FEDERAL BUDGET 2014-15
Sales Tax & Federal Excise
Adnan Mufti FCA
Shekha & Mufti
Chartered Accountants
Karachi Tax Bar Association
07 June 2014
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OVERVIEW OF TAX MEASURES
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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
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OVERVIEW OF TAX MEASURES
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Expenditure & Revenue Approach – FBR’s Role
Unrealistic Tax Target: FBR holds finance ministry responsible for fiasco
http://tribune.com.pk/story/708032/unrealistic-tax-target-fbr-holds-finance-ministryresponsible-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
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Unclear Policy Matters
 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
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Obstacles in Enforcement of Tax Laws !
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Enforcement of Tax Laws to Non Compliant Sectors
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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.
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The Government, instead of improving its expenditure side, is placing strong
emphasis on tax burdening measures.
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Retailers Taxation will be a revenue tool instead of expansion of tax base. It
may also encourage retailers to manipulate sources of electricity.
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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.
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Broadening of Tax - Measures
 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.
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Broadening of Tax Base - Measures
 Exemption Threshold of Rs. 5 Million for Retailers withdrawn
 Normal Tax Regime @ 17% or 0.75 percent for following retailers:
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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
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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
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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.
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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
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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.
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Whether electricity distribution companies will assume responsibly to harness
such huge non-compliant sector ?
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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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Input Tax Adjustments
Clause (iiia) in Section 7(2) has been inserted, which debars input tax adjustment
except in the case of following goods and services:
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imported or purchased for the purpose of sale or re-sale by the registered person
on payment of tax;
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used directly as raw material, ingredient, part, component or packing material by
the registered person in the manufacture or production of taxable goods;
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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
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plant, machinery and equipment used by the registered person in his declared
business premises for the manufacture, production or supply of taxable goods.
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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.
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An attempt has been made to revive repealed SRO 1307 of 1997 again !
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Why Section 7 has been amended ?
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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.
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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.
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Computation and accounting for input tax according to consumption pattern by the
business and verification thereof by the Tax Officer almost impossible.
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Input Tax Adjustments
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Discrimination and harassment of taxpayers under the garb of Section 7(2)(iiia)
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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
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Input tax allowed only on direct ingredients ! What are indirect inputs / material ?
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Provincial Sales Tax not admissible; Sales tax / FED paid on services including
that paid on telecommunication services not adjustable.
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MOUs signed with Provincial Tax Authorities and SRO 212(I)/2014 made
redundant
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Litigation Again !
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Input Tax Adjustments
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:
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goods and services not related to the taxable supplies
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goods and services acquired for personal or non-business consumption;
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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
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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.
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Benefits of an Undocumented Economy ?
Cost
Purchases from
Purchases from
Registered Sector
Unregistered Sector
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
750,000
127,500
6,410.26
2,250,000
382,500
19,230.77
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
2,006,000
100,855
Phone / Mobile Bills
Vehicle & Parts
Other CAPX
COST OF SALES TAX
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Further Tax
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Adjustment of further tax against input tax has been excluded.
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An identical restriction was also placed vide Finance Act 2003 in Section 7 for 1
year which was subsequently deleted vide Finance Act, 2004.
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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.
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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.
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Posting of Officers
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Mindset behind Section 40B ? Central Excise & Supervised Clearance
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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
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The proposed explanation stipulates that such powers conferred to the Chief
Commissioner, Commissioners are independent of the powers under Section 40.
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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.
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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.
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Electronic Scrutiny and Intimation
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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.
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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.
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The new system may cause issues for the taxpayers if their tax profile including
their email addresses are not updated.
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Tax on Imported Garments, Leather, etc.
- SRO 1125
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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.
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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.
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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.
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Such an anomaly needs to be addressed and rectified at the earliest.
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FED on Telecommunication Services
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The Finance Bill proposes to reduce FED on telecommunication services from
19.5% to 18.5%.
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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.
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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.
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THANK
YOU
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