Constitutional right for sales tax on wholesale and retail trade services

The article explains the complex issue of taxation on wholesale and retail trade under the Sales Tax regime. Pakistan operates under a rare dual system where Sales Tax on goods is collected by the federal government, while Sales Tax on services is collected by provincial authorities.

The recent amendment in Provincial Sales Tax laws implies wholesale and retail trade as ‘services’, however, the province of Sindh has taxed certain distribution services. These amendments have initiated a debate on constitutional rights of taxation, between Federal and Provincial Governments. It must be understood that international classifications like CPC are primarily designed for statistical purposes and assume a system where GST is collected by a single tax authority, as is common globally. This structural difference makes direct application of CPC classifications challenging.

While CPC is relevant for economic activity mapping, its use for taxation purposes in Pakistan requires careful alignment with constitutional provisions and practical realities.

1. Reconciliation of ownership flow

The assumption that wholesale and retail trade entity entirely constitutes services fails to reconcile the ownership flow of goods—from manufacturer to distributor, distributor to wholesaler, wholesaler to retailer, and finally retailer to consumer. Ownership transfer determines the taxable event under the Constitution as held in various judgments of superior courts. Without aligning tax recognition with ownership transfer, the proposed framework risks ambiguity in accounting and compliance.

2. Revenue recognition and ownership transfer

Revenue recognition is primarily based on transfer of ownership and transfer of risk and rewards. If distributors, wholesalers and retailers are treated as service providers, it implies that ownership of goods remains with the manufacturer or commercial importer until the goods are sold to the consumer.

As a consequence:

(i) Revenue recognition for manufacturers would be delayed until final sale to the consumer, which is inconsistent with actual business practice.

(ii) Inventory lying with wholesalers and retailers would represent goods owned by manufacturers/importers, whereas in reality, ownership has already passed to intermediaries.

This assumption may create a serious disconnect between tax treatment and accounting standards, leading to misinterpretation and misreading of financial statements.

3. Constitutional position on sales tax

Article 49 of the Federal Legislative List clearly states that sales tax on goods—whether imported, exported, produced, manufactured, or consumed—is a federal subject. The argument that wholesale and retail trade are “services” overlooks the fact that these transactions involve the transfer of goods ownership. Therefore, the entire sale price of goods should attract federal sales tax, regardless of intermediaries’ roles. Treating these as services dilutes the constitutional mandate and creates jurisdictional conflict.

4. Retailers and wholesalers: service to whom?

If a wholesaler’s and a retailer’s economic activity is considered as services, it then needs to be answered to whom such services are provided. Retailers do not provide services to consumers in the VAT sense; rather, distributors and wholesalers provide certain ancillary services to manufacturers, and likewise retailers provide certain ancillary services to wholesalers or manufacturers alongside material economic activity in the form of purchase and sale of goods. The margin of value-addition between the manufacturer’s price and the ultimate consumer price includes both the sale of goods and the services provided by intermediaries. The federal government cannot be deprived of sales tax on the final sale price of goods charged to the consumer despite intermediaries’ roles as services provider as well as seller of goods in supply chain.

5. Income tax aspect

If a wholesaler and a retailer are considered as service provider for sales tax purposes, then its income tax implications should also be reconciled with the same. Under the Income Tax law, cessionary / reduced rate regime is applicable on distributors, wholesalers and retailers, which tax their turnover on sale of goods @ 0.25 percent. In case where services tax regime will be considered for that sector, their income tax cost will increase to approx. 15 percent of turnover.

6. Example-based clarification

(i) If the consumer price is Rs. 1,000, then Rs. 180 represents the gross output sales tax payable @ 18 percent.

(ii) This output tax should be collected by the retailer from the consumer and paid to the federal government, after deducting all input taxes.

(iii) Input taxes represent the sales tax paid on the purchase price by the retailer to the wholesaler, and likewise by the wholesaler to the manufacturer.

(iv) The sales tax on services portion should represent the invoice issued by the wholesaler and retailer to the manufacturer or commercial importer for the services they provided in selling goods.

(v) That invoice will represent the output tax payable by the wholesaler and the retailer to the provinces, and this amount should be allowed as input tax credit in the hands of the manufacturer or importer.

This mechanism ensures that the federal government collects tax on goods as per constitutional mandate, while provinces collect tax on services without increasing the overall tax burden.

It is also pertinent to highlight that where the title of goods is not transferred among intermediaries, the economic transactions are executed under agency arrangement which is already under the ambit of provincial sales tax laws.

7. Hybrid tax regime until constitutional amendments

Until constitutional amendments are made to introduce an integrated GST system similar to India’s, the tax regime should allow the federal government to collect sales tax on sale of goods at final consumer price, while provinces collect tax on the services element if identified, with a single collecting agency and integrated IT systems to reconcile input tax credits across both regimes. This approach ensures compliance with the current constitutional framework while paving the way for a unified GST model in the future.

The harmonization would not only reduce the cost of doing business but would also enhance the level of ease of doing business.

8. Documentation of the economy

It is also very relevant to understand and determine whether the provinces are capable of documenting the economy with respect to wholesale and retail trade, because this segment of the economy is largely undocumented. Keeping in view the capability of the provinces, and despite FBR still struggling to ensure proper documentation of this sector, it will be appropriate for both the federal and provincial governments to coordinate and introduce a system whereby this sector’s economy is documented through the taxation system. This is possible only when there is a clear framework that shows both federal and provincial governments are parts of the integrated tax regime.

Conclusion and suggestions

To resolve the issues highlighted above:

(i) Align tax recognition with ownership transfer to maintain consistency with accounting standards.

(ii) Retain federal jurisdiction on sales tax for ‘goods’ as per the Constitution.

(iii) Allow provinces to tax pure services without encroaching on goods-related transactions.

(iv) Introduce a single collecting agency to reconcile input tax credits across regimes.

(v) Develop integrated IT systems for seamless compliance and credit adjustments.

(vi) Work toward constitutional amendments for a unified GST model in the long term.

Copyright Business Recorder, 2026