Sales Tax Act 1990: government may exclude batteries, auto parts & tyres from third schedule

The government may exclude storage batteries, auto parts, and tyres and tubes from the Third Schedule of the Sales Tax Act 1990 for retail price taxation if imported by automotive manufacturers or assemblers.
Sources told Business Recorder here on Saturday that the Federal Board of Revenue (FBR) summary to the federal cabinet failed to address the biggest issue of blockage of imported consignments of capital goods including plant and machinery, which is used for own in-house production facility. This major taxation anomaly has resulted in blockage of imported consignments at imports due to anomaly in the tax laws. There is an urgent attention to issue the clarification to customs authorities to make change in the WEBOC system to exclude the capital goods including plant and machinery, which is used for own in-house production facility, as the capital goods including plant and machinery which is used for own in-house production facility is not liable to pay the minimum value addition at import stage. The FBR should immediately exclude the plant and machinery/capital goods used for in-house manufacturing facility from the minimum value addition at import stage for speedy clearance of blockage consignments.
This is not clear how the FBR forgot to consider this important legal change in the summary as the anomaly has created serious problems for the importers of Capital Goods after the Finance Act 2019.
According to the FBR, under the Sales Tax Act, 1990, in general, the supplies of goods are charged to sales tax at a specified percentage of sale value ie the consideration in money received by the supplier. But in case of the goods specified in the Third Schedule to the Sales Tax Act, 1990, sales tax is charged on the basis of retail price to be paid by the end consumer as fixed by the manufacturer.
The objective is to ensure payment of sales tax on value addition carried out at subsequent stages of supply chain at the manufacturing stage. Through the Finance Act, 2019, the relevant provisions in sections 2 and 3 of the Act were amended to include imported goods in purview of such retail price taxation.
Further, imported goods as are not raw materials or intermediary goods and are not subjected to customs duty at a rate below 16 percent, are also subjected to value addition tax at 3 percent under the Twelfth Schedule to the Sales Tax Act, 1990, which is payable in addition to sales tax at standard rate. Since, the objective of both retail price taxation and 3 percent value addition tax is to recover sales tax at import stage that otherwise would have been paid at subsequent stages of supply, the simultaneous application of both provisions creates hardship for the traders/businesses.
Accordingly, it is deemed appropriate that application of 3 percent value addition tax on items in the Third Schedule to the Act may be withdrawn.
Moreover, storage batteries, auto parts, and tyres and tubes are also included in the Third Schedule for retail price taxation. However, the supplies of the same as made to the automotive manufacturers or assemblers have been excluded from purview of Third Schedule. No such exclusion is available to these goods as imported by automotive manufacturers or assemblers.
Since such imported goods are also meant for use in vehicles to be manufactured and not for sale to general public, the application of retail price taxation, thereon, is not justified. In view of above, it is proposed that, (i) S. No. 43 (storage batteries), 44 (tyres and tubes) and 49 (auto parts) of the Third Schedule may be amended to exclude these goods from purview of retail price taxation if imported by automotive manufacturers or assemblers; and ii) the Twelfth Schedule to the Sales Tax Act, 1990, may be amended to provide that value addition tax shall not be charged on the goods specified in the Third Schedule.
Both the amendments as proposed above can be made by the Federal Government in exercise of its powers under proviso to clause (a) of sub-section (2) of section 3, and the proviso to sub-section (2) of section 7A of the Sales Tax Act 1990 respectively. The draft notification duly vetted by the Law Division and approved by the Federal Cabinet is solicited to the proposal, the FBR added.
According to a tax expert, there is a serious and concerning issue regarding minimum value addition imposed on plant and machinery or all other capital goods which are imported and installed for in-house production facility.
The minimum value addition is payable at import stage on goods of supply in local market or otherwise would have been paid at subsequent stage of supply. The main purpose of minimum value addition is charged at import stage on specified goods that are onward supply in local market, as final discharge of liability of under the Sales Tax Act, 1990. The value addition tax paid at import stage shall form part of input tax, and importer shall deduct the same from the output tax due for the period, subject to limitations and restrictions under the Act, for determining his net liability.
The matter of fact is that, the vast majority of business transactions in Pakistan belongs to undocumented/unorganized sector and therefore in order to bring such section into the tax net, it was incumbent to evolve a formula and devise the methods whereby they could brought into the tax net in a pragmatic manner. In order to cater this necessity, the Legislature in its wisdom enacted section 7A and in pursuance thereof, the Federal Government framed the rules contained in Chapter 12 of the Rules for the purposes of determining value to supply in the undocumented/unorganized sector, now this is shifted in Twelfth Schedule, in Finance Act, 2019.
It is quite clear that registered person is to pay the final tax due on fixed value addition and not on "minimum value addition" at import stage on good which are onward supplied in the local market. The minimum value addition on import of goods is deal in sub-section 2 of section 7A of the Sales Tax Act, 1990, the sub-section 2 is reproduced here: -
7A (2) "Notwithstanding anything contained in this Act or the rules made thereunder, in respect of the goods or class of goods specified in the Twelfth Schedule, the minimum value addition tax, against the value added by the registered person, shall be payable, at the rate and by the registered persons or class of registered persons, specified therein, subject to the conditions, limitations, restrictions and procedure specified therein"
The sub-section 2 of the section 7A is dealt in supply of goods, while the custom authorities are also collecting the minimum value addition on plant and machinery due to the confusion that its build in automated duty structure into Webocsystem. because the minimum value addition is totally dealing with the supply of goods, while we are importing the Plant and Machinery for our inhouse manufacturing facility, which later do the value addition by their own production and onward supply into the market and exports.
The definition of supply of goods in sub-section 33 of section 2 of the Sales Tax Act, 1990 is also very much clear as under:
(33) 'supply' means a sale or other transfer of the right to dispose of goods as owner, including such sale or transfer under a hire purchase agreement, and also includes -
(a) putting to private, business or non-business use of goods produced or manufactured in the course of taxable activity for purposes other than those of making a taxable supply;
(b) auction or disposal of goods to satisfy a debt owed by a person;
(c) possession of taxable goods held immediately before a person ceases to be a registered person; and
(d) in case of manufacture of goods belonging to another person, the transfer or delivery of such goods to the owner or to a person nominated by him:
The plant and machinery for in-house manufacturing facility is not the supply of goods, therefore it should not be charged minimum value addition on import of plant and machinery at import stage.
The above said issue is very much concerning and needs urgent attention to issue the clarification to custom authorities to make change in the WEBOC system to exclude the Capital Goods including plant and machinery, which is used for own in-house production facility for or to issue the clarification that capital goods including plant and machinery which is used for own in-house production facility is not liable to pay the minimum value addition at import stage. The FBR should immediately exclude the plant and machinery/capital goods used for in-house manufacturing facility from the minimum value addition at import stage, for clearance of imported shipments, tax expert added.