Sales Tax Act 1990: AGP detects violation by certain sugar mills

The Auditor General of Pakistan (AGP) has detected violation of Sales Tax Act 1990 by certain sugar manufacturers. These violations include inadmissible adjustment of input tax on electricity consumed in residential colonies of the sugar mills.
The AGP has submitted a report on the 'performance audit report on tax exemption/subsidies allowed to sugar sector' to the Federal Board of Revenue (FBR) for comments. The tax authorities are taking viewpoint of all relevant Large Taxpayer Units and Regional Tax Offices (RTOs) on the audit observations of the AGP. Sources told Business Recorder here on Thursday that one of the issues highlighted in the AGP report is the inadmissible adjustment of input tax claimed on electricity consumed in residential colonies of mills Rs 1.017 million.
According to Section 8(2) of the Sales Tax Act, 1990, read with chapter-IV of The Sales Tax Rules, 2006 if a registered person deals in taxable and non-taxable supplies, he can reclaim only such proportion of the input tax as is attributable to taxable supplies in such a manner as may be specified by the Board. The scrutiny of available record (ie system generated tax profiles and sales tax returns) of three registered persons revealed that registered persons did not apportion the amount of input tax paid on electricity used in residential colonies.
In another case, the AGP pointed out that three manufacturing units including two textile units situated at Ghotki (Sindh) and Sheikhupura and a third sugar mill at Faisalabad working under single registration. The registered person has claimed input tax on electricity bills issued by Fesco, Wapda and Hesco during the period July 2009 to March 2010.
It is worth mentioning that textile units being zero-rated were allowed supply of utilities ie electricity and natural gas as zero-rated under the law. But contrary to this the registered person used to claim the adjustment of input used against the supply of sugar through out the year. Moreover, the electricity was also being used in the residential colonies of the factories.
So, the input tax claimed against the electricity used in colonies/administration blocks was not admissible. The irregularity caused inadmissible adjustment of input tax of Rs 0.807 million which also attracts default surcharge and penalty under the provisions of Section 33 & 34 of the Sales Tax Act, 1990.
Referring to another sugar mill, the AGP observed that a sugar mill during the period July 2008 to June 2009 has claimed input tax on electricity bills. The electricity was also being used in the residential colony of the factory. So, the input tax claimed against the electricity used in colony/administration block was not admissible. The irregularity caused inadmissible adjustment of input tax of Rs 0.122 million, which also attracts default surcharge and penalty under the provisions of Section 33 & 34 of the Sales Tax Act.
A sugar mill of Tandlianwala from July 2009 to March 2010 has claimed input tax on electricity bills. The electricity was used in the residential colony and administration blocks of the factory and no separate meter was installed for the purpose. So the input tax claimed against the electricity used in colony/administration block was not admissible.
The irregularity caused inadmissible adjustment of input tax of Rs 0.087 million which also attracts default surcharge and penalty under the provisions of Section 33 & 34 of the Sales Tax Act, 1990, the AGP added. The AGP recommended that the matter needs justification or amount pointed out be recovered from registered persons along with penalty and default surcharge leviable under the law.