The Federal Board of Revenue (FBR) has said that sales tax refunds of the dairy sector up to July 1, 2014 would be processed in view of the legal status raw/unprocessed milk enjoys, which is a sales tax zero-rated item under SRO.549(1)/2008 and SRO.570(I)/2013. Official sources told Business Recorder here on Friday that the FBR has issued a sales tax clarification regarding refund of input tax by dairy farmers.
The Regional Tax Office-II (RTO) Lahore has received refund claims of the dairy farmers and sought clarification from the FBR for further processing the refund claims. Till July 1 2014, the dairy farmers have to fulfil conditions of the said notification for claiming refunds. The conditions of the relevant notifications have to be fulfilled by the dairy farmers claiming refunds up to July 1, 2014.
Official said that the zero-rating facility is only available to the taxpayers having status of manufacturers. Now the milk has been shifted to the Fifth Schedule of the Sales Tax Act, 1990. According to the FBR's clarification, the raw/unprocessed milk is a sales tax zero-rated item and listed among the zero-rated items in SRO.549(1)/2008 dated 11.06.2008 as well as in SRO.570(I)/2013 dated 18.07.2013.
The FBR said that it is correct that "agricultural produce of Pakistan, not subjected to any further process of manufacture" is exempt from sales tax in terms of Serial No 10 of Table II of the Sixth Schedule to the Sales Tax Act, 1990 read with section 13(1) ibid. However, the crux of the present issue is whether the supply of raw/unprocessed milk is to be treated as agricultural produce of Pakistan or not. It is noted that in the original Sixth Schedule (inserted in 1990) "fresh and dried milk, whether or not packed for retail sale" appeared separately against Serial No 3 while "agricultural produce of Pakistan not subjected to any further process of manufacture" was separately granted exemption under Serial No 2. This separate treatment of milk from "agricultural produce" continued till 2006 when the entry "fresh, liquid and dried milk, without addition of sugar or any other sweetener matter whether packed or Not" was omitted by the Finance Act, 2006 and was zero-rated through a notification. It is a basic axiom of interpretation of statutes that redundancy of surplus age cannot be attributed to the legislature. As such it is clear that for the purpose of the Sales Tax Act, 1990 "milk" is treated separately form "agricultural produce," the FBR said.
The FBR further clarified that it is also observed that the term "agricultural produce" is not defined in the Sales Tax Act, 1990. However, section 41 of the Income Tax Ordinance, 2001 defines agricultural income as income derived by a person from land situated in Pakistan and used for agricultural purposes and thus clearly considers agriculture in the context of cultivation of crops. The Supreme Court of Pakistan in PLD 1959 SC 453 held that the term 'agriculture" as used in the Income Tax Act, 1922 was narrowly restricted to the cultivation of soil. As such, income from dairy farming is not considered as agricultural income under income tax law.
It is also observed that for the purpose of sales tax applicability, the process of manufacturing is not mandatory. Under Section 3 of the Sales Tax Act, 1990, the charging section, imposes sales tax on imports and supplies of "goods", not "manufactured goods". For this reason, sales tax is chargeable on the imports and supplies of a number of un-manufactured goods, and exemption has been granted in the Sixth Schedule even to live animal, fish, vegetables, fruit, etc.
It is confirmed that raw/unprocessed milk also falls under PCT Heading 04.01, which was listed among the zero-rated items in SRO.549(1)/2008 dated 11.06.2008 as well as in SRO.570(I)/2013 dated 18.07.2013. The PCT Heading 04.01 of Pakistan Customs Tariff covers milk and cream, not concentrated nor containing sugar or other sweeteners, the FBR maintained.
In view of the said sales tax clarification of the FBR, the concerned RTO has been advised to process and dispose of the pending refund claims of registered dairy farms against supplies of zero-rated milk on merit and in accordance with law, the FBR added.
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