The Federal Board of Revenue has disallowed 50 percent input tax adjustment against the taxable supplies of sugar mills under an old SRO(I)/2009 of August 23, 2009 which had exempted 50 percent of sales tax on supply of sugar, requiring the registered units to apportion the input tax accordingly.
It is learnt here on Wednesday that the FBR has issued a clarification on the apportionment of input tax which has resulted in issuance of show cause notices to various sugar mills on the basis of the FBR''''s legal interpretation. The sugar industry has strongly contested against the FBR''''s clarification and termed it illegal as well as against the relevant provisions of the Sales Tax Act 1990. The industry has approached the FBR for withdrawal of the clarification in view of accurate interpretation of the rescinded SRO and Sales Tax Act, 1990.
On the other hand, tax officials were of the view that under SRO(I)/2009 the supplies of sugar was exempted from 50% sales tax. Resultantly, the registered persons were required to apportion the input tax accordingly ie only fifty percent of the input tax shall be available for adjustment against the taxable supplies.
In a communication to the FBR Chairman Mumtaz Haider Rizvi, Pakistan Sugar Mills Association (PSMA) said that the FBR had issued SRO F. No 1(3)STM/2004 (Pt-II) dated August 23, 2009 under clause (a) of sub - section (2) of section 13 of the Sales Tax Act, 1990 that reads as under:-
"In exercise of the powers conferred by clause (a) of sub section (2) of Section 13 of Sales Tax Act, 1990, the Federal Government is pleased to direct that sales tax on local supplies of sugar shall be charged at the rate of eight per cent with immediate effect and until further orders." The above notification was rescinded by S.R.O. 480 (I)/2011 dated 3rd June, 2011.
Moreover, section 8 of the Sales Tax Act, 1990 reads as:
Tax credit not allowed
(1) Notwithstanding anything contained in this Act, a registered person shall not be entitled to reclaim or deduct input tax paid on -
(a) the goods used or to be used for any purpose other than for the manufacture or production of taxable goods or for taxable supplies made or to be made by him;
(b) any other goods which the Federal Government may, by a notification in the official Gazette, specify; and
(c) on the goods under sub-sections (1A) and 5 of section3.
(2) If a registered person deals in taxable and non-taxable supplies, he can reclaim only such proportion of the input tax as is attributable to taxable supplies in such manner as may be specified by the Board.
Upon an enquiry, the Second Secretary (ST-L&P) Federal Board of Revenue vide letter C. No 1(3)STM/2004(Pt-III) dated 02 May 2012 has stated as under:-
"I am directed to refer to LTU, Lahore''''s letter Ref. No AC(HQ)F.07(IT)2012/8931 dated 20-04-2012 on the subject cited above and to say that FBR agrees with the view point of LTU, Lahore that as per SRO__(1)/2009 dated 23-08-2009 the supplies of sugar were exempt from 50% of the sales tax under the provisions of section 13 of the Sales Tax Act, 1990. Sub-section (2) of section 8 of the Sales Tax Act, 1990 provides as under:
"If a registered person deals in taxable and non-taxable supplies, he can reclaim only such proportion on the input tax as is attributable to taxable supplies in such manner as may be specified by the Board."
(2) The registered persons, therefore, were required to apportion the input tax accordingly ie only fifty percent of the input tax shall be available for adjustment against the taxable supplies," it added.
The sugar industry opined that the viewpoint taken by the FBR vide his letter dated 02 May, 2012 is incorrect. The FBR has issued SRO dated August 23, 2009, purportedly exercising powers conferred upon it under clause (a) of sub-section (2) of section 13 of the Act. The said SRO remained operative for almost 22 months which was later rescinded vide SRO dated 03 June, 2011.
The FBR has misinterpreted SRO dated 23 August, 2009 and proposing fifty percent disallowance on input tax by misconstruing the said SRO under an impression that FBR has exempted fifty percent of sales tax on supply of sugar by wrongly resorting to the provisions of sub-section (2) of section 8 of the Act. The creating a sales tax charge at higher or lower rate and granting exemption are entirely two different concepts. Section 13 of the Act, empowers the Federal Government to exempt any taxable supply from whole or any part of tax, meaning thereby that whole or any part of tax can be exempted which is entirely different from lowering the rate of tax. The substance of the language as used in SRO is important. Perusal thereof would reveal that by no stretch of imagination any exemption flows out of it but for the reduction of rate of tax to 8%, keeping intact the taxability of the goods.
It has been further argued that the provisions of sub-section (2) of section 8 of the Act are not applicable to the sugar industry for the reason that petitioner only has taxable supplies, hence input cannot be disallowed proportionately.
In view of the legal position, sugar industry has requested the FBR that the interpretation of the SRO may be withdrawn. Hence the show cause notices issued to various sugar mills may be declared unlawful, sources added.
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