Auditor General of Pakistan has detected misuse of fiscal relief package for war-affected areas and irregularities in zero-rated regime under SRO.283(I)2011 and SRO.1125(I)/2001, as different techniques were applied by importers to exploit zero-rating facility during 2012-13. It is learnt here on Saturday that the Director General Audit Lahore has directed FBR Member Customs to clarify the unresolved issues for finalisation of the annul Audit Report for 2012-13.
Presently, the directorate of audit is finalising the Audit Report 2012-13. After due deliberation of both the tax departments and Audit, it was the considered opinion of the Audit that there are some lacunas in application of rules/procedures which are misused by the importers, exporters and customs staff for financial benefits. The rules require either amendments or policy guidelines/ clarifications be issued by the Board for uniform application of law across the board.
The first issue is that a clarification to implement the SRO 283(1)/2011 dated 01.04.2011 was issued on 11.04.2011, to provide the facility of zero-rating of sales tax to five major export sectors of the Pakistan. Finished goods, imported by commercial importers, were granted the benefit of the zero-rating of sales tax. The field staff did not take into consideration the clarification issued by the Board. The staff also failed to differentiate between applications of SRO 509 (open SRO) being replaced by the SRO 283 (restricted to five major export sectors). As per condition a(ix) of the SRO ibid, all the registered persons who have availed the benefit of zero-rating of sales tax under this notification are required to pay sales tax @4% of the value of the supply of all kinds of finished products to retailers, but interestingly all the commercial importers have enjoyed the zero-rating on import of finished goods.
The second issues is that under section 148 of the Income Tax Ordinance, 2001, withholding tax @ 1 percent is applicable on goods covered under zero-rating regime of sales tax and @ 5 percent on goods not covered under the zero-rating regime. Under SRO 1125(1)/2011 dated 31.12.2011, the import of finished goods were liable to sales tax at reduced rate of 5 percent, so the WHT was required to be charged @ 5 percent but charged @1 percent which is not in line with the provisions of section 148 of the ITO, 2001.
According to section 148 of the Income Tax Ordinance, 2001, withholding tax is not exempted on import of machinery and input goods under SROs 326(1)/2008 and 327(1)/2008 dated 29.03 2008 Audit pointed out goods imported by export oriented units (EOUs) were released without charging of WHT. The department argues that clause 56 of 2nd Schedule of Part-IV of the ITO, 2001 provides exemption to all items imported under temporary importation schemes for subsequent exportation. EOUs also operate under temporary importation scheme. Audit disagrees with the contention of the department and considers imports made by EOUs as a separate regime and not temporary importation, sources said.
Audit raised an observation that a unit cannot avail the benefit of two manufacturing licenses, one under SRO 327(1)/2008 dated 29.03.2008 and other under Chapter-XV of the Customs Rules, 2001. The department argues that a unit can avail two manufacturing licenses provided that it holds two different premises. Audit disagrees with the department and is of the view that if a unit has many factories at different locations of the country, it does not warrants that it is entitled to equal number of manufacturing certificates as SRO 327(1)/2008 dated 29.03.2008 and the Customs Rules, 2001 are two different streams, sources said.
Sources said that the exemption of sales tax under S. No 32 of schedule to the Sales Tax Act, 1990 is available to newsprint, newspapers, journals, periodicals, books but directories, imported couriers documents were granted exemption of sales tax which was objected by Audit on the grounds that the imported goods are not covered under the definition of goods referred to the above.
The Audit further objected that the disposable syringes are not drugs in terms of condition 7 of the SRO 551(1)/2008 dated 11.06.2008, but raw material, imported to manufacture syringes, was granted the exemption of sales tax under condition 11 of the SRO ibid. Audit objected the exemption and in reply to audit observation, the department claimed that the Ministry of Health had declared the syringe as drug. Audit disagreed with the contention and is of the view that the clarification was issued for medical purpose not for exemption of duties and taxes.
The Audit pointed out that three persons were granted exemption of withholding tax (WHT) on purchase of vehicles through auction under section 126F of the Income Tax Ordinance 2001 which states that profits and gains derived by taxpayer located in the most affected and moderately affected areas of Khyber Pakhtunkhawa, Fata And Pata for a period of three years starting from the tax year 2010. Audit objects that the exemption certificates issued by the RTO, Peshawar to grant exemption were not in line with the provisions of section 126F as the said exemption was available at the time of calculation of profits and gains not during the year and on every transaction.
The goods manufactured and exported from Pakistan were subsequently re-imported to remove the defects/repairs. Audit opined that they should be dealt under para 12(n) of the Import Policy Order 2009, whereas, the department is of the view that section 22 of the Customs Act 1969, deals with the issue, Audit objected.
Rule 58B of the Sales Tax Special Procedure Rules 2007, value addition tax shall be levied and collected @3 percent from every importer except the goods imported by registered manufacturers for in-house consumption. The department did not recover value addition tax on import of vehicles under baggage scheme stating that this tax is chargeable on goods imported by the registered persons only who maintain the record of their businesses. Audit objects the treatment and view point of department on the grounds that many a goods were imported on one time basis but leviable duties and taxes on them are charged.
According to section 3 of the Petroleum Product (Petroleum Development Levy) Ordinance 1961, petroleum levy is to be collected in time and manner of customs dues at import stage. Audit raised the observation that this levy should be added to the import value to calculate the sales tax. The department argues that in terms of section 2(46)(d) of the Sales Tax Act, 1990, the value included only customs duty and federal excise duty, the Audit added.