The Federal Board of Revenue (FBR) has conveyed to the textile sector that no exemption/exclusion from further tax is available to the zero-rated supplies covered under the SRO.1125(I)/2011, as supplies to un-registered persons involves risk of local consumption. The FBR has issued FBR's position/viewpoint to the textile sector on the anomalies in SRO.491(I)/2016 allowing zero-rating of sale tax to five export oriented sectors.
According to the FBR, further tax on supplies subject to zero-rate under SRO 1125(1)/2011 dated 31.12.2011. All the supplies to unregistered persons are subject to further tax at 2% under section 3(1A) of the Sales Tax Act, 1990, except those specified in SRO 648(1)/2013 dated 09.07.2013. Since zero-rated supplies are not mentioned in the said SRO, therefore, no exemption / exclusion from further tax is available to zero-rated supplies covered under SRO 1125(1)/2011 dated 31.12.2011. Further, the supplies to unregistered persons involve a risk that the same may end in local consumption, therefore, there is no justification in allowing exemption from further tax on such zero-rated supplies.
Zero-rating of Finished Fabric supplied to unregistered persons of five sectors: Since finished fabric can also be sold to final consumers and as per understanding with industry local consumption was to be taxed, therefore, facility of zero-rating on supplies to unregistered parsons, even if of five sectors, has not been allowed, as supply chain trail is broken in case of supplies to unregistered persons and the government would have lost its due revenue, the FBR said.
Exclusion of supplies outside five sectors from zero-rated regime: The zero-rating facility is available only to five export-oriented sectors. Therefore, if any supply is made outside any of these sectors, there is no justification in allowing zero-rating on such supplies. In order to prevent the possibility of making frivolous cases, the FBR has already issued directives to field formations that in case of supplies of yarn, which has no material use outside textile sector, no such cases be made out unless field formation has substantive evidence to prove otherwise, the FBR maintained.
List of 128 zero-rated items not received: SRO 491(1)/2016 dated 30.06.2016 is not an independent SRO. It has only amended SRO 1125(1)/2011 dated 31.12.2011, which already has a list of 128 items its Table, therefore, there was no need to include such list in amending SRO 191(I)/2016. As regards the inclusion of maize starch and caustic soda in the said list, it is emphasised that, firstly it was agreed with the textile industry that there will be no addition to existing list of 128 items, and secondly starch is mostly used in food industry and caustic soda in soap industry and a minor part of these items is used in textile industry. Therefore, their inclusion in SRO 1125(1)/2011 dated 31.12.2011 was not justified. It may be added that maize starch was excluded from this SRO in July 2015 on complaints of misuse of reduced rate on this item, the FBR said.
Zero-rating of essential spare parts: The amended SRO 1125(1)/2011 dated 31.12.2011 clearly provides that input tax adjustment on machinery, spare parts, lubricants etc shall be available, therefore, there is no requirement of allowing zero-rate on this item. As already stated, such agreement was not reached with the industry when discussing the new zero-rated regime. Further, such zero-rating may also be open to misuse. It may be added that originally it was agreed with the industry that the list of existing items will not be expanded and also that no refund of input tax paid on other items would be paid. It was felt in FBR that second condition will be too harsh for some sub-sectors of textile industry, therefore it was decided to allow refund of input tax paid on other left out items except packing materials, FBR explained.
Zero-rating of machinery / capital investment: It may be added that machinery not manufactured locally is subject to sales tax at reduced rate of 10% and not 17%, the FBR stated. Facility of zero-rating on import of coal and other fuels as provided for local supply should also be provided. This shall be examined and considered after ensuring a mechanism to prevent misuse, the FBR added.