ISLAMABAD: The Tax Reforms Commission (TRC) constituted by Finance Minister Ishaq Dar has recommended a flat rate of sales tax on petroleum products, a fixed rate of turnover tax on small retailers, rationalisation of extra tax regime, withdrawal of all tax amnesties/fixed tax and value-addition schemes and new incentives for registered persons. Sources told Business Recorder here on Wednesday that TRC has submitted its interim report containing proposals on sales tax and federal excise duty to the Federal Board of Revenue (FBR).
Ashfaq Tola, a leading sales tax expert, played a key role in drafting TRC proposals, particularly a single-stage levy of sales tax. One of the key recommendations of the TRC is that the federal and provincial sales tax Authorities should form a fully empowered commission to bring harmony in the sales tax laws dealing with services.
According to the TRC report, the proposal of 'Single Stage Tax' is still at deliberation stage with different stakeholders. So far presentations have been given to Tax Committee of ICAP and LTU Karachi, OICCI, PBC, other business forums, LTU Lahore and Islamabad for their input on 'Single Stage Tax'. Besides, these presentations other interactive presentations are also planned with FPCCI, Trade Bodies and Chambers of Commerce for their inputs. Latest data was requested on December 17, 2014 to update the study; however, complete data is still not available which may cause a delay. Since the deliberations are still under progress and updating process is yet to be accomplished the proposal is not covered in the interim report.
The TRC proposed that the petroleum products in Pakistan are subject to price fluctuations as these are linked to international petroleum prices. It recommended that sales tax should be charged on the basis of per litre of petrol at flat rate instead on moving selling price basis. The international import price of last year may be taken as a benchmark (in US $ terms) for setting sales tax price per litre at flat rate for the forthcoming year. It is also recommended that the price so set shall remain in force for the entire year irrespective of upward or downward movements.
So far, simplified regime of 0.75% as well as SRO.608 has not delivered the desired results, primarily due to exposure of un-declared wealth/investment, based on 'turnover'. It is therefore proposed to introduce a Fixed Tax Regime for income tax as well as sales tax, based on a shop size.
The TRC observed that illegitimate refunds/ input adjustments have so far been a major issue for revenue authorities to deal with. The culprits in supply chain manipulate the transaction in such a way that it results in avoidance of sales tax by under-declaration of local sales, and exaggerated input claims. Unfortunately, all the automated systems put in place have so far been unable to function faultlessly and involve manual intervention and discretion. Resultantly, not only the Government exchequer suffers but genuine taxpayers also suffer because they no longer remain competitive with those avoiding tax. The following suggestions can be taken into account to curb the aforesaid issue.
Refunds relating to export: The role of FBR field officers should be abolished. Scheduled banks receiving export proceeds should issue refunds in the form of export rebate at the time of receiving export proceeds. The amount of refund/ rebate should be based on actual quantity of exports declared in shipping documents verified by an independent surveyor.
Standard input-output ratios should be determined and finalised in consultation with Industry, and then such ratios should be notified. There should be no discretion for allowing deviation from standard ratios, TRC recommended.
The detail of refunds issued should be placed on FBR's web-site so that data relating to exports considered for issuing refund is open for everyone for identifying any discrepancy and discretion.
About the refunds relating to local sales (zero rated) and input adjustments by taxable sectors, TRC recommended that in line with export oriented sectors, input-output ratios for all other sectors, whether zero-rated or taxable, should be determined and notified. The concept of input - output ratio is in place for 19 goods and sectors, zero-rated / Notified under Fifth Schedule (S.No 12). Under the concept, input quantity for these goods and sectors is zero-rated by Commissioner in a prescribed manner. However that system is vulnerable to discretion and physical interaction between taxpayer and Tax Authorities.
The present basis for claiming input tax on an accrual basis shall continue; however an annual return should be filed, certified by auditor declaring whether the consumption of input was within the notified limits. Cases where percentage of input-output falls outside the Notified ratios should be subject to an audit by specialized audit cell; and report should be placed on website. The taxpayer would have a right to either concede the deviation before the audit (without default surcharge), or accept the findings of audit (with default surcharge), or file appeal against the findings of audit, TRC recommended.
In order to curb under-invoicing, it is suggested that, minimum import value should be notified for different goods/products on periodic basis based on scientific method and not on an arbitrary basis.
All tax amnesty schemes should be done away with as these encourage tax evasion and illegitimate tax avoidance. Like-wise, all fixed tax regimes should be abolished as these are against the spirit of VAT law and justice and all such sectors goods should be brought under the uniform tax regime. Similarly, deemed value addition mechanism for commercial importers should be abolished.
TRC further recommended that the government collects income tax and sales tax from all commercial connections of electricity. All these connections should be converted into NTNs and STRNs and filing of returns from these connections should be enforced.
TRC recommended that instead of levying a further tax for dealing with un-registered person, incentive may be offered to the registered persons, if they deal only with registered person. Tax credit available to registered persons under section 65A of the Income Tax Ordinance, 2001 (in case 90% of sales made to registered persons) be enhanced from 2.5% to 5%, and allowed against Minimum Tax Liability/Final Tax Regime / Alternate Corporate Tax. Tax credit (under income tax law) should be further enhanced say to 10% if registered person is issuing electronic invoices, as provided in Sales Tax Rules.
TRC also submitted recommendations for streamlining of anti-avoidance measures. The Sales Tax Act, 1990 contains anti-avoidance provisions in the form of sections 8A, 8(1 )(c)(a), (caa) and 21(3), combined effect of which in most of the cases is that genuine buyer ultimately suffers the wrath of un-warranted disallowances of input and investigation of Tax Authorities. The superior courts in almost all the cases have declared the application of these provisions null and void and by and large the buyers have been allowed input tax; if buyer holds valid tax invoice, supplier's name was appearing in the Active Taxpayers' List at the time when purchases were made; and payment was made through banking channel and in compliance with section 73 of the Sales Tax Act, 1990
Accordingly, all the aforesaid anti-avoidance provisions should be rationalised and brought in line with the above guidelines of superior courts. To bring the extra tax regime in line with the original spirit thereof, it is suggested that purchases made by registered manufacturers, who acquire specified goods (subject to extra tax) to manufacture or produce taxable goods, shall not be subject to extra tax.
Federal and Provincial Sales Tax Authorities should form a fully empowered commission to bring harmony in the sales tax laws dealing with services, particularly focusing on the following:
Firstly, updating list of taxable services in Islamabad Capital Territory (in line with services taxable in provinces) to curb un-warranted transfer/conduct of business for tax evasion. Secondly, principle for taxation of services (origin, destination or mix).
Thirdly, avoidance of multiple taxation by Provinces and/or Federal Government. Fourthly, mechanism for adjustment of taxes collected by Authorities, without causing any inconvenience to taxpayers. Fifthly, harmonisation of Tariff headings and definition/scope of services; Sixthly, withdrawal of FED on services where Provincial Legislation is in place.
India has recently brought in constitutional amendment to harmonise implementation of VAT regime in its true spirit. The EU has also streamlined VAT regime amongst independent countries. So it is high time that we also bring reforms to reduce litigation, collect more revenues, and provide relief to taxpayer from the ambiguities impinging the implementation of Taxation on Services, TRC maintained. A powerful commission may be formed forthwith to discuss and implement harmonised tariff at national and provincial level, TRC added.