CAF-2 · Chapter 17
Scope of Sales Tax Law and Rules for Registration and Deregistration MCQs with Answers
15 multiple-choice questions on Scope of Sales Tax Law and Rules for Registration and Deregistration for CAF-2 Taxation Principles and Compliance. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Atif supplied goods to his son’s newly established business at a heavily discounted price of Rs. 2,500,000. The discount allowed was 18%, whereas Atif's normal business practice is to allow an 8% discount. For the purpose of sales tax, what is the correct value of supply?
- A) A) Rs. 2,500,000 (The actual consideration received).
- B) B) Rs. 2,804,878 (The price calculated at the normal 8% discount).
- C) C) The cost of manufacturing the goods.
- D) D) Rs. 3,048,780 (The price with 0% discount).
Show answer & explanation
Answer: B) B) Rs. 2,804,878 (The price calculated at the normal 8% discount).
In the case of trade discounts, sales tax is levied on the discounted price only if the discount allowed is in conformity with normal business practices. Since the transaction is with an associate, the open market price (computed by allowing the normal 8% discount instead of 18%) must be used.
Question 2
ABC Ltd entered into a hire purchase agreement to supply a machine to a customer on 1st May. The machine was physically delivered on 15th May, and the first installment was received on 1st June. According to the Sales Tax Act, 1990, what is the "time of supply" for this transaction?
- A) A) 1st May
- B) B) 15th May
- C) C) 1st June
- D) D) The time of supply occurs proportionately as each installment is received.
Show answer & explanation
Answer: A) A) 1st May
The "time of supply" in relation to a supply of goods under a hire purchase agreement means the time at which the agreement is entered into.
Question 3
ABC Traders, a small retailer not falling under Tier-1, sells goods through an online marketplace. A customer purchases goods worth Rs. 100,000 using Cash on Delivery (CoD). How will sales tax be handled for this digital transaction?
- A) A) ABC Traders must register for sales tax and charge 18% on the invoice.
- B) B) The online marketplace will withhold 1% of the gross value as final tax.
- C) C) The courier company will withhold 2% of the gross value, which constitutes the final discharge of ABC Traders' sales tax liability.
- D) D) The transaction is entirely exempt from sales tax since it is under Rs. 100,000.
Show answer & explanation
Answer: C) C) The courier company will withhold 2% of the gross value, which constitutes the final discharge of ABC Traders' sales tax liability.
For supplies of digitally ordered goods delivered from within Pakistan, a tax of 2% is withheld by the courier service on Cash on Delivery (CoD) transactions. For retailers other than Tier-1, this withholding constitutes the final discharge of their sales tax liability, and they are not required to obtain sales tax registration.
Question 4
Which of the following manufacturing concerns meets the criteria to be classified as a "cottage industry" and thus have its local supplies exempt from sales tax?
- A) A) A manufacturer in a residential area with 12 workers and an annual turnover of Rs. 6 million.
- B) B) A manufacturer in a commercial area with 8 workers and an annual turnover of Rs. 5 million.
- C) C) A manufacturer in a residential area with an industrial electricity connection and an annual turnover of Rs. 7 million.
- D) D) A manufacturer in a residential area without industrial gas/electricity, with 9 workers, and an annual turnover of Rs. 7.5 million.
Show answer & explanation
Answer: D) D) A manufacturer in a residential area without industrial gas/electricity, with 9 workers, and an annual turnover of Rs. 7.5 million.
A "cottage industry" must fulfill all of the following conditions: (a) does not have an industrial gas or electricity connection; (b) is located in a residential area; (c) does not have a labour force of more than 10 workers; and (d) annual turnover does not exceed Rs. 8 million.
Question 5
A registered manufacturer supplies goods specified in the Third Schedule (e.g., shampoo and toilet soap) to an unregistered distributor. What is the rate of "further tax" applicable on this supply?
- A) A) 4%
- B) B) 3%
- C) C) 1%
- D) D) 0% (Further tax is not charged)
Show answer & explanation
Answer: D) D) 0% (Further tax is not charged)
Generally, a further tax of 4% is charged on taxable supplies made to a person who is not registered or not an active taxpayer. However, the Federal Government has exempted certain items from this further tax, specifically including items listed in the Third Schedule to the Sales Tax Act, 1990.
Question 6
Under the provisions of the Sales Tax Act, 1990, which of the following persons is NOT mandatorily required to be registered for sales tax?
- A) A) A manufacturer who is not running a cottage industry.
- B) B) An importer.
- C) C) A commercial exporter who does NOT intend to claim a refund against his zero-rated supplies.
- D) D) A wholesaler.
Show answer & explanation
Answer: C) C) A commercial exporter who does NOT intend to claim a refund against his zero-rated supplies.
Importers, wholesalers, and manufacturers (other than cottage industries) are required to be registered. However, an exporter is only required to be registered if he intends to obtain a sales tax refund against his zero-rated supplies.
Question 7
Where a person files an application for sales tax registration as a manufacturer but has not yet installed machinery, he may be granted "temporary registration" for the purpose of importing machinery. For how long is this temporary registration valid?
- A) A) 30 days
- B) B) 60 days
- C) C) 90 days
- D) D) 180 days
Show answer & explanation
Answer: B) B) 60 days
Temporary registration as a manufacturer shall be allowed for a period of sixty (60) days, subject to furnishing a complete list of machinery to be imported along with the Bill of Lading or Goods Declarations.
Question 8
Under the rules for suspension and blacklisting of registration, the Commissioner can suspend a registered person's sales tax registration through the system, without prior notice, if the person fails to file sales tax returns for:
- A) A) Two consecutive months.
- B) B) Three consecutive months.
- C) C) Six consecutive months.
- D) D) One entire tax year.
Show answer & explanation
Answer: B) B) Three consecutive months.
A registered person who does not file sales tax returns for three consecutive months shall be caused to be suspended through the system without any notice. (Note: Null filing for six consecutive months also triggers suspension).
Question 9
Emerald Traders (ET) purchased taxable goods from Sapphire Electronics (SE), another registered person, and paid the invoice value inclusive of sales tax. Later, SE failed to deposit the sales tax to the government. Under Section 8A, ET can be held jointly and severally liable for the unpaid tax IF:
- A) A) ET and SE are located in the same tax jurisdiction.
- B) B) ET is proven to have had knowledge or reasonable grounds to suspect that the tax payable in respect of that supply would go unpaid.
- C) C) The transaction was completed strictly through a banking channel.
- D) D) ET is always jointly and severally liable regardless of their knowledge.
Show answer & explanation
Answer: B) B) ET is proven to have had knowledge or reasonable grounds to suspect that the tax payable in respect of that supply would go unpaid.
Where a registered person receiving a taxable supply has knowledge or reasonable grounds to suspect that the tax payable in respect of that supply would go unpaid, such person (the buyer) as well as the person making the supply shall be jointly and severally liable for the unpaid tax.
Question 10
What is the primary difference between a "zero-rated supply" and an "exempt supply" under the Sales Tax Act, 1990?
- A) A) Zero-rated supplies apply only to imports, while exempt supplies apply only to local sales.
- B) B) Input tax paid related to zero-rated supplies is refundable, whereas input tax paid related to exempt supplies is inadmissible and cannot be adjusted or refunded.
- C) C) Zero-rated supplies require prior approval from the Commissioner, while exempt supplies do not.
- D) D) No sales tax invoice is raised for zero-rated supplies, while it is required for exempt supplies.
Show answer & explanation
Answer: B) B) Input tax paid related to zero-rated supplies is refundable, whereas input tax paid related to exempt supplies is inadmissible and cannot be adjusted or refunded.
For zero-rated supplies (like exports or Fifth Schedule items), the tax rate is 0%, but the supplier remains in the tax net and can claim a refund for the input tax paid on their purchases. For exempt supplies (Sixth Schedule items), the input tax paid is inadmissible, meaning it is neither adjustable nor refundable.
Question 11
A registered person makes a taxable supply of a home appliance to a consumer from the general public on an installment basis. The cash (open market) price of the appliance is Rs. 150,000, but the total installment price inclusive of markup is Rs. 180,000. What is the value of supply for calculating sales tax?
- A) A) Rs. 180,000
- B) B) Rs. 150,000
- C) C) Rs. 30,000
- D) D) Rs. 165,000
Show answer & explanation
Answer: B) B) Rs. 150,000
In case a taxable supply is made to a consumer from the general public on an installment basis at a price inclusive of markup rendering it higher than the open market price, the value of supply shall strictly mean the open market price of the supply excluding the amount of tax (i.e., Rs. 150,000).
Question 12
How is sales tax collected from retailers who do NOT fall into the Tier-1 category?
- A) A) They must file monthly returns and pay a standard 18% tax on their sales.
- B) B) They are completely exempt from sales tax.
- C) C) Tax is charged through their monthly electricity bills at 5% (if the bill does not exceed Rs. 20,000) or 7.5% (if the bill exceeds Rs. 20,000).
- D) D) They pay a flat extra tax of 4% directly to the FBR.
Show answer & explanation
Answer: C) C) Tax is charged through their monthly electricity bills at 5% (if the bill does not exceed Rs. 20,000) or 7.5% (if the bill exceeds Rs. 20,000).
Tax shall be charged from retailers other than those falling in Tier-1 through their monthly electricity bills at 5% where the bill does not exceed Rs. 20,000, and at 7.5% where the bill exceeds Rs. 20,000.
Question 13
For items specified in the Third Schedule (such as fruit juices, ice cream, and toilet soap), how is the sales tax calculated and displayed?
- A) A) Tax is charged at 18% on the wholesale price and printed on the invoice.
- B) B) Tax is charged on the retail price, and the manufacturer or importer must prominently print or emboss the retail price along with the amount of sales tax on the packaging.
- C) C) Tax is charged on the cost of production plus a 10% notional profit.
- D) D) Third Schedule items are strictly subject to a 0% tax rate.
Show answer & explanation
Answer: B) B) Tax is charged on the retail price, and the manufacturer or importer must prominently print or emboss the retail price along with the amount of sales tax on the packaging.
Taxable supplies and imports specified in the Third Schedule are charged to tax on the retail price, and the manufacturer or importer must legibly and prominently print or emboss the retail price along with the amount of sales tax on the packet, container, or label.
Question 14
If a registered person fails to file a sales tax return for six consecutive months, what action will the computerized system take?
- A) A) The system will automatically issue a notice for a best judgment assessment.
- B) B) The system will cause the person to be automatically de-registered after the Commissioner issues a notice and offers an opportunity of being heard.
- C) C) The person's bank accounts will be permanently seized.
- D) D) A fixed penalty of Rs. 500,000 will be automatically deducted from their bank account.
Show answer & explanation
Answer: B) B) The system will cause the person to be automatically de-registered after the Commissioner issues a notice and offers an opportunity of being heard.
If a registered person fails to file a tax return for six consecutive months, the Commissioner, after issuing a notice in writing and giving an opportunity of being heard, shall issue an order of de-registration, and the computerized system shall be caused to de-register the person accordingly.
Question 15
To force undocumented businesses into the tax net, the government introduced Section 14AC. If a person is liable to be registered but fails to do so after receiving three separate show-cause notices, what is the immediate enforcement measure taken against them?
- A) A) A permanent bar on the transfer of their immovable property.
- B) B) Sealing of their business premises and seizure of movable assets.
- C) C) Intermittent suspensions of their bank account operations (each suspension lasting 3 working days, up to 3 times).
- D) D) Arrest and imprisonment of the business owner.
Show answer & explanation
Answer: C) C) Intermittent suspensions of their bank account operations (each suspension lasting 3 working days, up to 3 times).
Under Section 14AC, after failed responses to notices, the enforcement measure is intermittent suspensions of bank account operations (each suspension lasts 3 working days, up to 3 times, with a gap of at least 1 week between suspensions). Only after continuous non-compliance does this escalate to a permanent bar on bank accounts or property transfers.