1

PRESENTATION ON SALES TAX WITHHOLDING WITH REFERENCE TO

THE TEXTILE SECTOR

LARGE TAX PAYERS UNIT, LAHORE07-11-2013

Ahmad KamalAdditional Commissioner

2

SCHEME OF PRESENTATIONHistory of zero rated / reduced rate regime for export

oriented sectors including the textile sectorSectors covered under the zero rated / reduced rate

regimeSalient features of SRO 1125(I)/2011 dated 31-12-2011

with reference to textile sector as amended to dateConcept of Withholding Sales TaxSection 3 (7) of the Sales Tax Act, 1990Sales Tax Withholding Rules, 2007 notified vide SRO

660(I)/2007 dated 30-06-2007 as amended to dateCumulative impact of SRO 1125(I)/2011 and SRO

660(I)/2007

3

History of zero rated / reduced rate regime for export oriented sectors including the textile sector

SRO 621(I)/2005 dated 17-06-2005SRO 509(I)/2007 dated 09-06-2007SRO 283(I)/2011 dated 01-04-2011SRO 1058(I)/2011 dated 23-11-2011SRO 1125(I)/2011 dated 31-12-2011

4

Sectors covered under the zero rated / reduced rate regime

Leathers and articles thereofTextile and articles thereof CarpetsSports goodsSurgical goodsIt is important to note here that the benefit of

reduced rate of sales tax is subject to fulfillment of certain conditions and the rate of tax also varies with the stage of supply and the goods supplied

5

Salient features of SRO 1125(I)/2011 with reference to textile sector as amended to dateSRO 1125(I)/2011 dated 31-12-2011 came into

operation on 01-12-2012It was amended a number of times since its

inception with the major amendments coming through SRO 154(I)/ 2013 dated 28-02-2013, SRO 504(I)/2013 dated 12-06-2013, SRO 682(I)/ 2013 dated 26-07-2013 and SRO 898(I)/ 2013 dated 04-10-2013

The SRO as amended to date has two tables consisting of various goods belonging to the five export oriented sectors as well as raw materials, chemicals, components, subcomponents etc. used in these export oriented sectors

6

Salient features of SRO 1125(I)/2011Major components of Table 1

Leathers and articles thereof, excluding finished articles of leather and artificial leather

Textile and articles thereof, excluding finished articles of textiles and textile made-ups; mono-filament of more than 67 decitex, sun shading, fishing net of nylon or other material, rope of polyethylene or nylon and tyre cord fabric

Carpets, excluding those in finished condition Sports goods, excluding those in finished conditionSurgical goods, excluding those in finished conditionRaw materials, chemicals, components, subcomponents

etc. used in afore referred export oriented sectors

7

Salient features of SRO 1125(I)/2011Components of Table 2

Finished articles of leather and artificial leather Finished articles of textiles and textile made-ups

excluding used and worn clothingAs regards the textile sector various rates of sales tax

have been provided2% of the value of supply regarding items mentioned in

Table 15% of the value of supply regarding items mentioned in

Table 23% of the value of supply regarding fabrics17% of the value of supply in case supplies are made

outside the reduced rate sectors

8

Salient features of SRO 1125(I)/2011The benefit of SRO 1125(I)/2011 pertaining to textile sector

is available to persons doing business in textiles who are registered as manufacturers, importers, exporters and wholesalers registered under the Sales Tax Act, 1990 and are on Active Taxpayer List of Federal Board of Revenue’s website

For the textile sector the notification applies from spinning stage onwards

Sales tax is chargeable @2% on import of goods usable as industrial inputs by registered manufacturers

Sales tax is chargeable @2% plus 2% value addition on import of goods usable as industrial inputs by commercial importers, on which tax shall be charged @2% within the five sectors and@ 17% outside these sectors

9

Salient features of SRO 1125(I)/2011Sales tax @5% along with value addition @2% is to be

charged on import of finished goods ready for use by the general public

Supplies of industrial inputs within five sectors is chargeable to sales tax @2% whereas supplies outside these five sectors is chargeable to sales tax @17%

Supply of finished products to retailers is chargeable to sales tax @5%

Registered retailers shall pay sales tax @5% on their retail sales

Registered manufacturers involved in processing of goods are required to charge sales tax @2% of the processing charges received

10

Salient features of SRO 1125(I)/2011Goods mentioned at Table 1 if supplied to manufacturers

for manufacturing goods mentioned at Table 1 or 2 shall be charged tax @2% even outside the five sectors

Import and supply of fabrics shall be charged sales tax @3% and value addition @2% shall be applicable in case of commercial import of fabrics

Registered persons are entitled to input tax adjustment on consumption of tax paid inputs, however refund against local supplies is admissible only subject to pre- refund audit and is also required to be scrutinized through post refund audit to be conducted within ninety days.

Registered manufacturers are entitled to input tax adjustment on machinery, parts, spares and lubricants

Registered manufacturers and exporters of five sectors are entitled to zero rated supply of gas and electricity

11

Concept of Withholding sales tax As a general rule the liability to pay sales tax is as

follows:In the case of local supply of goods, of the person making

the supply, and In the case of goods imported into Pakistan, of the person

importing the goods. In case of withholding sales tax the liability to pay sales

tax is partly shifted to the withholding agent making purchases in cases where supplies are made by registered person and it is completely shifted to the withholding agent where supplies are made by an unregistered person to government departments, autonomous bodies or public sector organizations

12

Section 3(7) of the Sales Tax Act, 1990

“The Federal Government may, by notification in the

official Gazette, specify any person or class of

persons as withholding agent for the purpose of

deduction and deposit of tax at the specified rate in

such manner and subject to such conditions or

restrictions as the Federal Government may

prescribe in this behalf.”

13

Salient features of Sales Tax Withholding Rules, 2007 as amended to dateThe Sales Tax Withholding Rules, 2007 were promulgated by

the federal government vide SRO 660(I)/2007 dated 30-06-2007 in exercise of powers under Section 3(7) of the Sales Tax Act, 1990

Major amendments were introduced to these rules vide SRO 98(I)/2013 dated 14-02-2013, SRO 505(I)/2013 dated 12-06-2013 and SRO 897(I)/2013 dated 4-10-2013

These rules came into force on 01-07-2007These rules apply to all taxable goods and services barring few

exceptions that are purchased by the withholding agents The definition of withholding agent includes Federal and

provincial government departments, autonomous bodies, public sector organizations, registered companies, registered recipients of services of advertisement and registered exporters

14

Salient features of Sales Tax Withholding Rules, 2007 Cont. 2

As per the rules, a withholding agent shall deduct an amount equal to one fifth of the total sales tax shown in the sales tax invoice issued by the registered supplier and make payment of the balance amount to him. In case of supplies made by a registered wholesaler, dealer or distributor the amount deducted would be one tenth.

The withholding agent is required to indicate through notice or advertisement that withholding sales tax shall be deducted by him on purchases of taxable goods

The sales tax so deducted shall be deposited by the withholding agent in the designated branch of National Bank of Pakistan on sales tax return-cum-payment challan, by 15th of the month following the month during which payment has been made to the supplier

15

Salient features of Sales Tax Withholding Rules, 2007 Contd. 3

A withholding agent having a FTN, Federal and provincial government departments, autonomous bodies and public sector organizations are required to deduct entire amount of sales tax from the payment due at the applicable rates on purchases made from unregistered persons

A registered company or exporter shall deduct sales tax equal to one percent of the value of supply on purchases made from unregistered persons. No input is allowed on such deduction

A sales tax registered recipient of services of advertisement is required to deduct entire amount of sales tax from the payment due to the service provider at the applicable rates on services obtained

16

Salient features of Sales Tax Withholding Rules, 2007 Contd. 4 The registered supplier is required to issue sales tax invoice

as stipulated in section 23 of the Sales Tax Act, 1990, in respect of every taxable supply made to a withholding agent.

The registered supplier is required to file monthly return as prescribed in the Sales Tax Rules, 2006, and can adjust total input tax against output tax under sections 7, 8 and 8B of the Sales Tax Act,1990, taking due credit of the sales tax deducted by the withholding agent

The Commissioner is required to keep a list of all withholding agents falling in his jurisdiction and monitor payment of tax deducted by withholding agents falling in his jurisdiction and shall also ensure that the return prescribed under these rules is filed.

17

Salient features of Sales Tax Withholding Rules, 2007 Contd. 5

The Commissioner is required to keep a list of all withholding agents in his jurisdiction and to monitor payment of sales tax by withholding agents. He is required to ensure that the return received from the bank is duly fed in the computerized system and also to periodically ensure that the suppliers mentioned in the return filed by the withholding agents, falling under his jurisdiction, are filing returns under section 26 of the Sales Tax Act, 1990, declaring the supplies made to withholding agents.

The provisions of these rules do not apply to supply of following goods and services if made by registered persons: (i) Electrical energy(ii) Natural gas

18

Salient features of Sales Tax Withholding Rules, 2007 Contd. 6

Petroleum products as supplied by production companies, oil refineries and oil marketing companies

Mild steel productsProducts made from sheets of iron, steel etc.Paper in rolls or sheetsPlastic products including pipesVegetable ghee and cooking oilTelecommunication servicesGoods specified in Third schedule of the Sales Tax Act,

1990Supplies made by commercial importers who paid value

addition tax at the time of import

19

Reasons for these amending SRO 660(I)/ 2007The federal government introduced these amendments as a

revenue measureThe scope of sales tax withholding has been increased

manifold, by introduction of companies and exporters as withholding agents

These measures have been introduced in order to discourage undocumented sector and to bring more persons carrying out taxable activity into the tax net through sales tax registration but this effect has been nullified due to latest amendment introduced through SRO 897(I)/2013 dated 4-10-2013

Failure on part of the department to bring various undocumented sectors / segments into the sales tax net is reflected by expansion of the with holding regime

20

Cumulative impact of SRO 1125(I)/2011 and SRO 660(I)/2007 on textile sector Textile sector is not amongst the sectors outside the

purview of withholding regime of sales tax therefore sales tax at varying rates has to be with held by the withholding agents in case of purchases pertaining to textile sector

A withholding agent shall deduct an amount equal to one fifth of the total sales tax shown in the sales tax invoice issued by the registered supplier of textiles and make payment of the balance amount to him. In case of supplies made by a registered wholesaler, dealer or distributor the amount deducted would be one tenth of the total sales tax.

21

Cumulative impact of SRO 1125(I)/2011 and SRO 660(I)/2007A withholding agent having a FTN, Federal and

provincial government departments, autonomous bodies and public sector organizations are required to deduct entire amount of sales tax from the payment due at the applicable rates on purchases made from unregistered persons who supply textile goods

A registered company or exporter shall deduct sales tax equal to one percent of the value of supply on purchases made from unregistered persons. No input is allowed on such deduction

The applicable rate of sales tax would vary keeping in view the description of goods, the stage of supply and the sector in which or to which the supply takes place as per Table1, Table 2 or conditions of SRO

22

THANK YOU