Provincial sales tax: right to claim input tax adjustment proposed to be withdrawn

The right to claim input tax adjustment on provincial sales tax is proposed to be withdrawn in Finance Bill 2016. Analyzing the proposed amendments to Finance Bill, Arshad Shahzad a renowned Karachi-based expert explained that after 18th Amendment the powers to collect and levy sales tax on services were delegated to provincial governments, who had made their own revenue collecting authorities. Unfortunately, in the absence of harmony of sale tax law between federal and provincial government, the controversies over jurisdiction and interpretation of sales tax law on services were apparent from day one and now it has increased to the new level. By virtue of amendment in section 2(14) of the Federal Sales Tax Act, the Federal government has excluded provincial sales tax levied on services from the scope of input tax and accordingly the taxpayers are no more entitled to seek adjustment of input tax on services in the Sales Tax returns filed with Federal Government. The proposed amendment may have serious repercussion for both the Federal and provincial authorities.
He said that the exemption threshold for small industries is increased from Rs 5 million to 10 million. The amendment is positive and it may give a significant sigh of relief to small sector industries. Now they do not require Sales Tax registration up-till having annual turnover of Rs 10 m or annual utility (electricity, gas and telephone) bills of eight hundred thousand rupees.
Highlighting another major procedural measure, Arshad Shehzad informed, new module for filing of sales tax return is going to be introduced. According to the new module the registered persons would require to first reports their sales/supplies in their return. These supplies will automatically be up-loaded in buyers account. The concept is excellent and it will not only result in reduction of crest discrepancies, reporting errors, it may also strengthen right of input claim and in case of any subsequent negative marking against the supplier such as non- active, blocked or black listed, the burden will entirely shift at the part of supplier. Keeping this new module, the provision of different due date for filing of different part of sales tax return are introduced.
Informing a simplification measure, he informed requirement for filing of annual sales tax return seems to be withdrawn since provision for its due date is omitted in Finance Bill, likewise provision for filing separate return in case for change of rates are also omitted. This is a positive move within an objective to simplify the law and to reduce unnecessary compliance.
Explaining technical amendments, he informed power for initiating legal proceeding for recovery of sales tax against short payment/non-payment of sales tax withholding are inserted in section 11(4). The board is forced to move this amendment after some adverse decision of the tax tribunals in the absence of any legal provision in the S.T.A. for recovery of short payment on account of sales tax withholding. The Directorate General of Input Output Coefficient Organization (IOCO)-Inland Revenue is also notified in the S.T.A. 1990. This directorate shall consist of a Director General and as many Directors, Additional Directors, Deputy Directors, Assistant Directors and such other officers as the Board may notify through a gazetted notification.
Explaining productive sales tax amendment he informed, the provision for transfer of taxable activity and transfer of ownership from one registered person to another registered person is proposed to be redefined. Now in case of sale or transfer of ownership of a taxable activity or part thereof to another registered person as an on-going concern, the taxable goods or part thereof shall be transferred to the new owner through a zero-rated invoice and the sales tax chargeable thereon shall be accounted for and paid by the registered person to whom such taxable activity or part thereof is transferred. He informed the amendment was desperately required in the law to facilitate and provide appropriate legal framework in sales tax law for transfer of business ownership from an individual to A.O.P or private limited concern. According to his opinion further detailed rules are also required to be introduced in this section.
Commenting on revenue measure, he opposed proposed amendment to charge sales at retail price on Mineral / bottled water sold in retail packing. In his opinion this amendment is not justified. Specially keeping the fact that supply of pure drinking water is one of the core responsibilities of the welfare state, At one end the state has failed to provide basic necessity of life to their masses and at the other end harsh taxation measure are proposed if the same are provided by the private sector.
He informed zero rating from colours in set, writing, drawing and marking inks, eraser, exercise books, pencils sharpeners, Geometry boxes, Pens, ball pens, markers and porous tipped pens, Pencils including colour pencils and Milk are withdrawn. Exemptions are granted to Premixes for growth stunting, Laptops, computers, notebooks whether or not incorporating multimedia kit, Personal Computers and Dump truck used in site and imported for Thar Coal Field. Exemption for the period of 40 years provided to concession holder of Gwadar port authorities. Likewise exemption of 23 years from sales tax and Federal excise duty is granted to businesses established in Gwadar free zone.
Arshad Shehzad endorsed government''s move to revive zero rating regime on five export oriented sector including Textile, Leather, Carpets, Surgical and Sports goods. He informed relevant notification 1125(i)/2011 is expected to be amended in order to incorporate provision for supply of industrial raw material at zero rate to entire sales tax registered regime of these five sector. He says the details modalities are not yet disclosed by the government however it seems position prevailed prior to 14th February 2013 is supposed to be restored with some check and balance. Likewise, option for payment of sales tax on turnover bases to retail regime is also one of the commendable move in this Finance Bill. The government was not able to collect due amount of sales tax from retail regime and if government seriously is willing to brought this sector under the sales tax net and start collecting sales tax, the simplify and lower rate based scheme is the only way out and it seems FBR has realized this fact, he concluded.