The Federal Board of Revenue (FBR) has sought a report from the Large Taxpayer Unit (LTU), Lahore, on complaints filed by Pakistan Dairy Association (PDA) regarding cases of sales tax recovery framed against dairy manufacturers on wrong interpretation of sales tax notifications and Sales Tax Act, 1990.
Sources told Business Recorder here on Sunday that the FBR has directed the LTU Lahore to submit a detailed report on the sales tax issues pertaining to tea whiteners. The matter has been pointed out by the PDA Lahore.
The sales of dairy products are subject to zero rating of sales tax vide SRO 549(1)/2008 dated June 11, 2008 under the Sales Tax Act, 1990. Subsequent to the SRO, all units in the dairy sector have been filing monthly sales tax refund claims in respect of dairy products and have been receiving refund claims.
There is another SRO 863(l)/2007 dated August 24, 2007 according to which zero rating to the raw materials of the dairy products has been granted by the Federal Government, which means that sales tax at zero percent will be charged while procuring the raw materials used in dairy products. Accordingly, the industry has been taking the benefit of the said SRO since August 2007.
Both the above SROs are obviously very beneficial for the dairy sector as SRO 549 makes the dairy products zero rated and consequently no output tax is charged at the time of sales of dairy products and if any input tax is paid on the purchase of raw materials, imports and utilities, it becomes refundable, industry said.
The SRO.863 makes the raw materials of dairy products zero rated; consequently, no sales tax is paid at the time of purchase, saving the cash for the industry which is often stuck with the tax department in the shape of refunds.
Sources said that the department has come up with a new interpretation now, holding that Pakistan Customs Tariff (PCT) Heading of liquid tea whitener 1901.9090 is appearing in both Sr.No 25 of the Sixth Schedule to Sales Tax Act, 1990 (which enlists the exempt products) and in SROs 549 and 863. As per department's interpretation, in case of conflict between the substantial law and subordinate legislation, the substantial law will prevail. Since the Sales Tax Act is a substantial legislation and SROs are subordinate legislation therefore substantial law ie Sales Tax Act, 1990 will prevail. In their view, liquid tea whitener is, therefore, an exempt product and accordingly is not entitled for benefit of zero rating of its inputs. According to their view, sales tax paid on raw materials of liquid tea whitener is not adjustable and will become part of the cost of the product.
Based on these views, tax department issued a show cause notice dated August 27 last year to a leading dairy unit for the recovery of refund amounting to Rs158,878,926 pertaining to tax periods between January 2011 and February last year already granted by the tax department. Furthermore, processing of refunds of the unit for the tax periods from March last year onwards has been stopped by the tax department resulting in accumulation of unprocessed refunds up to Rs 315 million. The unit has also been denied zero rating of raw materials relating to liquid tea whitener, Tea Max, going forward.
It is learnt that the writ petitions have been filed against both acts (against show cause notice dated August 27 last year and denying the benefit of zero rating of sales tax on raw materials of the product Tea Max) of the tax department in the Lahore High Court, Lahore (LHC) by the unit.
The LHC has granted unit interim relief in both the cases ie by restraining unit to file reply to the said show cause notice and the tax department from passing any order against that show cause notice and by directing the tax department to allow unit purchasing the raw materials of Tea Max without payment of sales tax till the time a final decision is taken by the court in this matter. The case is pending currently in the Lahore High Court (LHC), Lahore.
Sources said that the Federal Government is duly authorised to issue SROs under section 4 of the Sales Tax Act, 1990, which it has done by issuing SROs 863 and 549. Both these SROs are independent of each other and have no connection with each other.
Factually, an SRO (SRO 863(1)/2007 dated August 24, 2007) issued under the powers of the Federal Government granting an unconditional zero rating facility to the raw materials of the liquid tea whitener, is being ignored by the department in this case. If there is any ambiguity in the application of the SRO under discussion, field officers of tax department should get clarification from Federal Board of Revenue, Islamabad rather than initiation of punitive proceedings against the tax payers based on misperceptions.
The industry has requested the FBR to issue necessary instructions/clarifications to its field formation officers, barring them from taking any coercive measure against any Dairy Company which is based on this misconceived interpretation of law, industry said.
The FBR is further requested to advise its relevant field officers to withdraw the proceedings initiated against the daily unit on this account and grant them the necessary zero rating facility to the raw materials of tea whitener Tea Max under SRO.863(I)/2007 dated August 24, 2007 in addition to starting the processing of their blocked refunds with the tax department.
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