Distortions in VAT regime: FBR to withdraw zero-rating from certain items

SOHAIL SARFRAZ

ISLAMABAD: Federal Board of Revenue (FBR) Chairman Ali Arshad Hakim has said that the FBR has decided to withdraw sales tax zero-rating from certain items to remove distortions in the existing Value-Added Tax (VAT) regime for generating additional revenue in 2012-13.

Talking to Business Recorder here on Tuesday at the FBR House, FBR Chairman said the Board is reviewing the entire zero-rating regime to withdraw sales tax zero-rating from some items. Hence, the FBR will constitute a committee to examine the entire zero-rating scheme. The government wanted to generate additional revenue for which distortions in the VAT regime would be removed, Ali Arshad Hakim added. When contacted, a tax expert said that the FBR is legally empowered to withdraw zero-rating facility from different items under section 50 of the Sales Tax Act 1990. However, zero-rating facility available under Fifth Schedule of the Sales Tax Act 1990 could only be taken away through approval of the Parliament.

The FBR is expected to delete mostly zero-rating items from the SRO549(I)/2008. SRO549(I)/ 2008 - the most important notification which would be revised following Board’s decision to withdraw zero-rating facility. This notification is related to the zero-rating on certain goods subject to certain condition.

The zero-rated items included dairy products, stationary, exercise books, writing, drawing and marking ink, pens and pencil etc. sewing machine household type, cotton seed, oil cake and other sold residues.  Other items mentioned in the said notification included bicycles, wheel chairs, energy savers and constructions material for Gwadar Export Processing Zone (EPZ).

Zero-rating is also available on plant, machinery and equipment (whether or not manufactured locally), including parts thereof and plant, machinery and equipment, whether locally manufactured or imported.

Zero-rating is also applicable re-meltable scrap, dedicated CNG buses and all other buses meant for transportation of forty or more passengers whether in CBU or CKD condition, trucks and dumpers with g.v.w. exceeding 5 tonnes, bicycles, trailers and semi-trailers for the transport of goods having specifications duly approved by the Engineering Development Board and road tractors for semi-trailers, prime movers and road tractors for trailers whether in CBU condition or in kit form. Zero-rating is also available on raw materials, components, sub-components and parts if purchased from authorized vendors by a recognized manufacturer of tractors for use in the manufacturing of such tractors under SRO549(I)/2008.

Zero-rating has been applicable to raw materials, components, sub-components and parts in case imported or purchased locally for use in the manufacturing of such plant and machinery as is chargeable to sales tax at the rate of zero percent. Under existing zero-rating regime, SRO1125(I)/2011 deals with the zero-rating for five export-oriented sectors including textile, leather, carpets, sports and surgical goods.

SRO863(I)/2007 is related to zero-rating on certain goods subject to certain condition (raw material and local purchase for manufacturing of zero rated goods declared in SRO 549).

SRO769(I)/2009 deals with the zero-rating on import and supply of polypropylene for manufacturer of mono filament yarn and net cloth. SR0423(I)/2009 has granted zero rating on all product, services and equipment for execution of work for kararo-wadh section of national highway supplied to M/s. Taisei Corp. Ltd. Under the Fifth Schedule of the Sales Tax Act, zero-rating has been granted to US Aid programme. As per Fifth Schedule of the Sales Tax Act, zero-rating is available on supply to diplomats, diplomatic mission and privileged person and organization under various acts and regulations. In accordance with the Fifth Schedule of the Sales Tax Act, zero-rating is applicable on supplies of locally made plant and machinery to EPZ and to petroleum and gas sector exploration and production.