Second Hand Vehicles: Is it necessary to pay tax on the sale and purchase of used cars in Pakistan?

A new tax law on the sale and purchase of used cars has been in circulation in Pakistan for several days and many people are confused about it.

The debate began when the Federal Board of Revenue (FBR) issued an SRO on September 30, 2020, introducing new rules regarding sales tax on the sale and purchase of used vehicles. Are

Many on local media and social media expressed concern over reports that both sides would now pay a new additional tax on the sale and purchase of used cars.

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However, the FBR explained on Twitter that the new rules had recently been finalized and included provisions in the Finance Act 2020 to encourage businesses to recondition and sell second-hand vehicles. For which this new principle has been established.

Do I have to pay tax on the sale and purchase of used cars?

According to the FBR, the new law will only apply to the sale of used vehicles in reconditioned condition, ie if the value of the vehicle has increased. "Sales tax rebates have been set to encourage this business."

The agency says it will levy a 17% sales tax on profits alone, instead of the full purchase price of used cars.

According to the FBR, this will only apply to those who increase the value of used vehicles and sell them at a higher price, which will make reconditioned vehicles available at reasonable prices.

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Sales tax formula has been issued in SRO. Consumers will have to pay 17% sales tax on the difference (ie profit) between the purchase price and the sale price.

The FBR said in a Twitter message: "Under current law, sales tax (17%) is levied on the total purchase price of a vehicle, which is strict.

The business community has sought the support of the country's major chambers of commerce and at their request, the Finance Act has given relief and encouragement to the business of reconditioning second-hand vehicles.

This is 17 per cent of the value added tax levied on those who are registered for easy sales tax. Unregistered people cannot demand sales tax from any buyer.

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According to the FBR, if the sale of a used car is not a profit but a loss, then this tax will not have to be paid. This SRO stipulates the transfer of money through a bank.

People were outraged when local news channels reported that they would have to pay more taxes on the sale and purchase of used cars.

Many consumers thought that if this happened then it would not be good for the middle class.

An explanation was later issued by the FBR. But it was still not clear to the people who seemed to be saying that they should be made aware of the law in detail.

'Used cars can be more expensive'

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Ali Sajjad Jafari, a tax expert, welcomed the move on used vehicle transaction records, but said it would not be possible in practice.

He said that this tax would be applicable to the common people when they sell their old car but there was no scope for sales tax here.

He said the move would make used cars more expensive and that the middle class would buy and sell cars that would increase its burden.

He said that sales tax has been separated in every province and dealers also pay service tax on their income after earning commission on old vehicles.

He also expressed the possibility that people would now show their used car for less than its price and hide profits on other ways.