FEDERAL BUDGET 2015-16 Sales Tax & Federal Excise Adnan Mufti Karachi Tax Bar Association

1. FEDERAL BUDGET 2015-16 Sales Tax & Federal Excise Adnan Mufti Karachi Tax Bar Association 09 June 2015

2. Overview • What is NOT in the budget ? • Effective Rate of Sales Tax • Further tax enhanced to 2%. Is it a deterrent ? • Recovery Disputes between Customs & IRS Settled or Initiated • Section 8A rationalized • Sales Tax levied on 42 Services rendered in Islamabad • Reinforcement of FBR’s right on Toll Manufacturing • Supervised Clearance Re-introduced • Input Tax Credits • Special Audit Panels

3. What is NOT in the Budget ? • Measures for broadening the tax base instead of collection of revenue targets / books management. Why tax collection surges to billions in a single day during May & June ? • Consistency in commitment: In the Budget for 2011-12, the then Finance Minister had announced in NA that Excise Duty Regime is being condensed and would entirely be withdrawn in next 2 years. • Scheme of taxpayers’ facilitation especially for large taxpayers. Starting from seeking refund claims till seeking revision of return, the overall taxpayers’ experience is the same. • Policy framework in right spirit. Aircraft exempted; ghee, butter, milk taxed; tax enhanced on export oriented sectors; FED on sugar. On the other hand, India is now moving towards GST Regime.

4. What is NOT in the Budget ? • Objective criteria for tax machinery for recovery of due taxes and equitable enforcement of tax laws • Transformation from litigation to negotiation. Tax Settlement Commission; fair revival of ADRC • Exemption to Services separately taxed in Provinces. Surprisingly, FED on Telecom withdrawn last year. However, all other services rendered in Provinces have not been exempted causing double taxation and litigation.

5. Effective Rate of Sales Tax

6. Active Taxpayers & List Sales Tax General Order 34/2010 legitimized. Legal amendments made to support the existing modus operandi at FBR’s ePortal Non compliance of CREST notice: no offence under Section 8 but punishable under STGO Taxpayer can be classified as non-active under sales tax laws on the basis of his income tax filing profile appears to be a desperate attempt to grab the taxpayer by whatever means. This measure could be called in question before the Court of Law on the basis of available precedence Section 8 silent but still input tax adjustments, against invoice issued by non-active taxpayers, are denied. This may also incite litigation.

7. Toll Manufacturing Goods or Service ? FBR & Provincial Tax Authorities are at loggerhead STGO 3/2004 & SRO 1125 imposes tax on Toll Manufacturing. SRB & PRA also demands sales tax on such transactions High Court held it’s a service and cannot be taxed as goods Toll manufacturing has again been brought back in the main statute after being dropped in Year 2008 after the High Court’s verdict Overlapping / Double Taxation a new era of dispute over collection of sales tax on toll manufacturing would emerge between the Federal Government and the Provincial Governments. This will enhance litigation. Presently, the issue is subjudice and recoveries stayed by High Court

8. Input Tax on Pre-Fabricated Buildings Input tax on pre-fabricated buildings acquired for sale, re-sale, or direct use in the production or manufacture of taxable goods has been allowed. Previously such input tax was an admissible deduction under Section 8 without any conditions. Now tax adjustment has been made conditional if acquired for sale, re-sale, or direct use in the production or manufacture of taxable goods. It is not a beneficial amendment.

9. Input Tax on Services Identical to Year 2012, input tax on services, which are already debarred for adjustment under the respective provincial sales tax laws, has been denied under the Federal Law as well. These measures again reflect the tinkering mindset; thus ignoring the bigger picture. Input tax disallowance on franchise, business support, contractual execution of work, advertisements, construction, accountants / auditors, toll manufacturing, manpower supply, etc. will cause damage to businesses. It will also put business pressures upon service providers. Provincial tax authorities denies massive tax credits on negative goods specified under SRO 490 and lot more services. Both federal and provincial laws need rationalization and harmonization. Adjustments of tax credits may be bilaterally made among tax authorities in the light of MOUs. Now the IRS officers would have legal powers to interpret negative list of Provincial Laws. Such measures may provoke the Provincial Tax authorities enact identical provisions empowering them to penetrate into Federal Sales Tax Laws. This is a dangerous trend and may create chaos and serious practical problems for the businesses.

10. Input Tax on Goods & Services Input tax on goods and services has been denied if, at the time of filing return by the buyer, the seller had not declared the same in his tax returns. Another attempt for cross matching returns of buyer and suppliers. In the past, Section 8(1)(ca) was brought which was quashed by Lahore High Court. This measure appears to have brought to counter such verdict. Such measures will not yield result as the competitor acts faster. We saw “traders’ protest” for revival of further tax in Faislabad few years back. Problems lies in automation and weak capacity of tax machinery. The solution also lies there. There is a need to work on research, business processes, focused automation with sincerity.

11. Input Tax on Goods & Services • Practical problems: • How can parties access each other’s confidential tax returns on monthly basis. • Filing date for general class of taxpayer is the same; the buyer cannot ensure filing of his supplier’s return before such date. • FBR his allowed delayed return filing to IPPs, Petroleum and Exploration Companies, etc. In such cases, buyer of such sectors will not have supplier returns filed by the time he goes to file his own tax return. • Practical difficulties when the supplier himself opts for delayed filing of his tax returns. • No mechanism specified how the disputed input tax will again become admissible for the buyer after the supplier files his returns.

12. Status of Existing Exemptions Taxes (Amendment) Ordinance, 2015 promulgated by President of Pakistan has curtailed powers of Federal Government to grant sales tax exemptions. Such amendment(s) have been made part of Finance Bill 2015 for Parliament’s ratification and assent. Section 13(7) suggests that tax exemption awarded by the Federal Government will carry an expiry date of maximum 12 months. This means every exemption notification issued by the Federal Government will stands rescinded at the end of each financial year, if not rescinded earlier. The language couched in Section 13(7) implies to have a prospective effect, i.e., applicability on SROs issued from the date of enacted of Finance Act 2015. Identical amendments made in Federal Excise Act, 2005 states that exemption notifications issued only after 01 July 2015 would be rescinded after the end of each financial year. But no such statement is found for Sales Tax exemptions awarded in the past. GOP should clarify this confusion much before 01 July 2015.

13. Registration Concept of temporary sales tax registration has also been reintroduced to facilitate the new aspirants particularly manufacturer-cum-importer who would be able to import machinery etc. without completion of procedural formalities. Overlapping requirements for Registration and Eight Schedule were causing problems. Registration of persons who are not engaged in making taxable supplies and need registration for import or exports of goods has also been made easy. This is a beneficial amendment for semi-governments, non-profit organizations, etc.

14. Audit by Special Panel A new concept of Special Audit Panels has been introduced which will replace existing model of special audits. The new audit panel will comprise of tax officials, professional accountants and other nominees of the Board. The concept of joint audit with Provincial tax authorities has also been introduced. It will unnecessary enhance audit powers of the tax authorities who, apart from conducting audit under Section 25, can now also conduct audit under Section 32A. The Chairman of the audit panel would be officer of Inland Revenue which would mean that role of Chartered Accountants, Cost & Management Accountants and other professionals may be symbolic and not a decisive one. Audit under Section 32A may be conducted more than once a year.

15. Monitoring or Tracking by Electronic Means Notified goods (cigarettes, beverages, cement, fertilizer and sugar) will not be sold without being affixed tax stamp, banderole stickers, labels, bar code, etc. thereon to be acquired from licensee appointed by FBR. Tracking and monitoring of sales, production was initiated under Section 40B. Last year, Section 40B was amended apparently to undo the beneficial judgment of LHC which had restricted its operation. Now, the ambit of Section 40C is being enlarged. This is revival of supervised clearance under erstwhile central excise regime. Despite audits, monitoring, cross matching of records, inventory checks, etc. adoption of such measures transpires complete failure of tax machinery to overcome tax evasions. This increased vigilance of tax payers’ operations may result in unnecessary delays in execution of transactions and chances of taxpayers’ harassment will increase besides enhanced cost of doing business.

16. Agreement for Exchange of Information • Bilateral or multilateral agreements with provincial governments or foreign governments for exchange of information made possible. The amendment implies that such agreements will be for avoidance of double taxation and prevention of fiscal evasion. • In context local environment, we expect the amendment will help taxpayers especially those who are exposed to double taxation in respect of following services under respective provincial laws as well as federal government laws: • Advertisement • Shipping Agent • Banking Services • Insurance Services • Franchise • Stock broker • Port and Terminal operator

17. Tax on Textiles, Leather, Sports, etc. Tax rates on zero rated sectors have been enhanced. Refunds accrued to zero rated sectors to be filed on monthly basis. However, no corresponding amendment has been made in Section 10. The actual picture of such announcement will be clear once amended SRO is issued by GOP. Section 8 also exempted for such sectors. No two opinions on taxing local sales. The problem is the business mix which gives rise to refunds. The industry together with Commerce & Textile Ministries have been advocating for a complete zero rating for export oriented sectors. Industry claims approx. Rs. 100 has been stuck up in refunds. Last year, the FM had given 30 September 2014 as the last date for clearance of all ST refunds; now he has given a new date of 30 August 2015. Time to think on No Duty No Drawback Regime to boost investment, employment and exports. It is not an option; we need to find a way out in the current system.

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