Federal Budget 2007-2008Proposals in Indirect TaxesADNAN MUFTI, FCAPartner, Junaidy Shekha & MuftiChartered Accountants

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SALES TAX

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Input carried forward

Extension of 3rd Schedule

Taxation of Leasing

Fixed & Minimum Value Addition

Input Tax Credit vs. Output Tax Payment / Joint & Several Liability

Taxation of Retailer

Taxation of Commercial Importer

Tax on Courier Service

‘Suspicious’, ‘Abnormal Tax Profile’

Award of Stay by Collector (Appeals)

Alternative Dispute Resolution

Audit

Overview

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Adjustment Note & Advice

Refunds

Default Surcharge & Delayed Refunds

Recovery Rules

Debit & Credit Note

Appeal Effect

Section 73

Overview…..

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Issue

  The benefit of carry forward of input tax was withdrawn in Finance Bill 2005. This withdrawal has generated the following issues:

• Huge Claims for Refunds pending with the Collectorates• ‘Refund Avoidance Measures’ in Vogue• Distortions / Inconsistencies in various Books of Accounts• Enhanced contact between Taxpayer and Tax Collector / Litigation• Procedural Issues

Proposal

Today with the above legal pitfalls and hassles, it is proposed that the original

scheme may be revived forthwith to the taxpayers

Input Tax Carried Forward

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Extension of 3rd Schedule

Issue

The mechanics of ‘retail price’ encourages concentration of compliances at a particular stage of the supply chain and discourages documentation of the economy as a whole. Nevertheless, it is the safest and easiest tool for generation of tax revenues by recovering the entire tax payable on a particular product from a single stage (Refer CBR Rationale – Budget 2006)

Proposal

It is proposed that the retail price and 3rd Schedule of the Act may be scrapped altogether and the entire chain of goods mentioned therein should be brought in the VAT mode of taxation

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Issue 

The tax authorities have started probing potential areas involving financial and operational leases despite CBR’s ruling in terms of which ‘any direct lease by a manufacturer shall be treated as as supply liable to tax’

 Proposal

It is recommended that, to clarify the issue, proper thought process be initiated to the issue of taxation of lease and rules issued. The relevant conclusion thereof may be made part of statute in section 2(33) to remove confusion among the taxpayers

Taxation of Leasing

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Fixed & Minimum Value Addition

Issue

  A number of products are taxed as per minimum / fixed value addition. This concept has generated the following issues:

• Taxpayers involved in ‘tax engineering’ by concealing actual sales revenue

• Distortions; Non availability of level playing fields to various sectors of economy

Proposal

It is proposed that except for retailers, all schemes envisaging payment of minimum / fixed value addition may be done away with. On the contrary, documentation should be promoted through various incentives / privileges offers to compliant taxpayers

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Input Tax Credit vs. Output Tax Payment / Joint & Several Liability

Issue

By virtue of Finance Act 2006, input tax credit has been held to be inadmissible for a buyer, if the supplier fails to deposit the related output tax in government kitty. Likewise both buyer and supplier are jointly liable for failure of deposit of tax. This provision is not in keeping with the legal postulate that a supplier is a collecting agent of the Government

 Proposal

 

Quite obviously, a genuine buyer would not know whether the tax is paid by the supplier or not. These provisions contradict sections 3(3) and 7 of the Act and should be done away with in the coming Budget

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Taxation of Retailer

Issue 

A registered retailer is required to pay 3% tax on value of supplies specified in 3rd Schedule of the Act. Thus, they are exposed to double taxation on retail price items

 Proposal

 

It is proposed that to bring harmony in the law, registered retailers may also be exempted from the levy of tax on retail price items in the same manner as has been done in the case of wholesaler-cum-retailer

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Issue

Quarterly Tax Returns prescribed for commercial importers calls for quantity reconciliation of stock and the related sales tax. This requirement is unclear since the importer does not know whether stock figures are to be disclosed on accounting basis or tax basis. Difference in benchmark leads to a different value addition and consequently different tax liability

 Proposal

 According to tax law, the cost of import is the customs assessed value. However, according to international accounting standards, the cost of imported goods is the total of various costs incurred in bringing the inventories to their present condition and location

It is, therefore, proposed that importers’ rules may be amended to remove confusion and anomalies and to provide a benchmark for disclosure purposes acceptable to revenue authorities

Taxation of Commercial Importer

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Issue 

Commercial importer is not being able to adjust various other legitimate input taxes paid by him on acquisition of taxable services

 Proposal

 

It is recommended that tax return prescribed for commercial importers may be amended and a column for adjustment of tax charged by customs agents, paid on advertisement, etc, may be added thereto

Taxation of Commercial Importer …..

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Tax on Courier Services

Issue 

Keeping in view of the definition of courier services, it might be inferred as if the services of freight forwarding / transportation / logistics of machinery, goods, etc. might also be exposed to service tax

 Proposal

 

Under the Indian Service Tax Regime, all services in the name of goods transport attract sales tax as if they were courier services. Hence, to remove ambiguity, it is proposed that definition of courier services may be clarified as to whether transportation of cargo / heavy items from one place to another is liable to tax or not

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Issue 

A registered person may be declared “suspicious” if his tax profile is found to be “abnormal” by the Collectorate. These terms are not defined in the law. Further, there have been instances when a person was declared ‘suspicious due to computer error

 Proposal

 

Specific provisions should be introduced containing definitions for the terms ‘Suspicious’, ‘Abnormal Tax Profile’. Further, a proper mechanism should be put in place to deal with such cases, including rectification of computerized errors

‘Suspicious’, ‘Abnormal Tax Profile’

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Award of Stay by Collector (Appeals)

Issue 

With the removal of sub section 4 of section 45B, the law now appears to be silent with respect to powers of Collector (Appeals) to grant stay against a departmental demand, challenged by the taxpayer in his appeal before the Collector

 Proposal

 

It is suggested that powers previously vested with Collector (Appeals) should be restored

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Issues

The law does not provide a framework of the ADR system, following which certain problems pose a serious threat to the concept and working of ADR:

• Too centralized mechanism

• CBR holds powers to accept or reject the recommendations of ADRC

• Powers of ADR have not been specified; for instance, legally ADR cannot order inspection of books of accounts of a 3rd party

• Can documents exchanged / agreement reached at the ADR stage be put as evidence at any judicial proceedings ?

• No provision exists requiring appellate forums to put the judicial proceedings in abeyance till outcome of ADR

Alternative Dispute Resolution

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Proposal

It is proposed that specific rules / framework of ADR may be issued by the CBR. Reference may be made to identical ADR systems prevailing in various other jurisdictions. It is also proposed that old law, binding both parties in the event of unanimous recommendations by ADRC, may be restored

Alternative Dispute Resolution ….

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Issue 

Sales Tax Audits have always been a serious contentious issue in terms of their execution and lack of proper guidelines to the department

 Proposal

 

It is proposed that sales tax audits may be conducted only after a planned mechanism is developed in this respect. The development of the plan should be made integral part of the National Audit Plan. For an effective audit structure, amendments may also be made to provide parameters for selection of audits. Further, in the light of recent decision by Appellate Tribunal, section 25 may be amended to provide that audit would be conducted only by officers of Sales Tax and DRRA be debarred from audit function of taxpayers’ records

Audit

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Adjustment Note & Advice

Issues 

Confusion persists as to whether the taxpayer has an option to file ‘adjustment note’ or not ?

The period of 3 tax periods available for adjustment is not in accordance with the spirit of the law

No mandatory time frame for issuance of ‘adjustment advice’ by dept. Problems in getting refunds after the expiry of 3 tax periods

 Proposal

It is proposed that rules may be amended to provide an option to the taxpayers to choose his route. Secondly, time frame should be prescribed for the department for issuance of ‘adjustment advice’. Amendments may also be made to specify that no further question would be asked at the time of refunds in cases where the taxpayer already possess an adjustment advice for the related amount

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Issue 

Lawful and legitimate refunds filed under section 10 read with Refund Rules are being blocked and deferred on the pretext of STARR objections for the department’s failing to verify the payment of output tax by supplier

 Proposal

 

No refund should be withheld on the objections raised by STARR. Rules may be amended to provide strict / prompt release of refunds on compliance of section 7, 8 and 73.

FTO has also held such objections to be null and without legal effect 

Refunds

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Issue

Presently, no refund claim is entertained if all the desired documents are not filed by the claimant within 60 days of the filing of return

 Proposal

 The time limit of 60 days is quite harsh and impractical to comply. Further, this condition is against the spirit of section 7 of the Act and the dictate and decision of Supreme Court of Pakistan in the case of Pfizer vs. Federation of Pakistan. Therefore, it is proposed that the whimsical condition of 60 days should be done away with in the upcoming Budget

Refunds….

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Default Surcharge & Delayed Refunds

Issue 

In terms of section 34, a registered person can be penalized with default surcharge @12% or 18% p.a if he fails to pay off the tax liability by due date. On the other hand, failure of the department to pay off the due tax refunds in time only costs it 6% p.a

 Proposal

 It is proposed that, in line with the provision of section 34, the interest rate on delayed refund be enhanced to atleast 12%

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Recovery Rules

Issue

Section 48, read with Recovery Rules, empowers initiation of recovery proceedings at the end of 30 days from the date of related order. This provision is in conflict with section 45B of the Act

  Proposal

  Due to secretarial matters, adjudicating orders are served to the taxpayer long after their pronouncements. Therefore, section 45B allows the taxpayer to file an appeal with the Office of Collector (Appeals) within 30 days from the date of receipt of an appealable order. It is proposed that Recovery Rules may be amended and recovery proceedings may only be enforced after 30 days of service of order. This amendment is also required in the best interest of natural justice

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Issue

  Section 9 of the Act read with rules thereof restricts adjustment through debit & credit note beyond 180 days, extendable to another 180 days with prior approval. In practice, a number of goods, particularly food items carry expiry of a longer period. These are returned to suppliers after 180 days or 360 days

  Proposal

  In the present era where technology checks can be placed, it is proposed that time restrictions may be removed and adjustment may be allowed whenever the events, specified in section 9, take place

Debit & Credit Note

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Issue 

In the case of destruction of goods which are returned back to supplier on being unfit for consumption, the law vis.a.vis admissibility of related input tax is not clear

 Proposal

 

The Supreme Court of Pakistan has that input tax credit is a vested right of the taxpayer. Accordingly, it is proposed that specific amendments may be made in the statute clarifying that where goods unfit for consumption are destroyed by departmental approval, input tax credit shall remain available to taxpayer

Debit & Credit Note ….

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It is proposed that a new section, identical to section 124A of Income Tax Ordinance 2001 should be added in the statute whereby any issue decided by Appellate Tribunal, High Court or Supreme Court will be given effect in the returns / orders for the subsequent period. In case such an order or decision is reversed by the higher appellate authority, the assessment / returns may be revised to that effect. This provision is expected to reduce unwarranted litigation

 

Appeal Effect

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Section 73

Section 73 fails to address cases where payments are knocked off through contra book entries between buyer and sellers. Keeping in view the now sophisticated accounting and corporate environment, it is proposed that section 73 may be amended to cater the above inter company (book) transactions

 

Amendments may also be made in the provision to cater situations where payments become doubtful or eventually turned irrecoverable for the supplier

 

Further, the law does not take into account transactions where payments are made by creditors / guarantors / 3rd parties on behalf of the buyer. It is proposed that such eventualities may also be taken care of in the coming Finance Bill

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FEDERAL EXCISE DUTY

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Overview

Adjustment of duties of excise

Wastage

Refunds for Airlines

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Adjustment of duties of excise

Issue

Section 6 of Federal Excise Act 2005 allows adjustment of duty only if the registered person holds a valid proof to the effect that he has paid the price of goods purchased by him including FED and received the price of goods sold by him including FED through banking channels. The condition of payment and receipt is creating lot of problems for the taxpayers

Proposal 

It is proposed that amendments may be introduced in line with the sections 7 and 73 of Sales Tax Act 1990 and taxpayer may be allowed to adjust duty on accrual / paid basis. Further the duty adjustment should not be made subject to receipt of sale proceeds and related duty

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Wastage

Issue

There is no provision in the excise law which caters the unavoidable element of wastage that occurs in excisable products, like clinker, cement, etc.

 Proposal

 To avoid unending litigation on this single score, it is proposed that the statute may be amended to provide that no duty would be payable on quantity wasted during handling / processing, if the taxpayers proves the occurrence of waste and the waste does not exceed the normal industry ratio

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Refund For Airlines

  Issue

Due to inconsistency in Rule 41F and the tax return, foreign airlines are not being able to claim legitimate refunds on cancelled tickets

 Proposal

 Refund of tickets to passengers on cancellation of tickets is a common phenomena in the airline industry. Rule 41 F also allows the airline industry to refund duty alongwith airfare to passengers in case tickets are subsequently cancelled or not utilized for travel

It is, therefore, proposed that a specific column for deduction / reversal of excise duty (already paid by the airline in the government coffer on tickets subsequent cancelled and refunded to passengers alongwith related duty), may be added in the tax return enabling the airline to get back refund of excise duty

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THANK YOU