A revised sales tax law was prepared in 2009 by the Federal Board of Revenue (FBR), but the policymakers have taken no action on proposals to revamp Sales Tax Act 1990 and introduced the concept of reformed general sales tax (RGST). Sources told Business Recorder here on Wednesday that the Director General of Training and Research and former Advisor to the FBR Chairman Abdul Wadood Khan had drafted a comprehensive report on reforms in the sales tax law in 2009.
However, no action was taken on the report. Wadood on February 2, 2011 relinquished the charge of the post of Director General of Training and Research Lahore. He had presented a comprehensive report on the reforms in the sales tax law to the Finance Ministry during his posting as Advisor to the FBR Chairman. However, the concerned authorities have not taken any action on the reforms in the sales tax law.
At that time the report on the revised sales tax revealed that several sections of the Sales Tax Act, 1990 and notifications are totally against the concept of Value Added Tax (VAT) regime. The report proposed amendment/deletion of controversial sections of the Sales Tax Act through legislation. The report had identified actual distortions in the Sales Tax Act, which were required to be removed for implementation of broad-based VAT. The report proposed amendments in the existing Sales Tax Act instead of introducing a new law. The FBR has already prepared a "Plan-B" for introducing amendments in the existing Sales Tax Act to avoid introducing a new law.
In his report, Wadood said that certain provisions of law in the Sales Tax Act, 1990 are contrary to the spirit of VAT mode. Some of major controversial provisions included Third Schedule of the Sales Tax Act, section 4, section 8(B), section 65, section 71, SRO.480(1)/2007, SRO 509(1)2007, Sales Tax Special Rules, 2007 vide SRO.480(1)/2007 and zero-rating of local supply of some leading sectors is a major violation of the VAT regime. The rationalisation of the Sales Tax Act in line with the basic concept and standard international VAT practices should be done by deleting/amending the said sections/provisions of law.
The report explained the single stage levy Sales Tax Act, 1951 as well as multi-stage Value Added Tax, 1990. The vested trade and business interest groups through all kinds of political pressures sought and got special procedures, special concessionary SROs/notifications, various kinds of exemptions including zero-rating of special sectors and introduction of special rates for special kind of trade and businesses. These violations, deviations and aberrations eroded the original style and scheme of the VAT.
The crux of report said that section 3 of Sales Tax Act is against the concept of true VAT law. Secondly, the government had issued SRO.480(1)/2007 wherein special procedure is devised for payment of sales tax by retailers in order to tax the items which are out of the ambit of the third schedule. This special procedure is against the spirit of VAT mode. In VAT mode only goods exported are to be zero-rated, however, section 4 of Sales Tax Act, 1990 provides for zero-rating for other goods as specified in this section. In addition to this deviations from the VAT mode, the government has issued SRO 509(1)2007 under section 4(c) of the Sales Tax Act wherein input and supply of five export oriented goods ie leather and articles thereof, textile and article thereof, carpets, sports goods, surgical goods along with their raw materials have been zero-rated. The local supplies of the subject goods have also been zero- rated which is a big violation of the VAT system. Allegedly, it was due to problems/frauds committed in the refunds of these five export oriented goods the import of their raw materials had been zero-rated. But the zero-rating of the local supplies has caused huge losses of revenue in terms of sales tax collection, which was otherwise payable in terms of VAT mode.
Wadood further said the local sale of finished products of these export-oriented goods should have been charged to sales tax and section 4 is needed to be amended to bring in line with the pure VAT mode.
Explaining the section 8(B) of Sales Tax Act, the report pointed out that in terms of VAT mode the total input tax pertaining to a tax period is to be adjusted from the output tax of that tax period and in case of excess input tax the same is to be carried forward for the next tax period. However, section 8(B) of Sales Tax Act is a serious violation of the VAT mode.
About section 65 of Sales Tax Act, the report highlighted that section 65 was incorporated during the initial years of promulgation of Sales Act, 1990 due to the reasons that the business community was not fully aware about the Sales Tax Act, 1990 and its implementation thereof. Section 65 has now become redundant in the wake of the fact that almost 19 years have parsed and the business community is well aware of the applicability of sales tax on different items hence unnecessary exemption as provided under section 65 of the Sales Tax Act 1990 needs to be omitted;
Regarding section 71 of Sales Tax Act, the report pointed out that the in VAT mode no special procedures are provided, however, in Sales Tax Act a provision for special procedures has been provided vide section 71 of Sales Tax Act. The FBR had also issued Sales Tax Special Rules, 2007 vide SRO.480(1)/2007 containing XII (12) chapters pertaining to retailers, electric power, natural gas, TCP, services, sugar supply to TCP, advertisements, customs agents and ship-handlers, stevedore, Oil Marketing Companies, vehicle dealers, ginned cotton, commercial exporters, steel melters and re-rollers ship breakers etc. Biscuits and confectionery, etc need to quashed or modified to bring in line with pure Value Added Tax.
Moreover, all the exemptions conditional or otherwise except few internationally accepted by the model countries need to be withdrawn and those enjoying concessions must be dragged into the pure VAT mode. The pure VAT system is an audit-based system. The self-assessment is one arm and the audit second of the new system. The audit needs to be vigorously implemented in a fool proof and harassment free manner and mode ensuring justice and fairness giving fullest opportunity to the auditee according to objective criteria by exercising continuous and effective vigil by the senior supervisory officers to ensure zero tolerance for corruption and harassment, Abdul Wadood Khan added.