Transcript General Mechanism of Sales Tax

Budget Proposals
on
SALES TAX
at
Income Tax Bar - Karachi
April 21, 2006
Presentation by
Majid Khandwala
Ford Rhodes Sidat Hyder & Co.
Chartered Accountants
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1
Reduction in Sales Tax Rate
• Current rate on value
15%
Ground Realities
• Existence of a parallel economy
• High rates results in higher tax evasion
• Need to be competitive with the advent of WTO
• Indirect tax is borne by all, rich and poor alike
Proposal
The rate be reduced to 10%
This rate should not be enhanced for a period of say 5 years.
Ford Rhodes Sidat Hyder & Co.
Chartered Accountants
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2
Time of Supply
Time of supply as defined under section 2(44) is the earlier of time of delivery of
goods or when any payment of goods is received by the supplier
Ground Reality
•
This results in mismatching of the figures of sales as reflected in the sales
tax returns and in the financial accounts of an entity
•
Stocks would not reconcile as advances have been reflected as supply
when in effect there has been no movement of stocks
•
Difficulties are faced in explaining and reconciling the figures during a sales
tax audit
Proposal
Sales tax at the time of payment of advance should be removed from the
definition of Time of Supply.
Ford Rhodes Sidat Hyder & Co.
Chartered Accountants
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3
Definition of input tax [Section 2(14)]
The definition of input tax covers tax paid
•
On supply of goods
•
On imports
•
In Azad Jammu and Kashmir
•
On excisable services chargeable in sales tax mode
Ground Reality
Sales tax has also been levied on certain services through provincial
legislation with effect from July 01, 2000. It has been clarified time and again
by the CBR that sales tax on services under the Provincial Ordinances is a
permissible input adjustment.
Proposal
Definition of input tax should be modified to include sales tax paid on
services chargeable under Provincial Sales Tax Ordinances.
Ford Rhodes Sidat Hyder & Co.
Chartered Accountants
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4
Tax Fraud [Section 2(37)]
Making taxable supplies without obtaining Sales Tax Registration is a
Tax Fraud.
Ground Reality
• Obtaining a Sales Tax Registration Number takes its own time and
therefore results in a delay in commencement of business activities
• Alternatively if a supply is made before obtaining registration, there
is an exposure to a very serious offence by way of tax fraud.
Proposal
The definition of tax fraud should be suitably amended to allow
commencement of business once the Application for Sales Tax
Registration has been submitted.
Ford Rhodes Sidat Hyder & Co.
Chartered Accountants
e
5
Certain transactions not admissible
[Section 73]
•
any transaction involving payment exceeding Rs.50,000
•
shall be through a banking instrument
•
showing transfer of the amount of sales tax invoice
•
from the business account of the buyer
•
within 180 days of the invoice
•
Non-compliance would result in disallowance of input tax for the buyer.
•
The seller is required to deposit the proceeds in the business bank
account otherwise input tax is disallowed
Ground Reality
• There is an assumption that payment is in the form of currency– netting
off against payables, inter-company adjustments, adjustment against
brokerage/commission, discounts, exchange of goods, etc. are common
business transactions which are overlooked by section 73.
• The incidence of bad debts.
Ford Rhodes Sidat Hyder & Co.
Chartered Accountants
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6
Certain transactions not admissible
[Section 73] (Contd.)
Proposal
If payment is not made within the prescribed time by the buyer, the input tax
already claimed should be offered back.
If payment is made after the prescribed time, then it may be reclaimed by the
buyer at the time of actual payment.
Non-cash payments should be catered for.
In case of bad debts the seller should not be penalized
Section 73 should be revised accordingly.
Ford Rhodes Sidat Hyder & Co.
Chartered Accountants
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7
Carry Forward
The Finance Act 2005 made amendments to Section 10 whereby carry forward
of excess input tax is no longer permitted
Subsequently manufacturers through SRO 666(I)/2005 and wholesalers, dealers
and distributors through SRO 813(I) 2005 have been allowed to carry forward
such input tax for subsequent three months after submitting an adjustment note
and obtaining an adjustment advice from the Collectorate authorizing the
adjustment
Ground Reality
• The carry forward facility is no longer an automatic right
• Adjustment notes are not issued by the officers on timely basis to enable
adjustment in the next tax period
Proposal
The carry forward facility should be reinstated across the board
Alternatively it should be mandatory to issue the refund before the payment for
the next period becomes due
Ford Rhodes Sidat Hyder & Co.
Chartered Accountants
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8
Exemption on self supply of
intermediate goods
Clause 4 of Part Table 2 of the Sixth Schedule exempts raw materials and
intermediary goods and services if consumed in-house by a sales tax registered
manufacturer himself in the manufacture of goods subjected to sales tax.
The exemption does not extend where the ultimate goods produced are exempt
from tax.
Ground Reality
Industries producing ultimately exempt goods like food and medicines are facing
difficulties
Value to be assigned on self-supply of intermediate goods is difficult
If KESC or WAPDA electricity is used there is no problem.
However, if self-generated electricity is used then it becomes taxable
Proposal
The exemption on self-supply of intermediary products should be exempt from sales
tax whether the ultimate product is taxable or exempt
Ford Rhodes Sidat Hyder & Co.
Chartered Accountants
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9
Special Procedure for Commercial Importers
•
This is applicable to persons registered exclusively or otherwise as
Commercial Importers.
•
Commercial Importer is defined as a registered person who imports goods
for further supply in the same state to any other person
•
Sales tax is computed at 15% on a minimum value addition of 10%.
•
Output tax is to be paid in advance at import stage.
Ground Reality
In practice, import of goods for self use is also subjected to value addition.
Proposal
Suitable instructions be given to the Customs authorities so that goods
meant for self use are not subjected to Value Addition.
As the actual value addition is to be computed on an annual basis, the box
for total sales tax payable (box 10) in the monthly return is not necessary
particularly as there is no space for carry forward in case of excess input tax
Ford Rhodes Sidat Hyder & Co.
Chartered Accountants
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10
Special Procedures for Retailers
•
•
Special Procedure for Retailers is applicable to persons registered exclusively
as retailers under the Act.
Sales Tax to be paid on value addition of 10% or at reduced rates specified for
certain types of goods.
•
Value addition is to be computed on all purchases
•
There is also a Special Procedure under SRO 539(I)2005 for Retailers of
Specified Goods
•
The specified goods are export oriented goods - textiles, leather, carpets,
surgical goods and sports goods
•
Retail tax at the rate of 3% on turnover is payable (this includes 1% income tax)
Ground Reality
Retailers like supermarkets and general stores deal in specified goods as well as
other goods
There is considerable confusion as to which scheme is applicable to such retailers
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11
Special Procedure for Retailers
(continued)
• Strictly speaking both schemes are applicable and separate returns
should be filed as clarified through Sales Tax Circular No.2/2005
dated September 3, 2005
• Retailers are not equipped to keep segregated information and
accounts, prepare separate returns one based on purchases and
the other based on sales
• Informally they are told to follow whichever scheme that is more
beneficial to them
Proposal
The existence of parallel schemes for the same category of
registered persons (Retailers) is bound to cause complications.
Hence one scheme should be in vogue.
Ford Rhodes Sidat Hyder & Co.
Chartered Accountants
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12
Special Procedure for Manufacturers of
Biscuits and Confectionery
A special procedure under Chapter XVII of the Sales Tax Special Procedures
Rules provides that sales tax be paid on basis of printed retail price
The value of supply is prescribed at the rate of 12% of the of ex-factory price in
lieu of sales tax payable on basis retail price
Ground Reality
•
Biscuit and confectionery manufacturers are usually engaged in
manufacture of other snack items like potato chips, wafers and other
savoury items
•
A retail price is also prescribed for such items by the manufacturers
Proposal
It would be logical to include snack items within the ambit the Third
Schedule and the Special Procedure under Chapter XVII.
This would facilitate the manufacturers to be under one regime of sales tax.
Ford Rhodes Sidat Hyder & Co.
Chartered Accountants
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13
Special Procedure for Sales Tax on Sale
of Motor Vehicles
Special Procedure for Collection and Payment of Sales Tax On Vehicles
has been introduced through SRO 951(I)/2005 dated September 14,
2005
It prescribes that sales tax be paid at the time of sale by importer,
manufacturer, dealer and transferee where no dealer is involved
The assessable value for dealer in case of old used and second hand
vehicles is 10% of the sale price plus commission charged to the buyer
or seller over and above the price of the vehicle
The assessable value for transferee without involvement of the dealer in
case of old used and second hand vehicles is 10% of the declared
purchase price
Ford Rhodes Sidat Hyder & Co.
Chartered Accountants
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14
Special Procedure for Sales Tax on Sale
of Motor Vehicles - continued
Ground Reality
• Sales Tax is also being charged on Dealer's commission
• Supply of fixed assets against which input tax is not available under
a notification in terms of clause 8(1)(b) of the Act is exempt
• Notification vide SRO 490(I)2004 does not allow input tax
adjustment on Vehicles acquired otherwise than as stock in trade
• Effectively the exemption on sale of second hand cars is negated as
sales tax would have to be paid on the purchase whether the sale is
effected directly or through a dealer
Proposal
Since sales tax a tax on goods and not on income and moreover input
is not allowed this Special Procedure should be withdrawn.
Ford Rhodes Sidat Hyder & Co.
Chartered Accountants
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15
Input Claim on Telephone Bills
•
Telecommunication services are subject to CED in sales tax mode.
•
Input tax definition under section 2(14) encompasses such FED in sales
tax mode.
•
Hence input tax on telephone bills can be legitimately claimed .
Ground Reality
Electricity and gas have Special Procedures
These stipulate that the bill shall constitute an invoice, and
Input tax may be claimed if sales tax registration and declared business
address is mentioned on the bill.
• There are no Special Procedures for Telecommunication Services .
• The subscribers sales tax registration number on telephone bills is not
mentioned on the bill
• Section 7 requires that input tax claim can only be made if a registered
person holds a tax invoice in his name and bearing his registration number.
Ford Rhodes Sidat Hyder & Co.
Chartered Accountants
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16
Input Claim on Telephone Bills - continued
•
Effectively the input tax admissible under law can be denied.
Proposal
Like other utilities Special Procedures should also be prescribed for
Telecommunication Services.
The need for having the registration number of the subscriber on the
telephone bill should be dispensed with – particularly for the past.
Ford Rhodes Sidat Hyder & Co.
Chartered Accountants
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17
Appeals
• Section 45-B(4) requires a 15% payment of the tax demand of the
principal amount at the time of filing of first appeal
• The recovery of the balance amount is stayed for a period of six
months following the day on which 15% amount has been paid
• The Appellate Tribunal and High Court is empowered to grant a stay
against a tax demand of a maximum period of six months under
section 46 and 47 respectively
Proposal
Like in the income tax law, an automatic stay may be granted until
the decision in appeal.
The restriction to limit the stay to six months should be removed
Ford Rhodes Sidat Hyder & Co.
Chartered Accountants
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18
Thank You
Ford Rhodes Sidat Hyder & Co.
Chartered Accountants
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19