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ISLAMABAD: Tax experts have termed Federal Board of Revenue’s (FBR) three budgetary proposals impracticable including collection of withholding tax on domestic electricity bills, sales tax from sugar on printed retail price basis and additional revenue of Rs 38 billion from crude oil.

Tax experts told Business Recorder here on Sunday that Finance Bill 2021 has proposed 7.5 percent withholding tax on domestic electricity bills exceeding Rs 25,000 per month. This withholding tax will be collected only from consumers whose names do not appear on the Active Taxpayers List or who have not filed their tax returns for the latest year.

Previously withholding tax was collected from domestic electricity consumers irrespective of their return filing status at a rate of 7.5% if the monthly bill exceeded Rs75,000. The proposal on the first sight appears praiseworthy, persons paying high amounts as utility bills should be filing their tax returns and if not so must pay the penalty in the form of this withholding tax. However, an in depth analysis revealed several problems in the proposal. Firstly, the electricity connections in a large number of cases are not in the names of the persons actually using the residences. In case of rented houses and apartments the connection is in the name of the landlord but the bill is paid by the tenant. Similarly even in the case of self-occupied inherited residences the connection is in the name of father or even the grandfather of the present resident.

The person actually residing may be a tax filer but the connection can be in the name of a person who is not on the Active Taxpayers List and the resident will be subjected to the withholding tax.

If this withholding tax is to be enforced then FBR in coordination with the DISCOs has to undertake a massive drive to ensure that the electricity connections are transferred in the names of the actual residents. Even then it may not be possible to ensure the desired results as no landlord will accede to transfer of his electricity connection in the name of the tenant. This will end up in unnecessary hardship for the existing taxpayers. There will be additional problems for persons who are not required to file tax returns as they are deriving income exempt from tax such as agriculturists. Therefore, the proposal is not enforceable in its true spirit and may give rise to legal challenges.

Secondly, a proposed change in the Sales Tax Act aims to collect tax on sugar from the manufacturers on the basis of retail prices instead of the ex-factory price by including sugar in the third schedule of the Sales Tax Act. In case of goods appearing in Third schedule the manufacturer or importer pays the sales tax not on the price at which he is selling the goods but on the price at which it is sold to the consumers by the retailers. Accordingly the rest of the supply chain including distributors, wholesalers and retailers are not required to pay any tax on their value addition. In addition to paying the tax on the retail price the manufacturers are also required to print the retail price along with the amount of sales tax on each article or package in which the goods are sold. This will necessarily require that the goods leave the factory or import station in the same packing in which they are sold to the consumers. Keeping in view the said rationale, this mode of taxation has been traditionally applied to items in retail packing such as soaps, toothpastes, shampoos etc.

Practically, sugar is not packaged by the manufacturers in retail packing but in 40Kg bags whereas the retailers sell it to the consumers in smaller amounts and in their own packs. Thus, how the requirements of the third schedule be enforced? Moreover, this mode of taxation may result in further enhancement of the price of sugar. There is another issue in the implementation of the said proposal. The government is expressing a resolve to bring the retail sector in the tax net but placing ever increasing reliance of taxation of the consumer products through the third schedule shows that it has no confidence in its efforts. If the retail sector is coming into the tax net, the items appearing in the third schedule should be progressively reduced rather than adding more and more products to the list. It is worth mentioning that since 2019 more than a dozen items have been added in the Third Schedule, most of which are not suitable for this mode of taxation.

Thirdly, the government has withdrawn sales tax exemption on crude oil and the measure has been reported to bring in an extra Rs 38 billion in the next fiscal year. The question arises whether the FBR will be able to collect this Rs 38 billion from the imposition of the sales tax on crude oil.

Tax experts claimed that no extra revenue will come into the treasury. They explained that crude oil is refined by the local refineries to produce taxable petroleum products such as diesel, petrol, kerosene oil etc. All these products are subject to sales tax and sales tax is paid at the specified rate at the time of sales of these products by the refineries and petroleum marketing companies. If sales tax is collected on crude oil, it will have to be deducted from the sales tax payable on refined products. Therefore, the sales tax paid on refined products will be reduced by an amount equal to what has been collected from crude oil. There will be only a timing difference of collection of tax and no net gain to the government. As the crude oil is mostly imported therefore the tax collection will largely shift from the domestic stage to import stage and the government which is collecting half of the total tax collection from the ports will end up further exacerbating the proportion between taxes collected from the domestic market and those collected at import stage.

This will also create problems for petroleum exploration companies who will now have to pay sales tax on the crude oil sold by them. The zero-rating available to the supplies to petroleum & gas exploration companies is also proposed to be withdrawn, they added.

Copyright Business Recorder, 2021

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