There was much hype with the passing of the Finance Act 2004 that the government had announced a major concession for the people by reducing the burden of sales tax through introduction of uniform rate of 15% and eliminating further tax 3% on supplies made to the non-registered persons.
Amendments were made in the Sales Tax Act 1990 (hereinafter "the Act") in various sections through the Finance Act 2004 to these effect.
Indeed, many heaved a sigh of relief for being rescued from the torment of checking the credentials of parties they were transacting with in order to determine the quantum of rate of tax - different for registered and unregistered persons. But do the much-publicised amendments reflect the true situation vis-à-vis claim of reduction in sales tax incidence or are we in for another deceptive trap laid down by the crafty financial managers and wicked tax machinery?
The subsequent changes through delegated powers u/s 7A of the Act expose the tall claims of the regime that further tax is abolished.
This has assumed a new form that is non-adjustable input tax where compulsory value addition of 10% is provided in the case of commercial importers and retailers.
Section 7A of the Act which was introduced vide Finance Act 2003, read with rules 8 to14 contained in chapter II of the Special Procedure Rules 2004, brought with it the concept of compulsory value addition on specified goods for levy and collection of tax.
Although sub-section (2) of section 7A, empowers the Federal Government to specify minimum value addition required to be declared by certain persons or categories of persons.
At present commercial importers and retailers have been subjected to compulsory value addition of 10% by SRO 592(I)/2004 dated 8th July 2004 and SROs 673(I)/2004 dated 9th August 2004 respectively.
At the time of announcement of the budget for 2004-2005, the rate for compulsory value addition in the case of commercial importers was 14%. It is pertinent to mention that this compulsory value added tax does not qualify for input unless it is paid in excess of 10 percent as explained by the CBR in a recent ruling. In other words to the extent of 10% compulsory value addition, it has become the effective sales tax rate.
One wonders if the Government still claims and insists that uniform rate of 15% is applicable under the Act.
Is this not another means of imposing 'further tax' in addition to 15% sales tax on value of imports and retail sales? Aren't the commercial importers/retailers being forced to pay a higher rate of tax? Won't the end-user/consumer be burdened by paying higher price for goods which could have been much cheaper had they not been subjected to fictional value addition? Will this not adversely affect market competition for cheaper products? Will it not encourage the sale of cheaper smuggled items from across the borders rather than boost legal trade?
These questions merit answers from the policymakers and those at the helm of affairs. Their attention is drawn to the following two examples.
EXAMPLE: A taken from rule 10 for payment of sales tax on value addition and Example B is prepared assuming that the provision of compulsory value addition does not apply.
The incidence of all the taxes in Example A on import of an item having landed cost of Rs 100 is 41.8%. This includes Rs 20 (customs duty), Rs 18 (15% sales tax), Rs1.80 (15% sales tax on compulsory value addition) and Rs 8 (6% presumptive income tax).
In any civilised society the importers and retailers and for that matter any businessman will not be asked to make mandatory value addition while supplying goods to its clients.
Mutual agreements between the parties and market forces determine the purchase and sale price. Pakistan is a strange place where revenue authorities are forcing the importers and retailers to charge sales tax with mandatory value addition of 10% no matter if they sell any merchandise below the 10% value addition. Is it constitutionally valid?
Can a person be forced to sell goods at a certain pre-determined price? Since the law and rules require importers/retailers to maintain record of imports/purchases indicating description, quantity and value of goods imported/purchased both excluding sales tax and value inclusive of sales tax, separately and the name and address of the seller, it can be seen if any tax avoidance is made by not adhering to "open market price", an expression defined in section 2(19) of the Act. Section 2(46) authorises the tax authorities to re-determine the "value of supply" where due to connivance or other factors such as dealings between "associated persons" the principle of open market price is deviated or ignored.
It is simply unlawful to ask a person to charge sales tax with minimum 10% value addition. If a retailer buys an item at Rs 100 and sells at Rs 102, he is bound to charge sales tax of Rs 16.50 instead of Rs 15.30.
The additional levy of sales tax of Rs 1.20 in this case exposes the claim of the Government that uniform sales tax rate of 15% is introduced with effect from 12 June 2004.
The facts of this case show that effective rate of sales tax is 16.17%. In case he sells certain goods with more than 10% value addition, the tax rate will be 15%, but if he is selling at less than value addition of 10% over a purchase price, it cannot be 15%. It is crystal clear that in the case of importers and retailers, the law has been so manipulated that effective rate of tax has been enhanced from 15% in all the cases where supplies are made with less than 10% value addition.
The importer will not sell anything below this value addition and instead go for under-invoicing with the connivance of customs authorities. Retailers will charge this amount from the buyer even if they sell goods with lesser value addition. It appears the system will reap more benefits from the unholy alliance of unscrupulous businessmen and tax machinery, against the people of Pakistan.
In this scheme of things the government will get more tax and businessmen will remain immune from any audit. Together they exploit the masses making immense money at their expense.
Last but not the least, this provision brought in its wake an amazing exemption tag, viz. that those who complied with it were exempt from audit and those who dared to defy it were to be subjected to audit.
In other words, the government had openly admitted that since it had made audit so loathsome and horrendous for the taxpayers they should give preference to paying higher rate of tax rather than undergo the torture of audit.
To put it more crudely, one can say that the State was encouraging people to freely manipulate/ restructure transactions and then ignore their actions by asking them to pay some bhatta [extortion tax]. Now the State has gone a step ahead and has done away with this option.
Through the promulgation of SROs 592(I)/2004 dated 8th July 2004 and 657(I)/2004 dated August 4, 2004 all commercial importers have no choice but to pay additional sales tax on 10% compulsory value addition.
The same thing was later on done with the retailers through SROs 673(I)/2004 dated 9th August 2004 imposing condition of minimum value addition of 10%.
THE RELEVANT PORTION OF THE SRO READS AS UNDER: " In exercise of the powers conferred by section 71 of the Sales Tax Act, 1990, read with clause (9) of section 2, section 3, 3AA and 4, sub-section (2) of section 6, section 7A, clause (b) of sub-section (1) of section 8, clause (a) of sub-section (2) of section 13, section 26AA and 34A, and the first and second provisos to section 45 thereof, the Federal Government is pleased to direct that following further amendments shall be made in the Sales Tax Special Procedure Rules, 2004, namely:-
IN THE AFORESAID RULES:
(a) in rule 16, in sub-rule (1), for clause (e), the following shall be substituted, namely:
(e) ˜value addition' means the value added by the retailer on the value for which the goods are acquired (purchased) by him and calculated in the manner specified in Rule 19.
EXPLANATION: For a particular tax period the value for which the goods are acquired shall be the sum of the values indicated in all the invoices, bills, vouchers, cash payment slips and cash memos against which the goods are purchased by a retailer in a tax period;
(b) for rule 19, the following shall be substituted, namely:-
19. Determination of sales tax liability. A retailer shall pay retail tax on his monthly value addition, at the rate specified under sub-section (1) of section 3 of the Act.
Provided that the value addition, in percentage terms, shall not be less than ten per cent of the total value of purchases made during the said period.
EXAMPLE:
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(a) value of purchases Rs 100
(b) value addition rate 10%
(c) value addition (a x b) 100 X 10%
= 10.00
(d) retail tax on value addition
10 X 15% = 1.50
Tax Liability Rs 1.50
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In return, the government has given immunity from audit to all those commercial importers/retailers who pay sales tax on the basis of compulsory value-addition. The condition of detailed audit of commercial importers under the newly amended rules has been withdrawn through SRO 657(I)/2004 issued on August 4, 2004.
The commercial importers were confused over the term 'detailed audit' as specified in the procedure for collection of sales tax.
They opined that the sales tax auditors have the authority to conduct audit even in cases where the commercial importers pay sales tax on minimum value-addition of 10 percent.
Under the previous rule (Exemption from Audit), a commercial importer who paid sales tax on value-addition basis as prescribed under these rules for a year was not subjected to any audit for that year, and detailed audit was conducted in the case of a commercial importer who paid sales tax in a manner other than prescribed in the rules.
Now, the CBR has redrafted the rule, which says that 'payment of sales tax on value-addition basis shall be mandatory and the commercial importer shall be exempt from the requirements of audit'.
According to CBR officials, the immunity from sales tax audit does not mean that the auditors may not conduct audit in cases where there is definite information of evasion or fraud etc under the Act.
There would be detailed audit in cases of information, while immunity from audit would continue provided the commercial importers pay sales tax on 10 percent value-addition.
FOLLOWING IS THE TEXT OF THE NOTIFICATION ISSUED ON AUGUST 4, 2004: "In exercise of the powers conferred by section 71 of the Sales Tax Act, 1990, read with clause (9) of section 2, sections 3, 3AA and 4, sub-section (2) of section 6, section 7A, clause (b) of sub-section (1) of section 8, clause (a) of sub-section (2) of section 13, sections 26AA and 34A, and the first and second provisos to section 45 thereof, the Federal Government is pleased to direct that the following further amendment shall be made n the Sales Tax Special Procedure Rules, 2004, namely:-
In the aforesaid Rules, for rule 14, the following has been substituted, namely:-
"14 Exemption from audit. - Payment of sales tax on value-addition basis as prescribed under these rules shall be mandatory and the commercial importer shall be exempt from the requirements of audit."
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Example A
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(a) Value of imported goods determined u/s 25 or 25B of the
Customs Act 1969 = Rs 100
(b) Customs Duty (@ 20%) = Rs 20
(c) Assessed import value (a + b) = Rs 120
(d) Sales tax @ 15% payable on bill of entry = Rs 18
(e) Value of supplies, with value addition of 10%
[c + (c x 10%)] [120 + 12] = Rs 132
(f) Value addition on which S.T. is payable
(e - c) [132 - 120] = Rs 12
(g) S.T. on value addition (f x 15%) [12 x 15%] = Rs 01.80
Total cost of goods inclusive of:
indirect taxes only = Rs 133.80
indirect taxes and 6% withholding tax
u/s 148 of the Income Tax Ordinance = Rs 141.80
2001 [133.80 + 8]
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Example B
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(a) Value of imported goods determined u/s 25 or 25B of the
Customs Act 1969 = Rs 100
(b) Customs Duty (@ 20%) = Rs 20
(c) Assessed import value (a + b) = Rs 120
(d) Sales tax @ 15% payable on bill of entry = Rs 18
Total cost of goods inclusive of:
indirect taxes only = Rs 128
indirect taxes and 6% withholding tax
u/s 148 of the Income Tax Ordinance = Rs 135.68
2001 [128 + 7.68]
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This brings us back to the tall claims of the government of having made 15% uniform rate of tax.
Indeed it does remain 15%, once on import value and then again on compulsory value addition both in the case of importers and retailers. It is clear from the above example that a higher rate is concealed in the garb of the so-called uniform rate through the mechanism of compulsory value addition.
On an imported article of public consumption the effective rate of tax before any further supply is 41.80% [nowhere in the world such a high rate of tax is prevalent on imported goods] which is to be borne by the poor citizens of Pakistan who are neither aware of this colossal tax burden nor possess means to defy it as their so-called elected members in Parliament are not interested to look into fiscal laws, and Federal Government through the CBR enjoys unfettered powers to amend the law enacted by the Majlis-e-Shoora through Statutory Regulatory Orders (SROs).
By taking upon the role of an extortionist, the State is forcing itself on the innocent citizens for achieving irrational revenue targets and receiving kudos from the foreign donors.
(Mrs Huzaima Bukhari and Dr Ikramul Haq, leading tax consultants, are well-known authors of many books on Pakistani tax laws)
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