Supply to zero rated sectors manufacturers: raw material importers to pay 19 percent ST

The FBR has proposed imposition of 19 percent sales tax ie 16 percent standard rate of sales tax and 3 percent sales tax on value-addition on the commercial importers engaged in import of raw materials and inputs in the name of five zero-rated sectors, but actually supplied to un-registered persons or manufacturers of non-zero rated sectors.
Sources told Business Recorder here on Saturday that the FBR has drafted a statutory regulatory order (SRO) on revised zero-rated regime and the concept was shared with the members of the Tax Reform Co-ordination Group. The FBR has placed checks in the proposed notification to check abuse of the zero-rating regime by the commercial importers. The FBR will consult all stakeholders including commercial importers before issuance of the notification. The new notification is expected to take effect on and from December 15, 2011.
Under the new zero-rated scheme, the current facility of zero-rating shall be available at the time of import as well as for local supply chain except at the retail stage. At the time of import, sales tax @ 0 percent shall be charged from registered persons of five zero-rated sectors. At the time of import no sales tax shall be charged from commercial importers but guarantee (in form of good for payment cheque or pay order or bank guarantee or cash) shall be required.
Sources said that the guarantee shall be released on subsequent supply of the imported items to registered persons within the five zero-rated sectors. An important condition of the notification is that if imported goods are supplied to unregistered persons or to manufacturers of non-zero-rated sectors, then sales tax @ 16 percent along with value-addition tax 3 percent shall be charged on such supplies and this amount of tax shall be deposited in exchequer and thereafter the guarantee shall be released. The imports by manufacturers of non-zero-rated sectors shall be chargeable to sales tax @ 16 percent.
Sources said that the import of made-up articles of 5 sectors shall be charged sales tax @ 5 percent, irrespective of the fact whether they are imported by commercial importers or manufacturers of any sector. All transactions within the registered persons of five zero-rated sectors shall remain zero-rated up to the wholesale stage. Thereafter, supply of these goods to retailers and unregistered persons shall be chargeable to sales tax @ 5 percent.
The Input tax adjustment of all taxes paid shall be admissible under this scheme to avoid any double taxation. No turnover tax shall be chargeable on the sale of final/finished goods of 5 zero-rated sectors, sources added. According to the draft of the notification, the commercial importer shall submit good for payment cheque or bank guarantee or pay order or pay in cash the amount equal to the amount of sales tax at the rate of 16 percent payable at import stage and 3 percent value-addition sales tax. This good for payment cheque or bank guarantee or pay order or cash would be returned back, or as the case may be, refunded after providing evidence of next supply.
In case where the commercial importer sells any imported goods to persons registered in the five sectors within subsequent three months, such supply shall be exempt from sales tax but the commercial importers shall be required to provide details of each and every invoice in the sales tax return. On the basis of these details the good for payment cheque or bank guarantee or pay order or cash furnished shall be returned back or as the case may be refunded, it said.
In case where the commercial importer sells any imported goods to unregistered persons or persons registered in non-zero rated sectors (other than five sectors) within subsequent three months, he shall charge and pay sales tax at the rate of 16 percent of the value of such supply and value-addition tax at the rate of 3 percent of the import value at the time of such supply. This amount shall be deposited on monthly basis along with the sales tax return. On the basis of furnishing proof of such payment, the good for payment cheque or bank guarantee or pay order or cash shall be released. The commercial importer shall be required to provide details of each such sale to the unregistered persons or persons registered in non-zero rated sectors in the sales tax return.
The draft notification further said that the goods imported by all other importers (other than registered manufacturers of five sectors and commercial importers) shall be charged at the rate of 16 percent. It said that the facility of zero-rating shall be available to every such person engaged in manufacturing or trading in textile (including jute), carpets, leather, sports and surgical sectors who is registered for the purpose of sales tax other than as a retailer.
The imports made by registered manufacturers, importers and exporters of five sectors under this notification shall be exempt from sales tax. However, all imports of made-up articles/finished products of the five sectors shall be charged sales tax at the rate of 5 percent and no value-addition sales tax shall be charged on such made-up articles/finished products, the draft notification said.
On local purchase or supply, this notification shall, in case of textile sector apply from ginning stage onwards (for synthetic sector from production of PTA and MEG) and in case of other sectors registration will start from tanneries (in leather industry) and manufacturers of surgical, sports and carpet goods including the persons engaged in ancillary industrial activities. The supplies of these goods to registered persons of five zero-rated sectors up to wholesale stage shall be zero-rated. The supplies of all finished products of the sectors specified in the condition (i) shall, if sold to the retailers (both registered and unregistered) or end consumers shall be charged to sales tax at the rate of 5 percent ad val. Where a registered person has acquired goods on payment of sales tax at the rate of 5 percent or 16 percent ad.val, he shall be entitled to input tax adjustment or as the case may be, refund against the subsequent supplies made by him to registered persons either at the rate of 5 percent or 16 percent ad val or as the case may be, at zero rate, the notification said.
As per draft notification, a registered person who has consumed any other inputs acquired on payment of sales tax, whether covered in this notification or not, shall be entitled to input tax adjustment or, as the case may be, refund in respect of the supplies made by him either at the rate of 5 percent or 16 percent ad vat or at zero rate.
It further stated that the registered persons who are solely or otherwise engaged in the retail business of these goods or products shall pay sales tax at the rate of 5 percent ad vat on their retail sales and shall be entitled to input tax adjustment or, as the case may be, refund against such sales and they shall not be required to pay any other sales tax leviable on their such retail transactions However, such retailers shall be liable to pay turnover tax as prescribed under Chapter III of Sales Tax Special Procedure Rules, 2007, and the goods supplied at the rate of 5 percent shall not constitute part of turnover on which the aforesaid turnover tax is to be paid.
Where in the case of a registered person falling under the provisions of this notification, amount of claimable refund exceeds the amount of tax payable by him, he may minus the tax liability from his refundable amount and claim refund of the balance amount, if any, draft notification said. The registered manufacturers who process goods owned by unregistered persons shall charge sales tax at the rate of 5 percent ad vat on the processing charges received by them, provided that no tax shall be charged from the registered principals.
The registered manufacturers shall be entitled to the adjustment of input tax paid on machinery parts or spares and lubricants acquired by them for their own use. Supply of electricity and gas to the registered manufacturers of the above mentioned sectors shall be zero rated in such manner and to such extent as may be specified by the FBR, the draft notification added.