MARKET DEVELOPMENT
Sales Tax and Excise Acts: Experts Challenge Legal Interpretation by FBR Wing
Sales Tax and Excise Acts: Experts Challenge Legal Interpretation by FBR Wing
26/11/2014 (Business Recorder) - Experts have challenged the legal interpretation of Sales Tax Act, 1990 and Federal Excise Act 2005 by Directorate General of Intelligence and Investigation Inland Revenue, which formed the basis of raids on the offices of ghee and cooking oil producers.
Explaining the tax collection methodology of ghee and cooking oil industry, experts explained that the tax regime pertaining to sales tax and federal excise duty on registered manufacturers of ghee/cooking oil falls under a 'special procedure' settled between the industry and the Federal Board of Revenue (FBR) according to which the industry is forgoing its legitimate sales tax refunds by not claiming the input/output adjustment.
The applicability of sales tax on ghee and cooking oil units and solvent extraction industry needs to be understood before any major enforcement action against the industry. They were of the view that entire liability of sales tax and even value addition is being discharged at import stage with no provision of input/output adjustment meaning thereby that the FBR is satisfied there stands no chance of sales tax evasion in ghee industry.
As per salient contours of said procedure the manufacturers are not eligible for input/output adjustment of sales tax in FED mode paid @ 16 percent at import stage of edible oil under provisions of Federal Excise Act, 2005. Whereas exemption is granted from sales tax vide entry no. 24, Sixth Schedule of Sales Tax Act, 1990. Furthermore, vide S.R.O 24(I)/2006 dated January 19, 2006, additional FED in value addition mode @ Re 1/kg is also levied on vegetable ghee/cooking oil including edible oil at import stage, which is the final liability. In this regard Federal Excise General Order 01 of 2006 dated 19th January, 2006 provides further interpretation. Likewise, vegetable ghee/cooking oil has been excluded from withholding of sales tax through rule 5 of Sales Tax Special Procedure (withholding) Rules, 2007(SRO 660 (I)/2007 dated 30th June, 2007).
Experts maintained that all other inputs of manufacturing process are also being discharged with liability of sales tax, which yet again is non-adjustable and conveniently reflected in monthly sales tax return.
The liability of sales tax is also discharged both Sales Tax @ 16 percent and Sales Tax in value addition mode @ Rs 400/ ton, which was enforced through money bill 2012-13 and SROs issued subsequently on imported oil seed in lieu of edible oil extracted by Solvent Extraction industry.
However, sales tax @ 16 percent and VAT on edible oil extracted from indigenously grown oil seed such as cotton seed oil, sunflower and rape-seed oil seems to be still un-accounted for. The discharge of sales tax liability on edible oil extracted from local oil seed is a pure responsibility of solvent extraction units and cotton ginners industry. These two are distinct and different sectors with respect to sales tax liability under statute, they added. When contacted, representatives of the ghee industry, they termed that any move to exercise power under section 38 of Sales Tax Act, 1990 against industry would be considered as harassment.
The industry discharges more than 100 percent liability of sales tax and even forgo its legitimate sales tax refunds by honouring the Special Procedure settled with the FBR, they maintained. Subjecting the industry to numerous kinds of audits under section 25 or section 38 would be only wastage of tax machinery resources and time in addition to cumbersome and useless paper-work, they added.
The industry condemned the supply of loose, un-processed edible oil extracted from oil seed freely available in market at whole sale and retail stage for human consumption, which is unprocessed and poses a tough competition to our licensed and registered industrial certified/standardised products, manufactured under PSQCA license. In this backdrop action against legitimate industry would tantamount to 'adding insult to injury'.
They said that the vegetable ghee/cooking oil manufacturers import approximately 2.2 million tons edible oil annually to fulfil the national consumption of 3 million tons. According to the FBR year-book 2012-13 the manufacturers on their imports paid fixed custom duty to the tune of PKR 20.247 billion up by 9.9 percent when compared to customs duty paid in year 2011-2012, which stand at Rs 18.417 billion.
Similarly, the manufacturers paid sales tax in FED mode @ 16 percent and fixed FED against value addition @ Rs 1000/ tons, which totalled up to PKR 32.261 billion and 9.121 billion, respectively. Although the decline in collection of sales tax in FED mode was witnessed in 2012-13 by 7.6 percent, since it was PKR 34.898 billion in 2011-12, whereas the imports of edible oil increased by 1.8 percent in the same year. This lower collection was caused by the variation in international market price of RBD palm oil and other edible oils. In year 2011-12 the palm oil prices touched the highest level of $1,190 per ton, whereas it curtailed its peak of $1,025/ton in year 2012-13 ie retarded by 13.5 percent precisely. Currently it is prevailing at US $680 ton causing sizeable reduction in revenue collection.
The manufacturers also contributed handsome income tax @ 5.5 percent (as of now) in 'minimum mode' which stand at approximately PKR 9 billion. In view of above the manufacturers at import stage contributed around PKR 70 billion and managed in securing position amongst top five revenue spinners of Pakistan.
Earlier manufacturers approached the FBR against the audit of sales tax under section 25 of the Sales Tax Act, 1990, wherein notices were issued by RTOs. Now the Directorate General of I & I (IR) desires the powers to be delegated under section 38 of the Act, which allows agency's officers an access to the premises, stocks, accounts and record to check payments of sales tax on edible oil, vegetable ghee including cooking oil and even by products/waste.
The FBR's agency had observed that the customs authorities collect FED @Rs 1 per kg and 17 percent FED at import stage from importers/manufacturers, whereas, neither any importer charges 17 percent FED in VAT mode or 17 percent sales tax on sale of their products as per requirement of above provisions of the Act, sources said.
As conditions set forth for availing exemption are not being fulfilled by these manufacturers/importers either by avoiding or evading FED in VAT mode, the Directorate General of Intelligence and Investigation Inland Revenue intends to initiate action under section 38 of the Sales Tax Act, 1990 against these manufacturers/importers for recovery of sales tax evaded, agency added.
Explaining the tax collection methodology of ghee and cooking oil industry, experts explained that the tax regime pertaining to sales tax and federal excise duty on registered manufacturers of ghee/cooking oil falls under a 'special procedure' settled between the industry and the Federal Board of Revenue (FBR) according to which the industry is forgoing its legitimate sales tax refunds by not claiming the input/output adjustment.
The applicability of sales tax on ghee and cooking oil units and solvent extraction industry needs to be understood before any major enforcement action against the industry. They were of the view that entire liability of sales tax and even value addition is being discharged at import stage with no provision of input/output adjustment meaning thereby that the FBR is satisfied there stands no chance of sales tax evasion in ghee industry.
As per salient contours of said procedure the manufacturers are not eligible for input/output adjustment of sales tax in FED mode paid @ 16 percent at import stage of edible oil under provisions of Federal Excise Act, 2005. Whereas exemption is granted from sales tax vide entry no. 24, Sixth Schedule of Sales Tax Act, 1990. Furthermore, vide S.R.O 24(I)/2006 dated January 19, 2006, additional FED in value addition mode @ Re 1/kg is also levied on vegetable ghee/cooking oil including edible oil at import stage, which is the final liability. In this regard Federal Excise General Order 01 of 2006 dated 19th January, 2006 provides further interpretation. Likewise, vegetable ghee/cooking oil has been excluded from withholding of sales tax through rule 5 of Sales Tax Special Procedure (withholding) Rules, 2007(SRO 660 (I)/2007 dated 30th June, 2007).
Experts maintained that all other inputs of manufacturing process are also being discharged with liability of sales tax, which yet again is non-adjustable and conveniently reflected in monthly sales tax return.
The liability of sales tax is also discharged both Sales Tax @ 16 percent and Sales Tax in value addition mode @ Rs 400/ ton, which was enforced through money bill 2012-13 and SROs issued subsequently on imported oil seed in lieu of edible oil extracted by Solvent Extraction industry.
However, sales tax @ 16 percent and VAT on edible oil extracted from indigenously grown oil seed such as cotton seed oil, sunflower and rape-seed oil seems to be still un-accounted for. The discharge of sales tax liability on edible oil extracted from local oil seed is a pure responsibility of solvent extraction units and cotton ginners industry. These two are distinct and different sectors with respect to sales tax liability under statute, they added. When contacted, representatives of the ghee industry, they termed that any move to exercise power under section 38 of Sales Tax Act, 1990 against industry would be considered as harassment.
The industry discharges more than 100 percent liability of sales tax and even forgo its legitimate sales tax refunds by honouring the Special Procedure settled with the FBR, they maintained. Subjecting the industry to numerous kinds of audits under section 25 or section 38 would be only wastage of tax machinery resources and time in addition to cumbersome and useless paper-work, they added.
The industry condemned the supply of loose, un-processed edible oil extracted from oil seed freely available in market at whole sale and retail stage for human consumption, which is unprocessed and poses a tough competition to our licensed and registered industrial certified/standardised products, manufactured under PSQCA license. In this backdrop action against legitimate industry would tantamount to 'adding insult to injury'.
They said that the vegetable ghee/cooking oil manufacturers import approximately 2.2 million tons edible oil annually to fulfil the national consumption of 3 million tons. According to the FBR year-book 2012-13 the manufacturers on their imports paid fixed custom duty to the tune of PKR 20.247 billion up by 9.9 percent when compared to customs duty paid in year 2011-2012, which stand at Rs 18.417 billion.
Similarly, the manufacturers paid sales tax in FED mode @ 16 percent and fixed FED against value addition @ Rs 1000/ tons, which totalled up to PKR 32.261 billion and 9.121 billion, respectively. Although the decline in collection of sales tax in FED mode was witnessed in 2012-13 by 7.6 percent, since it was PKR 34.898 billion in 2011-12, whereas the imports of edible oil increased by 1.8 percent in the same year. This lower collection was caused by the variation in international market price of RBD palm oil and other edible oils. In year 2011-12 the palm oil prices touched the highest level of $1,190 per ton, whereas it curtailed its peak of $1,025/ton in year 2012-13 ie retarded by 13.5 percent precisely. Currently it is prevailing at US $680 ton causing sizeable reduction in revenue collection.
The manufacturers also contributed handsome income tax @ 5.5 percent (as of now) in 'minimum mode' which stand at approximately PKR 9 billion. In view of above the manufacturers at import stage contributed around PKR 70 billion and managed in securing position amongst top five revenue spinners of Pakistan.
Earlier manufacturers approached the FBR against the audit of sales tax under section 25 of the Sales Tax Act, 1990, wherein notices were issued by RTOs. Now the Directorate General of I & I (IR) desires the powers to be delegated under section 38 of the Act, which allows agency's officers an access to the premises, stocks, accounts and record to check payments of sales tax on edible oil, vegetable ghee including cooking oil and even by products/waste.
The FBR's agency had observed that the customs authorities collect FED @Rs 1 per kg and 17 percent FED at import stage from importers/manufacturers, whereas, neither any importer charges 17 percent FED in VAT mode or 17 percent sales tax on sale of their products as per requirement of above provisions of the Act, sources said.
As conditions set forth for availing exemption are not being fulfilled by these manufacturers/importers either by avoiding or evading FED in VAT mode, the Directorate General of Intelligence and Investigation Inland Revenue intends to initiate action under section 38 of the Sales Tax Act, 1990 against these manufacturers/importers for recovery of sales tax evaded, agency added.