Japanese investors seek tax relief for auto industry: FBR and BoI to review request

The Federal Board of Revenue and the Board of Investment (BoI) would jointly review request of Japanese companies seeking exemption for automobile industry from turnover tax, reducing the rate of advance tax from 5 to 1.5 percent on imports made by the automobile manufacturers and speeding up procedure for acquiring advance tax exemption certificate.
Sources told Business Recorder here on Monday that the taxation issues faced by Japanese investors would be discussed at a meeting to be held at the BoI on November 27. Tax authorities will give their policy viewpoint on the proposals of the Japanese investors. The BoI and the FBR will jointly take some decision on the taxation proposals of the Japanese companies.
According to BOI, turnover tax was introduced as an ultimate resort to discourage understatement of true income by unscrupulous taxpayers. All members of automobile industry are listed companies, subject to strict Corporate Governance and needs to be distinguished from other undocumented sectors. Moreover automobile industry is "High turnover-Low margin" sector and every price increase, just to cover foreign exchange impact, increases the turnover based tax burden. The turnover tax is mandatory even if the company has negative profitability.
The suitable amendments to be introduced in the relevant provisions of tax laws to the effect that auto sector be allowed specific relief as provided to others sectors such as Oil marketing companies, SNGPL/SSGC, FMCG's and other companies. The proposal is that the automobile industry be exempted from paying turnover tax.
Sources said that as part of manufacturing operations, automobile manufacturers import significant portion of raw materials in the form of Completely Knocked Down (CKD) kits. The import of these kits undergoes collection of withholding tax @ 5 percent of the import value, inclusive of related custom duty and sales tax, which fundamentally is the nature of Advance Tax, adjustable against the ultimate tax liability determined on net income basis.
However, owing to recession and negative growth in the automobile industry, such collection of tax has resulted in accumulation of substantial income tax refunds, giving rise to significant cash flow problems. It is pertinent to mention here that automobile sector unlike other manufacturing sectors like cement, paper and textile etc, largely depends upon imported raw material (CKD kits). As compared to automobile sector, the imported constituents for other manufacturing sectors are considerably less and as such the tax suffered on imports is likely to offset the tax charged on income resulting from sales. However, the incidence of tax on imports in case of automobile assemblers is too high because not only the imported constituents are too many but also these are high priced items, resulting in accumulation of refunds.
Advance tax is adversely effecting the smooth functioning of automobile manufacturers. The proposal is to reduce advance tax from 5 percent to 1.5 percent for automobile sector.
The FBR should introduce quick/easy procedure for acquiring exemption certificate from advance tax, sources said.
On June 3, 2011, the Federal Government vide a Customs Notification, as part of its budgetary measures, has reduced the duty on CRC import by welded steel pipe manufacturers to 5 percent from 10 percent by modifying the definition of respective thickness of CRC from 'exceeding 3 mm" to "thickness exceeding 0.5 mm, but less than 3mm" through amending SRO 565(1)2006, Dated: 05 June, 2006, Serial 88 (Pertaining to welded steel pipe manufacturers) Vide SRO 475(1)2011, dated June 3, 2011.
The 5 percent import duty protection is not enough for local manufacturers to operate on their huge investment and compete with international competitors owing to their high sales volumes. The government also loses 5 percent duty and sales tax as a result of this reduction in rates. It is proposed that the CRC items be deleted from the concessionary table of SRO.565, to provide complete protection to the local CRC manufacturers or, at least restoration of previous position as prevalent prior to the issuance of SRO 475(I) 2011 dated June 3, 2011, ie, (Increment of Import duty from 5 percent to 10 percent).