European cos seek end to discriminatory taxation

SOHAIL SARFRAZ

ISLAMABAD: The European Commission Directorate General for Trade Services to the government of Pakistan has asked the Federal Board of Revenue (FBR) to do away with discriminatory tax treatment to products imported into Pakistan and the same manufactured domestically, as higher sales tax rate on imported items would negatively affect the EU products destined for Pakistan.

Sources told Business Recorder on Saturday that the discrimination of sales tax rate on the imported goods from the EU and those locally manufactured has been seen as contrary to Pakistan's obligations under Article 111(2) of the General Agreement on Tariffs and Trade (GATT) 1994.

The European Commission Directorate General for Trade Services has specifically referred to the SRO.1125(1)/2011, which created discrimination between the sales tax rates applicable on imported goods and those manufactured locally. It has been pointed out that 17 percent sales tax is charged on the supply of finished imported goods ready for use by the general public (where they are not industrial inputs), whereas sales tax @ 5 percent is charged on supply of locally manufactured finished goods to retailers, and on subsequent retail sale of the locally manufactured goods under SRO.1125(1)/2011.

In this regard, the Commission has received complaints from European companies regarding discriminatory taxation on products imported into Pakistan and domestically manufactured products.

Sources said the delegation of the European Union to Pakistan presents its compliments to the Ministry of Foreign Affairs and has referred to the letter from the European Commission Directorate General for Trade Services to the Ministry of Commerce, government of Pakistan.

The delegation of the European Union has asked the Ministry of Foreign Affairs to keep them informed of the response from the Ministry of Commerce and the Federal Board of Revenue. The delegation of the European Union to the Islamic Republic of Pakistan avails itself of the opportunity to renew to the Ministry of Foreign Affairs the assurances of its highest consideration, it added.

According to the communication of European Commission Directorate General for Trade Services to the FBR, a tax @ 17 percent is charged on the supply of imported finished goods ready for use by the general public (where they are not industrial inputs), whereas a tax at 5 percent is charged on supply of like locally manufactured finished goods to retailers, and on the subsequent retail sale of the locally manufactured goods.

More specifically, this relates to SRO.1125(1)/2011 as amended by S.R.O. 154(1)/2013, S/RD.898(11)/2013, S.R.O. 420(1)/2014 and SRO. 575(1)/2014 related to domestic sales tax. For example in S.R.O. 1125 (as amended):

Condition (v) provides that import of finished goods ready for use by the general public shall be "charged to tax at the rate of seventeen per cent and value addition tax at the rate of 2 percent. it then states that "Subsequent supply of such goods shall be charged to tax at the rate of seventeen per cent subject to adjustment of input tax in accordance with the relevant provisions of the Act and rules made thereunder" (condition (v) was amended on 28 February 2013 (S.R.O. 154(1)/2013); 4 June 2014 (S.R.O. 420(1)/2014; and 26 June 2014 (S.R.O.

575(1)/2014), it said.

It said the conditions (vii) and (viii), in contrast, provides that "supplies of locally manufactured finished products of the sectors specified in condition (i) to registered retailers shall be charged to sales tax at the rate of five per cent" (with a carve out for fabrics) and. that "registered persons engaged in the retail sale of locally manufactured goods shall pay sales tax at the rate of five per cent on their retail sales", with input tax adjustment entitlements. (Conditions (vii) and (viii) were amended on 28 February 2013 (S.R.O.154(1)/2013); 4 October 2013 (S:R.O. 898(1)/20 13) and 26 June 2014 (S.R.O.575(1)/2014).

Discriminatory treatment and higher sales tax rate applied to imported products would negatively affect EU products destined for Pakistan. Furthermore, such discriminatory treatment could be seen as being contrary to Pakistan's obligations under Article 111(2) of the General Agreement on Tariffs and Trade (GATT) 1994, European Commission Directorate General for Trade Services said.

Pakistan should take necessary steps to ensure that any discriminatory treatment of imported finished goods in the application of its sales taxes is removed as soon as possible or explain why Pakistan considers that such treatment is not contrary to Pakistan's obligations under Article 111(2) of the GATT 1994, the European Commission Directorate General for Trade Services added.