Sales tax refund on import of plant, machinery: FBR, Karachi traders discuss key issues

The Federal Board of Revenue (FBR) and business community of Karachi have discussed key issues including sales tax refund on import of plant, machinery and equipment, combined rate of 5 percent on zero-rated sectors, blacklisting law, auto-revision of sales tax return, input adjustment on caustic soda and other issues of Finance Act 2011.
It is learnt that the tax related issues were discussed between the FBR Chairman Salman Siddique and business and trade of Karachi during last week in meetings at Karachi. Details show that the Board in mid-March this year had issued notification 230(I)/2011 wherein serial number 3 and entries related therein of notification 549(I)/2008 were omitted. The deletion of these entries resulted in discontinuation of zero rating facility from plant, machinery and equipment, and these items are now chargeable to 17 percent sales tax on their purchase and sale.
In the backdrop of current economic slowdown, fuelled by shortfall in revenue collection, has triggered ad hoc measure to support the budgetary target. The discontinuation of zero rating on plant and machinery is part of that short-term strategy. However, in the budget for 2011-2012 the facility of zero rating on plant and machinery was not restored, rather adjustment/refund in one go was proposed.
The policy of mere collecting tax for the time being and then its repayment never carries any justification and was avoided in the past. Therefore, the trade/business community has suggested that instead of discontinuation of zero rating on entire documented sector, sales tax should only be charged from unregistered segment, sources said.
On the other hand, tax officials reportedly observed that the Board had collected around Rs 7 billion only in one quarter. Besides this revenue impact, the board as a matter of policy intends to distinguish treatment meted out to documented and undocumented sector.
The registered sector through this measure though at purchase stage requires paying sales tax but they were eligible to get the refund. However, the unregistered sector would not be eligible to seek any refund. This would increase cost of doing business for undocumented economy. Tax authorities had asked the trade community to offer their counter-proposal, considering above principle.
The trade sector opined that the FBR could check that major portion of Rs 7 billion collected is eligible for refund. The trade community offered different suggestions. However, after counter-argument and feedback by the FBR team a two-tier policy has been mutually agreed upon for industrial undertaking and commercial importers, industry sources said.
First, an industrial undertaking would be required to extend surety in the shape of a surety ie 60 days'' post-dated cheque against sales tax liability. The post-dated cheque would be released immediately after filing first sales tax return by the industrial unit to ensure the sales tax compliance.
Second, the commercial importers are required to extend surety in the shape of bank guarantee or bank certified cheque or pay order in lieu of sales tax payment. The instrument submitted by the commercial importer would be released after they prove sale of imported plant and machinery to registered industrial unit through declaration of sales to industrial unit in their sales tax return.
During meetings, tax officials informed business community that two different rates of reduced sales tax on five export-oriented sector (ie 6 percent and 4 percent) creates distortion. The FBR''s advisors opined if the government really wants to facilitate the export-oriented sector through special rate, then there should be a single rate. In this perspective the FBR team had proposed single rate of five percent on five export-oriented sectors.
Sources said that the business leaders contended that detailed procedure of sales tax on domestic consumption of export-oriented sectors has been introduced a couple of months back after talks with all stakeholders. The single rate of 5 percent means increase in 25 percent tax payment for value-added sector, which is currently required to charge 4 percent. Therefore, any such abrupt change in the rate may shatter the confidence of these sectors.
It was urged if the single rate is inevitable, then to adopt single rate of 4 percent the scheme must continue for at least one year. However, if any further essential change in rate is required in future, increased rate of 5 percent tax may be applied with facility of input/output adjustment after completion of year. Resultantly, tax officials assured business community for their maximum co-operation. However, matter would be further discussed during the next meeting of board in council of the FBR.
The FBR and the business community also discussed the issue of inadmissibility of input tax adjustment against reduced rate, mainly in case of caustic soda. It was pointed out that the notification 283(I)/2011 read with Board''s clarification dated April 11, 2011 restricts adjustment of input tax against tax liability of reduced rate. By and large, currently all major input tax of textile sector is zero rated and incidence of sales tax on this sector is nominal. Hence, while working out the modalities for the SRO 283 nobody had raised any apprehension on inadmissibility of corresponding input tax on supplies against reduced rate, in the larger interest of the country. In fact, the business leadership had pointed out additional irrelevant insertion of 57 items in SRO 283 and ensured its deletion to avoid abuse of the facility.
However, after practical application of the scheme, it has been pointed out by the textile processing sector that since their major raw material ie caustic soda, is taxable, hence unlike other segments of textiles, restriction on input tax credit has more adverse effects.
Therefore, to bring all segment of the textile in a similar line, it is proposed either to include the soda ash in the list of zero rated items or sales of soda ash to textile processing sector be declared zero rated, industry suggested. Tax officials responded that the caustic soda flakes and liquid were zero rated in the last regime.
However, upon recommendation of the FBR officials caustic soda was omitted from the list of zero rating. In this connection, the Board is reviewing the items enlisted in the notification 283. It will be decided whether the input adjustment of caustic soda be allowed or it would be added in the list of zero rating notification.
On the issue of law of blacklisting, both sides agreed that the issue has already been addressed in the amendment passed by the National Assembly which were notified through Finance Act 2011.
On the income tax issues, both sides discussed section 111 of the Income Tax Ordinance relating to the unexplained income or assets charged to tax under the head from other source. The trade community observed that the scope of this section has been further widened in Finance Act 2001 to include concealment of income and furnishing of inaccurate particulars.
Now, if suppression of any production, sales or any item of receipt chargeable/liable to tax in whole or part shall be deemed as concealment, if in the opinion of the Commissioner, the explanation offered by the taxpayer is not plausible. The traders raised their serious apprehension that this amendment was likely to be misused by the field formation where the difference of opinion on such issues is very common feature.
Responding to this, tax officials informed that the board has no intention to apply section 111 in case of variation of sales. They endorsed the apprehension of the traders and agreed to resolve the issue with any suitable recourse. In order to address the reservation of the trade community, it was assured by the FBR team that they would issue a circular/clarification in the matter to define the difference between variation and suppression to restrict the misinterpretation of the law in the field formation.
It was pointed out by the trade that after introduction of notification 288, reduced rate of one percent is applicable on deduction of withholding tax on supply and import of supply chain of zero rated sectors. However, customs authorities are applying other than one percent rate. Tax authorities requested experts in the private sector.
Other issues discussed between the traders and the FBR related to denial of input sales tax refund/credit U/S 21 (3) and 8(A), allowing condonation of time limit to sales tax officials for issuing show-cause notices etc be withdrawn. The revision of sales tax return without permission of the sales tax authority should be allowed. Other issues included separation of tax judicial/adjudication system from administration, levying of income tax after excluding sales tax and federal excise, problems faced by the tax payers regarding levy of sales tax on supply of five export-oriented industries to registered and unregistered persons.