A sales tax expert has suggested withdrawal of several amendments introduced to the Sales Tax Act 1990 through Finance Bill 2019, keeping in view their negative implications in the sales tax regime from July 1, 2019.
Arshad Shehzad, a Karachi-based sales tax expert told Business Recorder that the sales tax budget through Finance Bill 2019 contains anomalies, which need to be removed.
Firstly, sales tax on retail sector across the board is proposed at the rate of 17%. Earlier there was a turnover tax regime at the rate of 2%, reduced rate regime, sales tax on electricity bills and standard rate regime. The government in the past has failed to enforce the sales tax on retail sector in spite of these attractive special rates. In this backdrop, such a drastic increase in the retail sales tax rate without persuading a large sector of undocumented retail sector may create disparity and eliminate level playfield to the compliant and registered retail segment.
According to a fair estimate, there are more than a million retailers are operative. "We are afraid the government has the capacity constraint to enforce this amendment and ensure collection. Therefore, in our opinion, simplified fixed sales tax collection should be made applicable regulated through a trade licence with parallel simplified reduced or turnover tax regime for the organised retail sector so that the government can immediately start getting revenue as well as spread the revenue burden to the undocumented sector rather squeezing the narrow registered trade, he suggested."
Secondly, all the supplies and sales tax thereon being subject to direct reporting under annex 'C' of the sales tax return through the introduction of STRIVE in 2016. Sales Tax withholding in between the registered persons were therefore abolished. In the proposed bill, the sales tax withholding at the rate 1/5th of the sales tax amount by companies is reintroduced. The proposal is therefore regressive and contrary to the introduced automation needs to be revisited. Furthermore, the rate of sales tax withholding on unregistered purchases is increased from 1% to 5%. This increase of 500% is harsh and thus also needs to be revisited.
Thirdly, the requirement of CNIC on purchases from an unregistered person is proposed with the consequence to disallow corresponding input tax by placing restriction u/s 8. The restriction is unfair to the registered persons, who were already under severe stress on this tough business condition. They were asked to act as policemen for government and failure to do so they are subjected to punishment for the misdeed of others through disallowance of the legitimate right of the input tax as guaranteed u/s 7 of the Act. This seems to an attempt to transfer the burden of broadening of tax net from revenue authority to the existing registered persons. "In our opinion, the government is expecting too much from the already squeezed registered regime. The restriction is even otherwise unconstitutional and likely to be challenged in the court of law if not addressed by the government."
Fourthly, nobody can disagree with the importance of audit in the self-assessment scheme but at the same time rights of the taxpayers need to be kept intact to maintain proper balance in equitable terms. The removal of protection to the audit period is only going to raises corruption. All around the world, the audits are done to a certain percentage and there is no justification for repeated audits every year. Likewise, there is no sense to keep audit parameter confidential in-fact the parameters should be loud and clear to follow by the taxpayer community.
Fifthly, zero-rating on five export-oriented sectors is proposed to be withdrawn on the grounds of its abuse and short payment at domestic consumption. Under this amendment, sales tax at the rate of 17% is made applicable to the supply chain of export sectors. The sales tax chargeable on purchase of exports raw material and supplies is refundable since the exports are zero-rated u/s 4. "This change in our opinion adversely affects the cash flow of the exporters at the one end and may increase corruption and elements of fraud at the other end." This may have adverse impact on exports and impact of minimum 10% may hurt the exports to the tune of US $ 1.5 billion. Whereas the entire revenue impact according to the bill of this measure is Rs 80 billion.
Sixthly, the sales tax at the reduced rate of 6%/9% was chargeable to local supplies even in the existing regime and if the government has failed to collect the potential amount of sales tax as per their claim then it is not the rate which needs to be increased rather enforcement needs to be improved.
Seventhly, the existing list of the industrial raw material of 118 items under SRO 1125(i)/2011 may be reduced significantly to curtail the benefit.
Further sales tax to unregistered persons makes part of the SRO 1125 to overcome its legal challenge and to sort-out the ongoing litigation
Instead of cash payment of sales tax refund adjustment, notes usable against electric gas bills and custom duties be introduces.
Eighthly, the value addition sales tax on imports to commercial importer operative under special procedure rule is transposed in the STA. Apparently the amendment is technical in nature, however, while this shifting of SRO regime into Act will affect the imports by industrial/manufacturer cum importer. This amendment may increase the production cost of the local industry and they may also be affected by the cash flow problem, he added.