Federal Bureau of Revenue (FBR) has announced a sales tax on sales and purchases of used cars. The board unveiled a valuation mechanism for the taxation in statutory regulatory order (SRO 931 (I)/2020) yesterday.
According to FBR, new rules will regulate the trade of used cars in the country. Under new regulations, FBR will get 17% sales tax on these transactions. “If an unregistered trader (non-filer) will buy a used car, then additional three percent tax will be imposed,” FBR said.
The new rules further said that if a second-hand car is sold at a price higher than its first sale price, the differential amount between sale and purchase would increase. According to media reports, the FBR has taken this step because many used-car dealers in Pakistan are not registered with the tax authorities and do not pay sales tax on the transactions.
Under the Finance Act 2020, the government has introduced an amendment to the Sales Tax Act 1990. The new law states that: “In case of a registered person who is purchasing the used vehicles from public, on which the sales tax is already paid at the time of manufacturing or import, and later, sold in the open market after specific value addition, value of supply will be difference between sales and purchase price of said vehicles, based on valuation method defined by FBR, on the following formula, namely A-B:
Where ‘A’ is the consideration in money, including all charges and fees but excluding the amount of sales tax charged, received by the registered person from the used vehicle’s buyer. Meanwhile, ‘B’ is the consideration in money, including all charges and fees, paid by the registered person to the seller of the used vehicle. Provided that the whole amount paid or received against the transactions mentioned above is made through the banking channel as required under Section 73 of the Sales Tax Act.
The FBR sources said the purpose of new rules is to compel the dealers to register with tax authorities. Under this new law, the transactions must be done through banking channels to identify the seller and buyer.
A brief read of this law shows that this law is for the businessmen and traders of used cars, as it will not implement on two individuals, selling or purchasing a vehicle on personal level. Furthermore, the question arises, whether this law is introduced to end the ‘Own’ culture in the country, but it is pertinent to mention that this exchange of money is always been done in cash, so the condition to do the business through banks will not be applicable on it. Because the dealers transfer the actual price of the car through banks, but there is no mechanism to keep a check on this ‘Own’ culture, hence, what is the benefit of this law?
Thirdly, who will decide the value of second hand car, because there are company rates of new cars, but the price of used-car is totally depend on the seller. So, how the government will develop a formula through which the price of second-hand car will be decided. So, we think there is alot of work need to be done on operational grounds.