Advance collection at import stage

Scheme altered without realizing impact on manufacturers: experts

ISLAMABAD: The scheme of advance income tax collection at the import stage has been totally changed through Finance Act 2020 without realizing its implications on manufacturers, who cannot now avail exemption certificates and excessive collection will mean blockage of funds for years.

Legal experts told Business Recorder Monday that through insertion of 12th Schedule in the Income Tax Ordinance 2001, the Federal Board of Revenue (FBR) seems to have facilitated the commercial importers at the cost of manufacturers from July 1, 2020.

Prior to July 1, 2020 importers were required to pay advance income tax at the port at a rate of 5.5 percent if the importer was an industrial undertaking or a limited company and at a rate of 6 percent if the importer was a commercial importer. However, to facilitate

the manufacturers in whose case the tax collected on import is an adjustable tax, the facility of making imports without payment of any advance tax was provided under clause (72B) of the second schedule of the Income Tax Ordinance. This clause permitted the manufacturers to obtain an exemption certificate from the concerned commissioner under which the tax on import of raw material was waived off. The importer could obtain the exemption certificate if he had paid tax equal to or higher than the tax paid by him in any of the last two tax years.

To prevent misuse the quantity of raw material eligible for import without payment of tax was restricted to 125 Percent of the quantity imported in the previous year and the importer was also required to get audit of his case for the previous year. Clause (72B) was introduced in 2013 for facilitating the industries whose capital got stuck up in the form of advance tax paid on imported raw materials and was never refunded to the taxpayers or refunded after considerable delay and at substantial cost. At the same time the manufacturers also had the facility of obtaining exemption certificate for import of plant and machinery under SRO 947(I)/2008 subject to certain conditions.

Tax experts were of the view that the scheme of advance income tax collection at import stage has been totally changed through Finance Act 2020. A Twelfth Schedule has been added in income tax law under which imported goods have been classified into three groups, ie, plant and machinery, raw materials and finished goods. The three groups will be subjected to payment of tax at the import stage at the rates of 1 percent, 2 percent and 5.5 percent, respectively.

Apparently, it seems that the rate of withholding tax on import of plant and machinery as well as raw materials has been reduced to 1 percent and 2 percent from the previously applicable rate of 5.5 percent but tax experts point out that in fact additional burden has been imposed on the manufacturers as the facility of exemption certificate available under above mentioned Clause (72B) has been withdrawn by omitting this clause through the Finance Act 2020. In other words the manufacturing units which were not paying any tax on import of raw materials will now be required to deposit 2 percent of the import value plus sales tax and customs duty as advance income tax. The manufacturers will be forced to claim the excess amount deposited as refundable at the time of filing their returns, experts opined.

As disclosed before the National Assembly Standing Committee on Finance, the FBR has already not paid refunds around Rs 550 billion for the previous years, it can be safely assumed that the substantial amounts that will be collected from manufacturers will also remain unpaid. This will create serious liquidity problems for the manufacturers including exporters and further damage the already tottering large scale manufacturing sector. The only benefit of the rate reduction will accrue to the commercial importers as they were not entitled to exemption certificates under the previous tax regime. It is not understandable why the FBR wanted to incentivise the commercial importers at the cost of manufacturers and why the relevant ministries have not taken notice of this major change, tax experts claimed.

Tax experts also pointed out that another innovation that has been made through Finance Act 2020 is collection of advance tax on imported goods at the retail price on items that are included in the Third Schedule to the Sales Tax Act instead of the import value. In case of these items sales tax on the retail price is paid by the manufacturers or importers and the subsequent supply chain does not have to pay sales tax on value addition. Although this mechanism of payment of sales tax is against the principles of valued added tax, and the government's claims of promoting documentation and doing away with distortions in the tax system but since we are only addressing the payment of advance income tax at imports we can leave this matter for a subsequent time. In the last two years there has been a considerable enlargement of the items included in the Third Schedule of the Sales Tax Act, tax experts explained.

Previously only fast moving consumer goods were subject to sales tax on retail prices but now several items such as batteries, tyres, paints etc that are also used by manufacturers have also been included in the third schedule. The sales tax law includes a provision that in case of sale of these items to manufacturers tax on these items will not be payable on the basis of retail price but while importing this concept into income tax law this safeguard has not been provided and the manufacturers on the import of these items will have to pay advance income tax on the basis of retail price thus further compounding their misery.

Legal experts highlighted that another issue is that an exhaustive and water tight classification of importable goods into raw materials and finished goods is not possible. Several goods which fall in the part of the newly introduced 12th Schedule may actually be raw materials or components or semi-finished goods to be used by manufacturers but tax will have to be paid at a rate of 5.5% on their import. Moreover, one item may be

a finished good for one line of business but an intermediate good for a manufacturer in another line of business.

The FBR on realizing this problem, recently issued draft rules for reclassification of goods from one category to another attracting lower rate of tax. A committee comprising three members of the FBR, Chairman National Tariff Commission and Chairman Engineering Development Board will decide this reclassification on the applications filed by the importers. The documentation requirements for applying for this reclassification that have been proposed are extremely cumbersome. Moreover, the high powered nature of the proposed members will also make it very difficult to convene their frequent meetings. The tax experts therefore are of the opinion that it will be a new experience for the importers to get their issues settled by the committee and they will be subjected to unnecessary hassles and costs just to satisfy the desire of the FBR high ups for introducing disruptive innovations, tax experts added.

Copyright Business Recorder, 2020