Zero-rated stationery, dairy products sectors: FBR starts investigative audit

The Federal Board of Revenue (FBR) has initiated investigative audit of manufacturers of stationery and dairy products, which are sales tax zero-rated, to check massive misuse of the facility. In this connection, the FBR on Saturday issued instructions to the Directors-General of Large Taxpayer Units (LTUs) and Regional Tax Offices (RTOs) for initiation of investigative audit of manufactures in these zero-rated sectors.
The investigative audit of the manufactures of the following goods would be conducted, where sales tax zero-rating facility has been granted under SRO 863(I)/2007: Colours in sets; writing, drawing and marking inks; erasers; exercise books; pencils sharpener; geometry box; pens, ball pens, markers and porous tipped pens; pencils including colour pencils; milk including flavoured milk; yogurt; cheese; butter; cream; Desi ghee; whey; milk and cream, concentrated and added sugar or other sweetening matter; preparations for infant use put up for retail sale and fat filled milk.
The instructions said that it had been observed very seriously in the Board that various manufacturers, availing of the facility of zero-rating of sales tax under SRO 863(I)/2007 of August 24 2007 were misusing the same at the cost to government exchequer.
It had also been reported that goods imported free of sales tax for manufacturing by the importers have found way into the market without observance of the prescribed conditions/provisions of SRO 863(I)/2007. Keeping in view the gravity of the issue, it has been decided that an investigative audit of all such manufacturers, who have been granted zero-rated facility under SRO 863(I)/2007 of August 24 2007 shall be carried out immediately and the said audit be completed by April 30 2009.
A comprehensive report highlighting discrepancies/evasion pointed out during audit may be sent to the FBR by May 1 2009 along with the recommendations on the continuation/withdrawal of the facility granted vide SRO.863(I)/2007, the FBR instructions added.
Meanwhile, sources told Business Recorder that FBR has ordered investigative audit of these sectors on the survey and analytical studies conducted by the Sales Tax collectorate of Lahore. Resultantly, all DGs of LTUs and RTOs have decided to immediately start audit of sectors covered under SRO 863(I)/2007.
Sources said that despite recessionary trends and shrinking trade volume, FBR has found that some sectors, which have been sales tax zero-rated, are showing manifold increase in their local sales. This has alerted FBR as such sectors are claiming refunds on taxable inputs used in the supply. It was further found that these sectors generally are claiming excessive per unit consumption of input goods.
It has been found that some zero-rated sectors do not have the manufacturing capacity as compared to their declarations made in the sales tax returns. Only in case of bakery, a top bakery in Lahore has obtained separate sales tax registration for dairy products which was zero-rated.
On the other hand, it did not get registered with the sales tax department for making taxable supplies with the argument that their turnover is less than Rs 5 million. The consumption of dairy products by the unit is exceptionally high as compared to actual sales of the bakery products. Similar kinds of cases have been detected in other zero-rated sectors.
Taking notice of this manipulation the Sales Tax Department Lahore initiated investigative audit of all such units. It was further found that these audits have to be completed on priority basis. The sectors so selected include dairy products and other zero-rated sectors.
The FBR initiated zero rating of local supplies to avoid use of flying and fake invoices. However, instead of making correct declarations, their returns indicate all kinds of abnormal trends which result in huge refunds. An analysis of the Sales Tax Collectorte Lahore also indicated that these units make their supplies to unregistered persons.
Consequently, it becomes very difficult to verify whether or not such supplies have been made as the name and particulars of buyers are not available. It is further learnt that the Board has asked reports on refunds received and claim by these sectors by April 12, 2009.
In the light of these reports the Board will decide whether or not local zero rating shall continue in forthcoming budget. Besides, the Board intends to take stringent actions against all such refund claimants who have received inflated/inadmissible refunds. The local sales tax authorities have found that there is considerable dip in turnover of sectors making taxable supplies.
On the other hand, there continue to be serge in the turnover of zero rated sectors. This is a clear discrepancy where zero-rated units are making supplies to un-registered persons. The RTO, Lahore is identifying all such units which did not have the manufacturing capacity that is required for the supplies being declared for refunds.
For this purpose the Collectorate of Lahore has constituted a dedicated cell to urgently complete the investigative audit of these sectors, sources added. It is important to mention that the government is charging sales tax at the rate of zero percent on raw materials, subcomponents, components, sub-assemblies and assemblies imported or purchased locally for the manufacture of the above mentioned goods SRO 863(I)/2007.
The zero-rating facility was given on fulfillment of certain conditions specified in SRO 863(I)/2007. A sales tax registered manufacturer of the items having suitable in-house facilities shall submit a complete list of his annual requirement of items (inputs) he intends to import or purchase locally for the manufacture of goods to the Collector of Sales Tax and Federal Excise having jurisdiction.
The Collector shall accept the declaration of input output ratio of the manufacturer without any physical verification in case the declared input/output ratio and raw material requirement is in accordance with the prevailing industry average or the raw material consumption pattern of the applicant manufacturer.
In case of goods to be imported by the registered manufacturer the authorised officer of Sales Tax Collectorate shall furnish all relevant information online to Customs Computerised System (PACCS) as per Annexure C appended to the notification against specific user ID and password obtained under section 155D of the Customs Act, 1969.
Where a registered person supplies goods to registered manufacturer, he shall issue a zero-rated invoice under section 23 of the Sales Tax Act, 1990 mentioning the name, sales tax registration and approval number of the buyer. A registered person will be entitled to claim refund of input tax paid on utilities and such inputs (goods and services) which are purchased by him after payment of sales tax under section 10 of the Sales Tax Act, 1990 read with the Sales Tax Refund Rules.
The manufacturer shall maintain records of the inputs and the goods manufactured from imported or local inputs. However, the input goods shall be purchased or imported before the expiry date of the approval. The manufacturer shall communicate to the concerned Collector of Sales Tax in writing about the consumption of imported or locally procured items within ninety days of consumption of goods.
The indemnity bond shall be released on receipt of written confirmation regarding consumption of goods by the manufacturer. In case of nonconsumption within the period mentioned in the approval from the date of import or local purchase, the registered manufacturer shall pay the sales tax involved or obtain extension from the Collector of Sales Tax and Federal Excise under intimation to Collector of Customs.