TRC subcommittee proposes deletion

SOHAIL SARFRAZ

ISLAMABAD: Tax Reform Commission (TRC) sub-committee has recommended deletion of Section 8A of Sales Tax Act (Joint and several liabilities of registered persons in supply chain where tax is unpaid) and allotment of Provisional Certificates to the new sales tax registration applicants to facilitate business community till issuance of permanent Registration Number by Federal Board of Revenue (FBR).

Sources told Business Recorder here on Sunday that the TRC's sub-committee on sales tax and federal excise has recommended amendments in the Sales Tax Act, 1990 and the Federal Excise Act, 2005.

Currently supply of taxable goods without getting registration with the department is treated as 'tax fraud' on the part of the supplier. Therefore, a genuine businessman is facing problems to carry on his business till the time he is awarded sales tax registration number.

It is recommended that Registration mechanism should be further streamlined within FBR. To provide safeguard to genuine businesses from the Tax Fraud, the concept of Provisional Certificate may be introduced whereby anyone applying for registration be given a Provisional Certificate to facilitate his business till he is allotted a permanent Registration Number.

A genuine businessman is facing problems to commence his business till the time he is awarded his sales tax registration number. On the contrary, supply of taxable goods without actually getting registered could get him penalized with the most serious offence of 'tax fraud' under the Act, TRAC added.

The existing provision of section 2(44) revealed that 'Hire purchase' transaction involves periodical installments received/earned over a period of time. Currently, Sales Tax is being charged on full amount at the time of signing of hire purchase agreement. It is, therefore, suggested that the definition of 'time of supply' may be amended and tax should not be levied at the time of signing of HP arrangement.

Accordingly, tax should be levied at the time when installment is effected / paid. Further, the element of interest embedded in such installment should also be excluded for assessment of sales tax.

Charging tax on full amount at the signing of hire purchase agreement is not justified and is in conflict with the definition of value of supply which states that it is the consideration which the supplier receives from the recipient for the supply, TRC recommended.

Prior to amendment made in section 2(44) of the Act through Finance Act 2013, Sales tax was levied at the time of actual delivery of goods regardless of time of payment. Subsequent to the amendment, Sales Tax is also being charged at the time of advance payment. It is recommended that sales tax on advances should be done away with. Application of sales tax on advances causes serious operational issues and also leads to discrepancies in CREST and unnecessary reconciliation, resulting in hardships to taxpayers. Due to this change, no other benefit other than slight timing difference accrues to the Government; while the taxpayer has to bear unnecessary compliance, audits and litigation costs, it recommended.

TRC observed that 'Further tax' has always been adjustable against output tax in the past. However, through the amendment made in section 7, the right to adjust further tax has been restricted and the same is not being considered as part of output tax for the purposes of adjustment against input tax. Moreover, withholding tax agents are also being denied identical credit.

It is recommended that both the supplier of taxable goods as well as the withholding agent should be provided adjustment of 1% further tax and prior position of section 7 should be restored.

It is recommended that both the supplier of taxable goods as well as the withholding agent should be provided adjustment of 1% further tax.

Rationale for change is to reduce the high cost of doing business in Pakistan for registered sector, TRC added.

TRC said that the tax auditors have been objecting adjustment of input tax paid by the taxpayers on electricity and gas consumed in residential blocks of the factory where its production department is of the view that this area falls under the mischief of section 8(1) (a) and thus such claims of input tax are inadmissible.

It is suggested that suitable amendments may be made to allow input tax on electricity and gas consumption within residential colonies of the registered person, particularly where round the clock supervision of production activities is indispensable and plants are based at the remote locations. It would allow genuine taxpayers to claim input tax being their prerogative.

It said that SRO 450 dated May 27, 2013 disallows input tax on sales tax paid on purchase of building materials even when these are used for the purpose of construction of projects assisting the taxable activity. These restrictions have now been placed in Section 8 through FA 2014.

Disallowing input tax credit is not fruitful and should be restored accordingly. TRC feels that such restriction on legitimate tax credits discourages investment in large projects that will further reduce the economic activity. We also understand that such projects do not contribute any output tax to the Government Exchequer. Moreover, this will reduce the cost of projects especially alternate energy projects which will also encourage investment in the long term, beneficial for revenue generation or GOP, it added.

The section 8A is related to the Joint and several liabilities of registered persons in supply chain where tax unpaid. TRC said where a registered person receiving a taxable supply from another registered person is in the knowledge or has reasonable grounds to suspect that some or all of the tax payable in respect of that supply or any previous or subsequent supply of the goods supplied would go unpaid, such person as well as the person making the taxable supply shall be jointly and severally liable for payment of such unpaid amount of tax.

The person making the payment in good faith should not be made responsible for non compliance by the supplier. Ultimately, the unpaid amount of sales tax will be recovered from the culprit and not from the genuine registered person, TRC said.

Presently, section 8B restricts the claim of input tax up to 90% of the output tax and requires mandatory payment of 10%. It is recommended that section 8B should be removed from the statute. Any provision deferring the claim of legitimate input tax/refunds of a registered person is not justifiable in any fiscal law.

In view of amendment by SRO 154 dated February 28, 2013 in SRO 1125 dated December 31, 2011, zero rating concept for sales tax has been converted into a reduced sales tax rate regime. Consequently, those who were earlier covered in SRO 647(1)/2007 dated June 27, 2007 entry no 7 (given below) cannot now adjust input tax in excess of 90% of output tax.

The section said that "7. Person making zero-rated supplies provided value of such supplies exceeds 50% of value of all taxable supplies in a tax period." This is impacting some of the taxpayers who have moved from the "zero rated" to the "reduced rate" regime as they are currently allowed to adjust only 90% of their input sales tax as per Section 8B of the Sales Tax Act.

TRC has given first option to the FBR to issue clarification letter for the words "zero-rated" mentioned at serial no 7 of the SRO 647 of 2007 "includes reduced rate supplies as well". Second option to be added at Serial No. 7 of the SRO 647 of 2007. The proposed section said "7. Person making zero-rated or reduced-rated supplies provided value of such supplies in aggregate exceeds 50% of value of all taxable supplies in a tax period."

Rationale for change is that it would allow taxpayers to claim input sales tax credit at an early date, in order to avoid blockage of funds leading to unnecessary refunds.