Retaining FED on services: FBR creates major distortion in system

The Federal Board of Revenue (FBR) has created a major distortion in the federal taxation system by retaining federal excise duty (FED) on services, resulting in double taxation on service providers operating in Sindh. Tax experts told Business Recorder here on Saturday that the Sindh Revenue Board (SRB) is legally empowered to collect provincial sales tax on services.
The SRB has started collecting sales tax on services under Sindh Sales Tax on Services Rules-2011 and other relevant rules/regulations. At the same time, the Federal Excise Act 2005 has also imposed the federal excise duty (FED) in value-added tax (VAT) mode on services, which are currently subjected to provincial sales tax.
The FBR was required to abolish the FED in VAT mode on services through amendment in the relevant Schedule of the Federal Excise Act. So far, the FBR has not abolished the FED on services, which has created confusion among major service providers, including telecommunication companies. Legally, it has resulted in double taxation on the service providers in Sindh.
Recently, the FBR had submitted Sales Tax (Amendment) Ordinance, 2011 before the National Assembly Standing Committee on Finance for continuation of sales tax on tractors by omitting reference to "tractors" from the description of S No 69 of the Sixth Schedule to the Sales Tax Act, 1990. Interestingly, the FBR can move the Federal Excise (Amendment) Ordinance, 2011 to withdraw the FED on services, but the tax authorities are deliberately avoiding such a move.
Another major anomaly in the taxation system is clearly reflected from the confusing language of the Finance Amendment Ordinance on collection of 15 percent income tax surcharge. The FBR collected only Rs 8 billion from the one-time surcharge levy in three and half months last year as against the projected target of Rs 36 billion, reflecting a shortfall of Rs 28 billion.
The corporate sector did not pay the tax owing to lacunas in the wording of the Income Tax (Amendment) Ordinance 2011 issued for the levy. They said that the ambiguous language of the Income Tax (Amendment) Ordinance 2011 had caused massive revenue loss to the national exchequer. It is not clear whether the drafters of the Ordinance are responsible for this loss or Law and Justice Division which duly cleared the Ordinance after going through the legal language of the said law.
Analysts point out that the FBR has also suffered revenue loss on account of wrong interpretation of FBR letters/clarifications issued regarding section 126F of the Income Tax Ordinance 2001 under which income tax exemption on profits and gains derived in war-affected areas was misused. The FBR has recently superseded all income tax clarifications issued on income tax exemption on profits and gains derived in Khyber Pukhtunkhwa (KP), Federally Administered Tribal Areas (FATA) and the Provincially Administered Tribal Areas (PATA). Due to repeated clarifications/letters issued by the FBR Income Tax Policy Wing, the exemptions granted to affected areas of KP/FATA/PATA have been grossly misused by the unscrupulous.
The fake or dummy units might have got themselves registered in the areas of KP/FATA/PATA and imported goods material and machinery/equipment with zero-rated facility and ultimately consumed the same in the taxable areas like Karachi, Lahore and Islamabad. These units obtained registration within the jurisdiction of KP/FATA/PATA merely to obtain exemptions of fiscal relief package due to simplified procedure for genuine claimants.
It is apprehended that the facility has been misused by certain unscrupulous elements who wrongly interpreted the relevant laws to obtain inadmissible exemptions. Now the FBR has made those persons taxable where the taxpayer is located inside the specified areas, but his business is carried on outside the affected and moderately affected areas. Such persons have to carry on business activities within the affected areas for availing exemption of capital gains.
Tax experts said that the FBR has deliberately created another major distortion in the documentation drive which was claimed to be launched to broaden the tax base. Under SRO 821(I)/2011, the FBR had directed that registered manufacturers, importers and exporters, making taxable or dutiable supplies to unregistered persons, shall issue an invoice containing "CNIC/NTN" of such unregistered persons. This was one of the major documentation measures to obtain basic particulars of the unregistered buyers and sellers.
The FBR has exempted sugar sector from the documentation provisions of the SRO 821(I)/2011. Resultantly, the FBR had suspended a major documentation measure for obtaining CNICs and NTNs of the unregistered buyers/sellers of the sugar mills. As a result of this anomaly, other sectors like ghee and cooking oil are also demanding similar exemption from the FBR. It is not clear if the FBR will, through political backing for enhancing documentation of the economy, be able to resist powerful lobbies and influential sectors to obtain exemption of the SRO 821(I)/2011.