Budget 2011-12: FBR forgot to reduce one percent ST on 70 items

The Federal Board of Revenue forgot to reduce one percent sales tax on nearly 70 items/raw materials in budget (2011-12) attracting higher rate of sales tax up to 22 percent despite one percent overall reduction in sales tax rate from 17 to 16 percent. Tax experts told Business Recorder here on Thursday that the FBR had reduced the standard rate of sales tax from 17 to 16 percent in budget (2011-12).
However, interestingly the government has forgotten to give effect of same one percent cut of sales tax rate on items/raw materials that attracted higher rate of sales tax. In the past whenever the rate of sales tax has been reduced or increased, it has impacted all the rates. The sales tax rate has been correspondently increased or decreased on all slabs.
However, the FBR has reduced the standard rate of sales tax from 17 to 16 percent, but the higher rates were not correspondently reduced which is not understandable. While reducing one percent sales tax on standard rate of sales tax government has forgotten to extend same reduction on higher rate of sales tax applicable through notification 644(I)/2007 on many raw materials, they added.
Tax experts further informed that higher rate of sales tax was basically applicable on raw materials on the contended rational by the board that eventually at the time of supply of finished good the incidence of higher rates set off by value addition factor on its supply at standard rate. However increase in difference of rate between 16% and 22% means required value addition of at least 37.5% in order to adjust the impact. This scenario further would widen in case of import of higher rate item by commercial importer who were already require to maintain minimum value addition of at least 13.63% to 18.75% from this fiscal. The issue does not end here due to further limitations on the business and trade under the sales tax law.
The manufacturer/industry further restricted with the condition for adjustment of input tax to the extent of 90% in case of excessive input tax over output or their input tax further increases due to the reverting back input tax on account of sales and tax withholding tax under SRO 603(I)/2007.
The VAT experts were of the view that under the above scenario the industries seems to remain stuck up in this vicious cycle of advance input tax payment and net refund claimant until the whole scheme of higher rate on raw materials would not be reviewed seriously by the board and in-built distortion not properly addressed, they added.
In budget (2008-2009), the rate of sales tax was increased from 15% to 16 percent and the sales tax on Provincial services is being increased from 15% to 16%. The rate of FED on goods and services (in sales tax mode) are being increased from 15 to 16 percent.
At the same time, the FBR had increased sales tax from 20 percent to 21 percent on the import and local supply of 70 major industrial inputs/raw materials and raised sales tax from 17.5 percent to 18.5 percent on nine items including flat-rolled products of iron or non-alloy steel. The FBR had amended SRO.644 (I)/2007 through a SRO.537 (I)/2008 to implement the budgetary decision.
As the standard rate of sales tax was increased from 15% to 16%, it was considered necessary that the sales tax rate should be increased from 17.5% to 18.5% and from 20% to 21% to maintain the scheme of things. This was the argument of the FBR in 2008-2009 when all the rates were increased by one percent on all items including raw materials and goods. It is yet not clear that why the FBR has not decreased the rates of nearly 70 items/raw materials subject to higher rate of sales tax up to 22 percent. There might be some legal explanation of the FBR for retaining the higher rate of 22 percent on such raw materials as mentioned in the 644(I)/2007.
The FBR had used the words 'to maintain the scheme of things' as basic rationale behind changing all sales tax rates by one percent when it was increased from 15 to 16 percent in 2008-2009. However, this year the logic to maintain the scheme of things has not been maintained by the FBR. Through a SRO.537(I)/2008, sales tax was increased from 20 to 21 percent on the import and local supply of many items in the past.