The Federal Board of Revenue (FBR) has announced a refined procedure for managing zero-rated supplies to duty-free shops (DFS) across Pakistan, effective immediately. This move, communicated in a press release today, aims to streamline tax regulations and reinforce compliance within the duty-free sector, ultimately benefiting both businesses and international travelers.
While the FBR clarifies that the fundamental procedure for zero-rated supplies already exists within Rule 164 of the Sales Tax Rules, 2006, this updated framework provides a more detailed and structured approach. The core objective remains to allow DFS operators to procure goods tax-free, provided they strictly adhere to the outlined guidelines.
Key Components of the Updated Procedure:
The FBR’s announcement breaks down the zero-rated supply process into ten essential steps, emphasizing a meticulous approach to documentation, authorization, and accountability. For DFS entities licensed by Customs and eligible under the Fifth Schedule of the Sales Tax Act, these steps are crucial for accessing tax-free procurements:
- Registration and Record-Keeping: The foundation of the procedure lies in mandatory sales tax registration for DFS operators. They must also commit to filing monthly returns and maintaining thorough records, adhering to existing legal requirements.
- Authorization Application: DFS operators are now required to proactively seek authorization from the Commissioner of Inland Revenue for each instance of tax-free purchase. This application must be comprehensive, detailing the goods’ description and quantity, along with the manufacturer’s sales tax registration number. Crucially, only goods intended for sale under duty-free baggage allowances will be considered for authorization.
- Indemnity Bond – A Security Mechanism: Accompanying the authorization application, DFS operators must submit an indemnity bond in a prescribed format. This bond acts as a financial guarantee, ensuring that if goods procured under zero-rated status are misused or diverted from duty-free sales, the DFS will be held financially responsible for the applicable sales tax and additional penalties.
- Zero-Rated Invoice and Clear Marking: Upon authorization and bond acceptance, manufacturers can deliver goods to DFS using a zero-rated invoice. This invoice must prominently display the authorization number and the value of goods in both Pakistani Rupees and US Dollars. Furthermore, a permanent sticker clearly stating “Exclusively meant for DFS sales under customs baggage rules” must be affixed to all such goods, leaving no room for ambiguity about their intended destination.
- Foreign Currency Transactions: Financial transactions for these goods are mandated in US dollars, with DFS operators required to surrender these dollars to the State Bank of Pakistan. Manufacturers, conversely, will receive payment in Pakistani Rupees, aligning with foreign exchange regulations.
- Receipt and Verification – Customs Oversight: Upon receiving the goods, DFS operators must issue a delivery receipt certificate, a crucial document that needs attestation by customs officials. Copies of this certificate must be shared with both the manufacturer and the Commissioner of Inland Revenue, creating a verifiable audit trail.
- Comprehensive Record Maintenance and Scrutiny: Both DFS operators and manufacturers are obligated to maintain meticulous records of all zero-rated transactions. These records must include passenger details for baggage concession purchases and be readily available for inspection by sales tax authorities, ensuring transparency and facilitating audits.
- Refund Process Streamlined: Manufacturers involved in zero-rated supplies are classified as “manufacturer-cum-exporters” for refund purposes. Refund claims will be processed according to Chapter V of the Sales Tax Rules, 2006, indicating a familiar and established framework for these financial adjustments.
- Procurement Time Limit – A Control Measure: To further control the system, DFS operators are restricted to procuring goods under this framework for a maximum period of three months. The FBR explicitly stated the imperative of preventing goods from entering the local market, emphasizing that domestic sales will trigger liability for sales tax and penalties.
- Indemnity Bond Release – Subject to Verification: The indemnity bond submitted by DFS operators will only be released after the Commissioner of Inland Revenue is satisfied – through audits or other verification methods – that all procured goods were indeed sold in compliance with duty-free allowances. This underscores the FBR’s commitment to thorough oversight.
