Karachi, August 19, 2024 – The Karachi Tax Bar Association (KTBA) has raised concerns over ambiguities in the income tax collection mechanism for sales within the supply chain, as stipulated under the Finance Act, 2024.
In a detailed letter addressed to Hameed Ateeq Sarwar, Member Inland Revenue Policy at the Federal Board of Revenue (FBR), KTBA President Zyed Zafar Ahmed pointed out that the recent amendments have broadened the scope of income tax collection, extending it to all sectors of the economy, compared to the previous requirement which was limited to twenty-two specific sectors.
The letter specifically highlights that Sections 236G and 236H of the Income Tax Ordinance, 2001, which govern the collection of income tax on sales, have now become applicable to all sectors of the economy. This change affects manufacturers, commercial importers, distributors, and dealers, creating a series of challenges and ambiguities for both tax professionals and businesses.
Direct Sales to End Consumers
KTBA has outlined several specific scenarios where the application of these provisions remains unclear. The first scenario involves direct sales to end consumers by manufacturers or commercial importers. According to KTBA, when a sale is made directly to the end consumer, rather than to a dealer, distributor, wholesaler, or retailer, the provisions of Sections 236G and 236H should not apply. The association argues that the intention of these sections is to cover transactions within the supply chain and not direct-to-consumer sales, thus seeking clarification from the FBR on this matter.
Sales to Businesses for Own Consumption
Another area of ambiguity involves sales made to businesses for their own consumption rather than for resale. The KTBA letter explains that when a business purchases goods for internal use, and not for further trading within the supply chain, such transactions should be exempt from the advance tax collection requirements under Sections 236G and 236H. The association contends that businesses, in this context, act as the end consumer and therefore should not be subject to the same tax obligations as those involved in the resale process.
Contract Manufacturing
The issue of contract manufacturing also presents complications. In many industries, products are manufactured by toll manufacturers or contract manufacturers based on the specifications and brand requirements of another party. KTBA highlights that both the party contracting the manufacturing and the toll manufacturer are considered manufacturers under the law. Consequently, the association argues that the advance tax collection provisions should not apply to sales made by contract manufacturers to the principal manufacturer. Instead, the tax obligation should commence when the principal manufacturer sells the goods onward.
Supplies to Non-Registered Persons
Lastly, KTBA raises concerns about the applicability of Sections 236G and 236H in cases where goods are supplied to persons not registered as dealers, distributors, or wholesalers. The association’s position is that such transactions should not trigger the advance tax collection requirements, as the provisions are intended to regulate transactions within the formal supply chain.
Request for Clarification
The KTBA has urged the FBR to provide clear guidance on these issues, emphasizing that such clarification is essential to resolving the ambiguities and ensuring proper compliance. The association has also offered to make a detailed presentation to the FBR to further discuss these concerns and seek a resolution.
The KTBA’s letter underscores the need for a more precise interpretation of the new tax provisions to avoid unnecessary complications for businesses and ensure the smooth implementation of the Finance Act, 2024. As businesses grapple with the expanded tax obligations, the KTBA’s request for clarification from the FBR highlights the importance of clear and unambiguous tax regulations in fostering a fair and predictable business environment.
