Local supply chain of 5 export-oriented sectors: reduced ST rates have negative implications

The local supply chain of five export-oriented sectors are facing problems in the implementation of the SRO.221(I)/2013 relating to the applicability of reduced rates of sales tax on domestic supplies. Arshad Shehzad, a renowned Karachi-based tax expert, told Business Recorder here on Monday that the reduced rate regime have serious negative implications under SRO.221(I)/2013.
The Board had amended provisions of SRO1125.(I)/2011 (revamped by SRO 154(I)/2013, 221(I)/2013 and also issued a clarification dated March 7, 2013. The benefits of amended provisions would only be available to the persons appearing as 'active taxpayer'. Simultaneously, procedure for 'active taxpayer' is further stringent by sales tax general order (STGO) 16/2013, requiring filing of returns and statement with month end, otherwise taxpayer would be declared "non active".
At present, the supply chain of five export-oriented sectors including spinning to finished textile product, PTA or MEG, in case of synthetic Sector, regular manufacturing in case of carpets and jute, tannery onwards in case of leather and organised manufacturing in case of surgical and sports, liable to pay sales tax @ 2% from March 1, 2013. Under the said SRO, the manufacturers of these sectors required to pay sales tax @ 2% on imports of items provided in notification useable as industrial input.
The commercial importer requires to pay sales tax @ 2% along with 2% value addition on imports of items provided in this notification useable as industrial input. The sales tax paid at import stage is adjustable with their output liability arising on supplies of these imports; however they would not allowed to seek refund on local supply. Therefore it has been concluded that the effective rate for sales tax on import and supply is not less than 4%. The imports of finished product ready for use by general public, shall be chargeable @ 2 along with 2% value addition tax, (total 4%) either imported by commercial or manufacturer cum importer, Shehzad said.
Within supply chain of export-oriented sector sales tax is levied @ 2% on supplies, whether the customer is registered or unregistered person. Supplies to person outside five export oriented sector would attract sales tax @ 5%, it is important to note there is no mechanism however available to ascertain relation of unregistered customer with five export oriented sectors, they said.
Shehzad said that the retailers are required to pay sales tax @ 2% on purchases of finished products from supply chain operating within scheme and liable to charge sales tax @ 2% on retail sales. The processing industry requires to pays sales tax @ 2% on processing charges. The input tax adjustment is available to entire supply chain in line with the Sales Tax Act., 1990. The refund is only admissible to exporters in accordance with law. ie to the extent of tax paid on goods actually consumed in the manufacturing of goods have been exported only and refund is not allowed against local supplies, he explained.
Highlighting negative implications of the notification, experts said that the SRO.221(I)/2013 result in accrual of heavy sales tax refunds. There is a discrimination with commercial importer, who has to pay 4% sales tax in comparison to 2% by manufacturers. There is also an increase in cost for those manufacturers, who pay 16% sales tax on their purchases and have output tax @2% on local supplies, could not neither pass on their incidence of tax nor claim refunds, hence they remain deprived from the scheme of reduced rate rather being benefited.
There would be capital blockage for exporter, who usually retains stocks of 3 to 4 months meaning by their sales tax payment of approx 6 months would remain stuck up within refund cycle, causing a major dent to exports. The complex condition to ascertain status of person not falling within supply chain in case of unregistered customer as the rate of tax 2% or 5% remain an issue of audit argument. Shehzad added that the reliance of refunds accrual regimes neither accepted to genuine trade nor it's suitable for government revenue collection.