Technology acquisition pacts: EDB urges FBR to abolish 10 percent FED

The Engineering Development Board (EDB) has asked the Federal Board of Revenue (FBR) to take away anti-investment and anti-exports provisions of the federal excise regime by abolishing 10 percent Federal Excise Duty (FED) on technology acquisition agreements.
Sources in the FBR told Business Recorder here on Tuesday that the EDB has proposed waiver of the FED on technology acquisition. According to the proposal, Federal Excise Duty at the rate of 10 percent of the charges has been levied on franchises.
However, it has been levied in such a manner that it has become chargeable on technology acquisition agreements entered to by engineering industry as well. This is considered anti investment and anti-exports. It has been proposed that federal excise duty on technology agreements made by Engineering Industry may be withdrawn.
The EDB has submitted a proposal under the engineering exports development strategy to provide tax concessions to the engineering sector. The EBD said that the huge potential of export growth in engineering goods remains unutilised due to multiple reasons. The government did not focus on Engineering Industry with all its possibilities, as it has remained busy in promoting other traditional export sectors. Also, the Engineering Industry itself has not been forthcoming in framing issues, seeking solutions and projecting its potential.
According to the EDB, the Federal Excise Act, 2005 levies federal excise duty on goods and services as specified therein. Section 3 of the above mentioned Act specifies that subject to the provisions of the Act and rules made there under, federal excise duties shall be levied and collected in such manner as may be prescribed. Clause (d) of sub-section (1) of section 3 of the Act includes services in the purview and reads as follow:
"Services provided in Pakistan including the services originated outside but rendered in Pakistan" The scope of term "services" has been limited to such services as are specified in chapter 98 of the First Schedule to the Customs Act, 1969. Further, the services mentioned in First Schedule to the Federal Excise Act, 2005 are to be levied and charged to federal excise duty at the rates, set forth therein. Sr. No 11 of Table II of the First Schedule of Federal Excise Act, 2005 reads as follow:
"11. Franchise Services 9823.0000 Ten percent of the charges" Further, the term "franchise" has been legally defined in section 2 of the Federal Excise Act, 2005 as follow: "Franchise" means an authority given by a franchiser under which the franchisee is contractually or otherwise granted any right to produce, manufacture, sell or trade in or do any other business actively in respect of goods or to provide service or to undertake any process identified with franchiser against a fee or consideration including royalty or technical fee, whether or not a trade mark, service mark, trade name, logo, brand name or any such representation or symbol, as the case may be, is involved".
As per EDB, this means that any technology transfer agreement, purchase of technical data, purchase of designs, procurement of drawings, franchise for using brands, logos & names for international acceptance or any other such activity in pursuance of technology acquisition which needs to be done for technology up gradation of Engineering Industry against a financial consideration has become liable to federal excise duty at the rate of 10 percent of the charges. Likewise, if any of the above mentioned services are performed within Pakistan whether for operations in Pakistan or exports abroad, those also become liable to federal excise duty at the rate of 10 percent. In the back drop of importance of technology acquisition from abroad, provision of engineering services within Pakistan or export of these services abroad, imposition of federal excise duty seems counter productive and illogical. A country, which is already deficient in technologies for production of engineering goods, imposition of FED is like taxing knowledge, development, growth and exports.
The EDB further said that perhaps the framers of Federal Excise Act, 2005 only had fast food restaurants and alike services in their view and the possibility of taxing technology did not cross them, otherwise they could never had imposed F.E duty in this manner. The Engineering Industry of Pakistan have been agitating against this front loading of costs as well as recurring costs on acquiring technological know how as they perceive it as anti growth, anti investment and anti exports.
It is suggested that the procurement of services by Engineering Industry as defined within the scope of the term "franchise" as mentioned earlier in this chapter, may be exempted from levy of federal excise duty. It has caused enough damage to the Engineering Industry already and cannot be afforded further, EDB proposal added.