The Federal Board of Revenue (FBR) is examining the overall quantum of exports during 2007-2008 for verification of the refund payment amounting to Rs 4.6 billion to the zero-rated sectors including textile, leather, carpets, sports and surgical industry.
Sources told Business Recorder that the board-in-council has directed member Sales Tax to analyse export data in view of Rs 4.6 billion refund paid to zero-rated sector. The department would also examine percentage of refund vis-à-vis free on board (FOB) value of exports.
Sources said that the main purpose of the exercise is to determine whether the zero-rated sectors have actually exported the finished products or not. The exports of five leading sectors were zero-rated and if these sectors have obtained refunds of Rs 4.6 billion in 2007-2008, the verification of their exports has to be carried out.
When asked about reasons of refund generation despite sales tax zero-rating, sources said that there are several factors responsible for payment of billions of rupees, as refund to zero-rated sector.
The zero-rated sectors have paid sales tax on packing material used in the export of finished products. There are certain chemicals, which are still liable to sales tax due to their multiple usage. The zero-rated sectors use such chemicals. There are units, whose electricity and natural gas consumption are also not zero-rated. Similarly, there are old cases of sales tax refunds, which are now being cleared by the department, sources added.
According to FBR, the change in the composition of refund payments between zero-rated (ZRS) sectors and non zero-rated sectors (NZRS) since 2001-2002 is quite interesting. As expected, 81 percent of total refunds in 2000-2001 were going to the five export related sectors with the textile sector being the main recipient (76% of the total and 95% of the zero-rated sectors). The share of the textile sector increased to 79% in 2003-2004, but declined slightly to 75% in 2004-2005 when zero-rate regime was introduced.
The board has stated that immediately afterwards, its share declined to 56.3% in 2005-2006 and to 19.3% in the subsequent year. However, it is interesting to find that while the share of ZRS was declining, that of the NZRS started to increase from 19% in 2000-2001 to 44% in 2005-2006 and to 66.9% in 2006-2007.
The amount of refund to NZRS in 2000-2001 was Rs 5.8 billion that jumped to Rs 14.2 billion in 2005-2006 and to Rs 24.7 billion in 2006-2007.
Further scrutiny of this change in NZRS revealed that major claims were now being made for electricity, which was also ultimately zero-rated to root-out this menace of refunds.