The Government is fully aware of the importance of promoting Pakistan exports. Accordingly several measures are adopted by legislating certain incentives primarily to reduce the cost to enable an exporter to compete in the international market and narrow down the balance of payment between imports and exports.
The legislature made several efforts to simplify taxation laws. The Income Tax Act, 1922 was replaced by the Income Tax Ordinance, 1979 and this Ordinance has recently been replaced by the Income Tax Ordinance, 2001 but clarity and simplicity are in no way achieved. It is still a complex code and for developing understanding and awareness one would need an expert's opinion.
The legislature enacts the law and the CBR administers the same but the interpretation of the law is the prerogative of judiciary. The large number of pending cases in our courts awaiting judicial interpretation speaks of the volume of litigation in fiscal statute.
Unless an exporter is fully aware of the concessions made available, the objects of their promotion are difficult to achieve. Accordingly an attempt is made to consolidate the fiscal concessions in their historic perspective.
In the year 1992 the presumptive tax regime was introduced whereby exporter's liability under the Income Tax Ordinance, 1979 (since repealed) was fixed on the withholding of tax at the prescribed rates (ranging between 0.5% to 1%) from the export proceeds of goods realised by the banks.
An exporter is also entitled to discharge his tax liability in respect of similar goods sold locally at the same rate of tax as applicable to export proceeds. This concession is available only when local sales do not exceed 20% of the overall turnover.
The presumptive tax regime is also extended to indirect exporters who supply goods to a direct exporter under an inland back-to-back letter of credit or through a crossed cheque against a Special Purchase Order (SPO).
Accordingly, an indirect exporter while supplying goods under this arrangement is treated at par with the direct exporter and the rate of tax shall be the same as the rate applicable to the proceeds of the direct exporter by the bank.
This proposition clearly emerges from the following passage of CBR Circular No 6 of July 9, 2003.
(III) CONCESSIONAL WITHHOLDING TAX FOR INDIRECT EXPORTERS UNDER DTRE REGIME Under sub-section (3) of section 154, indirect exporters are already enjoying the facility of taxation at par with the direct exporters where payment is received under an inland back-to- back letter of credit or through a crossed cheque against a Special Purchase Order as explained in Circular No 24 of 1999.
In order to further boost exports, a new sub-section (3B) has been inserted in section 154 and this facility has also been extended now to an indirect exporter as defined in the Duty and Tax Remission for Export Rules, 2001 provided in Sub-Chapter 7 of Chapter XII of Customs Rules, 2001.
The new provision requires a DTRE direct exporter and an export house to deduct tax at the rates specified in Division IV of Part III of First Schedule at the time of making payment under a firm contract to such an indirect exporter. The sub-section (4) of section 154 has also been amended to make tax so deducted as discharge of final tax liability.
An exporter, who is charged to tax on exports proceeds which is also in final discharge of his liability under the Income Tax Ordinance, 2001, can legitimately claim refund of all other taxes collected / deducted related to its export business.
Appreciating the difficulties in obtaining refunds from the tax department, exemptions are extended on importation of plant, machinery, material, etc. Moreover for a large number of specified industrial units exemption is granted from withholding of taxes on usage of electricity as well.
The tax chargeable in respect of commission received by an export industry agent or an export buying house is equal to the rate of tax applicable to such exports to which it relates.
In a recent notification vide SRO 946(1) 2005 of September 12, 2005 the services of stitching, dying, printing, embroidery and washing provided to an exporter are deemed at par with direct exports liable to tax at the rates applicable to the items of export by the direct exporter.
The CBR has also clarified in a recent circular that the tax withholding on such services be carried out by the exporter to whom such services are rendered.
One would appreciate the attempts of the Federal Government to reduce the cost of the product to enable the exporters to promote exports.
THE MECHANISM PROVIDED IN THE INCOME TAX ORDINANCE, 2001 IS SUMMARIZED AS FOLLOWS
SECTION 154: Authorised dealers in foreign exchange shall deduct tax at the rates specified in Division IV, Part III of the First Schedule.
SUB-SECTION (1): On realisation of proceeds for export by an exporter.
SUB-SECTION (2): On realisation of proceeds for indenting commission.
SUB-SECTION (3): On realisation of proceeds for sale of goods to an exporter under an SPO tax is deductible at the rate specified in Division IV of Part III of the First Schedule.
SUB-SECTION (4): Tax so deducted shall be a final tax under presumptive tax regime.
DIVISION IV PART III OF THE FIRST SCHEDULE
EXPORTS
1. Rates for deduction of tax under section 154(1) or (3)
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1. Items listed in Part I, Seventh Schedule 0.75% of proceeds
2. Items listed in Part II, Seventh Schedule 1.0% of proceeds
3. Items listed in Part III, Seventh Schedule 1.25% of proceeds
4. Items listed in Part IV, Seventh Schedule 1.50% of proceeds
2. For section 154(2) from Indenting Commission 5% of receipts
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The Seventh Schedule
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Part I 9 items 0.75%
Part II Leather and textile made-ups, etc 1.00%
Part III Textile and textile articles, etc 1.25%
Part IV Raw cotton - cotton yarn 1.50%
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The responsibility of deduction of taxes is on withholding agents and in this respect primarily the authorised dealers in foreign exchange being the scheduled banks should deduct tax legitimately and strictly in accordance with the law. In the absence of rules or clarification, the authorised agent is to exercise reasonable prudence for the application of law in the discharge of his obligations.
There is no ambiguity as to the rates of tax chargeable on direct export proceeds on realisation by the bank at the rates prescribed in the First Schedule which is linked with the items specified in the Seventh Schedule of the Income Tax Ordinance, 2001.
This Schedule has simply used the broad headline whereby "textile madeups" fall in the category of 1% whereas "textiles" and "textile materials" are categorised at 1.25%.
In the absence of any definition of these words in any law or customs code, one has to rely on its dictionary meaning or its understanding in common parlance.
The word "textile" as per the judicial dictionary 13th Edition Butterworths reads.
"The word 'textile' is derived from Latin 'texere' which means 'to weave' and it means woven fabric. When yarn, whether cotton, silk, woolen, rayon, nylon or of any other description made out of any other materials is woven into a fabric what comes into being is a 'textile' and is known as such. Whatever be the mode of weaving employed, woven fabric would be 'textile'.
The activity of making carpets though it involves knotting, in substance, amounts to weaving and the carpet is a fabric which is woven. Thus, it comes within the meaning of the expression 'textiles'."
"The meaning of 'textile' as a noun is a fabric which is or may be woven, a fabric made by weaving, a woven fabric, or a material suitable for weaving, textile material [Shree Meenakshi Mills Ltd v Union of India (1974) 1 SCC 468 at 478, AIR 1974 SC 366].
Textile refers to cloths of fabrics produced by weaving, knitting, netting or branding and classified into silk, wool, etc in accordance with the fibre used. [1974 Tax LR 2145 (Mad) (DB)].
That the entire process from the receipts of the cotton or yarn to the final stage, when it is ready to go on to the market, should be included in what we call textile process.
The 'textile' would include every kind of cloth, whether made of cotton, wool, jute or silk, natural or artificial, which is a finished product, in accordance with the needs of human beings, who include all classes, who want very fine cloth and those who are satisfied with comparatively coarser kind and who include men and women."
The upshot of the above analysis is that woven fabrics and materials are chargeable to tax at 1.25% whereas for all textile made-ups, the prescribed rate is 1%.
It is pertinent to note that an indirect exporter is governed by the deeming provisions of law and for the material he supplies to the direct exporter, its classification is immaterial as such supplies are deemed as item of export by the direct exporter and the appropriate rate of deduction shall be the same as applicable to items of export by the direct exporter.
To be more precise, any fabric supplied under an SPO to an exporter of textile made-ups where such fabrics are used shall qualify the rate of 1% and not the rate of 1.25% applicable to fabrics, textile or textile materials.
It is pertinent to note that for the business of exports presumptive tax regime which is simple in its operation, is provided and indirect exports, commission related to exports and the specified services rendered to direct exporters are deemed as exports governed by the same procedure applicable to direct exporter requiring withholding of tax on disbursement through authorised banks to achieve finality of tax obligation and such measures, no doubt are inducive for the growth of Pakistan exports.
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