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To remove an ambiguity in the Federal Excise Law, the Federal Board of Revenue (FBR) has issued procedure for collection of federal excise duty (FED) on goods produced by vendors (toll manufactures) from the raw materials supplies by their principals.
Sources told Business Recorder that a company engaged in the sale of washing powder in Pakistan does not have its own manufacturing facility. The company provides raw material to the "toll manufacture", who produce the goods on behalf of that company The calculation of FED by both the "toll manufacture" and principal company, who had supplied the raw material to the manufacturer, has been clarified by the board.
There was confusion about the payment of FED by the "toll manufacture" under the said arrangement. The board has removed the ambiguity through issuance of a Federal Excise General Order (FEGO). The FBR has also clarified issues pertaining to the adjustment of excise duty in cases where such arrangement of vendors and principals is taking place.
According to a FEGO 2 of 2008 issued on Wednesday, the FBR has clarified that both vendor and the principal fall in purview of the definition of manufacturer as provided in the Federal Excise Act, 2005 and both shall discharge their liability to pay duty under the law.
The assessable value for excise duty payable by the vendor shall be the actual consideration in money received, ie the gross conversion charges received. Under the new procedure, the principal will also apply to cases where the goods manufactured by the vendor are otherwise chargeable to FED on the basis of retail price.
The principal will pay duty on the basis of retail price, inclusive of all duties, charges and taxes other than sales tax, whereas the vendor will be liable to pay duty only on his gross conversion charges. The vendors shall not be entitled to any adjustment in case of duty-paid input goods used in the manufacturing process as are owned by the principal. However, the vendor shall be entitled to adjust FED paid by him on direct input goods, which are purchased by him on payment of duty.
The principal shall be entitled to adjust FED paid by him to the vendor against conversion charges as well as the duty paid by him on the raw materials owned by him, as were supplied to the vendor for manufacturing, against the final liability of the principal.
The vendors shall comply with all the applicable provisions of the Federal Excise Law and the principals will not be required to pay any duty on the movement of such raw materials or inputs from their possession to the vendors for the purpose of manufacturing or production of excisable products on their behalf, though they will properly account for such movements in their records.
The new procedure shall also be applicable to Special Excise Duty (SED) payable under SRO 655(I)/2007. However, as regards adjustment, it is clarified that adjustment of SED can only be made against SED and the same principal applies to FED payable under First Schedule of the Federal Excise Act, 2005.

Copyright Business Recorder, 2008

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