Sarhad Chamber of Commerce and Industry (SCCI) in its recommendations for Federal Budget 20012-13 has called for broadening of tax base, reducing the tax rate and preventing from passing further burden on the existing tax payers.
According to the recommendations prepared by the chamber, the Sales Tax Law & Procedure was changed in 1990 and was transformed into a shape of value added tax unlike the one promulgated in 1951 which was more akin to Central Excise Law. The sales tax Act, 1990 was further refined in the year 1996 undergoing drastic changes and completely turning it into a value added tax but with the passage of time its nature was disturbed by inclusion of various special procedures and unique types of fixed tax through the said procedure and various types of slabs of sales tax in addition to statutory rate of 16%. Energy shortage is crippling production while a poor tax base and collection mechanism is aggravating the taxes to GDP ratio. Accordingly, the prevalent high rates of sales tax from 16 percent to 22 percent, as applicable on specific taxable goods, in itself invites for evasion of tax which not only paves way for smuggling but also inflicts a severe burden on the existing tax base. It is worth mentioning that, in India it is a provincial subject with a straight tax rate of around 5 percent to 10 percent and there is effectively no VAT in China.
Following recommendations are stressed upon in the current scenario
Rate of Tax:
That in order to broaden the tax net it is direly needed that a uniform slab of 10 percent and sales tax be levied on goods produced and manufactured in Pakistan and goods imported into Pakistan. Sales Tax rates in Pakistan are among the highest in the region with highest slab at 22 percent (26 percent after value-addition). With such high rates of GST, there is a limited scope for new investment in industry and trade. For the GST mode of revenue generation to succeed, the rates of GST have to be brought down and rationalized while having more focus on expanding the base by encouraging new registrations across the supply chain.
GST on Industrial Raw Material:
The rates of Sales Tax on import of industrial raw materials currently are ranging from 16 percent to 26 percent which not only increase the cost of materials for legitimate imports but also promote smuggling from land routes as well as Afghan Transit Trade Raw materials, which are not produced in Pakistan, are subjected to high rates of GST, which is charged on duty-paid value. Industries using such raw materials imported by them cannot compete with those using smuggled raw materials. Secondly commercial importers paying up to 45 percent incidence of taxes on raw materials are mostly out of business because they cannot compete with imports under multiple exempt/zero rated regimes and smuggled materials, resulting in loss of substantial amount of revenue.
The concept of withholding sales tax, as was introduced on a trial basis, during 2009 should be reintroduced as this way of collecting/withholding tax may prove to be an effective instrument for broadening the base in the indirect tax regime. Necessary regulations could be developed once the idea is analysed and found workable.
The betterment of documentation if targeted and achieved could eventually enlarge the tax base. With this consideration in view and with a view to facilitate existing taxpayer by providing incentive to purchase from registered person it is recommended to modify Section 65A of the Sales Tax Act, 1990 in such a manner that the manufacturer should be entitled to a tax credit of two and a half percent of tax payable from a tax year if ninety percent of his purchases are made from a person who is registered under the Act during the said tax year.
Internal adjustment facility within sister concerns:
Currently, there exist numerous situations within the companies owned and managed as a group of companies that a company in the group has sales tax refunds to its credit while the other company has a sales tax liability towards FBR within the same period. In order to avoid processing for refund for one of the companies while arranging funds for payment of sales tax for a sister concern there could be possibility to facilitate internal adjustment(s) by outlining requisite procedure open to verification within the sister concerns.
Abolition of Special Procedures:
Special procedures may be abolished as these procedures are contrary to the very scheme of value added tax. For example a steel melter is required to pay tax on the basis of consumption of units of electricity consumed and every unit consumed attract sales tax at Rs 6/- per unit. A supply chain being the spirit of sales tax law becomes missing and the input tax, raw material, recipient of supply are left undocumented which is serious threat not only to the sales tax but also to the Income Tax.
Zero rating for inputs in cases of exempt outputs:
Currently, an industry whose output is exempt from sales tax is NOT ALLOWED to adjust its input tax as the input is not being passed on. It is recommended to allow zero rating for its inputs to be able to reduce unnecessary costs.
DTRE/AR-3 Mechanism to be made for Indirect export:
Invoices intended for an indirect export must be charged at zero percent for ease of both supplier, exporter and tax collector. This will also encourage exporters using local industrial input. Furthermore this can make the collection of tax intended for the production of goods in the local sector easier, as tax collectors will focus on transactions intended for local consumers.
Other hardships:
Sales Tax Act, 1990 requires to be redrafted by taking into consideration the effects and impacts of various rules/SROs as well as by removing intricate provisions to make the law friendly and easy to understand.
Like-wise, Sales Tax General Order (STGO) 34/2010 created under Section 55 of the Sales Tax Act, 1990 suffers from fundamental legal infirmities which require to be addressed in larger interest of the taxpayers and tax collectors. Some of the hardship areas are mentioned hereunder as the Chamber's observations and recommendations:
In relation to Non-Active Taxpayers:
Section 26 of the Sales Tax Act, 1990 obligates filing of return within the prescribed period where in case of default for two consecutive months classify him to be the "NON ACTIVE TAXPAYER". The practical hardship in this behalf as brought to notice by various members of the Chamber, is the FBR's own web portal which suffers from system problems especially near the filing dates and that factor alone is beyond the control of business community. The law doesn't cater for any condoning provision in case the default is made for factors beyond the taxpayers' control. Moreover, the requirement is in direct conflict with Rule 11(4) of the Sales Tax Rules, 2006 whereby non filing of tax returns for consecutive six months may classify the taxpayers as non-active with an eventual deregistration.
It is ,therefore, recommended that necessary amendment may be made in Section 26 to accommodate circumstances beyond the control of the taxpayers besides entitling him to revise the sales tax returns for any month where he finds an omission in sales or in the input. It is also recommended that different dates may be specified for different sectors so that the heavy internet traffic towards the deadline for filing returns by all the sectors could be over come without connectivity issues.
In relation to active/non-active taxpayers:
STGO provides for declaring the taxpayers in default as NON ACTIVE without being served with a show cause, the absence of such a mandatory process is against all norms of natural justice and principles of equity. Similarly, taxpayers are advised not to have any transaction with non-active taxpayers unless they are restored on active taxpayers list after the appellate process. The anomaly requires to be addressed to facilitate both the active and non-active taxpayers.
Input tax credit/adjustment -Section 73:
Section 73 of the Sales Tax Act, 1990 provides that the taxpayers will not be entitled to claim input tax credit/adjustment etc if the amount of related sales tax invoice is not paid within 180 days. It may be added for argument sake, that the situation herein sales tax is similar to the situation in income tax law where any liability not paid within three years of accrual is disallowed but the taxpayer can claim the payment which actually made thereafter. It is therefore, recommended that necessary amendment may be expressly accommodated in Section 73 to claim input tax credit/adjustment once sales tax liability is actually paid through prescribed banking channel to streamline the hardship.
Refunds:
Refund procedure, actually adopted compared to what has been outlined in the rules, has proved to be the most cumbersome processing on the part of FBR and for sure, requires to be addressed to remove various shortfalls and anomalies. Rule 38 of the Sales Tax Rules, 2006 has expressly spell down the requisite list of supporting documents that a taxpayer is obligatory to furnish while applying for refund. However, it is experienced that the requirement listed down in the Rule ibid are overruled by demanding records, returns, accounts, statements as well the summaries pertaining to the suppliers of the refund claimant for a cross match to the payment of output tax. It is therefore, strongly recommended that the FBR should device refund guideline procedure(s) afresh in such a way that the verification of various documentation could be made easy as well as purposeful by amending Section 10 of the Act and Sales Tax Rules, 2006, wherever needed. Besides, the anomalies for non-availability of any specific formula for prorating "input tax" between exports and local supplies, ie, tax attributed to exports and zero-rated, should be addressed.
Time framework for refunds:
There is no specific provision restricting time to be involved for refund of sales tax, resultantly huge refunds (countrywide) are pending for cases filed u/s 66 of the Sales Tax Act, 1990.
Registration procedure:
The procedure regarding sales tax registration should be made prompt and simplified. CNIC of proprietor, partner(s), director(s) (as the case may be), NTN certificates for business and bank account certification should be considered adequate for registration. Necessary amendments made therefore, be made in the forthcoming finance bill.
Appeals & appeal effects:
Powers of Collector (Appeals) for grant of stay should be restored by modifying Section 45 while condition of expiry of stay after six months be modified for period from 6 to 8 months which is the time limit for deciding appellate order. There is no concept of appeal effects in the sales tax law as opposed to income tax law, where a demand created once and modified later through appellate forum is give due appellate effect to avoid litigations. It is recommended that the sales tax laws may also be improved to accommodate concept of appeal effect as a result of decision of appeals at all levels, ie, Appellate Tribunal Inland Revenue, High Court or the Supreme Court of Pakistan.
Alternate Dispute Resolution Committee:
Currently ADRC formed u/s 47A of the Sales Tax Act, 1990 is functioning as a recommending body and is not competent to pass an order. The constitution of such a high levelled committees across the board have proved to be one of the finest decisions of FBR to help resolve disputes amongst both the parties, the taxpayers as well as tax collectors, by eventually accelerating disposal of disputes stuck up currently at large.
Keeping in view the international best practices experienced in Pakistan, it would be worth considering if the ADRC is empowered to decide the dispute as a competent forum equivalent to appellant tribunal in terms of its qualitative status as the ADRC have to generally hold series of meetings that are being attended by the representatives of both the parties, ie, tax payers and tax collectors and the outcome in the form of recommendations for FBR, though conclusive and comprehensive still warrants exercise of discretionary powers at the FBR level. The Chamber therefore, recommends empowering ADRC for deciding disputes rather than restricting to the recommending body only by modifying relevant laws accordingly.
Faulty Software System:
From the year 2005 onward the activities relating to filing of returns, GDs, refund claims, verifications and other areas have been put on the web portal of FBR but it is badly failed to achieve its expected results. The faulty system is mainly due to lake of co-ordination between the software engineer and the person knowing the las and procedure. Secondly the software act in mechanical way and any objection raised by the system is directly used by the department to penalize the tax payer. If any registered person claims input tax relating to the previous period, the system raise an objection for unlawful adjustment. Such objection comes from FBR and the field formations implement the objection blindly without resorting to the factual position and so in other matters ie refund claims, return filing, GD filing etc
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