General, The Federal Board of Revenue (FBR) has proposed a fundamental change in the Federal Sales Tax system which is governed by the Sales Tax Act, 1990.
Under the proposed process a change is proposed for the adjustment of input tax against the sales tax payable by a registered sales tax person. Under the proposed system sales tax paid on all goods that can be claimed as input tax has been identified for particular industries. At present, such a proposal is for seven (7) major industries in Pakistan which are:
Weaving Dyeing & printing
Steel melters/Re-Rollers
Oil & ghee
Chemicals
Cement
Lead & batteries
Paper & paper board
A bare reading of the proposal depicts that once this proposal is adopted input tax will be allowed only for the items listed in respective circular to be issued by the Federal Board of Revenue. A tentative list has been attached with the circular.
Present law
Input tax is allowed under Section 7 of the Sales Tax Act, 1990 which states as under:
7- Determination of tax liability. – (1) Subject to the provisions of section 8 and 8B, for the purpose of determining his tax liability in respect of taxable supplies made during a tax period, a registered person shall , subject to the provisions of section 73, be entitled to deduct input tax paid or payable during the tax period for the purpose of taxable supplies made, or to be made, by him from the output tax excluding the amount of further tax under sub-section (1A) of section 3 that is due from him in respect of that tax period and to make such other adjustments as are specified in Section 9
Section 8 and 8B are the negative lists for the allow ability of input tax. Section 8 states as under:
8- Tax credit not allowed. – (1) Notwithstanding anything contained in this Act, a registered person shall not be entitled to reclaim or deduct input tax paid on –
(a) the goods or services used or to be used for any purpose other than for taxable supplies made or to be made by him;
(b) any other goods or services which the Federal Government may, by a notification in the official Gazette, specify
(c) the goods under sub-section (5) of section 3
(ca) the goods or services in respect of which sales tax has not been deposited in the Government treasury by the respective supplier;
caa) purchases, in respect of which a discrepancy is indicated by CREST or input tax of which is not verifiable in the supply chain;
(d) fake invoices;
(e) purchases made by such registered person, in case he fails to furnish the information required by the Board through a notification issued under sub-section (5) of section 26 ;
(f) goods and services not related to the taxable supplies made by the registered person;
(g) goods and services acquired for personal or non-business consumption;
(h) goods used in, or permanently attached to, immoveable property, such as building and construction materials, paints, electrical and sanitary fittings, pipes, wires and cables, but excluding prefabricated buildings and such goods acquired for sale or re-sale or for direct use in the production or manufacture of taxable goods;
(i) vehicles falling in Chapter 87 of the First Schedule to the Customs Act, 1969 (IV of 1969), parts of such vehicles, electrical and gas appliances, furniture furnishings, office
(j) services in respect of which input tax adjustment is barred under the respective provincial sales tax law;
(k) import or purchase of agricultural machinery or equipment subject to sales tax at the rate of 7% under Eighth Schedule to this Act;
(l) from the date to be notified by the Board, such goods and services which, at the time of filing of return by the buyer, have not been declared by the supplier in his return or he has not paid amount of tax due as indicated in his return; and
(m) the input goods or services attributable to supplies made to unregistered distributor, on pro-rata basis, for which sale invoices do not bear the NIC number or NTN as the case may be, of the recipient as stipulated in section 23.
FBR has issued various circulars under the aforesaid provisions which disallow input tax for certain items. Those circulars are effectively the negative list.
Advantages and benefits of the system
Though apparently being an aberration of a general Value Added Tax system the proposed procedure is beneficial both for the government and the taxpayers for the following reasons:
a- It is recommended that for these items the provisions of Section 8B will not be applicable which restricts the claim of input tax to ninety (90) of the amount claimed with balance to be carried forward;
b- The tax department will be knowledgeable about the quantity of input claimed as a particular item with HS Code would be available with the return. This possibility already exists; however, now it will be counter-checked.
Matters to be considered
It is practically difficult to include all items that are used as input tax. There is a risk on both sides. Some items may be missed out whereas, on the other hand, some unrelated items may be included in present and in future due to pressure or otherwise. The input for services is a matter that would require a separate consideration.
Conclusion
This is a positive step. It appears that the government intends to use the technology in a better way to obtain information in a manner which can be handled without direct human intervention. This step should be supported.
The List of items is enclosed as ‘Annexure’ to this note. All concerned are advised to go through the list and forward their recommendations in this regard to Secretary (ST-Operations), FBR, Islamabad by 28.12.2023 for the addition or deletion of any items enumerated in the list.
Copyright Business Recorder, 2023
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