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Budget Proposals on SALES TAX at Income Tax Bar - Karachi

This presentation discusses budget proposals on sales tax, including the reduction in sales tax rate, update of definitions related to time of supply and input tax, addressing tax fraud, revising transactions not admissible, and reinstating carry forward facility.

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Budget Proposals on SALES TAX at Income Tax Bar - Karachi

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  1. Budget Proposals onSALES TAX at Income Tax Bar - Karachi April 21, 2006 Presentation by Majid Khandwala

  2. Reduction in Sales Tax Rate • Current rate on value 15% Ground Realities • Existence of a parallel economy • High rates results in higher tax evasion • Need to be competitive with the advent of WTO • Indirect tax is borne by all, rich and poor alike • Proposal • The rate be reduced to 10% • This rate should not be enhanced for a period of say 5 years.

  3. Time of Supply Time of supply as defined under section 2(44) is the earlier of time of delivery of goods or when any payment of goods is received by the supplier Ground Reality • This results in mismatching of the figures of sales as reflected in the sales tax returns and in the financial accounts of an entity • Stocks would not reconcile as advances have been reflected as supply when in effect there has been no movement of stocks • Difficulties are faced in explaining and reconciling the figures during a sales tax audit Proposal Sales tax at the time of payment of advance should be removed from the definition of Time of Supply.

  4. Definition of input tax [Section 2(14)] The definition of input tax covers tax paid • On supply of goods • On imports • In Azad Jammu and Kashmir • On excisable services chargeable in sales tax mode Ground Reality Sales tax has also been levied on certain services through provincial legislation with effect from July 01, 2000. It has been clarified time and again by the CBR that sales tax on services under the Provincial Ordinances is a permissible input adjustment. Proposal Definition of input tax should be modified to include sales tax paid on services chargeable under Provincial Sales Tax Ordinances.

  5. Tax Fraud [Section 2(37)] Making taxable supplies without obtaining Sales Tax Registration is a Tax Fraud. Ground Reality • Obtaining a Sales Tax Registration Number takes its own time and therefore results in a delay in commencement of business activities • Alternatively if a supply is made before obtaining registration, there is an exposure to a very serious offence by way of tax fraud. Proposal The definition of tax fraud should be suitably amended to allow commencement of business once the Application for Sales Tax Registration has been submitted.

  6. Certain transactions not admissible [Section 73] • any transaction involving payment exceeding Rs.50,000 • shall be through a banking instrument • showing transfer of the amount of sales tax invoice • from the business account of the buyer • within 180 days of the invoice • Non-compliance would result in disallowance of input tax for the buyer. • The seller is required to deposit the proceeds in the business bank account otherwise input tax is disallowed Ground Reality • There is an assumption that payment is in the form of currency– netting off against payables, inter-company adjustments, adjustment against brokerage/commission, discounts, exchange of goods, etc. are common business transactions which are overlooked by section 73. • The incidence of bad debts.

  7. Certain transactions not admissible [Section 73] (Contd.) Proposal If payment is not made within the prescribed time by the buyer, the input tax already claimed should be offered back. If payment is made after the prescribed time, then it may be reclaimed by the buyer at the time of actual payment. Non-cash payments should be catered for. In case of bad debts the seller should not be penalized Section 73 should be revised accordingly.

  8. Carry Forward The Finance Act 2005 made amendments to Section 10 whereby carry forward of excess input tax is no longer permitted Subsequently manufacturers through SRO 666(I)/2005 and wholesalers, dealers and distributors through SRO 813(I) 2005 have been allowed to carry forward such input tax for subsequent three months after submitting an adjustment note and obtaining an adjustment advice from the Collectorate authorizing the adjustment Ground Reality • The carry forward facility is no longer an automatic right • Adjustment notes are not issued by the officers on timely basis to enable • adjustment in the next tax period Proposal The carry forward facility should be reinstated across the board Alternatively it should be mandatory to issue the refund before the payment for the next period becomes due

  9. Exemption on self supply of intermediate goods Clause 4 of Part Table 2 of the Sixth Schedule exempts raw materials and intermediary goods and services if consumed in-house by a sales tax registered manufacturer himself in the manufacture of goods subjected to sales tax. The exemption does not extend where the ultimate goods produced are exempt from tax. Ground Reality Industries producing ultimately exempt goods like food and medicines are facing difficulties Value to be assigned on self-supply of intermediate goods is difficult If KESC or WAPDA electricity is used there is no problem. However, if self-generated electricity is used then it becomes taxable Proposal The exemption on self-supply of intermediary products should be exempt from sales tax whether the ultimate product is taxable or exempt

  10. Special Procedure for Commercial Importers • This is applicable to persons registered exclusively or otherwise as Commercial Importers. • Commercial Importer is defined as a registered person who imports goods for further supply in the same state to any other person • Sales tax is computed at 15% on a minimum value addition of 10%. •  Output tax is to be paid in advance at import stage. Ground Reality In practice, import of goods for self use is also subjected to value addition. Proposal Suitable instructions be given to the Customs authorities so that goods meant for self use are not subjected to Value Addition. As the actual value addition is to be computed on an annual basis, the box for total sales tax payable (box 10) in the monthly return is not necessary particularly as there is no space for carry forward in case of excess input tax

  11. Special Procedures for Retailers • Special Procedure for Retailers isapplicable to persons registered exclusively as retailers under the Act. • Sales Tax to be paid on value addition of 10% or at reduced rates specified for certain types of goods. •  Value addition is to be computed on all purchases • There is also a Special Procedure under SRO 539(I)2005 for Retailers of Specified Goods • The specified goods are export oriented goods - textiles, leather, carpets, surgical goods and sports goods • Retail tax at the rate of 3% on turnover is payable (this includes 1% income tax) Ground Reality Retailers like supermarkets and general stores deal in specified goods as well as other goods There is considerable confusion as to which scheme is applicable to such retailers

  12. Special Procedure for Retailers (continued) • Strictly speaking both schemes are applicable and separate returns should be filed as clarified through Sales Tax Circular No.2/2005 dated September 3, 2005 • Retailers are not equipped to keep segregated information and accounts, prepare separate returns one based on purchases and the other based on sales • Informally they are told to follow whichever scheme that is more beneficial to them Proposal The existence of parallel schemes for the same category of registered persons (Retailers) is bound to cause complications. Hence one scheme should be in vogue.

  13. Special Procedure for Manufacturers of Biscuits and Confectionery A special procedure under Chapter XVII of the Sales Tax Special Procedures Rules provides that sales tax be paid on basis of printed retail price The value of supply is prescribed at the rate of 12% of the of ex-factory price in lieu of sales tax payable on basis retail price Ground Reality • Biscuit and confectionery manufacturers are usually engaged in manufacture of other snack items like potato chips, wafers and other savoury items • A retail price is also prescribed for such items by the manufacturers Proposal It would be logical to include snack items within the ambit the Third Schedule and the Special Procedure under Chapter XVII. This would facilitate the manufacturers to be under one regime of sales tax.

  14. Special Procedure for Sales Tax on Sale of Motor Vehicles Special Procedure for Collection and Payment of Sales Tax On Vehicles has been introduced through SRO 951(I)/2005 dated September 14, 2005 It prescribes that sales tax be paid at the time of sale by importer, manufacturer, dealer and transferee where no dealer is involved The assessable value for dealer in case of old used and second hand vehicles is 10% of the sale price plus commission charged to the buyer or seller over and above the price of the vehicle The assessable value for transferee without involvement of the dealer in case of old used and second hand vehicles is 10% of the declared purchase price

  15. Special Procedure for Sales Tax on Sale of Motor Vehicles - continued Ground Reality • Sales Tax is also being charged on Dealer's commission • Supply of fixed assets against which input tax is not available under a notification in terms of clause 8(1)(b) of the Act is exempt • Notification vide SRO 490(I)2004 does not allow input tax adjustment on Vehicles acquired otherwise than as stock in trade • Effectively the exemption on sale of second hand cars is negated as sales tax would have to be paid on the purchase whether the sale is effected directly or through a dealer Proposal Since sales tax a tax on goods and not on income and moreover input is not allowed this Special Procedure should be withdrawn.

  16. Input Claim on Telephone Bills • Telecommunication services are subject to CED in sales tax mode. • Input tax definition under section 2(14) encompasses such FED in sales tax mode. •  Hence input tax on telephone bills can be legitimately claimed . Ground Reality • Electricity and gas have Special Procedures • These stipulate that the bill shall constitute an invoice, and • Input tax may be claimed if sales tax registration and declared business address is mentioned on the bill. • There are no Special Procedures for Telecommunication Services . • The subscribers sales tax registration number on telephone bills is not mentioned on the bill • Section 7 requires that input tax claim can only be made if a registered person holds a tax invoice in his name and bearing his registration number.

  17. Input Claim on Telephone Bills - continued • Effectively the input tax admissible under law can be denied. Proposal Like other utilities Special Procedures should also be prescribed for Telecommunication Services. The need for having the registration number of the subscriber on the telephone bill should be dispensed with – particularly for the past.

  18. Appeals • Section 45-B(4) requires a 15% payment of the tax demand of the principal amount at the time of filing of first appeal • The recovery of the balance amount is stayed for a period of six months following the day on which 15% amount has been paid • The Appellate Tribunal and High Court is empowered to grant a stay against a tax demand of a maximum period of six months under section 46 and 47 respectively Proposal Like in the income tax law, an automatic stay may be granted untilthedecision in appeal. The restriction to limit the stay to six months should be removed

  19. Thank You

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