One percent tax on cotton importers: Collector contests FBR clarification to APTMA

A senior Collector of Customs has strongly apprehended that the clarification of the Federal Board of Revenue (FBR) issued to All Pakistan Textile Mills Association (APTMA) on the applicability of reduced rate of one percent income tax on the cotton importers would have negative implications like creation of huge refunds of income tax/sales tax paid on past clearances.
In a communication received by the Federal Board of Revenue (FBR) here on Friday, Collector of Customs Model Customs Collectorate (MCC) Appraisement West Karachi Dr Jawwad Uwais Agha has strongly contested the FBR's income tax clarification issued to the APTMA dated June 30, 2015. The Collector of Customs letter to the FBR clearly reflects that the customs have declared the same illegal on the grounds that cotton is not covered under SRO1125(1)/2011. Under Finance Act, 2015 for levying reduced rate of income tax on cotton, a separate serial number has been added to the Income Tax Ordinance, 2001.
Collector of Customs has also asked the FBR to endorse the viewpoint of the said Collectorate to avoid impact of the said clarification, sources said. According to the Collector, the 'Raw Cotton' was chargeable to sales tax @ 0 percent under SRO 1125(1)/2011 dated 31.12.2011, prior to its amendment through SRO 154(1)/2013 dated 28.02.2013. The amendment notification replaced the phrase "ginning stage onward" in condition (ii) (a) of the SRO with "spinning stage onward" for the 'textile sector". Since the raw / ginned cotton undergoes various processes such as carding and combing etc prior to spinning stage and in the spinning stage carded/combed cotton and not ginned / raw cotton is used, hence the ginned/ raw cotton is, prima facie, not covered under SRO 1125(I)/2011 dated 13.12.2011.
Accordingly raw and ginned cotton is also outside the purview of Section 148 of the Income Tax Ordinance, 2001 through which a reduced rate of income tax @ 1 percent is levied on goods covered under the said SRO. Consequently, the importers-cum-manufactures started paying leviable statutory rate of income tax on raw/ginned cotton. However, some of the importers continued claiming the inadmissible reduced rate of income tax and being reputed manufacturers, their consignments were cleared by the system through Green Channel. On post importation scrutiny, demands were raised to recover the short levied amount and certain importers deposited the short paid income tax amounting to Rs 87.10 million, Dr Jawwad said.
Subsequently, the Collectorate forwarded the contravention cases for adjudication against those importers who did not pay income tax amounting to Rs 307.97 million. During adjudication proceedings the importers have sought coverage under Board's aforementioned letter to APTMA claiming that as per Board's clarification, cotton importers are entitled for income tax @ 1 percent, the collector said.
MCC Appraisement West Karachi holds the opinion that cotton is not covered under SRO1125(1)/2011 dated 13.12.2011 and the same stands strengthened by the fact that in the current Finance Act, 2015 for levying reduced rate of income tax on Cotton, a separate Sr. No (vi) has been added in Part-II, Second Schedule to the Income Tax Ordinance, 2001 whereas Sr. No (iv) already existed which covers manufacturers importing goods under SRO 1125(1)/2011 dated 13.12.2011.
Board may like to consider the said Collectorate's stance as the aforementioned letter to APTMA may have implications including creation of huge refunds of income tax and sales tax earlier paid on past clearances, Dr Jawwad Uwais Agha added. Referring to the FBR's clarification dated June 30, 2015, Collector of Customs said that the said clarification is related to the chargeability of higher rate of withholding tax at import stage at 5.5 percent from beneficiaries, ie, textile spinning units under SRO.1125(I)/2011.
The clarification said that refer to the provisions of clause (9C) of Part II of the Second Schedule, Part II of the First Schedule to the Income Tax Ordinance, 2001 and SRO 1125(I)/2011 dated 31.12.2011 as mentioned through SRO 154(I)/2013 dated 28.2.2013 and to say that "manufacturers doing business in textiles (including leather, sports and surgical goods sectors and fulfilling the conditions of SRO 1125, irrespective of the type of goods imported are covered under SRO 1125(I)/2011 dated 31.12.2011 and reduced rate of 1% under Section 148 of the Income Tax Ordinance, 2001 will be applicable on their imports, it added.