The Federal Board of Revenue issued SRO 283/(1) 2011 on April 1, 2011 to amend the sales tax zero rating scheme for five export sectors namely textiles, carpets, leather, surgical and sports goods.
Although this zero rating scheme had been in existence for several years and was introduced primarily with a view to provide relief to these export sectors it also applied to other sectors as the various SROs issued over the years relating to the scheme, listed goods under several PCT headings under the Customs Act and stated that these were to be charged to sales tax at the zero rate on their import and supply whether such supply was out of such imports or out of domestic production irrespective of whether the purchasers were from the above export sectors, registered or unregistered, manufacturers or non manufacturers or for use in goods manufactured for export or for domestic sale.
The main purpose of this scheme however was to provide relief to exporters in the five sectors who before its introduction had to claim input tax paid on goods purchased which were used by them in the manufacture of goods for exports as refunds from the tax authorities as exports under the Sales Tax Act were liable to sales tax at zero percent rate. Delay in refunds of input tax from the FBR, was usually a constant industry complaint resulting in financial costs and mounting pressure on their working capital requirements. There were also allegations from the revenue that the input tax claims were sometimes exaggerated by including input tax on fake or 'flying invoices' in the refunds claimed.
SRO 283/(1)2011 was issued in suppression of SRO 509(1)2007 dated June 9, 2007 being the last SRO which governed the zero rating scheme before it was rescinded. SRO 509(1)2007 prior to its suppression by SRO 283(1)2011was amended in March 2011through SRO 231(1) 2011 whereby application of the zero percent rate previously available to all persons was restricted only to goods which after import or domestic production were sold or purchased between persons registered as manufacturers, manufacturer cum exporter or as exporter for use or utilisation in goods meant for export. This amendment was made to restrict the application of the zero rate to certain classes of persons and only to exports with a view to expanding the tax base. In other words goods listed in the Table in the SRO with the amendment became liable to sales tax at the full rate on import if the supply of such goods after import or domestic production were sold to persons who were not registered or used in goods not meant for export.
SRO 283(1) 2011which replaces SRO 509(1) 2007 further amends the application of the zero rate and now provides that the goods specified in the table under the various PCT headings in the SRO are to be charged to sales tax at the zero percent rate on the supply and import thereof or at a reduced rate of 6% or 4% only if the conditions specified in the SRO are met. However surprisingly although the objective of the scheme was to provide relief to exporters, the zero rate scheme, the way the SRO is worded, also applies to import and supply of goods falling in the five sectors in finished form as the amendment made in SRO 509(1) 2007 through SRO 231(1) 2011 that the goods are for use or utilization in goods meant for export has not been included.
As a consequence of SRO 283(1) 2011 goods listed in the notification which previously were charged to sales tax at the zero rate on import and supply if sold to persons registered as manufacturers, manufacturer cum exporter or as exporter for use or utilization in goods meant for exports, are now liable to sales tax on import at the zero rate if the goods listed are imported by a registered importers, traders, manufacturers or exporters other than a retailer or at the zero or reduced rate if the goods listed are supplied either out of the imports by the importer or by a domestic manufacturer or trader of such goods to buyers in the aforesaid sectors for trading or manufacturing purposes depending on the status of the buyer and the stage of production in which the item sold are to be used. Goods imported in finished form by a registered person or acquired at the zero rate it appears are to be charged to tax at the 4% rate when sold to the retailers whether registered or unregistered. The condition that the goods listed must be for use or utilization in goods meant for exports is no longer necessary.
From an analysis of the conditions specified in the notification for the zero or reduced rate to apply there are several grey areas on which clarity is required to prevent disputes arising on application of its provisions.
For instance condition (i) listed under 'Miscellaneous' in the notification states that the benefit of zero rate or reduced rate shall be admissible only if the goods covered in the notification are usable and are used in the aforesaid sectors for trading and manufacturing purposes and no other sector or industry shall be entitled to the benefit of this notification. From a bare reading of this condition three tests therefore are specified in this condition which the prescribed sectors must meet for them to claim the zero or reduced rate. These are (a) that the goods listed are usable in the aforesaid sectors (b) that the goods listed are not only usable but are used in the aforesaid sectors and (c) that when such goods are supplied out of imports or out of locally manufactured goods, these are to buyers in the aforesaid sector for trading and manufacturing purposes. No other sector or industry is to be entitled to the benefit of this notification
Keeping these tests in view how does an importer of goods listed in the Table in the notification satisfy customs of the 'usable and are used' test at the time of import to qualify for the application of the zero rate. He can perhaps meet the "usable test' on the grounds that the goods imported having been listed in the Table in the notification is proof enough that the items listed are acknowledged by the FBR as being usable in the prescribed sectors. But how does the importer meet the second test of 'Are used in the aforesaid sector'. How does he satisfy this condition as the usage is a subsequent event following the import.
For items specific to an export sector under the PCT Headings such as S.No 1 Leather and articles thereof PCT headings 41.01 to 41.15, Serial No 2 Textiles and articles thereof PCT Headings under Chapter 50 to Chapter 63 this could be possible if the items listed therein are specific for that sector and can be solely used in that sector. But what about items which are common to several other industries such as (S.No 10) magnesium oxide, (S.No 11) Titanium oxide, (S.No 23), Hydrogen Peroxide, (S.No 29) Ethyl Glycol, (S.No 32) Formic Acid, (S.No 113) Rubber latex amongst others. How will an importer satisfy the usage test at the import stage to qualify for the zero rate.
If the importer is a manufacturer in the prescribed sector there is a presumption that the imported items will be used in that sector. Will this be a sufficient acceptable evidence of usage or will the manufacturer be required to give an indemnity that these will be used in that sector. What happens if the importer is a commercial importer or trader. How will he satisfy the usage test at the time of import.
He does not know at the import stage who the ultimate consumer will be particularly where the import covers items which can be used also in industries other than the prescribed sectors. Will he be required to file an indemnity to qualify for the zero rate to apply on import and more so how does he provide that guarantee of use.
Unless appropriate safeguards are built to cover this, the lacuna provides considerable room for misuse as goods imported at the zero rate which can be used also in other industries can then be sold in the market to such industries through flying invoices at zero rate or to unregistered buyers at the reduced sales tax rate giving the unregistered buyer a comparative price advantage over other registered importers who import and sell the same goods but have paid sales tax on import at the 17% rate.
What is to stop them from selling such goods to consumers other than in the prescribed sectors. Opponents of course will argue that consumers who purchase such goods may do so but then if they are registered consumers they will not get a deduction for input tax. But then sums have to be done to see if there will be a cost advantage in following this route.
Similar questions on what sales tax rate to apply arise on supply of goods listed in the Table which are imported or are manufactured locally. For instance in the case of the textile sector condition a(ii) states that where a commercial importer sells any imported goods to an unregistered person, he shall charge and pay sales tax at 6% of the value of supply, if the goods are usable in textile sector upto the stage of spinning including the product of spinning such as yarn and its by products, where after such importer will charge and pay sales tax at 4% of value of supply.
How does a commercial importer determine this at the time of sale whether the item sold is to an unregistered buyer from the textile sector or that the goods sold will be used upto the stage of spinning to which the 6% rate applies or for a stage thereafter to which the 4% rate applies. Is he to rely on the word of the unregistered buyer or expected to do something more.
What happens if the sales tax authorities later find out that the goods sold were in fact not used in the textile sector. Will they penalise the commercial importer or will it be the buyer who misrepresented facts to the seller.
A similar situation also applies in the case of a local manufacturer who produces goods, which can also be used in industries other than the prescribed sectors. At the time of sale the notification requires that if he sells the goods to a registered manufacturer or trader in the textile sector, he is to charge a zero percent rate if he can establish that the goods will actually be used for manufacturing purposes as the 'usable and are used 'test is a general test which equally applies to supply of locally manufactured goods listed in the notification as well as to imports. How does the manufacturer now meet the 'usable and used test' at the time of sale.
For the usable test he perhaps can check the registration of the buyer on the active list as required by Miscellaneous condition (viii) on the FBR website which states that the benefit of the notification shall be available in the case of persons already registered under the Sales Tax Act 1990 only if they are shown on the active taxpayers list on the website of FBR and have done a declared business activity in any of the tax periods during the last 12 months. This he can do but how does the manufacturer then determine that the buyer has declared business activity in any of the last twelve months tax period which is also a requirement of condition (viii).
Even if he can somehow do this, the problem does not end here as the check only establishes that the buyer is a registered buyer qualifying for the zero rate but then how does the manufacturer meet the used test to determine whether the goods purchased will be used for manufacture in the textile sector which is also a condition for the zero or for that matter a reduced rate to apply.
Is he to presume this at the time of sale and again if he does and this subsequently turns out to be not true, will he be held liable for not having charged the sales tax at the 17% full rate. Secondly how is he to decide what rate should he apply at the time of sale on such goods - 6% rate or 4% rate- if the sale is to an unregistered buyer and the goods can be used both upto the spinning stage or for products thereafter. These issues require clarification from the Board.
Lately perhaps to address the issue of items of common usage by several industries, the FBR through its notification 323(1) 2011 deleted several items which were initially included in SRO 283(1)2011. However the items deleted also include some specific to the export sectors. Deleting these would now require these sectors to import or purchase them locally by paying sales tax at the full rate and then claiming the tax paid as a refund of input tax from the FBR, which is stated to be paid within one week of filing the claim.
Lastly but not the least, the language of the SRO is confusing in several areas. For example condition a(iii) states no sales tax shall be payable at ginning or man made and synthetic fiber manufacturing stage. What does this mean. Does this concession apply to all persons in the ginning or man made fiber supply chain registered or unregistered. Condition a(iv) states that in case of registered manufacturers importing their inputs or acquiring their inputs from commercial importers or registered manufacturers such manufacturers shall charge and pay sales tax at 6% of the value of supply only at the spinning stage if these goods are supplied to any unregistered person etc. Again what does this mean. What happens if a manufacturer has acquired inputs also from unregistered persons. Will he still have to charge tax at 6% or at the full rate. This is probably not the intention but strict reading of the condition may lead to this peculiar interpretation.
Condition a(vii) states that in case of stages after weaving, if the fabric is sold by a registered manufacturer to an unregistered person, sales tax shall be charged at 4% of value of supply, if such manufacturer has availed zero rate facility at previous stages of the production chain. What does this exactly mean. What happens if such manufacturer has not availed the zero rate facility at all times in the previous stages of the production chain. Will the 4% rate still apply. We can only hope this confusing hybrid system works.
(The views expressed in this article are those of the writer and not of any institution or firm)