ISLAMABAD: Fertilizer industry on Friday sought exemption from two income tax and sales tax-related clauses and subjecting fertilizers to sales tax on the basis of retail price as both clauses are disastrous for the agriculture sector.
In a letter to the Prime Minister Advisor on Finance and Revenue, Dr. Abdul Hafeez Shaikh, the industry sought his personal intervention for the suspension of the clause about disallowance of expenditure on account of sales to unregistered persons, for three months, as "agreed" during a meeting on 22 June 2020.
During the meeting, Finance Advisor had directed FBR to consider fertilizer industry's request for exemption from the application of clause (q) to section 21 of the Income Tax Ordinance through the Finance Act 2020 and provisions of Section 73(4) earlier introduced in the Sales Tax Act through Tax Laws Amendment Act 2020, after the budget approval. "The combined effect of these provisions entails catastrophic implications for the agriculture sector and the overall national food security in Pakistan," said Brig Sher Shah Malik (retired) Executive Director, Fertilizer Manufacturers of Pakistan Advisory Council (FMPAC).
The Council highlighted the following facts pertaining to the downstream supply chain (dealers) of the Fertilizers sector: (i) • fertilizer industry operates with a simple value chain where dealers operate on very limited margins to the extent of 2%-3% of sale price; (ii) over 90% of the dealers are registered for income tax purposes and these dealers are subject to minimum tax regime under Section 113 of the Income Tax Ordinance. Tax is withheld by manufacturers/commercial importers at 0.7% of sale price for income tax filers. For non-filers there is already a higher tax deduction of 1.4%; (iii) due to minimal value addition and margins, major part of the sales tax is collected upfront at the time of initial sale by the manufacturers/commercial importers; and (iv) the end customer of the industry is the farmer who shows reluctance to submit his CNIC or NTN number at the time of purchase.
FMPAC has drawn the attention of the Finance Advisor to the "anomaly" that exists in the current fiscal framework that is detrimental to dealers getting registered for sales tax purposes.
"In case of sale to a registered customer and sub-dealer, any payment made to the dealer is subject to a minimum tax of 4.5%. This is on the top of the tax already deducted by the manufacturer / commercial importer at the time of initial sale. So, by virtue of registration and sale to a registered customer / sub-dealer, the dealer is subject to double taxation in excess of six times the initial tax withheld at source at the time of purchase," Sher Shah added.
FMPAC maintained that more than 90% of fertilizer dealers are income tax filers, the provisions in question would lead to incremental cost burden of around Rs 14 billion on the agriculture sector. On the contrary, sales tax registration of all dealers would only result in an additional sales tax collection of Rs 180 million. Moreover, the documentation of the economy is already being ensured fairly through declaration of CNIC/NTN wise dealer sales by registered manufacturers in their sales tax returns and the income tax returns of these fertilizer dealers.
FMPAC has recommended the following budgetary solutions "that will not only ensure required revenue collection for the Government but would also ensure" appropriate level of economy documentation without affecting industry's costs: (i) specific exemption to fertilizer industry from the provisions of section 21 of the Income tax Ordinance and the provisions of section 73(4) of the Sales tax Act; and (ii) fertilizers be subject to sales tax on the basis of retail price so that all of the sales tax in the value chain is collected by the manufacturer/ commercial importer and deposited upfront with the national exchequer; this would result in Rs 180 million incremental revenue for the government.
Copyright Business Recorder, 2020
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