Zero rated sectors: FBR notifies revamped five percent reduced ST rate

The Federal Board of Revenue (FBR) on Friday announced a revamped sales tax zero-rating regime for five export-oriented sectors including textile, leather, carpets, surgical and sports goods, and introduced a single 5 percent reduced rate for five export-oriented industries. In this regard, the FBR issued SRO.1012 (I)/2011 on Friday.
Sources told Business Recorder that the long-awaited notification for the single reduced rate for export-oriented industries was issued by the board after amicable consultation process with the stakeholders. The government, in fact, had agreed, in principle, to bring the amendment at the time of budget making exercise last year. However, since the consultation process with the concerned stakeholders was not done, the issue was deferred at that point of time.
A prominent sales tax expert and advocate, Arshad Shehzad, said that apparently it seems that the government has achieved multiple objective under the special amended procedure. Firstly, simplification was achieved through eliminating application of double rate on different stages and clear-cut provisioning of adjustment. Now, there would be only a single 5 percent rate applied at any stage of sale and purchase.
Secondly, facility of zero rating/exemption on import stage restricted to industrial/manufacturing undertaking, all other imports would now attract reduced rate of 5 percent at customs stage. Thirdly, input/output adjustment facility was extended to persons operating under this regime.
Arshad said that all the three amended provisions carry significant values. The rationalisation of single rate seems to be done with the object that the single rate of tax would increase in the long run gradually to make it harmonised with standard rate besides, objective of simplification. The most important aspect unfolded in the amended scheme was restriction of exemption facility with manufacturers only at import stage. The measure seems to have been taken upon below expected tax collection under previous arrangement of the scheme, and apparently it would result in immediate revenue increase, since from now onward 5 percent sales tax would be attracted at import stage other than manufacturers. However, in a cautious initial opinion, it may also cause accrual of refunds at subsequent stage, if the supplies are made to zero-rated export industry by the importers. Hence, the impact of revenue increase will also set off considerably. The adjustment of input/output facility extended by the board seems to be more industry-friendly measure. However, it also reflects intentions of the board to keep intact the basic ideology of VAT system in any special scheme announced for any particular sector.
The amended scheme though on the one hand would cause increase in revenue collection, it may also generate further refund, on the other, Arshad said. According to the notification, the specified goods (useable as industrial inputs) covered under the revised notification if imported by the registered manufacturers of textile, carpets, leather, sports and surgical goods sectors, shall be exempt from sales tax. However, the goods imported by the registered commercial importers shall be charged to sales tax @ 5 percent of the value.
On local manufactures, purchase or supply side, the new notification shall, in case of textile sector, apply from ginning stage onwards (for synthetic sector from production of PTA and MEG) and in case of other sectors, from the first organised manufacturing stage onwards.
The notification said that the supplies of these goods to registered persons of five zero-rated sectors up to wholesale stage shall be zero-rated. The supplies of these goods to unregistered persons and retailers (both registered and unregistered) shall be charged to sales tax @ 5 percent of the value. Where a registered person has acquired goods on payment of sales tax at the rate of 5 percent, he shall be entitled to input tax adjustment or as the case may be refund against the subsequent supplies made by him either at reduced rate or as the case may be, at zero rate.
A registered person who has consumed any other input acquired on payment of sales tax, but not covered in this notification, shall be entitled to input tax adjustment or, as the case may be, refund in respect of the supplies made by him either at the rate of 5 percent ad val or at zero rate, the SRO.1012(I)/2011 said.
According to the notification, the registered persons who are solely or otherwise engaged in the retail business of these goods or products shall pay sales tax at the rate of 5 percent ad val on their retail sales and shall be entitled to input tax adjustment or, as the case may be, refund against such sales and they shall not be required to pay any other sales tax leviable on their retail transactions. Where in the case of a registered person falling under the provisions of this notification, amount of claimable refund exceeds the amount of tax payable by him, he may minus the tax liability from his refundable amount and claim refund of the balance amount, if any.
The notification further said that the registered manufacturers who process goods owned by unregistered persons shall charge sales tax at the rate of 5 percent ad val on the processing charges received by them, provided that no tax shall be charged from the registered persons. Moreover, the registered manufacturers shall be entitled to the adjustment of input tax paid on machinery parts or spares and lubricants acquired by them for their own use.
The benefit of this notification shall be available if the goods covered in this notification are used for the purpose of manufacturing or trading in the sectors specified. All finished products of the sectors specified in the condition (i) shall, if sold to the end consumer, be charged to sales tax at the rate of 5 percent ad val, SRO.1012(I)/2011 said.
The restrictions specified in the notification shall also be deemed to be the conditions of this notification; and supply of electricity and gas to the registered manufacturers of the above mentioned sectors shall be zero rated in such manner and to such extent as may be specified by the FBR.