Five zero-rated export sectors: revised SRO issued

The Federal Board of Revenue on Friday issued a revised statutory regulatory order (SRO) for five zero-rated sectors under which further relaxation has been given to textile, leather, surgical, sports and carpet industries by reducing sales tax rate from 17 to 6 and 4 percent at different stages involving unregistered persons with no facility of input tax adjustment or refund.
In this regard, the FBR has superseded SRO.509(I)/2007 through an SRO.283(I)/2011 issued here on Friday to announce a new amnesty scheme for the freshly registered persons in the zero-rated sectors for not asking any question about their past sales tax transactions. The zero-rating facility would be applicable retrospectively from March 15, 2011.
Under the revamped regime for five zero-rated sectors, registered persons would avail the zero-rating facility on the import and local supply of 185 notified items. Further relaxation to zero-rating sectors has been given by reducing sales tax rate from 17 percent to 6 percent and 4 percent in respect of the categories: The sales to un-registered buyers will be liable to sales tax @6 percent on raw materials and 4 percent on finished products.
According to the salient features of the new zero-rating regime, the sales to un-registered buyers will be liable to sales tax @ 6 percent on raw materials and 4 percent on finished products. The lower rates have been offered as an incentive to bring un-organised units in this sector into tax net as well as to reduce the arbitrage between smuggled items/Afghan Transit Trade items and the goods produced by these sectors for domestic consumption and now subjected to sales tax. The aim of this reform measure is incentivise the documentation of the whole chain of the textile sector; and as such the sales tax rate has been kept at a level lower than the standard rate. Since there would be no refunds in this regime, no revenue loss is likely to accrue, given the fixed nature of the tax and improved compliance level due to an incentivised tax rate. This regime would assist in broadening the tax net and documentation of the economy, the FBR added.
The FBR further announced that it has been decided to allow sales tax free import of items mentioned in the SRO 509(l) 2007 to the existing active commercial importers with good track record and such new commercial importers who provide certificate about their financial soundness from their banks with the condition that they will provide these items zero sales tax to registered manufacturers, registered manufacturer-cum-exporters and registered exporters.
Under SRO.283(I)/2011, the facility of zero-rating shall be available to every such person engaged in manufacturing or trading in textile sector (including carpets and jute) who is registered for the purpose of sales tax other than retailer. No tax shall be payable at any stage of the supply chain if goods are sold by a registered person to a registered person till the stage of processing where sales tax shall be charged as specified hereunder.
The benefit of this notification shall be available to registered importers, traders, manufactures and exporters. In case where a commercial importer sells any imported good to unregistered person, he shall charge and pay sale tax @ 6 percent of value of supply, if the goods are usable in textile sector up to the stage of spinning including the product of spinning such as yarn and its by-products, whereafter such importer shall charge and pay sales tax @ 4 percent of value of supply.
The SRO further said that no sales tax shall be payable at ginning or man-made and synthetic fiber manufacturing stage. In case of registered manufacturers importing their inputs or acquiring their inputs from commercial importers or registered manufacturers, such manufacturers shall charge and pay sales tax @ 6 percent of value of supply only at the spinning stage, ie yarn and its by-products if these goods are supplied to any unregistered person provided that if such goods relate to the stages after spinning, sales tax shall be charged and paid @ 4 percent of the value of supply.
In case of yarn purchases on payment of sales tax @ 6 percent of value of supply from spinning mills by unregistered persons ie traders or persons engaged in activities like sizing, warping, weaving, intermediary and other ancillary processes etc. before processing of finished fabric, no further amount of sales tax shall be charged or demanded.
In case of registered persons engaged in providing processing services of any kind in respect of textile goods, such person shall charge from the person who owns the goods but is not a registered person, sales tax @ 4 percent of service charges. In case of stages after weaving, if the fabric is sold by a registered manufacturer to an unregistered person, sales tax shall be charged @ 4 percent of value of supply, if such manufacturer has availed zero-rate facility at previous stages of the production chain.
At the stage of processing or finishing of any kind of fabric or stitching of such fabric, if any registered person supplies the goods including finished products like finished, dyed/processed/printed fabric, textile apparel, home textile and clothing including garments and all non-woven products, etc, to an unregistered buyer, he shall charge and pay sales tax @ 4 percent of the value of supply and registered persons who have acquired goods at zero-rate under this notification shall pay sales tax @ 4 percent of value of supply on their supplies of all kinds of finished products to retailers, regardless of the registration of such retailers.
The FBR said that the benefit of zero-rating or reduced rate shall be admissible only if the goods covered in this notification are usable and are used in the aforesaid sectors for trading and manufacturing purposes. No other sector or industry shall be entitled to the benefit of this notification. Secondly, no input tax adjustment or refund shall be admissible to any registered person against his liability of sales tax @ 6 percent of the value of supply, or as the case may be, of @ 4 percent of value of supply. However, admissible refund in case of capital goods, maintenance parts, lubricants, packing materials or other sector-specific used inputs, not covered under this notification, whether imported or acquired locally, shall be paid to such person against zero-rated supplies in one week of filing of the complete claim.
Thirdly, the registered persons of these sectors shall be entitled to acquire electricity and gas at zero-rate in the manner prescribed by the FBR. Subject to miscellaneous condition, where at any stage of registered supply chain, no liability to charge and pay sales tax accrues under this notification the supply at such stage shall be deemed to be a supply chargeable to sales tax at the rate of zero percent and reflected on the tax invoice accordingly.
Fourth, no special excise duty shall be charged on the goods of the said sectors as mentioned in the aforesaid Table whether these are chargeable to zero-rate or to reduced rate of tax and special excise duty shall be treated as exempt.
Fifth, the persons registered after the issuance of notification but not after 30th day of June, 2011 in case of persons already engaged in businesses in the above sectors, shall not be questioned about their past transactions in their businesses for the purpose of the Sales Tax Act, 1990 or as the case may be, the Federal Excise Act, 2005 provided that no refund of any amount of tax or duty already paid or recovered shall be admissible to any person on account of this condition.
In case of commercial importers registered after the issuance of this notification, benefit of this notification shall be available only if they satisfy the Collector of Customs at the time of import of their first consignment about their business and financial soundness on the basis of a certificate from the bank(s) in which they have opened and will operate their business accounts. In case of persons already registered under the Sales Tax Act, 1990, benefit of this notification shall be available only if they are shown as active in active taxpayers list (ATL) on the website of Federal Board of Revenue and have done a declared business activity in any of the tax periods during the last twelve months and the composite units including wholesalers covering supplies upto retail stage shall pay sales tax @ 4 percent of value of supply and shall not pay any other amount of upfront tax on their retail sales under any other scheme for retailers under the Sales Tax Act, 1990 or notifications issued or rules made thereunder.
This notification shall take effect on and from March 15, 2011, provided that any liability accrued under this notification and as a consequence of the said supersession shall take effect with immediate effect.
To deal with the remaining zero-rating sectors including leather, sports and surgical goods, the FBR said that the zero-rating facility shall cover the whole registered supply chain covering both imports and local supplies except retail. The registrations will start from tanneries and manufacturers of surgical and sports goods including the persons engaged in ancillary industrial activities.
The jobbers working in informal or un-organised sector for individual and specified industrial or like processes prior to manufacturing of leather, surgical and sports goods in tanneries and other manufacturing units shall not be required to be registered provided their annual turnover from service charges does not exceed Rs 5 million or their annual utility (electricity, gas and telephone) bills do not exceed seven hundred thousand rupees, and if so exceed, they will be required to be registered; and no sales tax shall be charged at any stage of supply for domestic consumption except that where a tannery supplies its product to any un-registered person other than retailer, it shall charge and pay sales tax @ 6 percent of the value of supply and where any finished product of leather, sports or surgical goods is supplied to any unregistered person by a manufacturer other than tannery, such manufacturer shall charge and pay sales tax @ 4 percent of the value of supply. All supplies of finished goods made to retailers shall, however, be charged to sales tax @ 4 percent regardless of their registration, the SRO added.
According to FBR, the SRO 509(l) 2007 dated 09.06.2007 allowed facility of zero rating on various raw materials used by major five export oriented sectors ie textiles, carpets, leather and leather products, sports goods and surgical goods.
In an effort to bring the domestic sales of these sectors in the tax net, this facility was restricted to registered manufacturers cum exporters and registered exporters for exports by amending this SRO through SRO 231(l) 2011 dated 15.03.2011 which was further extended to registered manufacturers for exports through SRO 274(I) 2011 dated March 27, 2011.
The government has been successful in building a consensus between the stakeholders for this new arrangement, which was necessary for smooth implementation of the reform. To implement the above decisions agreed to with trade and industry, the existing SRO 509(1) 2007 dated 09.06.2007 as amended vide SRO 231(1) 2007 dated 15.3.2011 and SRO 274(1)2011 dated 27.03.2011 has been replaced with SRO 283(1 )/2011.