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FEDERAL BUDGET 2014-15Sales Tax & Federal Excise

Adnan Mufti FCA

Shekha & MuftiChartered Accountants

Karachi Tax Bar Association

07 June 2014

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Pro Business Budget - Reality Unfolds Slowly & Gradually The Expenditure & Revenue Approach – FBR’s Role Unclear Tax Policy Our Problem: Enforcement ! Broadening of Tax Base - Measures Input Tax Adjustments Self Assessment OR Supervised Assessment FBR vs. Provincial Sales Tax Authorities Partial Exemption of FED on Services

OVERVIEW OF TAX MEASURES

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OVERVIEW OF TAX MEASURES

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Unrealistic Tax Target: FBR holds finance ministry responsible for fiasco

http://tribune.com.pk/story/708032/unrealistic-tax-target-fbr-holds-finance-ministry-responsible-for-fiasco

FBR Chief admits Govt. withholding Rs.97B sales tax refunds

http://tribune.com.pk/story/699490/inefficient-fbr-chief-admits-govt-withholding-rs97b-refunds

Pakistan & IMF agreed to increase tax collection

http://www.brecorder.com/top-stories/0/1181616

Tax Targets of Rs. 2.8T framed for 2014-15

http://epaper.dawn.com/DetailNews.php?StoryText=04_06_2014_001_002

Ishaq Dar defends ambitious budget targets

http://tribune.com.pk/story/717411/raising-taxes-is-not-for-harrassment-ishaq-dar

Expenditure & Revenue Approach – FBR’s Role

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Single Digit Sales Tax

Federal Excise Duty

Finance Minister’s Budget Speech in National Assembly 2012-2013

 

“To bring prices down and give incentives to the private sector, the Government intends to phase out Federal Excise Duty (FED) in the next two years…………...To ensure this, FED was abolished on 15 items last year and the rates were brought down on many more. The Government intends to further eliminate FED on 25 additional 10 items……………”

Sales Tax Refunds

Unclear Policy Matters

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Obstacles in Enforcement of Tax Laws !

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Except for half baked measures in the case of retailers, no tangible effort has been made to enforce tax laws to non compliant sectors.

The Government, instead of improving its expenditure side, is placing strong emphasis on tax burdening measures.

Retailers Taxation will be a revenue tool instead of expansion of tax base. It may also encourage retailers to manipulate sources of electricity.

      The complaint sector is overburdened with tax load and withholding taxes.

Fear is also emerging among small taxpayer not to get registered and get documented.

Enforcement of Tax Laws to Non Compliant Sectors

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Major tax exemptions have been withdrawn and Zero Ratings have been rationalized.

While machinery has been exempted from Customs Duty, 5% sales tax has been imposed on plant and machinery not manufactured locally and equipment, apparatus and capital goods imported by specific sectors and for specific purpose

Machinery, equipment and other capital goods for Service Sectors, Surgical, Hotels, Tourism, Telecommunication, etc. Taxed @ 17%

To encourage investment climate in the country and to protect undue drain of liquidity, adjustments of tax paid on plant / machinery and timely refunds of excess input tax not adjusted in 12 months’ time needs to be ensured.

Broadening of Tax - Measures

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Exemption Threshold of Rs. 5 Million for Retailers withdrawn

Normal Tax Regime @ 17% or 0.75 percent for following retailers:

retail outlets operating as part of national or multinational chains; operating in air-conditioned malls; provide facility of debit or credit cards; and consume electricity exceeding Rs. 50,000 per month

Mammoth task to bring retailers from 0.75% to 17% tax bracket. Ground work / consultation needs to be done with Trade Bodies or Chambers

Procedure of Registration not defined yet

Tax Structure of Retailers having outlets both in malls and outside malls not clear

Broadening of Tax Base - Measures

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2nd Tier Retailers to be charged sales tax via monthly electricity bills @ 5% if monthly electric bill is less than Rs. 20,000. In case of bill exceeding Rs. 20,000, sales tax will be levied @ 7.5% of the electric bill

Despite levy of sales tax via monthly bills, the Finance Bill proposes that extra tax and further tax on electricity bills shall still be collected from such retailer.

In other words, besides being in tax net, retailer will still be an unregistered person ? This approach needs to be rectified; otherwise the entire scheme may be jeopardized

Correct identification of retailers and charging of sales tax is a challenge. Problems would emerge where electric connection is not in the name of retailer operating the business.

Whether electricity distribution companies will assume responsibly to harness such huge non-compliant sector ?

Broadening of Tax Base - Measures

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Tax Incidence of Retailer

Monthly consumption less than Rs.

20,000

Monthly consumption exceeds Rs.

20,000

Sales Tax on Electricity 17% 17%

Extra Tax on Electricity 5% 5%

Further Tax on Electricity 1% 1%

Sales Tax on Electricity Bill 5% 7.5%

Total Tax on Electricity 28% 30.5%

Purchases from Registered Sector 17% 17%

Further Tax on Purchases 1% 1%

TOTAL TAX INCIDENCE 46% 48.5%

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Clause (iiia) in Section 7(2) has been inserted, which debars input tax adjustment except in the case of following goods and services:

 imported or purchased for the purpose of sale or re-sale by the registered person on payment of tax;

 used directly as raw material, ingredient, part, component or packing material by the registered person in the manufacture or production of taxable goods;

 electricity, natural gas and other fuel consumed directly by the registered person in his declared business premises for the manufacture, production or supply of taxable goods; or

 plant, machinery and equipment used by the registered person in his declared business premises for the manufacture, production or supply of taxable goods.

Input Tax Adjustments

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Newly inserted clause (iiia) prescribes harsh, too narrow and subjective criteria for adjustment of input tax as against Section 7(1) of the Act which is a much broader provision existing in the statute for a very long time now.

An attempt has been made to revive repealed SRO 1307 of 1997 again !

Why Section 7 has been amended ?

  Both Sub Section 1 and Sub Section 2(iiia) of Section 7 are contradictory to each

other, besides being conflicting with Section 73(2) of the Act.

  The basis of tax adjustment has been shifted on the basis of consumption as against

Section 7(1) which allows input tax credit on total procurements / imports for the relevant tax period.

  Computation and accounting for input tax according to consumption pattern by the

business and verification thereof by the Tax Officer almost impossible. 

Input Tax Adjustments

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Discrimination and harassment of taxpayers under the garb of Section 7(2)(iiia)

The entitlement of input tax credit has been made subject to cash basis instead of accrual basis prescribed in Section 7(1) and Section 73

  Input tax allowed only on direct ingredients ! What are indirect inputs / material ?

  Provincial Sales Tax not admissible; Sales tax / FED paid on services including

that paid on telecommunication services not adjustable.

  MOUs signed with Provincial Tax Authorities and SRO 212(I)/2014 made

redundant

  Litigation Again ! 

Input Tax Adjustments

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Section 8 has also been amended whereby with minor modifications, the negative list specified in SRO 490/2004, has been brought in the main statute. Following items have been added in Section 8:

goods and services not related to the taxable supplies

goods and services acquired for personal or non-business consumption;

goods used in, or permanently attached to, immoveable property, such as building and construction materials, paints, electrical and sanitary fittings, pipes, wires and cables, but excluding such goods acquired for sale or re-sale or for direct use in the production or manufacture of taxable goods; and

vehicles, parts of such vehicles, electrical and gas appliances, furniture, furnishings, office equipment (excluding electronic cash registers), but excluding such goods acquired for sale or re-sale.

The proposed amendments in Section 7(2)(iiia) do not allow the taxpayer any input tax except the restricted input tax directly attributable to his business. Hence, on this account, the foregoing disallowances proposed in Section 8 appear to be mere duplication.

Input Tax Adjustments

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Benefits of an Undocumented Economy ?Purchases from Purchases from

Registered Sector Unregistered Sector

Cost   Sales Tax   Sales Tax (WHT)

Indirect raw material 1,500,000 255,000 12,820.51

Indirect Packing material 1,250,000 212,500 10,683.76

Other overheads 2,000,000 340,000 17,094.02

Phone / Mobile Bills 750,000 127,500 6,410.26

Vehicle & Parts 2,250,000 382,500 19,230.77

Other CAPX 500,000 85,000 4,273.50

Building and construction materials & paints 2,500,000 425,000 21,367.52

Civil Works 1,050,000 178,500 8,974.36

COST OF SALES TAX   2,006,000 100,855

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Adjustment of further tax against input tax has been excluded.

An identical restriction was also placed vide Finance Act 2003 in Section 7 for 1 year which was subsequently deleted vide Finance Act, 2004.

During the entire fiscal year 2013-2014, the issue of adjustment of input tax against further tax remained an unresolved issue between the revenue and taxpayers. Despite no legal support, the tax department was not allowing adjustment of input tax from further tax and has made several cases against such taxpayers who had adjusted the same in their sales tax return.

After the above amendments in Section 7(1), the ongoing dispute will be put to rest and all previous cases initiated by the tax department on the subject matter stand settled.

Further Tax

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Mindset behind Section 40B ? Central Excise & Supervised Clearance

An explanation has been inserted in Section 40B in order to give legal protection and to extend the powers of the Board, Chief Commissioner and Commissioner for posting of any officer of the Inland Revenue to the premises of any registered person for the monitoring of production, sales and stock position

The proposed explanation stipulates that such powers conferred to the Chief Commissioner, Commissioners are independent of the powers under Section 40.

Such an explanation aims to negate the recent judgment pronounced by Appellate Tribunal Inland Revenue wherein it was held that posting of the Officer of the Inland Revenue under Section 40B is subject to the requirements of Section 40 and obtaining warrant from the magistrate.

Through this amendment, blanket powers are intended to the given to the Chief Commissioner and Commissioners for posting of Officers without any search warrants as required under Section 40 of the Act. This is a dangerous trend.

Posting of Officers

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New Section 50B is proposed to be inserted after Section 50A to give legal coverage to various electronic intimation and notices send through computerized systems.

Further, a new computerized system similar to “CREST” is intended to be implemented which will make automatic scrutiny, analysis, cross matching of the returns and other available data of the registered person and to issue electronic notices to the registered taxpayers.

The new system may cause issues for the taxpayers if their tax profile including their email addresses are not updated.

Electronic Scrutiny and Intimation

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To strengthen the local industry, import of finished articles of textile, leather, etc. has been made subject to sales tax at normal rate @ 17% alongwith 2% Value Addition Tax.

Supply of such goods will continue to be taxed @ 5%, which is likely to result in refunds / excessive input tax in the hands of such traders. This would make the amendment practically redundant.

An SRO 420 has been issued w.e.f. 04 June 2014 which suggests that all imports w.e.f. 04 June 2014 have become subject to 17% sales tax. However, on the other hand, the Salient Features of Budget 2014 issued by the Government clearly suggested that the new tax regime will take effect from 01 July 2014.

Such an anomaly needs to be addressed and rectified at the earliest.

Tax on Imported Garments, Leather, etc. - SRO 1125

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The Finance Bill proposes to reduce FED on telecommunication services from 19.5% to 18.5%.

As a first but incomplete step towards elimination of FED on services separately taxed by provincial tax authorities, the Bill proposes to withdraw FED from Telecommunication Services rendered in provinces of Sindh, Punjab and Khyber Paktunkhaw where such Provinces are separately collecting provincial sales tax under their respective statutes.

In line with the above amendment, FED should be completely withdrawn on all services which are taxed under the Provincial Sales Tax Laws. Till then, the issue of double taxation would continue to haut the taxpayers.

FED on Telecommunication Services

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THANK THANK YOUYOU