The Federal Board of Revenue (FBR) has decided to strengthen its right of collection of sales tax on "Toll Manufacturing" through the Finance Bill 2015.
It is learnt that through Finance Bill (2015-16), "Toll Manufacturing" would be specifically classified as manufacturing; definition of supply to be amended to include "return of goods after manufacturing process". Earlier it was covered under "any other disposition of goods". Resultantly, FBR would be legally empowered to collect sales tax on "Toll Manufacturing" and it would not be treated as service for collection of sales tax.
Reportedly, Punjab Revenue Board (PRA) and Khyber Pakhtunkhawa Revenue Authority (KPRA) have opposed the Federal Board of Revenue (FBR) interpretation of taking ''toll manufacturing'' within the ambit of manufacturing. The PRA/KPRA insisted to treat it as a service for collection of sales tax.
Classification of toll manufacturing is a debatable disputed issue between provinces and federal government. PRA and KPRA took the stance that it falls within the definition of service and therefore the provinces have the right to collect sales tax thereon. SRB was of the view that the SRB is willing to consider it as manufacturing as a ''quid pro quo'' with FBR regarding other issues such as withdrawal of Federal Excise Duty on franchise and other services if considered by the FBR. The Chairman FBR requested PRA and KPRA to reconsider their position so that things can move forward in an agreed manner.
Experts said that PRA while insisting to consider toll manufacturing as service is arguing that it is clear from the language of 3(1) of the Sales Tax Act, 1990 that Federal sales tax is payable only on the taxable supplies (besides goods imported in to Pakistan). Under section 2(41), taxable supply means a supply of taxable goods by an importer, manufacturer, wholesaler, distributor or retailer. Again under section 2 (33), the pivotal principle for any transaction to become a supply is that it must be a sale or the transfer of the right to dispose of goods as owner, which means "ownership title" must be transferred from seller to buyer, otherwise the transaction is not a supply for the purpose of Federal Sales Tax Act. Under toll manufacturing, ownership for title of goods is not transferred to the vendor under any circumstances, which means a transaction for the purpose of toll manufacturing can never be treated as supply. The ownership of both input goods (raw materials, semi-finished products or components etc) and output goods (processed or finished products) remains with the principal throughout the performance or the execution of the toll manufacturing contract, whether written or otherwise.