STUDY NOTES ON FEDERAL EXCISE DUTY (FED)

CHARGE OF FED

FED is levied and collected, at rates specified in the First Schedule, on

o Goods produced or manufactured in Pakistan;

o Goods imported into Pakistan;
o Specified goods which are produced or manufactured in the non-tariff areas,
excluding Azad Jammu & Kashmir and are brought to the tariff areas for sale
or consumption therein; and

SRO 649 dated 1.7.2005

Goods which are produced or manufactured in the non-tariff areas excluding
the territory of Azad Jammu and Kashmir and brought to the tariff areas shall
be leviable for duty. Example

- Vegetable ghee and cooking oil

- Cigars, cigarettes, etc.
- Perfumes and toilet waters
- Beauty or make-up preparations
- Pre-shave, shaving or after-shave preparations,

o Services are provided or rendered in Pakistan

POINT OF CHARGE

The value and the rate of duty in respect of goods and services shall be the value
and the rate on the date: (Section 11)

o when goods are cleared for exports;

o when goods are cleared for home consumption;
o when services are rendered or provided;
o when goods are brought for sale or consumption from the non tariff area into
the tariff area.

BASIS OF CHARGE

FED on the goods shall be levied on either of the following basis, depending on the
category of goodsbeing subject to excise duty:

o Ad volarem
o Retail Price
o Weight (Ton, kilogram, Litre, etc)
o Quantity
o Measurement (Cubic Meters)
o Unit (British Thermal Unit)
o Charges, bill of lading and premium (in case of excisable services)
o Production capacity, machinery, undertakings, establishments or installations
o On fixed basis on any goods or services
RATE OF TAX

The general rate of FED is 15% advolarem.

‘VALUE’ FOR CHARGE

Where FED is leviable on the basis of value, then value for the purpose of
determining FED shall be: Section 12

o wholesale cash price of the goods on the day on which sales is made, and
where such wholesale price is not available, the whole sale cash price for
identical or similar goods, to a general body of retail trade or the general body
of consumers, if retail trade body is not available, on the day of sale, without
deduction whatsoever, except the amount of duty and sale tax.

o the total amount of charges in case of services irrespective whether services

are provided on payment or free of charge or any concessional basis.

o value determined in accordance with section 25 of the Customs Act, in case of

imports.

o where duty is leviable on the basis of retail price, the retail price as fixed by
the manufacturer inclusive of all charges and taxes other than sales tax, if it
is specified.

o Minimum price fixed by the CBR. However, where the goods or classes of
goods are sold at a price higher then the price fixed by the Board, the duty
shall be levied at such higher price of goods or class of goods, unless
otherwise directed by the Board in this regard.

When to pay (Section 4 read with Section 2(9a)

Duty shall be paid:

o In respectr of import, at the time of payment of custom duty in the case of

import of goods; and

o in respect of clearance made in a month, the last day of that

month(previously within seven days of the following month through
prescribed challan.

However, monthly excise return shall be filed to the Collector within 15 days
following the end of the month or such other notified date. In case of change in the
rate of duty during the month, separate returns showing different rates are to be
filed.

Revised return can also be filed to correct a bonafide mistake or error in the original
return within 90 days of the filing of original return. .

Zero rate of duty and drawback of duty (Section 5)

Zero-rate of duty is allowed on the goods –

o exported out of Pakistan

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 o specified by the Federal government.

The CBR may, by notification in the official Gazette, and subject to such conditions
and rates as may be prescribed, allow draw back of duty paid on goods used for the
manufacture of goods: (Section 5 & Rule 33).

o manufactured in and exported outside Pakistan; or

o shipped as provisions or stores for consumption in board a ship or aircraft
proceeding to a destination outside Pakistan.

Adjustment of duty will be available to zero-rate excisable goods.

The CBR may, however, by a specific notification, prohibit or restrict payment of

duty draw back, refund or adjustment of duty in respect of goods exported outside
Pakistan or any specified goods or class of goods to any specified goreign port or
territory.

Adjustment of duties of excise (Section 6)

Adjustment of duty is allowed on excisable goods used as direct input for the
manufacture or production of such goods liable for excise duty subject to –

o registered person has a proof in the form of purchase invoice or goods

declaration or any other lawful document issued in his own name.

o registered person has a proof that he has paid the price of goods inclusive of
duty through banking channels including online payment.

o registered person has a proof that he had received the price of goods sold by
him inclusive of duty through banking channels including online payment.

CBR may disallow or restrict adjustment of FED, in whole or in part – Section 6(3).
Through SRO 650 dated 1.7.2005, CBR has disallowed adjustment of duty in
respect of Concentrates in all forms including syrup and flavors used in the
manufacture of aerated waters, including mineral water.

Application of Sales Tax Act, 1990. – Section 7

Section 7 explains that provisions of Sales Tax Act, 1990 shall be applied to the
goods specified in the Second Schedule of the Federal Excise Act i.e.

o Edible oil excluding expoxidized soyabean oil

o Vegetable ghee and cooking oil

Provisions of Sales Tax Act, 1990 shall also be applied to the services as specified by
CBR. Accordingly, CBR under SRO 550 dated 5.6.2006 specified services, which
includes all services highlighted in the Table II of First Schedule except insurance.
Examples:

o Advertisement.
o Facilities for travel.
o Carriage of goods by air.
o Shipping agents.
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 o Telecommunication services.

It means that in terms of the said section the registered person, in respect of goods
covered under the Second Schedule or specified services, is entitled to adjust the
amount of input tax paid under the Sales Tax Act, 1990 against the excise duty
payable by it under the Federal Excise Act. Conversely, the amount of duty paid on
such goods / services can be adjusted against the output tax payable by the
registered person under the Sales Tax Act, 1990.

Fixed tax on import of vegetable ghee, edible oil and cooking oil.
SRO 24(I)/2006 dated 7 January 2006

In lieu of FED leviable on the production / manufacture of edible oil excluding

deoxidized soybean oil,, vegetable ghee and cooking oil, fixed tax at rate of Rs. 1
per kg is collectable at the import stage It is clarified that the tax so collected then
constitute full and final discharge of the tax liability of such manufacturers and
producers.

Rebate of duty:

The CBR, via its various SROs has provided rebate of FED paid in respect certain
items used in the manufacture and export of the products made from such
items, subject to the condition that the applicant produces a proof of payment of
FED in respect of such items. These include:

• base oil used in the manufacture of motor lubricating oil. SRO 807(1)/2005
dated August 12, 2005

• Cement used in the manufacture of fiber cement pipes and fiber cement flat
sheets. – SRO 808(I)/2005 dated 12 August, 2005.

Default surcharge. – Section 8. Default surcharge is chargeable @ 1% per

month for the first six month and @ 1 ½ percent thereafter. Default surcharge is
computed from the day following the day on which the duty is payable upto the day
preceding the day on which payment of duty is made.

Collection of excess duty, etc – Section 11

Every person who has collected any duty, which is not payable and the incidence of
which has been passed on to the consumer, shall pay the amount so collected to the
Federal Government.

Registration – Section 13

Every person engaged in the excisable goods and services is required to obtain
registration in the prescribed manner regardless of his annual turnover or volume of
such goods or services.

If a person is already registered for Sales Tax purpose he does not need to get
registered separately for excise.

Exemption – Section 16

All goods imported or manufactured in Pakistan and services provided or rendered

shall be exempt from whole of FED except those specified in the First Schedule.
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Goods and services specified in the Third Schedule shall also be exempt subject to
conditions specified therein.

However, no adjustment in terms of section 6 shall be admissible in respect of goods

exempt from duty.

Apportionment of adjustment – Rule 14

In case a registered person is manufacturing and selling both excisable and non-
excisable goods manufactured from duty-paid inputs, he shall be entitled to
adjustment of duty only to the extent of excisable goods.

Records (Section 17) Every person registered shall maintain and keep for a period
of 3 years at his business premises or registered office in English or Urdu language the
following records of excisable goods purchased, manufactured and cleared (including
those cleared without payment of excise duty):

(a) records of clearances and sales made indicating the description,

quantity and value of goods, name and address of the person to whom
sales were made and the amount of the duty charged;
(b) records of goods purchased showing the description, quantity and
value of goods, name, address and registration number of the supplier and
the amount of the duty, if any, on purchases;
(c) records of goods cleared and sold without payment of duty;
(d) records of invoices, bills, accounts, agreements, contracts, orders
and other allied business matters;
(e) records of production, stocks and inventory;
(f) records of imports and exports; and
(g) such other records as may be specified by the Board.

Invoices (Section 18) A person registered under this Act shall issue for each
transaction a serially numbered invoice at the time of clearance or sale of goods,
including goods chargeable to duty at the rate of zero per cent, or providing or
rendering services containing the following particulars, namely:–

(a) name, address and registration number of the seller;

(b) name, address and registration number of the buyer;
(c) date of issue of the invoice;
(d) description and quantity of goods or as the case may be,
description of services;
(e) value exclusive of excise duty;
(f) amount of excise duty; and
(g) value inclusive of excise duty.

In case a registered person is also engaged in making supplies taxable under the Sales
Tax Act, such person shall not be required to issue a separate invoice for excise
purposes.

The Board may specify goods in respect of which a copy of the invoice shall be carried
or accompanied with the conveyance during their transportation or movement.

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The Banking companies are not required to issue an invoice in respect of their
services.

Refund – Section 44

Refund is permissible only if it is claimed within one year of its accrual.

Special procedure for collection of excise duty on services provided by

banking companies, financial institutions and non-banking finance
companies.
(Part II, First Schedule read with Rule 40A of FE Rules, 2005)

Every banking company, financial institution and non-banking finance company shall
pay the Federal excise duty levy able on the services rendered or provided by the
company or institution to any person. For the purpose of levy of excise duty under
these rules, the services provided by the banking companies, financial institutions
and non-banking finance companies shall represent:,–

(a) L/C commission;

(b) guarantee commission;
(c) brokerage commission;
(d) issuance of pay order and demand drafts;
(e) bill of exchange charges;
(f) transfer of money including telegraphic transfer, mail transfer and
electronic transfer;
(g) providing bank guarantees;
(h) bill discounting commission;
(i) safe deposit lockers fee;
(j) safe vaults;
(k) credit and debit card issuance, processing, operation charges; and
(l) commission and brokerage on foreign exchange dealings.

The rate of duty is 5%.

The Head Offices of the banking companies, financial institutions and non-banking
financial companies shall apply to the Central Registration Office located at Central
Board of Revenue for excise registration in the prescribed form.

The duty under these rules shall be paid by the banking company or financial
institution or non-banking finance company on the gross amount charged for service
provided to the customers.

The duty due for each month shall be paid by the Head Office of the company or
institution by the 14th day of the following month in respect of the services provided
upto the last working day of each calendar month. For every month, the company or
institution shall file a return electronically in the prescribed form by the 15th day of
the following month to the Collectorate in whose jurisdiction it is registered.

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In case duty is not deposited by the company or institution by the due date, it shall,
in addition to the payment of duty and default surcharge, be also liable to penalty
under the Act or the Rules.

The Head Office of the company shall maintain records of the services provided or
rendered under these rules and the collection of duty thereon in such manner as will
enable the distinct ascertainment of payment of excise duty on each of the services
mentioned in the scope of these rules. The Head Office shall also submit a copy of
annual audit report to the Collector of Federal Excise within 15th day of its
publication and any short payment of duty found out as a result of such audit report
shall be paid by the registered person within 15th day of the notice received for
such payment.

Application of FED in case charges are waived, for any item stated in
Schedule Of Charges (SOC).

An issue that is currently being raised by the banking companies is the

application of FED if the charges are not collected from the customer. In this
connetion the general stand point is as follows:

Rule 40A of Federal Excise Rules, 2005 provides in Sub rule 4 that:

“(4) the duty under these rules shall be paid by the banking
company, financial institution and non-banking finance company on the
gross amount charged for service provided to the customers”.

A plain reading of the above sub-rule clearly indicates that FED is to be levied
on the gross amount charged for service provided to the customer. It would
therefore logically follow that where no amount is charged or a lesser amount
than what is listed in the schedule of charges is charged, the FED is leviable
accordingly.

However section 12 of the Federal Excise Act, 2005 while dealing with
determination of value for the purposes of duty, provides in Sub-section 2
thereof for determination of value for services as under –

(2) Where any services are liable to duty under this Act at a rate
dependent on the charges thereof, the duty shall be paid on total
amount of charges for the services including the ancillary facilities or
utilities, if any, irrespective whether such services have been rendered
or provided on payment of charge or free of charge or on any
concessional basis.

This means that if FED is leviable at a rate dependent on the service charges,
FED is payable irrespective of whether the charges are collected or not.
However, if as a policy the bank / financial institution is not charging any
charges for a particular category of service, there would be no FED in respect
of such services. Hence, if for example a banking company / financial
institution is providing credit cards ‘free of charge’ to all customers, there
would be non FED as there are no charges for calculating FED. However, if the
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 company charges some fee for making a credit card but the same is waived
for some customer for one reason or the other, FED would be payable in
respect of such services, even though no charges are collected from the
customer.

As such, if the bank s waiving charges of a particular item, we are of the

opinion that FED would be applicable on the same.
Special procedure for payment of Federal excise duty on franchise fee or
technical fee or royalty under a franchise agreement.
(Part II, First Schedule read with Rule 43A of FE Rules 2005)

Every person, firm or company, (hereinafter referred to as franchisee), using the

right to deal with the goods or services of the franchiser under a franchise
agreement against a pre-determined fee or royalty, if not already registered, shall
obtain Federal excise registration from the Collector of Federal Excise in whose
jurisdiction the franchisee or as the case may be, his head office is located:

Provided that where a franchisee is already registered under the Sales Tax Act,
1990, he shall not be required to take separate registration for excise purposes and
his Sales Tax registration shall be deemed to be a registration for the purpose of the
Act.

The duty shall be paid by the franchisee, or as the case may be, the head office of
the franchisee at the rate of five per cent of the value of taxable service,
which shall be the gross amount or the franchise fee or the deemed franchise fee or
technical fee or royalty charged by the franchiser from the franchisee for using the
right to deal with the goods or services of the franchiser.

The franchisee, or as the case may be, the head office of the franchisee shall pay
the duty due for a month on the last day of each month. (however, via General
Order no. 5/2006 dated 5 August, 2006 the payment of duty is now linked when the
fees / royalty is actually paid. See below). For every month, the franchisee or the
Head Office of the franchisee shall file a return in the prescribed form by the
15th day of the following month to the Collectorate in whose jurisdiction it is
registered.

Failure to pay the duty by the due date, as specified in sub-rule (3), shall render the
franchisee, or as the case may be, the head office of the franchisee, liable to a
penalty under the Act, in addition to the payment of duty and default surcharge.

The Collector of Federal Excise having jurisdiction shall obtain from the State Bank
of Pakistan the statistics or data concerning payment of franchise fee or technical
fee or royalty paid by a franchisee to the franchiser, on a quarterly basis and shall
use such statistics or data to determine or verify the amount of duty paid by a
franchisee during the said period.

An officer of Federal Excise as are deputed by the Collector of Federal Excise having
jurisdiction, shall have access to the records maintained by the franchisee, or as the
case may be, the head office of the franchisee.]

General Order no. 5/2006 dt. 05 August 2006

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The Central Board of Revenue, in order to streamline the levy and collection of
excise duty on franchise services, issued the following instructions:

(i) In such cases where remittance/payment of the franchise fee or royalty

or technical fee is made under a proper agreement between a foreign
or local franchiser and a franchisee, the assessable value for the
purpose of levy of 5% excise duty shall be the gross amount
remitted/paid to the franchiser of the amount laid down in the franchise
agreement;
(ii) In case where franchisers are foreign or local beverage companies, if
there is no formal agreement between the franchiser of franchisee, the
assessable value for the purpose of levy of excise duty shall be 5% of
the value of concentrate supplied by the franchiser to the franchisee.
However, in such cases where proper remittance/payment of fee or
royalty is being made by the franchisee beverage company to the local
or foreign franchiser under a proper agreement, the assessable value
shall be the gross amount of fee or royalty remitted/paid to the
franchiser or the amount laid down in the agreement;

(iii) For the food sector, in case of a proper franchise or royalty agreement,
the assessable value for levy of excise duty shall be the gross amount
of franchise fee or royalty remitted/paid to the franchiser or the amount
laid down in the agreement. In case there is no formal agreement the
assessable value for levy of excise duty shall be 5% of the net sales of
the franchisee;

(iv) In case where the franchiser and franchisee are both locally
based, the liability to deposit the franchise fee or royalty shall
be upon the franchiser; and

(v) The excise duty shall be payable on the 15th day of the month,
following the payment month laid down in the franchise agreement.
Where there is no date prescribed in the agreement or in case of no
agreement the duty shall be payable on the 15th day on quarterly basis.

Toll Manufacturing – General Order No. 2 dated 15th August, 2005 (Same
principles as that for sales tax)

Under the new scheme, the toll manufacturers (vendors) manufacturing or

producing excisable goods on behalf of their principals with the raw materials or
inputs owned by such principals shall be liable to pay excise duty on such goods,
which shall be adjustable against the final liability discharged by the principals. Such
vendors shall not be entitled to any adjustment in case of duty-paid raw materials or
inputs owned by the principals. However, the principal shall be entitled to
adjustment on such raw materials or inputs. The vendors shall comply with all the
applicable provisions of the Federal Excise law and the principals will not be required
to pay any duty on the movement of such raw materials or inputs from their
possession to the vendors for the purpose of manufacture or production of excisable
products on their behalf, though they will properly account for such movements in
their records. However, where a vendor adds any raw material or input acquired by
him on payment of excise duty, which he has used exclusively for the manufacture
or production of such products, he shall be entitled to adjustment of such duty as
admissible under the law

Important Definitions
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Adjustment means deduction of amount of duty paid on goods used in the
manufacture or production of other goods from the amount of duty payable on such
other goods.

Duty means any sum payable including default surcharge and zero-rate duty

Factory means any premises including precincts where goods are manufactured or
where any manufacturing process connected with the production of goods is being
carried.

Goods means goods leviable to excise duty, as specified in the First Schedule
including goods manufactured or produced in non-tariff area and brought for use or
consumption to tariff area.

Manufacture includes –

o Any process incidental or ancillary to the completion of a manufactured

product;

o Any process of re-manufacture, remaking, reconditioning and the processes of

packing or repacking of goods

o Preparation of cigarettes, cigars, cheroots, biris and similar products

o Any person who employs/hired labour in the production of goods

o Any person who engages in the production of goods on his own account if
such goods are intended for sale

o Any person dealing in goods shall be deemed to have manufactured, whether

or not he carries out any process of manufacture

Non-tariff area means Azad Jammu and Kashmir, Northern Areas and such other
territories or areas to which this Act does not apply.

Person includes a company, an association, a body of individual whether

incorporated or not, a public or local authority, a Provincial Government or Federal
Government.

Services means services, facilities or utilities leviable to excise duty under the Act
or specified in the First Schedule read with Chapter 98 of the Pakistan Customs Tariff
including the services, facilities and utilities originating from Pakistan or its tariff
area or terminating in Pakistan or its tariff area.

Registered person means a person who is registered or is liable to be registered

under the Federal Excise Act. A person liable to be registered but not registered
shall not be entitled to any benefit available to a registered person, unless allowed
by Board.

Zero rated means duty of Federal excise leviable and charged at the rate of zero
percent under section 5 of the Act.
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