KARACHI: Karachi Tax Bar Association (KTBA) on Monday proposed steps to the Federal Board of Revenue (FBR) for the exports growth without any negative implications to the tax revenue.
The KTBA submitted following proposals to FBR Chairman Syed Shabbar Zaidi:
1- Section 8B (Bottleneck for potential / existing exports)
Section 8B restricts Input tax adjustment to the extent of 90 percent of the Output tax (i.e. ratio of Input / Output ≤ 90percent). Since exports do not contribute towards Output tax (denominator) while the input tax relating to exports is included in numerator, therefore, such input tax relating to exports should not be considered for the purposes of comparison of ratio of Input / Output under Section 8B.
For fair comparison, 90 percent restriction should be made applicable only for local sales where both input tax and output tax are subject to the levy of standard rate of sales tax.
As per serial no.4 of SRO 1190(I)/2019 dated October 02, 2019, section 8B is not applicable to persons whose zero rated supplies during a month is more than 50 percent of the total taxable supplies.
Suggestion: Either of the following options may be considered to be implemented by the FBR:
i. Since exports do not contribute towards Output tax, therefore, condition of 50 percent should be amended to 10 percent [in serial no. 4 of the said SRO 1190] on monthly basis for all exports irrespective of any sector otherwise it would not be possible for registered person to absorb the amount of input tax paid for the purposes of manufacturing of items for local and export sales and consequently, the same would discourage export of goods; OR
ii. Abolish sales tax on conversion cost (like electricity / gas bills) for manufacturers whose export sales during the preceding tax year is more than 40 percent of the total sales. Sales Tax liability, if any, on local sales, will be discharged by the registered person at the time of filing of monthly sales tax return.
In case a person utilizing 80 percent of total capacity for local sales gets an opportunity to export remaining unutilized capacity of 20 percent, he will not be interested to avail that export opportunity as input tax paid on goods used for exports will form part of the total input tax and consequently, he will be required to pay 10 percent minimum value addition tax under section 8B, which will be refunded after around a year.
Considering the impact of finance cost of delayed refund, he will not be interested to avail that export opportunity.
2- Section 8B (Discriminatory Treatment with Manufacturers as compared to Commercial importers)
Sales tax is now being collected from manufacturers on almost all value additions (like conversion cost, contractors, transporters etc.) and then they are required to pay 10 percent minimum value addition tax over and above all these inputs under section 8B of the Sales Tax Act, 1990 whereas on the other hand, commercial importers paying 3 percent minimum value addition tax at import stage have been excluded from the ambit of section 8B.
In order to provide level playing field to manufacturers, the FBR is requested to consider any of the following options:
i. Exclude manufacturers of 100 percent taxable goods from the ambit of section 8B of the Sales Tax Act, 1990
ii. If complete exemption is not possible, increase the threshold of restriction of input tax adjustment to 95 percent from present 90 percent; OR
iii. Abolish sales tax on conversion cost (gas / electricity bills) incurred by manufacturers of 100 percent taxable goods. This will not have any negative impact on Government’s revenue as sales tax liability, will be discharged by manufacturers along with filing of the monthly sales tax return.
3- MINIMUM VALUE ADDITION (MVAT) SALES TAX AT 3 percent ON IMPORT OF PLANT & MACHINERY
On the basis of powers under subsection 2 of section 7A, 12th Schedule has been inserted in to the Sales Tax Act, 1990 wherein it has been stated that MVAT will be applicable on
“All imported goods subject to exclusions as in conditions and procedure given after the Table”.
Moreover, among few other exclusions under clause 2 of the 12th Schedule, raw materials and intermediary goods meant for use in an industrial process which are subject to customs duty of less than 16 percent have also been excluded from the ambit of applicability of MVAT. You will appreciate that said exclusion is applicable only on raw materials and intermediary products of less than 16 percent Custom duty whereas similar exemption is nowhere specified for Plant and Machinery / spare parts and therefore, custom authorities are charging MVAT on import of Plant & Machinery / spare parts by manufacturers.
It is needless to mention that exclusion from MVAT is already available to service sector importing goods for their in-house business. Clause 2(iii) of the Twelfth Schedule is reproduce as under:
(iii) Registered service providers importing goods for their in-house business use for furtherance of their taxable activity and not intended for further supply.
3.3- Based on the above submissions and considering the fact that goods including plant and machinery imported by service sector is already exempt from MVAT, the Plant & Machinery imported by manufacturers for its own use should not be subject to the levy of MVAT under Twelfth Schedule read with subsection 2 of section 7A.
Therefore, it is requested to kindly issue necessary notification for inserting following clause in Twelfth Schedule.
(ix) Plant, machinery and spare parts imported by manufacturers for their in-house business use for furtherance of their taxable activity and not intended for further supply.
3.4- It is worth mentioning that earlier as per Chapter X of the repealed Sales Tax Special Procedures Rules, 2007 both the goods as imported by a manufacturer of goods for in-house consumption as well as goods imported by registered service providers for in-house business use, were exempt from levy of MVAT, however, in the 12th schedule of the Sales Tax Act, 1990, exemption from MVAT in case of imports of Plant & Machinery/spare parts by manufacturers of goods, has not been retained.
4. SALES TAX REFUND – ISSUE BEING FACED BY EXPORTERS
As per the amendments made in Sales Tax Rules, 2006 vide SRO no. 918(I)/2019 dated August 7, 2019, mechanism for expeditious processing of refund claim has been devised only for manufacturers-cumexporters.
As per the Rules, refund will be treated as having been filed only after filing of Annexure H of the Sales Tax return, for which deadline of 120 days has been prescribed in the Rules and the same can be extended for a period of 60 days on the basis of approval from the Commissioner.
However, the rules are silent about the mechanism for processing of Sales Tax refunds incase Annexure H has not been filed by manufacturer-cum-exporter for any reason. Considering the legal and legitimate right of the taxpayer to claim adjustment / refund of the input tax, either of the following two option be considered by the FBR for facilitation of exporters:
i. Allow filing of Annexure H without any time limit [present time limit of 4 months be abolished and taxpayer be allowed to claim refund as and when required]
ii. Incase present limit of 4 months cannot be abolished, registered persons be allowed at least to alternatively file refund on annual basis after the end of the tax year.
Apart from the above, Annexure H is only being allowed to be filed to taxpayers who have filed the said Annexure from sales tax returns of July 2019 and onwards. Instead of claiming refund,
some taxpayers have reported sales tax carried forward balance in their sales tax returns from July 2019 onwards.
In case they now intend to file Annexure H from the current month, FBR’s online portal does not allow such taxpayers to enter opening balance of inventory / raw materials as the said field in blocked for editing. This limitation should be removed and taxpayers should be allowed to file Annexure H for any specific month, for which they intend to claim refund.
From apparent mechanism being followed by the system, it appears that those taxpayers who have not filed Annexure H for the month of July 2019 will never be allowed to file Annexure H for any subsequent month.
This apparent anomaly should be resolved at earliest.
These suggestions will have no revenue loss to the government as sales tax collected is otherwise adjustable, however, through industrialization, government will be able to generate more tax revenue as well as employment opportunities.