KCCI submits recommendations to rectify anomalies in Finance Bill 2020

KCCI submits recommendations to rectify anomalies in Finance Bill 2020

KARACHI: Karachi Chamber of Commerce and Industry (KCCI) has submitted its recommendations for rectification of anomalies in the Finance Bill, 2020.

The KCCI in a communication on Friday with the Chairmen/Co-Chairmen of the Anomaly Committees formed by the Federal Board of Revenue (FBR), has pointed out anomalies in the Finance Bill 2020-2021 presented by the government on 12 June’2020.

KCCI has specifically mentioned the anomalies created due to various measures in the budget for FY2020-21, pertaining to Income Tax, Sales Tax, Federal Excise Duty and Customs.

These anomalies, which adversely affect the trade and industry, will be discussed in the meetings of Anomaly Committee-Business and Anomaly Committee Technical to be headed by Saqib Sherazi and Ashfaq Tola respectively. Muhammad Jawed Ghani, Member-Customs FBR and Dr. Hamid Ateeq Sarwar, Member-IR Policy FBR are designated as Co-Chairmen in both committees.

KCCI has elaborated on the issues created due to various anomalies and has proposed corrective measures to rectify these anomalies.

01. Anomaly

KCCI had proposed to withdraw 3 percent Further Tax on Supplies to Unregistered persons because it has caused promoted Fake and Flying Invoices. To avoid 3 percent Further Tax, suppliers issue invoices to registered entities who claim adjustment and refund. The proposal was accepted by FBR but is not incorporated in Finance Bill 2020-21

Impact

Under clause 14 of Finance Bill’2020-21 , A NEW SECTION 56AB INSERTED IN SALES TAX ACT’1990. Under new provision FBR has acquired  Real Time Access to Data of all citizens of Pakistan. Hence the onus of documenting the unregistered person should also be on FBR and IR officials. There is no justification to impose 3 percent Further Tax, after such access.

Proposal for rectification

01. 3 percent Further Tax on Sales to Unregistered persons should be withdrawn to facilitate transactions and help to overcome liquidity crisis.

02. FBR should be made responsible to broaden the tax base and register all entities in Sales Tax regime so that suppliers are not forced to sell to unregistered persons.

02. Anomaly

Provision of CNIC and levy of 3 percent Further Tax on supplies to Unregistered persons at the same time is unjust and counterproductive.

Impact

01. If the CNIC number of Unregistered person is provided by the supplier, it should be considered as sufficient information for the FBR to track the buyer.

02.After providing CNIC of Unregistered person, it is unjustified to impose 3 percent Further Tax.

Proposal for rectification

3 percent Further Tax should not be charged where CNIC number of Unregistered buyer is provided by registered supplier.   With access to a bulk of data base, FBR has to take responsibility to identify unregisered persons and bring them into Sales Tax regime. 

03. Anomaly

After acquiring powers by FBR  to access data of citizens from institutions and organizations such as FIA, Banks, NADRA and airlines etc., a major security risk has been created for citizens/tax-payers.

Impact

With evolving technology and advancement in IT tools, all data bases are vulnerable to misuse and hacking.  It is valuable data and holds very high commercial value. Therefore it is possible to be compromised.

Proposal for rectification

1. Adequate safeguards may be inserted in the law.

2.Exemplary penalties be fixed in the provisions in case if the data is compromised by any IR officials.

3. Access to data should be limited to officers in higher grades only.

04. Anomaly

By amendment in Federal Excise Act’2005, First Schedule, Table 1, new serial No.6A has been inserted, whereby the FEDERAL EXCISE DUTY on CAFFEINATED ENERGY DRINKS (H.S.2202.1010, 2202.9900) has been increased from 13 percent to 25 percent.

Impact

The phenomenal increase in rate of FED from 13 percent to 25 percent on a product (Caffeinated Energy Drinks) is unjust and discriminatory. Caffeinated Energy Drink is produced by only one of the two major producers of beverages in Pakistan who contributes a major portion of over Rs.100 Billion in Tax revenue.  The unjust increase is tantamount to targeting one producer.

Proposal for rectification

Caffeinated Energy Drink is not a luxury product and the producer is in fact doing import substitution while maintaining an affordable price for the consumers. The drink is popular among young people in all income groups and provides a healthy option. Therefore the Rate of FED on CAFFEINATED ENERGY DRINKS be restored to 13 percent.

05. Anomaly

Clause 12 of Finance Bill. U/S 45 B, a new sub-section (5) has been added, which disallows production of any new documentary material or evidence before Commissioner (Appeals) which earlier has not been produced by the Appellant before the officer of Inland Revenue.

Impact

Insertion of such conditions is tantamount to denial of a fair opportunity and inherent rights to the appellant to contest his appeal and produce any available evidence or material.

Proposal for rectification

The clause may therefore be removed as it is contrary to law of natural justice and ultra-vires of the constitution. A tax payer should not forfeit the right to produce evidence or documentary material at any stage while contesting his case.

06. Anomaly

By amendment in Section 65B through Finance Bill 2019-20, the rate of Tax Credit has been reduced from 10 percent to 5 percent.

Impact

KCCI had proposed to restore Tax Credit @10 percent on purchase of new machinery for BMR, to encourage investment in industry and spur growth. However the proposals has not been included in Finance Bill’2020-21

Proposal for rectification

Rate of tax credit may be restored to at least 10 percent and this credit should be applicable up to FY2025 to enhance the Investment in production capacity of industries.

07. Anomaly

CLAUSE 22 OF AMENDMENTS TO SALES TAX ACT’1990 – 3 percent VALUE ADDITION S.TAX.  in the Twelfth Schedule, under the heading “Procedure and conditions”, in condition (2), 3 percent Value Addition Sales Tax has been re-imposed on Commercial Import of Raw Materials.

Impact

Value Addition Sales Tax at import stage on commercial importers of Raw materials was removed in the Finance Act’2019-20, because Commercial importers do not add any value to raw materials and sell it in the same form. No inputs such as Gas, Electricity, Labor or Machinery  are used hence 3 percent VAT was an obvious anomaly and contradiction in law.

Proposal for rectification

The anomaly has been created again in the Finance Bill’2020-21. VAT cannot be imposed where no value is added.  The anomaly may therefore be rectified and the clause re-imposing 3 percent Value Addition Sales Tax on commercial importers of Raw materials in the Finance Bill should be deleted.

08. Anomaly

High rate of GST at 17 percent is a major factor in cost of doing business which affects the entire spectrum of trade and industry.

Impact

The cost of this indirect tax is ultimately passed on to consumers particularly those in the low income segments. GST @17 percent has a negative impact on GDP growth and curtailed domestic demand.

Proposal for rectification

The rate of GST should therefore be reduced by 3 percent and revised from 17 percent to 14 percent. This measure will have a very positive impact on business sentiment and will trigger demand in domestic market. The measure will also provide much needed relief to trade, industry and consumers.

09. Anomaly

In Finance Act’2014, Flavored Milk was placed in Zero Rated regime and inserted in 5th Schedule to Sales Tax Act’1990, being popular consumer item. Similarly, component and sub-components used in Flavored Milk, including Raw Milk, Packaging, Assemblies and sub-assemblies were also Zero Rate, to avoid Refunds of Sales Tax on ingredients. However, through Finance Act’2015, Flavored Milk (PCT.04.02) and components were omitted from 5th Schedule of Sales Tax Act and placed in 8th Schedule. Consequently, Flavored Milk is subjected to Sales Tax @10 percent and 3 percent Further Tax on supplies to unregistered persons.

Impact

Inclusion of Flavored Milk in 8th Schedule since July’2015 has resulted in sharp increase in cost and retail price of Flavored Milk which has been a healthy diet supplement and popular among the masses. Flavored Milk category was in initial development stage within Dairy Industry but its growth potential has been capped by imposition of Sales Tax and Further Tax at high rate and market size has reduced.  Ironically, Milk and Fat Filled Milk (Liquid Tea Whitener) and components remain in Zero Rate Regime.

Proposal for rectification

Flavored Milk with natural ingredients is a healthy substitute for other drinks, particularly for children and has a tremendous market potential for growth. It also complements to import substitution and saving of foreign exchange. Therefore the locally manufactured Flavored Milk and its components/sub-components may be excluded from 8th Schedule and included in Zero Rated regime by insertion in 5th Schedule, and status prior to Finance Act’2015 may be restored.

10. Anomaly

Through Finance Act, 2019 FBR has inserted new clause (m) to Section – 8 of the Sales Tax Act, 1990 by which the input Sales tax adjustment is to be disallowed on pro-rata which is attributable to supplies to without mentioning CNIC on invoices issued to un-registered person

Impact

The disallowance of input tax U/S.8(m) has unfairly penalized registered manufactures/ suppliers specially those engaged in supply of third schedule products which are subject to Sales Tax on retail price.  while it is the responsibility of FBR and its field officers to identify unregistered persons and bring into tax-net.

Proposal for rectification

Clause (m) of Section 8 shall be deleted to allow registered suppliers to continue its business activity freely (rather going into unnecessary litigation) that in result would generate much needed revenue for the exchequer.

11. Anomaly

Due to inclusion of Motorcycle and Automobile Spare parts in the Third Schedule, to the Sales Tax Act’1990 vide new serial No.49 in column (1) through the Finance Bill’2019-20, Serious hardship is being faced by importers of Motorcycle and Automobile spare parts.

Impact

Under new procedure, importers are required to print MRP (Maximum Retail Price) on imported parts and pay Sales Tax and Addnl. Sales Tax on Customs Value. It is not possible to ascertain the retail price of Autombile and Motrocycle parts before arrival of consignments to Pakistan due to fluctuation in exchange rates and prices in domestic market.

Proposal for rectification

Automobile/Motorcycle spare parts may be taken out of Third Schedule and included in normal tax regime for assessment of Customs Duty, Sales Tax, Additional Sales Tax and WHT, subject to standard valuation procedures.

12. Anomaly

Vide new SRO.351(I) dated 04 May 2020, Zero rating of Sales Tax has been granted to export of PMC and PVC materials (H.S.CODES 3901 TO 3914) to Afghanistan.PMC or PLASTIC MOLDING COMPOUND is a general term and covers Polypropylene H.S.3902.1000, 3902.2000, 3901.3000;  POLYETHYLENE 3901.1000, 3901.2000,3901.3000 etc.

Impact

Pakistan does not produce Polypropylene and Polyethylene.  Both these raw materials are imported and are a major source of revenue (approx. Rs.53.0 Billion on import of 1.1 Million Tons per annum. Apparently the SRO allows Zero Rate of Sales Tax on export of POLYMER RAW MATERIALS and not finished goods.

Proposal for rectification

The ambiguity be remove or the SRO.351 may be rescinded. Also the PMC and PVC may be restored in list of exclusions in SRO.190 (I) 2002.  It may be made clear, whether the SRO allows Zero Rating on export of an imported Raw Material or is it on Finished goods, specific 8 digit H.S. Codes.

13. Anomaly

Domestic Industry of Medium Density Fiber Board (MDF) has sufficient capacity to meet 90 percent of country’s requirements. Due to concessional tax regime, FTAs, heavy Under-invoicing on imports and DTRE scheme, serious and material damage has been caused to domestic industry which cannot compete with cheap imports.

Impact

Cheap imports of MDF board under FTAs and concessional tax regime have caused material damage to domestic industry and stifled its growth. The industry significantly contributes to contruction industry and import substitution. Current tax structure and concessions have mostly promoted the commercial imports.

Proposal for rectification

MDF Board may be taken out of the Items allowed under FTA due to material damage to domestic industry.  Concessions on import under various SROs be withdrawn and Regulatory Duty be imposed @16 percent on import of MDF board. Clause ‘D’ of preamble SRO 280(I)/2014 Dt.08.04.2014. (2) 16 percent Concessions [Sr. No. 2059, Table 1, SRO.659(I)/2007].   LDCs (SAARC) [S No. 822, Table II, SRO 558(I)/2004]

14. Anomaly

Through Finance Bill, 2020 the rate of Custom Duty is proposed to be reduced from 5 percent to 0 percent for Coils of aluminium alloys imported by registered local manufacturer of aluminum beverage cans.

Impact

The single Local manufacturer of Aluminum Beverage Cans already enjoys a high degree of protection through the increase in Custom Duty (20 percent) on Empty Beverage Cans, additional Duty (7 percent), Regulatory Duty (5 percent) and Valuation ruling on higher side.

Further, such manufacturer is also exempted from Income Tax and other taxes.

This wide disparity has created a monopoly  rendering the import of Aluminum Beverage Cans unviable for the bottlers, who are left with no option but to purchase it from local Beverage Can manufacturer whereas reliability and quality of which is yet to be tested in long run.

Proposal for rectification

To prevent monopoly of a captive market and protect the beverage industry from exploitation, exemptions and concessional rate of Duty proposed in Finance Bill’2020-21 may be rationalized and the high rates of Customs Duty, Sales Tax and WHT on import of Aluminum Beverage Cans be reduced. Around 70 percent raw material for beverage cans is imported because there is no domestic production of Aluminum Coils in Pakistan, hence there will be a perpetual loss of revenue.

15. Anomaly

Currently the Empty Aluminum Beverage Cans are subject to Customs Duty 20 percent, ACD.7 percent & RD.5 percent (Total 32 percent) as compare to total incidence of 11 percent in June 2016 or 12 percent June 2017. In addition to that such cans are also subject to higher valuation rates through valuation rulings issued time to time.

Impact

Domestic market has been monopolized by a single local manufacturer while also the rates of Customs Duty and Sales Tax on raw materials for manufacturing of Aluminum Beverage Cans have been further reduced to ZERO in Finance Bill’2020-21.

Proposal for rectification

To make the local beverage industry competitive and prevent monopoly by local manufacturer of beverage cans, Rates of Customs Duty be reduced from 20 percent to 10 percent and Additional Customs Duty (7 percent) and RD (5 percent) should be withdrawn to support Domestic beverage industry which is among the largest tax-payers has also to compete with imported and smuggled canned beverages.

16. Anomaly

Through Tax Laws (Second Amendment) Ordinance, 2019 (issued in December 2019) a New sub-Section – 4 to Section – 73 was added by which the registered manufacturers were not allowed to supply to un-registered person in excess of Rs. 100 million in a year and Rs. 10 million in a month otherwise manufacturer is not  allowed input Sales Tax adjustment attributed to such excess supplies to un-registered person.

Now the Scope of such provision is extended to all persons (whether they are manufacturer, dealer, distributors or wholesalers).

Impact

This has created un-necessary disallowance of input tax to suppliers is tantamount to punish the compliant tax-payers for the failure of tax authorities to broaden the tax-base and identify unregistered persons. Suppliers/manufacturers engaged in supply of third schedule products which are subject to Sales Tax on retail price, are particularly affected by the provision.

Proposal for rectification

Such sub-Section – (4) of Section – 73 should be deleted to allow suppliers to continue its business activity freely (rather going into unnecessary litigation) that in result would generate much needed revenues.

17. Anomaly

Through Finance Act, 2019 new Section -108B to Income Tax Ordinance, 2001 was inserted by which a Manufacturer supplying 3rd Schedule goods under a dealership arrangement to dealers not registered in Sales Tax and are not appearing in the IT ATL, an amount equal to 75 percent of the dealer’s margin (which is 10 percent of manufacturer’s sale price) shall be added to the income of supplier / manufacturer.

Impact

It is an unfair provision and unjustly punishes the registered entities. With the unhindered access to data base of various institutions, provided to FBR it should be the responsibility of FBR to identify unregistered persons conducting business transactions.

Proposal for rectification

Such Section – 108B of the Income Tax Ordinance, 2001 should be deleted to allow manufacturers to continue carry on business activity without unnecessary hurdles and fear. (rather going into unnecessary litigation)

18. Anomaly

Through Finance Bill, 2020 two clauses (p and q) are proposed to added to negative list of expenses to be allowed to deduct from taxable business income of a taxpayer. By such clauses:

(p) Utility Expense in excess of such limits and in violation of such conditions may be disallowed; and

(q) Expenditure attributable to Sales made to Sales Tax Un-registered person by an Industrial Undertaking in proportion to total turnover and turnover from sale to such un-registered persons [where their sales is equal to or exceed Rs. 100 million).

Impact

This would create un-necessary financial burden on Industrial undertakings and is against the basic regime of normal taxation.

Proposal for rectification

Both the clauses to Section – 21 of the Income Tax Ordinance, 2001 shall be deleted from Finance Bill, 2020 to avoid un-necessary disagreements between taxpayer and officers and to avoid unnecessary appeals / litigations.

19. Anomaly

Through Finance Bill, 2020 major changes are proposed to Section – 22 of the Income Tax Ordinance, 2001  by which tax depreciation on new additions to Capital assets are to be restricted to 50 percent of allowable tax depreciation.

Impact

This change would increase the taxable Income as tax deductible expense by way of tax depreciation would be reduced which would in return increase the tax burden or liability of the person.

Proposal for rectification

This change would negative affect the Capital expenditures by the business specially the investment in Plant & machinery by the Industrial undertakings.

Such proposal shall be dropped in approved Finance Act, 2020 for broader interests of all stakeholders.

20. Anomaly

Through Finance Bill, 2020 major change is proposed to Section – 131 of the Income Tax Ordinance, 2001  that makes the filing of Appeal before the Appellate Tribunal Inland Revenue (ATIR) conditional upon payment of 10 percent of tax demand as up-held by the Commissioner (Appeals) Inland Revenue CIR (A).

Impact

This change is against the fundamental right of the appellant specifically when the demand is up-held by the Departmental Appeal forum (i.e. CIR (A) and not by an independent forum like ATIR.

This would create liquidity issues for the appellants and would also create refunds issues when the appeal is finally decided in favour of the appellants by the independent forum.

Proposal for rectification

Such proposal may be revoked to avoid un-necessary litigation by the appellants.

21. Anomaly

Polyester filament yarn is a raw material for weaving, knitting and home textiles. Most of the requirement (about 70 percent) of the industry are met by imports because the local manufacturers only produce basic specs and only fulfill about 30 percent of the total demand. PFY  (HS codes 5402.3300 and 5402.4700) are subject to a higher customs duty of 11 percent and additional customs duty of 2 percent.  Antidumping duty ranging from 3.25 to 11 percent is imposed on imports originating from China and Malaysia.

Impact

Local manufacturers of PFY already enjoy excessive protection and a further imposition of RD @ 2.5 percent  in the Finance Bill’2020-21 would be grossly unjust and render the textile industry uncompetitive.

Proposal for rectification

It is therefore proposed to omit the Regularity @2.5 percent which has been recommended in the Finance Bill’2020-21.

22. Anomaly

Withholding tax on commercial importers from 3 percent to 2 percent under erstwhile SRO 1125 while the withholding tax on industrial importers is 1 percent.

Impact

Withholding Tax should be uniform for both categories of importers considering that government intends to remove the discriminatory withholding tax regime for other sectors.

Proposal for rectification

Polyester filament yarn is a raw material and both commercial and industrial importers supply this yarn to the SME sector. It is therefore recommended that a uniform rate of WHT be applied on import of PFY @1.0 percent for both Commercial importers and manufacturers.

23. Anomaly

For the last over 10 years, it has been the practice by FBR to insert provisions in ITO, Sales Tax Act, Customs Act and Federal Excise Act, which confer massive discretionary powers to Officers of Inland Revenue.

Impact

Practice of using the Finance Bill to make changes in laws governing powers of FBR and officers in its various departments and organs, should be discouraged.

Proposal for rectification

Federal Budget should only reflect projections of Revenue and Expenditures and the changes in relevant provisions which give legal effect to revenue measures.  Any changes in powers and authority of the FBR and IR Officials should be made through separate bills which may be debated in parliament before approval.

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