CAF-2 · Chapter 18
Determination of Sales Tax Liability MCQs with Answers
15 multiple-choice questions on Determination of Sales Tax Liability for CAF-2 Taxation Principles and Compliance. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
If a registered person inadvertently failed to deduct input tax in the relevant tax period in which the purchase was made, what is the maximum time limit allowed by the Sales Tax Act, 1990 to claim such missed input tax?
- A) A) It can only be claimed in the immediately next tax period.
- B) B) It can be claimed in the return for any of the six succeeding tax periods.
- C) C) It can be claimed within one year from the end of the financial year.
- D) D) It cannot be claimed once the relevant tax period has passed.
Show answer & explanation
Answer: B) B) It can be claimed in the return for any of the six succeeding tax periods.
Where a registered person did not deduct input tax within the relevant period, he may claim such tax in the return for any of the six succeeding tax periods.
Question 2
Alpha Ltd purchased taxable raw materials worth Rs. 500,000 from a registered supplier on credit. The tax invoice was issued on 1 January 2026. Due to a liquidity crisis, Alpha Ltd paid the amount via a crossed cheque drawn on its business bank account on 15 August 2026 (after 227 days). What is the sales tax implication of this transaction for Alpha Ltd?
- A) A) The input tax remains admissible since the payment was made through a crossed cheque.
- B) B) The input tax will be disallowed because the payment was made after 180 days from the issuance of the tax invoice.
- C) C) The input tax is admissible, but a 10% penalty will be imposed.
- D) D) The input tax is reduced by 50%.
Show answer & explanation
Answer: B) B) The input tax will be disallowed because the payment was made after 180 days from the issuance of the tax invoice.
Payment must be made within 180 days of the issuance of the tax invoice in case of credit transactions. If this condition is not fulfilled, the buyer will not be entitled to claim input tax, and if already claimed, it must be reversed in the month after the lapse of 180 days.
Question 3
Which of the following input taxes is strictly INADMISSIBLE under Section 8 of the Sales Tax Act, 1990?
- A) A) Input tax paid on raw materials used for making zero-rated supplies.
- B) B) Input tax paid on machinery purchased for the factory.
- C) C) Input tax paid on building and construction materials, such as paints and electrical fittings, used in the construction of the company's own factory building.
- D) D) Input tax paid on utility bills of the manufacturing plant.
Show answer & explanation
Answer: C) C) Input tax paid on building and construction materials, such as paints and electrical fittings, used in the construction of the company's own factory building.
A registered person shall not be entitled to deduct input tax paid on goods used in, or permanently attached to, immoveable property, such as building and construction materials, paints, electrical and sanitary fittings, pipes, wires and cables.
Question 4
A registered manufacturer has an output tax liability of Rs. 1,000,000 for the month of August 2026. The input tax paid on raw materials during the same month is Rs. 950,000. Under Section 8B, what is the amount of sales tax payable with the return, and what is the treatment of the remaining input tax?
- A) A) Tax payable is Rs. 50,000; nothing is carried forward.
- B) B) Tax payable is Rs. 100,000; the remaining Rs. 50,000 input tax is carried forward to the next tax period.
- C) C) Tax payable is Rs. 0; Rs. 50,000 is carried forward.
- D) D) Tax payable is Rs. 100,000; the remaining Rs. 50,000 lapses.
Show answer & explanation
Answer: B) B) Tax payable is Rs. 100,000; the remaining Rs. 50,000 input tax is carried forward to the next tax period.
A registered person shall not be allowed to adjust input tax in excess of 90% of the output tax for that tax period. 90% of Rs. 1,000,000 is Rs. 900,000. Thus, the payable amount is Rs. 100,000 (1,000,000 - 900,000), and the unadjusted input tax of Rs. 50,000 (950,000 - 900,000) is carried forward.
Question 5
Following up on the 90% input tax restriction under Section 8B, which of the following input tax claims is EXEMPT from this 90% limitation?
- A) A) Input tax paid on imported raw materials.
- B) B) Input tax paid on fixed assets or capital goods.
- C) C) Input tax paid on packing materials.
- D) D) Input tax paid on electricity bills.
Show answer & explanation
Answer: B) B) Input tax paid on fixed assets or capital goods.
Restriction on the adjustment of input tax in excess of 90% of the output tax shall not apply in case of fixed assets or capital goods.
Question 6
XYZ Traders deals in both taxable and exempt supplies. During the month, the value of their taxable supplies was Rs. 6,000,000 and exempt supplies was Rs. 2,000,000. The residual input tax (common input tax not specifically allocable) was Rs. 400,000. How much of this residual input tax can XYZ Traders claim?
- A) A) Rs. 400,000
- B) B) Rs. 100,000
- C) C) Rs. 300,000
- D) D) Nil
Show answer & explanation
Answer: C) C) Rs. 300,000
If a person deals in taxable and non-taxable supplies, he can reclaim only such portion of input tax as is attributable to taxable supplies. The formula is: (Value of taxable supplies / Value of taxable + exempt supplies) x Residual input tax. (6,000,000 / 8,000,000) x 400,000 = Rs. 300,000.
Question 7
A registered manufacturer sold taxable goods with a 1-year warranty. Five months later, a customer returned a defective part, and the manufacturer provided a free replacement under the warranty. The open market value of the replaced part is Rs. 50,000. What is the output tax liability on this replacement?
- A) A) Rs. 9,000 (18% of 50,000)
- B) B) Nil
- C) C) Rs. 4,500 (9% of 50,000)
- D) D) It will be taxed at the rate of 4% extra tax.
Show answer & explanation
Answer: B) B) Nil
The free replacement of defective parts during the warranty period is considered as equivalent to the value of the original supply and not a separate supply, hence such replacement is not chargeable to tax.
Question 8
If a customer returns goods to the supplier and the goods are found to be completely unfit for consumption and must be destroyed, what is the legal requirement for destroying the goods and adjusting the input tax?
- A) A) The goods can be destroyed internally by the supplier's management, and input tax is fully admissible.
- B) B) The goods must be destroyed after obtaining permission from the Collector of Sales Tax, and the input tax credit in respect of such destroyed goods shall not be admissible.
- C) C) The goods must be returned to the FBR headquarters.
- D) D) The goods can be destroyed, but the output tax cannot be reversed.
Show answer & explanation
Answer: B) B) The goods must be destroyed after obtaining permission from the Collector of Sales Tax, and the input tax credit in respect of such destroyed goods shall not be admissible.
Goods unfit for consumption shall be destroyed after obtaining permission from the Collector of sales tax, under the supervision of an Inland Revenue officer, and the input tax credit in respect of goods so destroyed shall not be admissible.
Question 9
Under the Sales Tax Rules for Debit and Credit Notes, what is the maximum standard time limit for issuing a debit or credit note to adjust the output or input tax?
- A) A) Within 30 days of the relevant supply.
- B) B) Within 90 days of the relevant supply.
- C) C) Within 180 days of the relevant supply (extendable by another 180 days by the Collector).
- D) D) By the end of the financial year.
Show answer & explanation
Answer: C) C) Within 180 days of the relevant supply (extendable by another 180 days by the Collector).
The adjustments which lead to reduction in output tax or increase in input tax can only be made if the corresponding Debit Note or Credit Note is issued within 180 days of the relevant supply, provided the Collector may extend it by a further 180 days.
Question 10
A registered supplier made a supply to an UNREGISTERED person. The unregistered person subsequently returned the goods due to defects. What is the specific procedural requirement for the supplier to adjust their sales tax return via a credit note in this situation?
- A) A) The supplier can simply issue a credit note on their own and claim it.
- B) B) The unregistered buyer must log into the FBR portal to issue a debit note first.
- C) C) The seller must obtain prior approval of the Commissioner for the preparation of the credit note.
- D) D) No adjustment is ever allowed for goods returned by unregistered persons.
Show answer & explanation
Answer: C) C) The seller must obtain prior approval of the Commissioner for the preparation of the credit note.
A new proviso requires the seller to obtain prior approval of the Commissioner for preparation of a credit note in case of cancellation of supplies or return of goods by an unregistered person.
Question 11
If a registered person pays an amount of sales tax less than the tax due as indicated in their own filed sales tax return, what immediate action can the Inland Revenue Department take under Section 11A?
- A) A) The department must issue a show-cause notice and wait 30 days.
- B) B) The department must initiate an extensive audit before taking any action.
- C) C) The short-paid amount along with default surcharge shall be recovered by stopping the removal of goods from the business premises and attaching bank accounts without giving any show-cause notice.
- D) D) The department can only impose a nominal penalty but cannot stop business operations.
Show answer & explanation
Answer: C) C) The short-paid amount along with default surcharge shall be recovered by stopping the removal of goods from the business premises and attaching bank accounts without giving any show-cause notice.
Where a registered person pays tax less than the tax due as indicated in his return, the short paid amount along with default surcharge shall be recovered by stopping removal of any goods and through attachment of bank accounts without giving him a show cause notice.
Question 12
If the federal government changes the standard rate of sales tax (e.g., from 17% to 18%) in the middle of a month (e.g., on the 23rd of the month), how should the registered person file the sales tax return for that specific month?
- A) A) Apply the new 18% rate to the entire month's supplies.
- B) B) Apply the old 17% rate to the entire month's supplies.
- C) C) A separate return for each portion of the tax period must be furnished (or a single return if it provides the facility to incorporate both rates) based on the rate in force at the time of each supply.
- D) D) Wait until the next full month to start applying the new rate.
Show answer & explanation
Answer: C) C) A separate return for each portion of the tax period must be furnished (or a single return if it provides the facility to incorporate both rates) based on the rate in force at the time of each supply.
A taxable supply shall be charged to tax at the rate in force at the time of making the supply. If there is a change during a tax period, separate returns for each portion (or a single return accommodating both rates) must be furnished.
Question 13
A Tier-1 retailer operates a large clothing store but fails to integrate their retail outlet with the FBR's computerized Point of Sale (POS) real-time reporting system. What is the specific penal consequence regarding their input tax under Section 8B?
- A) A) Their entire input tax for the period will be disallowed (100% reduction).
- B) B) Their adjustable input tax for the whole of that tax period shall be reduced by 60%.
- C) C) They will be charged an extra tax of 5%.
- D) D) Their sales tax registration will be immediately cancelled without notice.
Show answer & explanation
Answer: B) B) Their adjustable input tax for the whole of that tax period shall be reduced by 60%.
In case a Tier-1 retailer does not integrate his retail outlet in the manner as prescribed, the adjustable input tax for whole of that tax period shall be reduced by 60%.
Question 14
In cases where excess input tax arises specifically because the registered person made zero-rated local supplies or exports during the tax period, what is the statutory time limit for the FBR to refund this excess input tax?
- A) A) Not later than 45 days of filing the refund claim.
- B) B) It cannot be refunded; it must be carried forward indefinitely.
- C) C) Within 120 days of the end of the financial year.
- D) D) Within 180 days of filing the return.
Show answer & explanation
Answer: A) A) Not later than 45 days of filing the refund claim.
If input tax exceeds output tax on account of zero-rated local supplies or export, the excess amount shall be refunded not later than 45 days of filing of the refund claim.
Question 15
A manufacturer makes taxable supplies to an unregistered distributor. The manufacturer issues sales tax invoices but fails to mention the CNIC or NTN of the unregistered distributor on the invoices. What is the consequence of this failure under Section 8?
- A) A) The manufacturer will have to pay a 10% penalty on the total invoice value.
- B) B) The unregistered distributor will be compulsorily registered by the FBR.
- C) C) The input tax attributable to supplies made to the unregistered distributor will be disallowed on a pro-rata basis.
- D) D) The output tax on these supplies will be doubled.
Show answer & explanation
Answer: C) C) The input tax attributable to supplies made to the unregistered distributor will be disallowed on a pro-rata basis.
A registered person shall not be entitled to deduct input tax attributable to supplies made by a manufacturer or importer to an unregistered distributor, on a pro-rata basis, for which sale invoices do not bear the NIC number or NTN of the recipient.