The issuance of a sketchy notification by the Federal Board of Revenue (FBR) has created confusion about the charge-ability of sales tax on local supply of spare parts of imported zero-rated machinery.
Sources told Business Recorder on Monday that the FBR had recently issued a clarification of SRO 530(I)/2005, 'local supply of imported parts of machinery chargeable to sales tax at the rate of zero-percent at import stage shall be zero-rated for sales tax purposes'. This seemed to clarify that supply of spare parts is not chargeable to sales tax under SRO 530(I)/2005.
Taxpayers had sought clarification in view of the unclear notification ie SRO 530(I)/2005. The first part of the notification has specified that imported plant, machinery and equipment (whether or not manufactured locally), including parts thereof shall be charged to sales tax at a rate of zero percent.
The second part says that supply of plant, machinery and equipment, whether locally manufactured or imported would also be liable to sales tax at the rate of zero-percent.
Interestingly, the notification did not specify whether the local supply of parts of the machinery, on which sales tax zero-rating is applicable, would be chargeable to sales tax or not. The notification should have been clearly specified that the local supply of parts was zero-rated or not.
Taking into account the plain reading of the SRO 530(I)/2005, business community assumed that sales tax zero-rating is applicable on the imported plant, machinery and equipment (whether or not manufactured locally), including its parts. Zero-rating is also applicable on local supply of machinery.
As the notification does not speak about the sales tax levy on parts, taxpayers opined that sales tax zero-rating is not applicable on the local supply of parts of machinery under SRO 530(I)/2005.
Sources said that taxpayers started collecting 15 percent sales tax on the local supply of parts of machinery on which sales tax is applicable at the rate of zero-percent. This practice continued for over two years till issuance of clarification on August 22, 2007.
After a passage of two years, the board has now issued the clarification. The issue has not emerged if the board had clearly spelled out the SRO 530(I)/2005 that supply of plant, machinery and equipment including its parts would also be liable to sales tax at the rate of zero-percent.
However, a slight mistake has caused problems for those taxpayers where 15 percent sales tax have already been charged on local supply of parts for the last two years.
It is important to mention here that section 3B of the Sales Tax Act clearly says that any person who has collected any tax, whether under misapprehension of any provision of Sales Tax Act, which was not payable as tax or charge or which is in excess of the tax or charge actually payable and the incidence of which has been passed on to the consumer, shall pay the amount of tax to the federal government. This shall be deemed to be an arrears of tax or charge payable and shall be recoverable accordingly and no claim for refund on such amount shall be admissible.
The burden of proof that the incidence of tax or charge referred to has been or has not been passed to the consumer shall be on the person collecting the tax or charge, section 3B added.
Therefore, it would be difficult for the taxpayers to claim refund of the 15 percent sales tax paid on local supply of spare parts under SRO 530(I)/2005. It is not clear how the board would deal with all refund cases where 15 percent sales tax was collected on local supply of spare parts keeping in view section 3B of the Sales Tax Act. The FBR should draft its notifications in such as manner that taxpayers can easily understood the SROs and there should be no need for such clarifications, sources added.