A F Ferguson & Co, member firm of PricewaterhouseCoopers network, has proposed to the Federal Board of Revenue (FBR) to reduce sales tax rate from 17 to 15 percent, incentives for compliant taxpayers, promote electronic invoicing to check corruption in sales tax refunds, expedite sales tax registration process, extend facility of temporary registration to all the persons other than manufacturers and allow temporarily registered persons to make taxable supplies and issue sales tax invoices.
According to the budget proposals (2016-17) of A F Ferguson & Co. submitted to the FBR, presently, approval process for sales tax registration takes at least 60 to 120 days to be completed. This process is usually long when the law considers the supplies made without registration as "tax fraud". Rule 5A of the Sales Tax Rules, 2006 allows temporary registration to manufacturers who intend to import machinery within 72 hours of filing of application. However such manufacturers cannot issue sales tax invoices during temporary registration. The swift process of registration benefits both the registered person and the FBR i.e. easy payment of sales tax and timely revenue generation.
INCENTIVE FOR REGISTERED PERSONS: Presently no additional benefits/rewards are being given to compliant registered persons dealing with registered and organized sectors. This approach is encouraging Sales Tax evasion by unregistered sectors. Section 56C is present in the Sales Tax Act, under which the Board may prescribe prize schemes to encourage general public to make purchases from registered persons issuing tax invoices, however, till to date, no such scheme has been announced by the Board.
Incentive may be offered to general public as well as registered persons by announcing a scheme in this respect, if they deal only with registered and organized sectors. The incentive for registered persons may be in the shape of fixed or variable tax credit(s) at the end of the year to promote registration and dealing with registered and organized sector.
De-registration, Blacklisting and Suspension of Registration Section 21 (2): (a) The law provides that before blacklisting or suspending any taxpayer registration, the Commissioner will follow the relevant procedure as prescribed under the notification to be published in the Gazette.
(b) Section 21 (3)
If a registered person is blacklisted, the refund or input tax credit claimed against the invoices issued by him even prior to prior blacklisting/suspension is not admissible.
It proposed that despite lapse of considerable time, the said notification prescribing the procedure for blacklisting and suspension has not been issued by the FBR. Accordingly, the powers exercised under Section 21(2) have been discarded by the Appellate fora. It is therefore recommended that the relevant notification be issued.
Section 21(3) should be rationalized and input tax should not be deprived off if:
a) Buyer holds valid tax invoice;
b) Supplier's name was appearing in the Active Taxpayers' List at the time when purchases were made; and
c) Payments were made through banking channel in compliance with section 73 of the Sales Tax Act, 1990.
The rationale behind the proposal is that a registered person should not be deprived of his legitimate right of input tax if he fulfils all the three conditions.
Multiple Audits - Section 25 & 38: The said two sections give powers to sales tax audit /investigation is conducted under Section 25 and Section 38. In terms of Section 25, an audit of a registered person may be conducted once in a year. On the other hand Section 38 empowers the department to conduct investigation of registered persons without any time limitation. Quite often tax authorities conduct multiple audits of same tax period under different nomenclatures i.e., annual audit, investigative audit, desk audit, audit for abnormal profile, etc. The terms 'Desk Audit', 'Investigative Audit' and 'Abnormal Tax Profile' have not been defined in the statute.
It is recommended that the no audit may be initiated unless specific scope, guidelines and mechanism thereof are available in the law. Moreover, all audits should be conducted strictly in terms of law and not otherwise. Moreover, if detailed audit of a registered person has already been conducted under section 25, the registered person should not be again subjected to investigation under section 38. Likewise, if detailed investigation of a registered person has already been conducted under section 38, there should be no need to conduct audit of a registered person under section 25.
It is recommended that in the presence of specific section 25, which gives powers to conduct audit, there is no need of section 38 which gives powers for investigation. However, if section 38 has to be retained in the statute book, the law should provide a specific and subjective criteria and mechanism for conducting investigative audits under Section 38, which should not be used as a tool for harassment and revenue generation.
Simplification of Sales Tax Return - Section 26: The existing sales tax return contains complications and unnecessary annexures which are time consuming and requires employment of experienced staff. Condition of filing unnecessary annexures should be curtailed to achieve simplification, such details if necessarily required, can be made part of annual return.
POWER TO ARREST - SECTION 37A: Presently, Inland revenue officers are authorized to execute arrest of any person and if that officer has on the basis of material evidence has reason to believe that such person has committed a tax fraud or any offence warranting prosecution under Sales Tax Act, 1990. Moreover, the powers given to officers also include powers to arrest any director of the Company if the officer has reasons to believe that such director or officer is personally responsible for actions of the Company contributing to tax fraud. This section should only be applicable where the case of tax fraud has already been established at the stage of Order-in-Appeal. Alternatively, the amendment be made in Section 37A in line with the amendment made in Section 8A through Finance Act 2015 and the burden to prove the allegations should be on the tax department to avoid undue harassment of genuine taxpayers by taxation authorities.
SALES TAX ON TOLL MANUFACTURING CHARGES BY FEDERAL AND PROVINCIAL GOVERNMENTS: The Federal Government has been collecting sales tax on toll manufacturing charges as it has repeatedly defined/clarified that the toll manufacturing activity falls under the definition of manufacturing. The Federal Government has further strengthened its stance over collection of sales tax on toll manufacturing by inserting clause (d) in section 2(33) through the Finance Act, 2015; followed by FBR clarification letter dated January 8, 2016 to KCCI that only the Federal Government is authorized to charge and collect sales tax on processing of goods owned by other persons.
Similarly, the Punjab and Sindh governments have also subjected the toll manufacturing activity as chargeable to tax. This tantamount to duplication of sales tax as the taxpayer is being pressurized to pay sales tax to both federal and provincial governments, it added.
It is proposed that Ministry of Finance should take up the matter with Provincial Governments and reconcile their differences. Taxpayers involved in toll manufacturing may not be subjected to double taxation, it added.
REFUND: (a) The biggest element of corruption in sales tax is "refunds", these are arising in zero rated as well as in normal tax regimes, where the supplier purchases invoice without any supply, and these are commonly known as flying invoices.
In order to curb this, the legislature has introduced section 8(1)(ca) & 73 and made changes in registration rules. However, these are creating hardship issues for the genuine businesses as well.
(b) In recent case, the tax authorities have started rejecting refund claiming under section 3B of the Act where such claims were not booked as receivable in the taxpayers' audited accounts. In support of such contention, the tax authorities contested that non recording of refund as receivable from government tantamount that the sum claimed was charged off in cost of sales; thus becoming part of selling price which was ultimately recovered from the customers.
It is recommended that in order to reduce the risk of claiming inadmissible input tax, the use of electronic invoicing should be promoted in compliance with Chapter XIV of the Sales Tax Rules, 2006.The invoices issued by the supplier will be transmitted electronically to the buyer and FBR simultaneously. Further, the sales tax return will also be updated on real time basis. This process will also be helpful for companies which have a large customer/consumer base.
In quite a few cases because of the contingent nature of refunds; interpretation/legal issues and in view of the intentionally accepted accounting convention, the taxpayer could not book it as receivable in the accounts. It is therefore, suggested that the refunds should be claimed in the light of the documents prescribed under section 22 of the Act and allowed accordingly.
FEDERAL EXCISE DUTY ON SERVICES: Notwithstanding certain services being taxed under independent Provincial Sales Tax Laws in vogue in Sindh, KPK and Punjab, such services are still taxable under both the Federal Excise Act 2005 as well as under Provincial Sales Tax Laws, which tantamount to double taxation.
It is recommended that Federal Excise Duty on all services rendered in Sindh, KPK or Punjab may be abolished.
SPECIAL PROCEDURES/S.R.O: Present rate of 17 percent Sales Tax with an additional 3 percent value addition tax, on commercial Imports is a bottle-neck in inducing people to come within tax net besides also contributing towards inflation.
Tax rate should be reduced to 15 percent and should further gradually reduced to 10 percent in the next year.
We are cognizant that reduction of tax rate will result in significant decrease in Government's revenues. Hence, in order to bridge the potential revenue gap as a result of slash in tax rate, we recommend the following measures:
-- Exemptions presently available under 6th Schedule of the Act and through various SROs should be minimized and unwarranted subsidies should be done away with.
-- All taxable goods/activities should be taxed without any threshold, i.e., across the board.
Zero ratings awarded to certain sectors/classes of goods should be rationalized and accordingly minimized.
The reduced tax rate will encourage the unregistered taxpayers to get them registered so that they can avail the benefits of input adjustment which is currently not available to unregistered persons. Moreover, the same will serve as a step towards documents economy, A F Ferguson & Co added.
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