The Inland Revenue officers of the Federal Board of Revenue (FBR) have been empowered to search vehicles coming from tax-exempt areas of the Azad Jammu and Kashmir (AJK), the Gilgit-Baltistan and tribal areas to check entry of exempted goods into tariff areas of Pakistan and impose heavy penalty on non-duty/taxes paid items.

According to the FBR, there is no sales tax in Pakistan on the supplies of goods as originating from AJK. The tax on the same is payable in the AJK. The tax is, however, applicable if the recipient of such supply makes further supply in Pakistan, and he had to despot tax due after adjustment of input tax paid in the AJK.

Under the sales tax law as in force in the AJK, except five items, all others are exempted during the first five years of the establishment of a manufacturing concern, the FBR said. This concession is reportedly misused, as after five years, the same manufacturing concern adopts new name and new ownership.

The goods so exempted are generally supplies to Pakistan, the FBR maintained. Although such goods are taxable in case of further supply in Pakistan, as stated, but due to lack of documentation and proper checking, such goods escape taxation in Pakistan and thus have competitive edge over similar goods manufactured in Pakistan, the FBR said. Similar concerns exist in relation to other tax-exempt areas.

In order to safeguard industry in Pakistan and to prevent misuse of exemption, it is proposed to add a new Section 40D in the Sales Tax Act to provide for powers to prescribe documentation in relation to such goods and to examine and check vehicles coming from tax-exempt areas such as the AJK, Gilgit-Baltistan and the tribal areas, and also to prescribe penalty for such contravening goods, the FBR added.