Call for educating taxpayers, bringing changes in sales tax law: LCCI budget proposals

The Lahore Chamber of Commerce & Industry (LCCI), while demanding a strong taxpayer education system, has also asked the government to bring changes in the sales tax law, SROs, etc.
The LCCI President, Mian Anjum Nisar had conducted a through study of the sales tax law, in the light of problems being faced by the taxpayers and had offered necessary remedies accordingly, according to a spokesman of the LCCI here on Wednesday.
The sales tax law and SROs were not easily understandable to most of the taxpayers. As the changes had far reaching consequences for future tax liabilities of taxpayers, it was important that changes in law to be informed in easily understandable language and duly circulated to all the taxpayers, Anjum said in LCCI's budget proposals for the year 2004-05.
DIFFICULTY IN REGISTRATION: The registration of a business has become very cumbersome and time consuming so It is proposed that where registration papers are forwarded by an association licensed under Trade Ordinance 1962, the applicant may be registered without certain formalities such as NOC of owner of premises, copy of registry proving ownership etc.
The department subsequent to registration may conduct enquiries if required. In case a certificate of a licensed association does not support application, registration may be issued only after required verification has been done.
SUPPLY OF COMPLETE ADDRESSES OF BUYERS IN CASE OF SUPPLIES TO UN-REGISTERED PERSONS: At times, the auditors raise objections that complete address of the buyer is not mentioned in case of supplies to unregistered person.
On this basis, flimsy objections are raised and auditors threaten revised assessments.
The requirement of the department is unnecessarily hampering the businesses in their day-to-day functioning. Obviously such buyers would not like to give their complete addresses to their suppliers.
It is proposed that clear-cut instructions may be issued that where three percent further tax is charged and paid no objection with regard to complete address of the buyer should be raised.
It is the responsibility of the department to register those persons who are liable to register.
CHANGES IN THE REFUND RULES: A draft of the revised refund rules has been circulated. The following changes are proposed in draft Refund Rules 2004: - There is a discrepancy between the language of Rule 1(2) and Rule 2(c). Under Rule 1(2) a commercial exporter can zero rate all or part of his supplies. However, the definition of commercial exporter contained in Rule 2(c) relates to commercial exporters who are "exclusively" involved in supplies of "same-state goods".
A commercial exporter may make local supplies as well. The word "exclusively" should therefore not be there. The definition of "manufacturer-cum-exporter" needs some clarification.
A reading of the draft suggests that a manufacturer-cum-exporter must have his own manufacturing facility wherein all manufacturing facilities should be available.
For example, a manufacture of readymade garments may get yarn from the market, get it weave, dyed and processed from outside and may have his own manufacturing facility for manufacturing of readymade garments.
An apparent reading of the definition suggests that that such manufacturer will be excluded from the definition of "manufacturer-cum-exporter".
The confusion is further confounded by the definition of "same-state goods" contained in Rule 2(f) of the Rules.
It is therefore, proposed that definition may be made more clear and transparent. Under Rule 5(1)(e), supportive cheques/pay orders or banking instruments through which payment had been made to the supplier are required to be submitted as supportive documents for processing of refund claim.
As a result of this condition, no refund will be sanctioned unless payment through banking instrument is shown. On the other hand, law allows at least 120 days before making the payment.
Therefore, the sales tax staff will sanction no refund unless the payment proof is shown. Obviously this cannot be the intention. It is therefore; proposed that words "in case payment has been made to the supplier" may be added at the end of Rule 5(I)(e).
Under Rule 6(2), a refund in "Green" channel shall be sanctioned after cross matching of the supportive documents with the data provided in the prescribed electronic format.
It is proposed that cross matching should also be done in the post refund audit scrutiny because the sales tax staff in this cross matching exercise will take lot of time. If the condition is continued, it is again likely to result in delays.
In Rule 6(2), in the proviso, after the word discrepancy the brackets and words "(other than patent error apparent from record)" may be added. In Rule 6(4), at the end of the sub-rule, the following may be added: "This exercise must be completed within 30 days. In case exercise is not completed by the department during this period, refund claim shall be processed in the yellow channel."
In Rule 7(1), the word "fully" may be deleted. In Rule 8(1), after the word zero-rated, the words "or taxable" may be added. This is so as refund to manufacturer-cum-exporter is not to be allowed in respect of zero rated supplies only. Since he is allowed refund on purchases, he might be making domestic taxable supplies also from the said purchases.
Disputes will therefore arise regarding payment and refund of such manufacturer-cum-exporters. In Rule 11(4) it has been laid down that in case of fake invoices, case shall be dealt as a case of tax fraud.
It is proposed that the "Fake Invoice" should be defined. In the absence of such definition, the term is likely to be misused and misinterpreted by the auditors.
CHANGES IN SECTION 73 OF THE ACT: Section 73 of the Sales Tax Act, 1990 has posed many problems for the taxpayers. It is therefore, proposed that; Section 73 may be re-drafted in consultation with various trade associations and chambers; It should have suitable provision for bad debts; No time limit should be laid down for payment.
In case limitation period is a must, it should be enhanced to 180 days with suitable facility for extension of time limit under section 74 of the Act.
Suppliers should not be penalised, if they have paid the sales tax and their buyers refuse to make the payment through banking instruments. Only the buyer should be penalised; and the Government should be concerned with its money only.
Hence, if the amount of sales tax is paid through banking instrument, it should be considered that provisions of section 73 have been fulfilled.
It is proposed that the new draft of section 73 may be prepared keeping in view the above factors.
PROBLEMS BEING FACED WITH REGARD TO PREVIOUS SECTION 73: A lot of cases have been framed against the taxpayers under the erstwhile section 73. This has happened due to various and often conflicting clarifications given by CBR.
It is proposed that time period of 120 days for deferred payments may be increased to 180 days. The power to extend time period under section 74 of the Act may be vested with the Collector, rather than with the CBR.
All pending requests for extension of time period may be expedited by CBR or CBR should move these cases to the respective Collectorates to decide them.
Various clarifications with regard to section 73 were issued by CBR, which has entirely changed the complexion of section 73.
It is proposed that all those clarifications, which are against the provisions of section 73, may be withdrawn, especially clarifications relating to pay orders and Demand Drafts.
CHANGES IN SECTION 7 OF THE SALES TAX ACT RELATING TO FURTHER TAX: Further Tax was imposed to encourage registration. The purpose has now been achieved in the sense that efforts are now being made by the department to discourage spurious registration.
In the budget 2003-04, section 7 was amended to make it mandatory to deposit the amount of further tax along with the monthly sales tax returns.
This is causing problems for the taxpayers, who, on the one hand, carry forward huge amount of input tax and on the other, are required to deposit the amount of further tax.
This is irrational and without any justification. The business and industry is willing to pay further tax so that it continues to encourage registration, but this should be done after adjustment of carry forward only. However, 3% further tax is on the higher side, which should be reduced to maximum rate of 1 percent.
AMENDMENT IN PROVISIONS RELATING TO 'TAX FRAUD': The scope of present definition of 'tax fraud' is very large and is liable to be misused by tax functionaries.
Similarly, minor errors have also been included in the definition of 'tax fraud' eg short filing of return for two consecutive tax periods (section 2(37) & section 37C refers).
In fact, criminal proceedings can be initiated for host of reasons under section 37-C, which is not warranted under any decent tax system. It is proposed that section 37-C may be done away with and definition of tax fraud may be reworded so that it can be invoked only in cases of 'mens rea'.
The definition is proposed to be re-worded as under: - "Tax fraud" means knowingly, dishonestly or fraudulently and without any lawful excuse (burden of proof of which excuse shall be upon the accused)- doing of any act or causing to do any act; or omitting to take any action or causing the omission to take any action, in contravention of duties or obligations imposed under this Act or Rules issued there under with the intention of understating the tax liability or overstating the entitlement to tax credit or tax refund to cause loss of tax;
HIGHER RATE OF TAX ON RAW MATERIALS: At present items under Chapter 28, 29, 32 and 38 of harmonise custom tariff are liable to a higher sales tax rate of 20 percent under SRO 389(1) 2001 dated 18lh June 2001.
Most of these items are industrial raw materials whereas finished goods made of these raw materials are chargeable to tax at the rate of 15 percent.
It is giving rise to multiple problems. With the coming of WTO, SAFTA, Trade with India and increased dumping from countries like Chine, the local industry faces the prospect of closure. It is therefore imperative that industrial inputs are subjected to the standard rate of tax only.
Secondly, the present standard rate of 15 percent is also very high which may be reduced to 10 percent and uniform for all industries.
VALUE OF SUPPLY IN RESPECT OF IMPORTED GOODS: At the time of import, value of goods, at times, is arbitrarily enhanced by customs and duty & sales tax is collected on the arbitrarily enhanced price.
It is proposed that law may be made clear by suitable amendment or instructions may be issued to sales tax staff not to raise illegal objections in this regard.
CASES RELATING TO VALUE ADDITION: The concept of value of supply in the Sales Tax Act is based on the transactional value ie the "consideration received by the supplier from the buyer for the supply". No Notional value addition can be worked out.
However, the auditors, at the time of audit, insist on certain percentage of value addition not based on any legal and factual grounds.
Profit and loss in any business is determined by market forces and not by the whims of sales tax auditors. It is proposed that strict instructions may be issued to the department to follow the law in this regard.
RECTIFICATION OF ERRORS APPARENT FROM RECORD: At present, calculation error made for the first time is condonable under the Act (section 33(2)(d) refers).
Provision for revised return has also been made in the Act in the budget for the year 2003-2004 vide amendment in section 7 of the Act. However, there can and still are cases where patent mistakes could not be detected during this three months period.
Similarly, there may be cases of more than one-calculation errors in a year. It is proposed that rectification of error apparent from the record should not result in imposition of any penalty.
In fact, this should be allowed as a gesture of good grace and provision for the same may be made in the Act as is already available in the income tax law (section 221 of Income tax Ordinance 2001 refers).
TIMELY COMPLETION OF AUDIT REPORTS: Various problems are being felt by the tax payers with regard to Sales Tax Audit. The auditors demand irrelevant documents in violation of audit parameters laid down vide Board's letter C.No 5 (49) ST-Int.Audit/2001 dated 17.11.2001, press for higher valuation on ITP value of goods irrespective of sale price and do not accept the bank documents as evidence of price verification.
It is proposed that the whole system of audit may be revamped to ensure that (a) auditors call no unnecessary documents; and (b) audit reports are completed within specified time period (ie 45 days) and without delay.
In this regard, CBR should develop a computer-based system to monitor the performance of the auditors.