Textile sector: Massive misuse of revised ST zero-rating regime unearthed
SOHAIL SARFRAZ
ISLAMABAD: Directorate General of Intelligence and Investigation Inland Revenue (IR) Federal Board of Revenue (FBR) has unearthed massive misuse of the revised sales tax zero-rating regime by textile sector and launched country-wide investigation drive to identify textile units involved in large scale sales tax evasion by using SRO 1125(1)/2011 and SRO.283(1)/2011 instead of paying lower rate of sales tax.
Sources told Business Recorder here on Tuesday that the FBR had notified the revised sales tax zero-rating regime in consultation with all the stakeholders. The directorate of intelligence IR was shocked to know that the textile industry, a key stakeholder, has been involved in massive misuse of the new zero-rating regime under which a lower rate of 4 percent, 5 percent or 6 percent sales tax has to be paid. Contrary to this, certain textile units not only evaded sales tax by showing most of their sales from registered manufacturers to other registered manufacturers to avoid sales tax. Due to multiple sales tax rates available under revised regime for textile sector, it was very easy to complicate the situation for evading the authorities.
The intelligence arm of the FBR has thoroughly analysed the 1125(1)/2011 and SRO. 283(1)/2011 and collected information from field formations before launching action against textile sector. The directorate of intelligence IR seriously realize that the textile sector is the backbone of the economy and action will only be taken against units where sales tax evasion and misuse of SRO.1125(1)/2011 and SRO. 283(1)/2011 would be confirmed by the field formations.
On a report of evasion of sales tax by textile units in Faisalabad, the agency immediately started country-wide investigation and directed all Large Taxpayer Units (LTUs) and Regional Tax Office (RTOs) to verify such kind of trend in the units falling in their respective jurisdiction. During this exercise, if the units have not misused the revised zero-rating regime, no action will be taken against such textile units. In case, if LTUs/RTOs would confirm tax evasion, enforcement action would be taken by the directorate under Sales Tax Act, 1990.
According to the instructions of the directorate of intelligence IR issued to the filed formations, the study of behaviour of textile sector in response to the SRO.1125(1)/2011 and SRO. 283(1)/2011 revealed that there is massive tax evasion in textile sector. The directorate has found that a number of textile units either not declaring any sales to unregistered buyers or do not discharge their tax liability of sales tax @4%, 6% and 5% on their supplies to unregistered persons. Secondly, the textile units have illegally adjusted output tax liability against input tax in violation of SRO. 283(1)/2011. Thirdly, the majority of the units are avoiding this levy through issuance of fake/ flying invoices where the goods actually sold to the unregistered persons but invoices were issued to registered manufacturers.
It has also been observed that many units remained dormant / null filer / non-filer during the calendar year 2010 but showing huge sales and purchases during calendar year 2011. Prima facei these units are engaged in paper transactions only.
Sources said that the RTO Faisalabad has started an exercise against the aforementioned units who were dormant during the calendar year 2010 but showing huge sales and purchases during calendar year 2011. They have identified eight units and physical verification of these units reveals that none of these units is available at given address.
In the light of foregoing, the directorate of intelligence IR has directed the RTOs/LTUs to identify the registered manufacturers who are not declaring any supplies to unregistered persons. Physical verification of stocks on selective basis may be made for taking action under section 25 or section 38 of the Sales Tax Act, 1990.
The filed formations would also analyze the Annex-A & C of the sales tax returns of the manufacturers to identify the registered manufacturers who have not paid the sales tax against the supplies made to unregistered persons. Recovery proceedings under the law against the defaulters may be initialled.
Thirdly, the LTUs/RTOs would identify the registered persons particularly wholesalers whose profiles shows abnormal growth in purchases and sales in 2011 vis-a vis 2010.
Fourthly, the LTUs/RTOS would identify the registered persons who remained dormant during the calendar year 2010 but showing huge sales and purchases during calendar year 2011.
Fifthly, physical verification of stocks on selective basis may be made for taking action under section 25 or section 38 of the Sales Tax Act 1990.
The directorate of intelligence IR has informed the field formations that the textile sector needs to be closely monitored while implementing the SRO. 283(1)/2011 dated 01.04.2011, as amended vide SRO. 323(1)/2011 dated 27.04.2011, SRO. 1058(1)/2011 dated 23.11.2011 and SRO 1125(1)/2011 dated 31.12.2011. The Board had reduced the rate of sales tax as 4% or 6% on supplies (related to textile, carpets, leather, sports and surgical) made to unregistered persons vide SRO. 283(1)/2011 dated 01.04.2011. Salient features / conditions of the aforesaid SRO for textile sector are explained as under:
1. Till the processing stage the supplies made by the registered person (other than retailer) to registered person shall be charged at the rate of zero percent.
2. If commercial importer supplies to unregistered person then up to spinning stage sales tax shall be charged @ 6% of value of supply and after spinning stage sales tax shall be charged @ 4% of value of supply.
3. No sales tax shall be payable at ginning or man-made and synthetic fiber manufacturing stage.
4. If registered manufacturers importing their inputs or acquiring these from commercial importers or manufacturers and engaged in supplies to unregistered persons then only at spinning stage sales tax shall be charged @ 6% of value of supply and after spinning stage sales tax shall be charged @ 4% of value of supply.
5. If un-registered manufacturers or traders (engaged in intermediary process before processing stage) purchases yam on payment of sales tax @ 6% of value of supply from spinning mills, no further sales tax shall be charged or demanded.
6. At processing stage the registered manufacturer shall charge sales tax @ 4% of value of service charges from un-registered person.
7. If a registered manufacturer has availed zero rated facility up to weaving stage and fabric is sold to unregistered person, sales tax shall be charged @ 4% of value of supply.
8. Supplies of finished products to unregistered person shall be charged @ 4% of value of supply.
9. Supplies of finished products to retailers shall be charged @ 4% of value of supply.
10. Aforementioned SRO envisages that no input tax adjustment or refund shall be admissible to any registered person against his liability of sales tax 4% or 6%.
Following are the major amendments made in SRO. 283(1)/2011 dated April 1, 2011 vide SRO 1125(1)/2011 dated December 31, 2011:-
1. Benefit of zero rating under aforementioned SRO is available to the person who is registered in the following categories in five zero rated sectors including manufacturer; importer; exporter and wholesaler.
2. Imports by the registered manufacturers of five zero and mentioned sectors shall be charged at the rate of zero percent.
3. Goods imported by or supplied to the manufacturers other than manufacturers mentioned above shall be charged at the rate of 5%.
4. The imports of the commercial importer shall be charged sales tax @ 2% along with 1% value addition tax, which will be adjustable against their subsequent supplies of these goods. Sales tax against supplies shall be charged as under:- In case of supplies to zero rated sectors, sales tax shall be charged @0%. In case of supplies to non-zero rated sector, sales tax shall be charged @ 5% of value of supply.
5. The import of finished goods ready for use by the general public shall be charged @ 5% and value addition tax @ one percent.
6. Supplies of finished products of the five major sectors, if sold to retailers (whether registered or not), shall be charged @ 5%.
7. The registered retailers shall pay sales tax @ 5% of their retail sales and shall be entitled to input tax adjustment.
8. At processing stage the registered manufacturer shall charge sales tax @5% of value of service charges from un-registered person. No sales tax shall be charged from registered person.
9. The registered person is entitled to input tax adjustment in respect of the supplies made by him at the rate of zero percent or 5% or 16%, as the case may be.
Sources added that no input tax adjustment or refund was admissible to any registered person against his liability of sales tax 4% or 6%. However, textile units have illegally adjusted output tax liability against input tax in violation of SRO. 283(1)/2011.