A number of legal and procedural changes in federal tax laws are expected in coming budget (2017-18) under the exercise to simplify sales tax/excise laws including possible adjustment of Federal Excise Duty (FED) on accrual basis and concept of group taxation in the Sales Tax Act, 1990.
Sources said the Federal Board of Revenue (FBR) is considering various budget proposals of the Tax Reform Commission''''s sub-committee for simplifying indirect tax laws. The FBR formed a committee for simplifying tax laws. Task and mandate of the committee was to suggest amendments to be considered in the forthcoming budget for 2017-18 in relevant laws to simplify (but not to make structural changes in) the existing laws relating to federal indirect taxes, without compromising the revenue of the government.
Within this limited time, the members of the sub-committee deliberated on various matters relating to indirect taxes, and based on that, submitted this initial report. Tax simplification is an ongoing process which evolves over time. Therefore, it was recommended to let this sub-committee work even after the current budget is announced towards other long-term issues for simplifying the indirect tax regime eg levy of sales tax on services on either origination or termination basis and single return with identification of provincial head of account and direct deposit of share of tax of each province, etc.
Following are the major amendments proposed in the existing tax laws and their rationale behind each proposal:
Present position of tax law: Group Taxation in Sales Tax: At present, there is no concept of Group Taxation in the Sales Tax Act, 1990 (STA) on the pattern allowed under the Income Tax Ordinance, 2001 (ITO). As a result, refund of one group company is not adjusted against ST liability of other group company. Further, intra-group transactions are also subjected to sales tax.
Proposed change: A new section to this effect should be incorporated in the STA whereby group companies, eligible for group taxation under income tax, can opt for sales tax under the concept of single fiscal unit. As a result, sales tax refund of one group company would be adjustable against the sales tax payable of another group company. Further, any intra group transactions will be considered as non-taxable / zero rated for Sales tax purposes thereby eliminating the duplication of sales tax on such transactions. It would also provide an ease to the tax authorities to examine the returns and claim on consolidated basis rather than carrying out such examinations for each of the entity on individual basis. The above concept is already part of VAT laws of various developed economies of EU.
Rationale for change: Sales tax refunds are not easy to obtain. Slow processing of sales tax refunds and their accumulation is resulting in an ever increasing cost to companies as well as for the Government. Since the FBR is legally bound to pay compensation for delay of refund. Adjustment of refund within group company would resolve the issue to certain extent, without any revenue loss. Further, the concept will be given preference of economic substance over legal form. Provisions relating to compulsory sales tax audit can be introduced for companies opting for group taxation for sales tax purposes.
Present position of tax law: Sales Tax on Advances: - Prior to amendment made in Section 2(44) of the STA through the Finance Act 2013, ST was levied at the time of actual delivery of goods regardless of time of payment. Subsequent to the amendment, sales tax is also being charged at the time of advance payment.
It is recommended that collection of sales tax on advances should either be completely done away with or restricted to those sectors where there is problem/ possibility of revenue leakage.
Rationale for change: Collection of sales tax on advances has no permanent tax advantage. Due to timing difference advantage presently accruing to the Government, the taxpayer has to bear unnecessary compliance cost and accounting issues resulting in unnecessary reconciliations, and also leads to discrepancies in CREST.
Present position of tax law: Rationalization in Time Limit for different Compliances/filings: Under different provisions/rules, a time period has been specified which can be increased to facilitate the taxpayers and avoid unnecessary process/compliance for obtaining extensions/condonations.
Proposed change: The time period for the following can be rationalised as under:
1. Claiming input tax within 6 months u/s 7 be increased to 1 year.
2. Filing of refund claim for unadjusted input tax u/s 10 read with relevant rules, can be reduced to 6 months, which should be optional.
3. Time period for filing refund claim u/s 66 can be increased from 1 year to 2 year.
4. Time limit for payment of input tax u/s 73 ( 180 days) can either be withdrawn as government now allow input tax once sales tax is paid by seller (under STRIVE).or time limit should be increased to at least 1 year.
5. Time limit for issuing debit/credit notes u/s 9, as provided under the rules, can be increased from 180 days to 1 year.
Rationale for change: Rationalisation in time periods will not only facilitate taxpayers but will also reduce unnecessary approvals/condonations, and interaction between taxpayers and tax officer.
Present status of tax law: Stay against demand till first appeal upon payment of 25 percent demand: In line with amendment made in section 140 of the ITO through FA 2016, a new provision may be introduced in section 48 of STA to allow stay against demand till first appeal, upon payment of 25% of demand. Section 37(3) of FEA, allows stay (till first appeal or six months which is earlier) upon payment 15 percent of demand. Section 37 (3) may also be aligned if required, accordingly.
Rationale for change: Reducing unnecessary litigation, facilitating the taxpayers, and alignment with income tax law.
Present status of tax law: Discharge of tax liability at subsequent stage:- It is now a settled principle that if any liability for short paid tax is subsequently discharged then the same cannot be recovered from the taxpayer again, as it would tantamount to double taxation. At present, there is no express provision in STA to that effect.
Proposed; it is suggested that subsection 4B be inserted in Section 11 as follows: "Where at the time of recovery of Sales Tax under sub-sections (1), (2), (3) or (4), it is established that the sales tax that was required to be paid or deducted has meanwhile been paid by that person or recovered from the supply chain, no recovery shall be made from the person who had initially failed to pay or deduct the sales tax or had paid or deducted short amount of sales tax without prejudice to any liability on account of default surcharge or penalty, if applicable". Furthermore, where a tax is collected from a registered person, in respect of past tax liability, there should a mechanism probably through debit/credit notes whereby the registered person in next supply chain can adjust the same as input tax.
Rationale of the proposal: Recovery of tax should be restricted to cases where the sales tax in question remains unpaid. The proposed changes would not only simplify the process, but would also reduce litigation and increased tax revenues in long term. This is further in line with the underlying concept of neutrality of VAT. Sales tax being an indirect tax has to be ultimately passed on the end consumer without any additional burden on the persons in supply chain (except where they are subject to special tax regimes). In most of the cases, failure to charge sales tax (due to interpretational issues) eventually result in a direct cost to the seller without any recourse of recovery from the buyer hence increase in litigation. One can consider restricting the above benefits to the persons who are not otherwise found to be engaged in any tax fraud and who decides not to contest the matter in litigation.
Present status of tax law: Sales Tax Withholding rules/Anti-avoidance Provisions - After the introduction of STRIVE, input of sales tax is allowed after the FBR has secured sales tax from the supplier. Hence, there is no need to keep withholding provisions and certain anti-avoidance provisions in statute.
Proposal: It is recommended that Sales tax withholding should now be restricted to payment to unregistered persons with some minimum threshold. Further, withholding should be applicable at the time of payment (instead of present position requiring withholding at the time of accrual). Presently, Federal Sales Tax withholding provisions are not expressly applicable on services covered by FED (under sales tax mode). There is a difference of opinion on such matter which should be resolved by expressly making amendments in the Federal sales tax withholding rules to specify that withholding provisions are also applicable on all taxable services covered by FED law (to the extent of those services which are covered by Sales Tax mode).
Moreover, following anti- avoidance provisions may be withdrawn:
-- Section 8 (1) (ca )--Goods or services in respect of which sales tax has
-- Not been deposited in the Government treasury by the respective supplier.
-- Section 8 (1) (caa)--Purchase
-- In respect of which a discrepancy is indicated by CREST or input tax of
-- Which is not verifiable in the supply chain.
-- Section 8 (1) (d)---Fake invoices Section 8 (A)---Joint and several liability of registered persons in supply chain where tax unpaid.
Rationale: Simplification of tax law, and withdrawal of unnecessary provisions in statute to avoid its misuse. To provide clarity on application of sales tax withholding on services covered by FED law.
Present status of tax law: Appeal Effect Order under the sales tax and FED law:- Presently provisions relating to appeal effect order, similar to section 124 of the Income Tax Ordinance, 2001, are not available under the STA and FEA. Further, provisions of section 124A of Income Tax also to be incorporated in Sales Tax and Federal Excise laws to make it mandatory for tax authorities to follow the Tribunal and high Court''''s order irrespective of further appeal.
Proposal: Introduce enabling provisions in STA and FEA, in line with similar provision contained in ITO, to provide for processing appeal effect, and for following binding judgements of Appellate Tribunal and High court in taxpayer''''s case by assessing authorities.
Rationale: To align/ simplify tax laws, reducing litigation, and for reflecting correct position of demand in the records of the FBR.
Present status of tax law: Adjustment of sales tax refund with income tax liability: - It has been seen that a registered person''''s funds are stuck with the Inland Revenue in the form of sales tax refund and at the same time the taxpayer is required to pay income tax at the time of assessment of his income tax liability.
Present status of tax law: Condonation of time limit - In terms of Section 74 of the STA and section 43 of FEA, the Board and the Commissioner is allowed to condone the time where any timeline has been prescribed under any provision of the law. Moreover, Pursuant to Section 74/43 of STA/FEA, read with SRO 394(I)/2009/ 395(I)/2009, the Commissioner may condone 1 year lapse in any compliance related issue.
Proposal: A new provision may be introduced in sections 74/43 of STA/FEA, whereby a condonation shall be deemed to have been allowed, if the application is not approved within a period of 30 days. In case of rejection, taxpayer be allowed to file review application with CCIR. Moreover, powers given to Commissioner for condonation may be extended to two years from existing one year and a transparent web based mechanism be laid down for electronic processing, and follow-up/status of pending applications.
Rationale of the proposal: To avoid wastage of time and cost of the taxpayer.
Present position of tax law: Show cause notices- Presently detail/records are sought in the name of show cause notices under section 11 of STA/section 14 of FEA.
Proposal: Amendments are proposed in section 11/14 of STA FEA to the effect that no show cause notice shall be issued unless the definite information of tax evasion illegal input tax adjustment or refund etc is available with the tax officer through tax audit or otherwise.
Rationale of the proposal: To reduce misuse of show cause notices and litigation, resulting in increased revenue.
Present position of tax law: Multiple tax audit: - As per Section 25 of STA/section 46 of FEA, there can only be one audit per year However, in practice multiple audits are conducted under different names, ie, investigative audit, desk audit, audit for abnormal profile, etc, without following agreed/defined parameters and specified time frame. Audit observations are also not submitted within the prescribed time limit.
Present position of tax law: ''''Further tax be part of output Tax - "Further Tax" has always been part of output tax in the past. However through the amendment made in Section 7 vide Finance Act 2014, ''''Further Tax'''' is now not part of output tax leading to higher mandatory payment pursuant to Section 8B. Moreover, it is not adjustable against overall liability of the registered withholding tax agents and is directly payable to the exchequer. Further Tax" should be treated as part of output tax.
Proposal: It is proposed that the expression "sold in retail" be inserted to the preamble of the rule 58S to read as under: (proposed insertion in italics). Option 1: "58S. Application.- The provisions of this Chapter shall apply to supplies of goods "sold in retail" specified in the following table...............". OR Option 2: Insert an additional sub-rule under Rule 58T as below in To avoid piling up of refund and reduce the high cost of doing business in Pakistan for registered sector.
Present position of tax law: Rationalisation of extra tax regime: A. Several items have been removed from the Third Schedule vide SRO 895(I)/2013 and these items have now been included in the "Special Procedure for Payment of Extra Sales tax on Specified Goods" vide SRO 896(I)/2013.
Included therein are items which are consumed by Manufacturing Sector as Raw-Material which are now subject to Extra Tax @ 2 percent in addition to the normal 17 percent sales tax. Further as per section 8(1)(c) of the Sales Tax Act, 1990,the claim of this extra tax of 2% by way of input tax is prohibited.
It is proposed that the expression "sold in retail" be inserted to the preamble of the rule 58S to read as under: (proposed insertion in italics). Option 1: "58S. Application.- The provisions of this Chapter shall apply to supplies of goods "sold in retail" specified in the following table...............". OR Option 2: Insert an additional sub-rule under Rule 58T as below in the "Special Procedure for Payment of Extra Sales tax on Specified Goods": "The purchases made by registered manufacturers, who acquire the specified goods to manufacture or produce taxable goods, shall not be subject to extra tax under this Chapter".
Existing law: Extra tax is applicable @ 2% on various items tabulated in Rule 58S of the Special Procedure for Payment of Extra Sales tax on Specified Goods. Subsequent supply of items subjected to Extra Tax is exempt from the levy of sales tax as per Rule 58T(5). Extra Tax is collected to recover value addition tax on the whole supply chain at initial stage from manufacturers/importers.
Further tax @ 2 percent under section 3(1A) is applicable on supplies of goods to unregistered persons.
Proposal: Amendments be made in law to specifically exclude items subjected to Extra tax from the ambit of Further Tax.
Rationale: Extra Tax is collected to ensure collection of value addition of subsequent supply stage, therefore, levying further tax is an irritant and absurdity which needs rectification to streamline the VAT regime.
Existing law: Rationalisation of input tax: Clause (a) of section 8(1) restricts input tax adjustment on goods and services used for purpose other than for taxable supplies. Restriction in almost similar manner have also been provided in clauses (f) and (g) of section 8(1).
Proposal: To delete clauses (f) and (g) of section 8(1) of STA.
Rationale: Extra Tax is collected to ensure collection of value addition of subsequent supply stage, therefore, levying further tax is an irritant and absurdity which needs rectification to streamline the VAT regime.
Clause (a) of section 8(1) is sufficient to disallow input tax adjustment on goods/services used for purpose other than taxable supplies, therefore, additional conditions, being superfluous, should be deleted.
Present position: Provisions relating to income tax neutrality on transfer/disposal of business under various scenarios are covered under sections 95 to 97A of the Income Tax Ordinance, 2001. However, such provisions are not specifically provided under the Sales Tax Act, 1990. Although the concept is embedded in section 49 but there is always a chance of misinterpretation.
Proposed change: in order to avoid chances of misinterpretation, express provisions be added for providing sales tax neutrality on transfer of assets under Scheme of Amalgamation/transfer of assets as part of going concern.
Rationale: To align sales tax and income tax laws and to avoid unnecessary interpretational disputes between tax department and the taxpayers.
Present status: Federal Excise Duty (FED) on purchases is adjustable on payment basis rather than on accrual basis. Moreover, there is also a condition for adjustment that sales proceeds of goods including related FED are received through banking channel. For services (such as franchise) which are subject to lower rate of tax under FED, there is no corresponding adjustment against the output tax.
Proposal: Adjustment of FED should be allowed on accrual basis ie in the month in which purchase is made, in the same manner as it is allowed in the sales tax law. Condition of adjustment after receiving sale proceeds of goods should also be abolished. For franchise services, it may be made optional for the franchisees (in line with Sindh Sales Tax law) that if they want to opt for normal rate of payment they can do so with a corresponding adjustment against their output tax. As an alternative, all services presently subject to FED should be removed from the scope of FED and incorporated in ICT Sales Tax law so as to be subject to normal sales tax rate with corresponding input tax adjustment.
Rational: Condition of claiming FED on payment basis is inconsistent with the requirement of discharging FED liability on sale of goods on accrual basis ie in the month of sales/supply.
Present law: At present, there are various services which are taxable in Provincial Sales Tax law but not taxable in ICT Sales Tax law or there are different definitions or interpretations of certain entries.
Proposed change: The existing list of taxable services in ICT Sales Tax law should be updated to include all services which are otherwise taxable in different provinces. This will remove the arbitrage as certain services are capable of being transferred to ICT instead of Provinces. Further, certain headings of ICT Sales tax law need to be revised to keep them all encompassing. For instance, the services of Software and IT based system development consultants need to be aligned with the similar entry in Punjab law which is more extensive and cover all services of IT sector.
Rationale: Brings consistency in provincial laws of sales tax to remove the arbitrage and possibility of avoidance of tax by shifting certain activities to Islamabad from other provinces.
Existing law: It is an accepted principle of VAT around the world that export of services is subject to zero rating regime. However, no such concept is explicitly available in FED or ICT sales tax law.
Proposed law: Enabling provisions should be introduced in both FED and ICT Sales tax law to provide zero rating/exemption on export of services subject to receipt of foreign exchange through official banking channels and subject to other reporting requirements of State Bank of Pakistan.
Brings consistency in provincial laws of sales tax to remove the arbitrage and possibility of avoidance of tax by shifting certain activities to Islamabad from other provinces.
Rationale: There are similar provisions in Punjab and Sindh sales tax law. The absence of such provisions in FED and ICT law is counterproductive for export related sectors situated in Islamabad particularly in IT Sector.
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