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KARACHI: The Karachi Chamber of Commerce and Industry (KCCI) has highlighted problems faced by the small and medium enterprises (SMEs), which are a major contributor to GDP, and suggested measures to deal with Fiscal and Current Account deficits.

“Clearly, tax administration, laws and provisions with discretionary powers need to be reformed but most importantly the mindset of tax hierarchy needs to be changed to achieve the goal of broadening the tax base and creating a civilised tax culture in budget proposals for the year 2022-23,” said the chamber.

“This will only happen when taxpayer gets the respect he/she deserves, taxpayer is treated as a partner in revenue generation and growth and accountability is ensured at both ends.

“KCCI believes that out-of-box solutions are needed to avoid further downslide in the economy. It is important for the decision-makers in the government to have a better perception of ground realities of Pakistan’s economic landscape and business dynamics.

“The coercive, outdated and complex tax regime should be done away with and policies that stimulate growth and global competitiveness of Pakistani products should be formulated,” KCCI said in a statement.

“Last but not least, the city of Karachi, the largest revenue contributor and export base with 54 percent share, (should be) given top priority in PSDP allocation to revamp and rebuild its dilapidated infrastructure and improve the pathetic living conditions so that it can contribute more to the national economy.”

Turning to its proposals and recommendations for the federal budget for FY2022-23, with a focus on measures aimed to achieve higher GDP growth, broadening of tax base, plug leakages, reduce cost of doing business through fair taxation and reforms in laws, rules and procedures governing taxation, the KCCI statement said: “(1) REQUIREMENT OF CNIC AND FURTHER TAX (PENALTY) ON SALE TO UNREGISTERED PERSONS: An obvious anomaly is perpetuated by imposing 3% Penal Tax (Further Tax) on Registered Persons on Supplies made to Unregistered persons. Despite providing CNIC number of unregistered buyers, as required under Section 8 (Sub-Sec. 1, Clause M) of Sales Tax Act, 10th Schedule, the Registered seller has still to pay 3% Further Tax.

“Moreover, prior to Supplementary Finance Bill 2022, Registered seller was not held responsible in case a fake CNIC was provided by buyer. However, after enactment of Supplementary Bill 2022, Seller will be held accountable and face consequences in case Fake CNIC number is provided by unregistered buyer.

“It is unjust and irrational to impose 3% Further Tax on supplies by Registered person to Unregistered persons, while also it is required to provide CNIC Number of Unregistered buyer in Sales Tax Invoice.

The chamber suggested that CNIC number of Unregistered buyers provided by registered seller/supplier be treated at par with STRN. A Further Tax of 3% on supplies to unregistered buyer should not be charged if CNIC number is provided by Registered seller in Sales Tax Return.

“In case CNIC number of unregistered buyer of Raw Materials is not provided, VAT may be charged at 1.7% on Sales of Raw Material. “Benefit: Discourage cash economy and encourage documentation by placing the trust in registered persons. Placing the responsibility to broaden the tax base squarely on RTOs and LTUs, rather than on taxpayers. “Discourage Fake and Flying invoices which are issued to avoid 3% further tax. Enhance business transactions through banking channels and promote growth.

“(2) 3% VALUE ADDITION SALES TAX ON COMMERCIAL IMPORT OF INDUSTRIAL RAW MATERIALS

“3% Value Addition Sales Tax at import stage on commercial importers of Raw materials was removed in the Finance Act 2019-20 after long deliberations with FBR and Ministry of Finance for several years. It was agreed by FBR that the tax is unjustified because Commercial importers do not add any value to raw materials. It is sold to SMEs without any change in form or any process. No inputs such as Gas, Electricity, Labour or Machinery are used; hence 3% VAT was an obvious anomaly. “Unfortunately, the very next year through Finance Act 2020, an amendment was made in the Twelfth Schedule to Sales Tax Act 1990 — under the heading “Procedure and Conditions”, in condition (2), 3% Value Addition Sales Tax has been imposed again on Commercial Import of industrial Raw Materials, thus restoring the Anomaly.

“Also, after re-imposition of this 3% VAT, the exclusion from Sec. 8 B (1) 2, provided to commercial importers under SRO. 647 (I) 2007 was not restored. This has led to double taxation as importers are forced to pay Extra 10% Value Addition over and above 3% paid at custom stage.

“Hence a Dual anomaly has been created again in the Finance Bill 2020-21.

“1). 3% VAT cannot be imposed on Raw Materials where no value is added.

“2). Registration of 90% adjustment of input is tantamount to double taxation as imports of raw martial forced to pay extra 1.7% (10% of 17%) value addition over and above 3% paid at custom stage under Section 8(B) of Sales Tax Act 1990 through SRO1190(I)/2019.

The chamber proposed that the obvious anomaly be rectified and raw materials imported by Commercial Importers shall be excluded from the scope of Condition (2) under “Procedures and Conditions” Twelfth Schedule of S. Tax Act.

“Thus removing 3% Value Addition Sales Tax on commercial importers which was re-imposed unjustly. Importers of Finished products paying 3% VAT at custom stage and having no local purchase should be excluded from application of Sec 8 (B).”

The chamber noted that an obvious anomaly and disparity in rates of Sales Tax on Raw Materials should be removed because all raw materials are ultimately consumed in the industry, and mainly by SMEs.

“3:- SEC. 8B, SUB SEC. 1 PROVISO 2 RESTRICTION ON ADJUSTMENT OF INPUT TO 90% IMPORTERS OF RAW MATERIALS

“Under Section 8B vide SRO. 647(i)/2007, Commercial importers were excluded from the purview of Sec. 8B, Sub Sec. 1 Proviso 2 and allowed 100% adjustment of 17% Sales Tax+3% Value addition Sales Tax paid at import stage. Then under a new SRO. 1190(i)/2019 exclusion was withdrawn and adjustment was restricted to 90%. “Adjustment of 100% allowed only subject to imports of more than 50% of the value of imports in previous tax period.

“Distinction has to be made between importers of Finished goods and Industrial Raw Materials.

“Consequently, the commercial importer is denied adjustment of 100% of input Sales Tax in case the imports in current tax period are 50% or less in value compared to previous tax period. Meanwhile domestic industry is allowed 100% adjustment under SRO. 98(1)2021 which creates an anomaly.”

KCCI also suggested that the condition in SRO. 1190(i0/2019 for commercial importers of raw materials be deleted and 100% adjustment of input tax be allowed regardless of transactions of previous month. There is no logic in retaining 10% of Sales Tax paid by commercial importers because there is no provision for refund or adjustment in subsequent tax periods. The provision is unjust and is impossible to comply with.

Copyright Business Recorder, 2022

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