliers who are Active Taxpayers (2) Suppliers other than Active Taxpayers.

After this amendment, if the supplier is Active Taxpayer, and withholding agent is unregistered, such supplies would be subject to deduction at 10% and 20% depending upon supplier category. And, if the supplier is other than Active Taxpayer, whether withholding agent is registered or not, such supplies would be subject to deduction at 5% of gross value of supplies or whole of applicable sales tax was liable to be deducted, depending upon the supplier category.

Important thing to note is that above withholding provisions shall only apply when (1) the buyer is un-registered and supplier is active taxpayer, or (2) the buyer is registered/un-registered person and supplier is other than active taxpayer, which is fine.

Interestingly, FBR assumes that unregistered buyers would make compliance of this provision and deduct sales tax at the time of making payment to the suppliers – a fantasy of FBR.

Rates as per Eleventh Schedule are provided below: