BUDGET BRIEFING 2020: Comments on Finance Bill 2020-II

TEXT: SALES TAX

1. Active taxpayer

Section 2(1) (a) & (d)

Section 21 of the ST Act specifies various scenarios such as issuance of fake invoices, committed tax fraud, claiming fraudulent input tax or refunds, etc. where the FBR or the Commissioner may blacklist such persons, suspend their registration or block the refunds / input tax adjustment of the person. Section 2(1)(a) provides that the person who is blacklisted or whose registration is blocked in terms of section 21 of the ST Act shall not be covered under the definition of Active Taxpayer.

The Bill seeks to omit the term "blocked" from the definition of the term "Active Taxpayer" which appears to be a corrective amendment as Section 21 of the ST Act only refers to suspension of registration. However, it may also be inferred that even if the refunds or input tax adjustment of a registered person is blocked in view of Section 21 of the ST Act he may not be treated as a non-active taxpayer.

It may be noted that the Bill also seeks to amend section 165 of the Ordinance and proposes the filing of a quarterly statement instead of a bi-annual withholding statement. Consequently, Section 2(1)(d) of the ST Act is also sought to be amended. The Bill now seeks to substitute the words " two consecutive monthly" with the term "quarterly". Accordingly, every registered person who fails to file quarterly withholding statement under Section 165 of the Ordinance, shall also be declared as non-active taxpayer.

1. Output tax

Section 2(20) (c)

Section 2(20) of the ST Act provides the definition of the term "output tax" which means "sales tax charged under ST Act on supply of goods", "tax levied under the FE Act in sales tax mode" and "Provincial Sales Tax levied on services rendered". After the Eighteenth Amendment in the Constitution of Pakistan, 1973, the Provinces have enacted their respective Acts and are charging and collecting sales tax on the services rendered in their respective jurisdiction. However, the sales tax on services under ICT Ordinance is still administered and collected by the FBR. Hence the term "Provincial Sales Tax levied on services rendered" in the definition of the term "output tax" under the ST Act seems to be redundant.

The Bill seeks to streamline the situation and substitute clause (c) of sub-section (20) of section 2 of the ST Act and seeks to retain only "sales tax on the services rendered or provided" by the person under the ICT Ordinance, and accordingly has proposed this amendment.

1. Value of supply

Section 2(46)(h) and (j)

Section 2(46)(h) provides definition of value of supply for the Independent Power Producers which pay sales tax only on the amount received on account of energy price.The amount of received on account of capacity purchase price, energy purchase price premium, excess bonus, supplement charges, etc. is not included in the value of supply for the purpose of charging sales tax under the ST Act. The Bill now seeks to insert WAPDA whose value of supply shall also be considered as the amount received on account of energy price only, and exclusion provided for Independent Power Producers shall also be applicable on WAPDA.

The matter of application of sales tax on used vehicles was under consideration as most of the persons engaged in the supply of used vehicles were not offering sales tax on such supply. The Bills seeks to insert clause (j) in Section 46 of the ST Act, whereby registered persons who are engaged in purchasing vehicles from general public on which sales tax had already been paid at the time of import or manufacturing shall charge sales tax on the difference between sale and purchase price of the vehicle, if sold in the open market after making certain value addition.

1. Determination of tax liability

Section 7(5)

The ST Act, subject to certain conditions and limitations, allows deduction of input tax paid or payable during a tax period for the purpose of taxable supplies. The Bill seeks to insert sub-section (5) in Section 7 of the ST Actwhereby, the FBR through a notification in the official gazette, may impose restrictions on the adjustment of input tax attributable to the wastage of material in respect of the goods or a class of goods.

1. Tax credit not allowed

Section 8(1)(m)

The Finance Act, 2019, has restricted claim of input tax proportionately on goods, if sales tax invoice issued to un-registered persons without mentioning their CNIC number or NTN. Under section 2(14) of the ST Act, the adjustment of input tax levied on services is admissible subject to certain conditions or limitations as specified in the ST Act, however, clause (m) of sub-section (1) of section 8 of the ST Act does not restrict the adjustment of input tax on services if the aforesaid conditions are not satisfied.

The restriction on claim of input tax is proposed to be extended to services if supplies were made to un-registered persons and invoice were raised without mentioning NTN or CNIC.

1. Power of tax authorities to modify orders, etc.

Section 11C

The Bill seeks to insert a new section, Section 11C to the ST Act, whereby the Commissioner or the Officer Inland Revenue, notwithstanding whether any appeal is filed before the Supreme Court of Pakistan, or a reference is filed before any High Court, may follow the decision of the Appellate Tribunal or the High Court, decided on or after the first day of July, 1990, in case of any pending assessment of a taxpayer, which applies the same question of law, until the decision of the High Court or the Appellate Tribunal is reversed or modified. The aforesaid section also provides that in case the decision of the High Court or the Appellate Tribunal is reversed or modified, the Commissioner or Officer Inland Revenue may, within a period of one year from the date of receipt of such decision, modify the assessment or order in which the decision of the Appellate Tribunal or the High Court was followed, so that it conforms to the final decision.

The proposed section also states that the period of one year from the date of receipt of the Order of the High Court or the Supreme Court of Pakistan, shall be notwithstanding the expiry of period of limitation prescribed for making any assessment or order.

1. Tax invoice

Section 23(1)(b)

Clause (b) of sub-section (1) of Section 23 of the ST Act requires every registered person to provide name, registration number of the recipient and CNIC or NTN of the un-registered person, as the case may be, excluding supplies made by a retailer where the transaction value inclusive of sales tax amount does not exceed PKR 50,000, if sale is being made to an ordinary consumer. The Bill now seeks to provide that where a transactional value is less than PKR 100,000, a retailer is not required to mention CNIC or NTN of an unregistered person.

1. Access to record, documents, etc.

Section 25 (2A)

Section 25 of the ST Act provides procedure and powers of the Commissioner to conduct audit of the records of a registered person. To conform with the modern digital age, the Bills seeks to insert new sub-section (2A) in Section 25 of the ST Act, which empowers the Commissioner to conduct audit proceedings electronically through video links or any other facility as prescribed by the FBR.

1. Return

Section 26(1)

Section 26 of the ST Act, provides that the registered person shall furnish not later than the due date a true and correct return in the prescribed form. The electronic Sales Tax Return form comprises of several Annexures which every registered person is required to submit. However, it has been observed that in various cases the return could be filed where complete information is not provided other than the information which impact the net liability or carry forward/or refund of the return filer. Such information includes detail of exempt purchases and sales, etc.

To ensure provision of all the required information or details, the Bill seeks to insert a term "complete" in addition to "true and "correct" in Section 26(1) of the ST Act.

1. Offenses and penalties

Section 33, Serial 25 & 28

The serial number 25 of the table under Section 33 of the ST Act deals with the offence committed by a person who is required to integrate his business for monitoring, tracking, reporting or recording of sales, production and similar business transactions with the FBR or its computerized system. The Bill now seeks to propose that even after imposition of penalty, if a person does not integrate his business with the FBR system within two months, the business premises shall be sealed until he integrates such business.

The Bill also seeks to add the following new entry at serial number 28 for imposing penalty for non-sharing of information.

============================================================================================

Offences Penalties Section of the Act

                                                                      to which offence

                                                                      has reference

(1) (2) (3)

Any person who is required Such person shall pay a

to share information under penalty of

section 56AB, fails to do twenty five thousand

so in the manner as rupees for first

required under the law default and fifty thousand rupees for

                           each subsequent default                    56AB

============================================================================================

1. Authorized officers to have access to premises, stocks, accounts and records.

Section 38(1)

The FBR has powers to authorize any of its officers or Commissioner on its behalf to have free access to business or manufacturing premises, registered office or any other place where any stocks, business records or documents required under this Act are kept or maintained belonging to any registered person liable for registration or whose business activities are covered under this Act or who may be required for any inquiry or investigation in any tax fraud committed by him or his agent or any other person.

The Bill seeks to widen the scope to include real-time access. The Bill further seeks to empower the FBR to make Rules relating to electronic real-time access for audit or a survey of persons liable to tax.

1. Appeals

Section 45B (1A)

The Bill proposes to insert new sub-section (1A) to Section 45B of the ST Act whereby procedure for filing of appeals before the Commissioner (Appeals) is prescribed. An appeal shall now:

(a) be in the prescribed form;

(b) be verified in the prescribed manner;

(c) state precisely the grounds upon which the appeal is made;

(d) be accompanied by the prescribed fee specified in sub-section (1B); and

(e) be lodged with the Commissioner (Appeals) within the time set out in sub-section (1).

Aforesaid procedure has already been followed, being part of form of appeal provided in STR-23 of the Sales Tax Rules, 2006.

Moreover, second proviso to the Section 45B(1) provides appeal fee of PKR 1,000 for all class of taxpayers. Now, the Bill seeks to omit the above proviso and insert new sub-section (1B) which introduces different fee for corporate and non-corporate taxpayers as under:

========================================================================================

Type of Appeal Status of Taxpayer Amount of Appeal

                                                                    Fee (PKR)

========================================================================================

In case of appeals against Corporate taxpayer 5,000

as assessment Other than corporate taxpayer 2,500

In case of other appeals Corporate taxpayer 5,000

                                 Other than corporate taxpayer      1,000

========================================================================================

The Bill also proposes to insert sub-section (5) which intends to harmonize the appeals procedure with the Ordinance whereby the Commissioner (Appeals) may not admit any documentary evidence which was not produced before the Officer Inland Revenue unless he is satisfied that the appellant was prevented by sufficient cause from producing such material.

1. Alternative dispute resolution

Section 47A

The provisions of this section were completely revamped through the Finance Act, 2018 as a result whereof, the forum of Alternative Dispute Resolution (ADR) was converted into another appellate forum whose findings were not challengeable. The reason being that the order passed by the FBR in ADR proceedings has been made final for both the taxpayers and the tax authorities rather than being an option for taxpayers to seek alternate remedy. In case, the recommendations made by the Committee formed for ADR purposes are not acceptable, the taxpayer was allowed to pursue the matter at other legal forums. The amendments made through the Finance Act, 2018 were generally criticized by businesses as well as professional forums and it was emphasized that the mechanism under ADR before such amendments should be restored.

In order to address the above concerns, the Bill proposes to make key amendments to the ADR mechanism. It is proposed that the taxpayer would no longer be required to withdraw his appeal pending before the appellate forum immediately after the constitution of the Committee. Instead, the taxpayer shall withdraw the appeal pending before the appellate forum only if he is satisfied with the decision of the Committee/ FBR. It is further proposed that the decision of the Committee/ FBR shall not be binding on the taxpayer but shall be binding on the Commissioner, provided that the order of withdrawal of appeal is communicated to the Commissioner within 60 days of the service of decision of the FBR upon the taxpayer. The amendments so proposed are welcome amendments that various industries and professional bodies have been seeking for the past two years.

Currently, the Committee for ADR consists of an officer of Inland Revenue not below the rank of a Commissioner, a person nominated by the taxpayer from a panel notified by the FBR and a retired judge nominated through consensus by the other two members. Furthermore, the Committee decides the dispute by majority. The Bill now proposes that the Committee shall comprise of the Chief Commissioner having jurisdiction over the case and two persons from a panel notified by the FBR. Conversely, the Committee shall decide the dispute through consensus rather than majority.

The Bill also proposes that the Committee may, in case of hardship, stay the recovery of tax payable in respect of the dispute pending before it for a period not exceeding 120 days in aggregate or till the decision of the Committee or its dissolution, whichever is earlier.

Corresponding amendments in this regards should also be introduced in respective rules provided under the Sales Tax Rules.

1. Service of orders, decisions etc.

Section 56 (1)(d) & (2)(d)

Section 56 of the ST Act deals with the service of notices and other documents. Sub-section (1)(d) and sub-section (2)(d) of Section 56 provides that any notice, order or requisition required to be served, shall be treated as properly served if sent electronically through email or to the e-folder maintained for the purpose of e-filing of Sales Tax-cum-Federal Excise returns, to limited companies, both public and private.

The Bills seeks to substitute the expression "limited companies, both public and private" with "registered person". Consequently, electronically service of notices and other documents through email or to the e-folder maintained for the purpose of e-filing of Sales Tax-cum-Federal Excise returns, shall be treated as the prescribed mode of serving notices, orders or requisition to all registered persons irrespective of their legal status.

1. Real-time access to information and databases.

Section 56AB

For broadening of the tax base and effective monitoring of tax evasion, the Bill seeks to insert a new section dealing with the provision of real-time access of information and database of various organizations to the FBR. Such organizations and the related information is as follows:

===========================================================================================================

Organization Information

National Database and Registration Authority "Details pertaining to National Identity Card,

                                                        Pakistan Origin Card, Overseas

                                                        Identity Card, Alien" "Registration Card, and

                                                        other particulars contained in the

                                                        Citizen Database"

Federal Investigation Agency Details of international entry and exit of all

persons and information pertaining to work permits, employment visas and immigration

                                                        visas"

Bureau of Emigration and Overseas Employment Detail of international entry and exit of all

                                                        persons and information pertaining to work

                                                        permits, employment visas and

                                                        immigration visas

"Islamabad Capital Territory, Provincial and local Record-of-rights including digitized edition of

and development authorities record-of-rights, periodic record,

                                                        record of mutations and report of acquisition

                                                        of rights

Islamabad Capital Territory and Provincial "Details regarding registration of vehicles,

                                                        transfer of ownership and other

Excise and Taxation Departments associated record"

All electricity suppliers and gas transmission "Particulars of a consumer, the units

and distribution companies consumed and the amount of bill charged or

                                                        paid, name" and CNIC of the owner and

                                                        user in cases where the connection is

                                                        shared or used by a person other than

                                                        the owner

"Any other agency, authority, institution or Any information and detail notified by

organization notified by the FBR" the FBR

===========================================================================================================