The massive misuse of zero rating facility has prompted Regional Tax Offices (RTOs) to suggest the Federal Board of Revenue (FBR) to check sales tax zero rating on the "Master Batches" - a colouring material used by manufacturers of plastic packing material and allied industries - while making revision in zero rating regime.
Sources told Business Recorder on Friday that the FBR has recently decided to withdraw zero rating from certain items to remove anomalies in the value added tax (VAT). Since the colouring material has no relevance to the export oriented sectors, therefore, it has been proposed to withdraw SRO 163(I)/2011 and three Pakistan Customs Tariff (PCT) headings 3204.1700, 3206.1900 & 3206.4910 may be eliminated from SRO 1125(1)/2011 dated December 31, 2011. Certain registered persons have been involved in massive misuse of the zero rating regime. They have no sufficient production capacity, therefore, chain audit under section 38 of the Sales Tax Act, 1990 may be allowed for last three tax years, ie, 2009 to 2011 of manufacturers falling within the jurisdiction of RTO Lahore.
The rationale which compelled the substitution of PCT headings in SRO.163(I)/2011, particularly with reference to extending its benefit retrospectively may be ascertained, which ultimately favoured the above registered persons to the tune of Rs 548 million in the form of refund.
It has been observed that the registered persons of RTO, Lahore who are engaged in manufacturing of "Master Batches" had claimed and received sales tax refunds by declaring that "Master Batches" (colouring material used by manufacturers of plastic packing material and allied industries) supplied by them are zero rated/reduce rated vide SRO 1175(1)/2011.
Details revealed that the claimants obtained theses refunds by stating that their products fall in the PCT heading 3206.1700. 3206.1900 & 3206.4900 in the SRO 1125(1)/2011 despite of the fact that the said SRO was issued for export oriented sectors and said "Master Batches Colouring Material" has nothing to do with export oriented sectors or goods but it is supplied to local plastic industries, who manufactures/ produces ordinary plastic packing material etc for local sales use. The FBR through SRO.1125 had definitely allowed zero-rating to colouring materials used only in textile or other export oriented five sectors and not to "Plastic Master Batches" which have nothing to do with textile or other export oriented five sectors. The said misdeclaration by registered persons has caused FBR a loss of Rs 548 million during tax year 2007 to 2012 without having nexus with textile or other export-oriented five sectors.
The refund claimants are also enjoying exemption from customs duty on import of raw materials for manufacture of "Master Batches" (survey based) under No 54. of SRO No 565(1)/2006 by declaring their end products as "Master Hatches". Reportedly, it is revealed from the computer profile of claimants that they had claimed and received refund of sales tax to the extent of Rs 548 million during tax year 2007 to 2012 under section 10 of the Sales Tax Act, 1990 read with the Sales Tax Rules, 2006 under SRO No 555(1)/2006 dated 5th June 2006, sources said.
It has been noted that SRO 1125(1)/2011 regarding supplies at zero rate/reduced rate @5 has been issued for export-oriented five sectors and the benefit of this notification shall be available to every registered person doing business in textile (including jute), carpets, leather, sports and surgical goods due to certain objectives. Reportedly, neither the Plastic Master Batches Manufacturers fall in the aforementioned zero rated sectors nor their product is used in export oriented industry inter alia.
Sources explained that the scheme of "Zero Rated Supply" was introduced only for the purpose of claiming adjustment or refund of input tax consumed in the zero rated supplies under the Sales Tax Act, 1990. The provisions of section 4 are applicable to the goods mentioned in 5th Schedule to the Sales Tax Act, 1990 or the goods specified in section 24 of the Customs Act, 1969 for consumption abroad or those which are notified in the official Gazette by the Federal Government for specific purpose. It implies that the said scheme was introduced to facilitate exporters or export oriented sectors to avoid hassle of claiming refund of input tax which an exporter may have paid on his purchases made for exports. However, the manufacturers of Master Batches have misused scheme of zero rating by way of making supplies to local industries engaged in supplying goods for domestic consumption. It is further added that the provisions of Customs Tariff entails that "Master Batches" are not zero rated and are liable to Customs duty at 15 percent.
Initially, zero rating facility to "Master Batches" was provided vide SRO 621(I)/2005 under PCT headings 3204.1700, 3206.1900 & 3206.4900 which was subsequently replaced by SRO 525(I)/2006 dated 05.06.2006. Keeping in view the intention of the legislature, it was never intended to include "Plastic Master Batches" in the said notifications used by local industries producing ordinary plastic packing material. Afterwards, PC heading 3206.4900 was substituted by SRO 509(1)/2007 dated 09.06.2007. Pigments and preparations based thereon covers under PCT heading 3204.1700, pigments and preparations based on titanium dioxide PCT heading 3206.1900 and other colouring matter and other preparation covers under PCT headings 3206.4910.
The PCT heading 3206.4910 was again amended vide SRO 163(1)/2011 dated 02.03.2011 with 3206.4900 and the amendment was made effective retrospectively from 09.06.2007 ie the date of issuance of SRO 509(I)/2007 dated 09.06.2007. This amendment granted the benefit to an item which is primarily being used as input in locally supplied items and had no predominant use in five specified export oriented sectors.
The history of relevant SROs reflects that there has been frequent changes to include or exclude PCT heading 3206.4910 from the zero rating regime, however, PCT headings 3204.1700 and 3206.1900 always remained in the zero rating regime. Currently, the "Master Batches" manufacturers are availing the facility of the concessionary SRO 1125(1)/2011 dated 31.12.2011 due to illogical inclusion of PCT heading 3206.4910 in the said SRO 1125. Since, the Master Batches have no direct use us inputs of the five export oriented sectors, the PCT headings 3204.1700. 3206.1900 & 3206.4900 may be excluded from the SRO 1125(1)/2011 dated 31.12.2011. Sources said that the profile analysis of the registered persons transpired a substantial increase in their production and supplies, which may be attributed to the various refund schemes in 2010 onwards. It is worth mentioning that with meager capital, huge turnover was declared which comprise major portion of the unregistered persons, particularly in 2011-12, sources added.