Budget proposals 2014-2015: FPCCI recommends penalty to tax officials for mal-administration

KARACHI: The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) has proposed amendments in the sales tax laws to penalize tax officials found involved in mal-administration.
In its budget proposals for indirect taxes, the FPCCI said that there is no difference of opinion that some of the tax officer behave in total dis-agreement of law. There are number of reported incidence of proven mal-administration and arbitrary decision and creation of tax demands. Since there is no legal provision under sales tax act which make them accountable, this practice is unfortunately increasing day by day.
It causes mistrust, loss in faith of law and shakes confidence of investors/taxpayers. Therefore it proposed a new section 67-A be inserted in sales tax act, 1990 which should provide appropriate action against such officer. Any officer found involved in such practice be taken into task.
The FPCCI said that recourse to seek justice would be available to the taxpayer.
The apex trade body highlighted that the registered persons are required to retain and maintain plethora of records under section 22 up-till 6 years that includes invoices, credit notes, debit notes, bank statements, banking instruments in terms of section 73, inventory records, utility bills, gate pass, inward and outward transportation record, salary and labour bills, rental agreement, sales purchase agreements, lease agreements etc.,
Every registered person requires services of professional staff and thus increases cost of compliance. It is not possible for small and medium size businesses to afford sales tax registration or its compliance.
Condition of keeping record should be curtailed at maximum level to achieve simplification. Particularly in the presence of detailed electronic return filing system retention of record for such period only reflects mentality prevails during excise regime. It said that it would less cost of compliance and book keeping for taxpayer.
In order to achieve transparency in tax audits. Powers for selection of audit should be rested with FBR only thorough parametric or computerized selection, the FPCCI said and added that taxpayers suffer from uncertainty, mental torture and undue harassment that discretionary powers of selection of cases for audit may not be exercised by other authorities.
Considering the hardship faced by the taxpayers it proposed explanation inserted through amendment in section 25 vide Finance Act, 2013 for calling information, record etc., for other than audit, be deleted.
Taxpayers should be selected for audit through computer balloting only. The list of selected cases be placed on web site along with reasons for selection. In case of any irrationality, taxpayer may take up issue of such selection before penal / committee.
The existing sales tax return contains some complicated and unnecessary annexures which are time consuming and require plenty of professional staff. Annex ‘F’ and Annex ‘H’ pertaining with stock details are difficult to properly fill-in each month.
Reporting of stock detail in each and every month is neither practicable nor necessary. Such compliance only causes hassle to trade and genuine taxpayers.
Condition for filing unnecessary annexure should be curtailed at maximum level to achieve simplification, such details if essentially requires can be made part of annual sales tax return.
Provisions for self revision of sales tax return was withdrawn couple of years back, resultantly any sort of revisions now requires prior approval of tax commissioner.
It increases discretionary powers of a tax officer. Minor corrections of data feeding errors now involves repeated visits of tax office and requires hectic efforts.
Provisions for self revisions should be restored. Particularly if there is no increase in refund / input adjustment or reduction in tax payment, then there is no justification for prior permission at all.
Less cost of compliance and hassle free business operation for taxpayer. Reduces unnecessary visits and corrupt practice on this account at-least.
Omission of section 45 from the S.T.A. resulted in abolition of separate and independent adjudication system, which has created problems for the registered persons in obtaining impartial assessment orders.
The powers to adjudicate by the same audit / tax officer are disastrous to judicious and fair process of legal system. The existing scenario is also against the basic maxim of law that no one can be a judge of his own cause.
Provision of section 45 may be restored, in order to separate powers of adjudication from executive. It is worth to note that similar amendment has been incorporated in Customs Act., last year.
To reduce the discretionary powers of audit officers, bring transparency in system, eliminate Imbalance between taxation officer and taxpayer.
The Finance Act, 2013 has inserted a new sub-section “1A” in section 45-B, according to which powers for granting stay by Commissioner Appeal has been restricted to 30 days only. The wisdom of the Appellate authority should not be restricted. It is against the principals of natural justice and equity.
It is also observed that tax officer at 1st appellate forum is posted from FBR’s administration and therefore normally works under the influence of FBR. It will benefit absence of fair appellate forum, FBR’s influence and legal restrictions are slowly and gradually made this forum practically injudicious.
The time limit of 30 days be removed.
Appeal should be heard by a person who is not under the administrative jurisdiction of FBR at all.
Speedy and fair dispensation of justice. Reduction of workload from higher courts.
In the recent past unusual exercise of powers to arrest has been witnessed irrespective of the nature of allegations, past history of the taxpayers and industrial infrastructure set up by them. A person having investment in shape of industry cannot fly over night to avoid trial.
Any abuse of this most harsh provision of the law resulted in total defamation of the sales tax law and FBR’s administration. Such harsh provision of the law is one of the reasons for narrow sales tax regime during last 20 years.
Persons having large manufacturing setup, public or private limited firms should not be allowed to arrest without prior trial.
Curtailment of discretionary powers of tax officials. Promotion of industrialization and businessmen friendly environment.
The payment of tax less than the tax indicated in the return is recoverable from registered person without giving him a show cause notice in terms of section 11-A. Interestingly, in the existing electronic sales tax filing system there is no provision for short payment. The powers given under 11-A are thus superfluous and unnecessary.
On the one hand, government is bent upon curtailing the discretionary powers of tax officials to the minimum level whereas on the other hand government is taking measures to enhance their discretionary powers. It is entirely in contrast to the government policy. The FPCCI said that no action should be taken without issuance of show cause notice.
Regarding posting of a sales tax officer at manufacturing facility under section 40-B and 40-Cat the premises of a registered person or monitor his business activities through electronic tracking system.
This is against the government policy to minimize direct contact between a tax collector and taxpayer as it may be resulted in corruption and tax evasion.
It totally negates the concept of self assessment, which forms the basis of whole sales tax scheme.
It is revival of supervised clearance scheme of central excise in Sales Tax Act.
The provision be removed from the statute or it can only be exercised after completion of due process of law including issuance of show cause notice. Minimize chances of corruption and direct contact between tax collector and payer.
FBR through SRO 450(I)/2013 for tax credit on construction material is made inadmissible. The disallowance of input tax on the pretext that these are not directly used in manufacture of taxable supply is an invalid argument. No business activity can be initiated without capital investment.
Input tax credit should be made admissible on all items directly or indirectly required for business activities. The FPCCI said by incorporating such proposal it will Incentive for promotion and establishment of new business setup.
Clause 33 of the rules states that refund to the claimants shall be paid to the extent of the input tax paid on purchases of imports that are actually consumed in the manufacture of goods which have been exported or supplied at the rate of zero percent. The apex trade body said that it is very cumbersome to record and proof the extent of input goods consumed in the manufacturing of goods exported or supplied at zero rates.
Therefore, it proposed that requirements under clause 33 of above rules be done away with.
Another issued highlighted that the goods in respect of which sales tax has not been deposited in the government treasury by the respective supplier. Which resultes in punishment to genuine taxpayer (purchaser) who has honestly paid the tax to his supplier. It is the responsibility of the supplier to ensure that the amount is deposited or not as it is not possible for a purchaser to ensure that his supplier has deposited the amount or not.
Instead of outright rejecting the input tax. Tax officer must fulfill its responsibility i.e. to initiate recovery action against the supplier u/s-11 and FBR’s responsibility should not be imposed on the taxpayer. The FPCCI claimed that by doing this genuine taxpayers will be able to claim the input tax duly paid by them.
It said that there are incidences of bank attachment and other serious coercive measures taken by the tax officer under the umbrella of section 48 for recovery of arrears. Therefore, it suggested that all cases should be decided as per the strict interpretation of law. Section 48 should not be exercised unless the case under litigation has undergone two appellate proceedings.
ADRC forum provides the taxpayer an easy and efficient dispute resolution mechanism to resolve tax related disputes and to liquidate arrears of tax It is an independent body because of the nature of its composition (IR officials and other experts from public and private sectors) and thus has a very strong element of credibility being trustworthy and totally unbiased. The FPCCI proposed: The recommendation made by the Committee should be accepted in a letter & spirit, unless there is any apparent mistake; That instead of communicating the agreement to the appellate forum, the appeals filed by the respective parties should be withdrawn; Cogent reasons including dissenting notes by the ADR Member must properly be provided and incorporated in the Order issued by the FBR; Proper rules may be framed for formation of the committee, scope of work, conducting of ADR proceedings, stay of matter/demand, disposal of application by the ADR Committee, retention of record, remuneration for members of ADRC and etc.
The FPCCI said that it will help in efficient use of ADRC in generating more taxes to the national exchequer.
The Finance Act, 2013 states that only such bank accounts of the registered persons will be treated as business accounts which are duly incorporated in their registration profile through proper insertion of changes in their particulars as given in application of registration by STR-I Form. The FPCCI said that this provision is against the principle of simplification of law. It requires taxpayers to incorporate all their business bank accounts within their sales tax registration profile to claim input and compliance as per law within the ambit of section 73.
The condition to incorporate each and every bank account is unnecessary. Bank statement is a proper document and particulars available in it neither can be changed nor altered. Therefore, any banking instrument appearing in the bank statement of the taxpayers cannot be denied as undocumented transaction merely upon objection that it is not incorporated in registration profile.
The apex trade body said that further tax at the rate of one percent was introduced in the Finance Bill, 2013 on sales to unregistered persons. The law provides exclusion in certain condition. However, Commercial importers, who pay advance full and final value addition sales tax are not excluded from the purview of further sales tax. It was inconsistency of the law. Exclusion is provided on similar grounds in other situations. Therefore, commercial importers should be excluded from application of further sales tax
The FPCCI said that the manufacturers mainly plastic industry, were subjected to higher (upto 22percent) input sales tax rate, on consumption of raw material upto June 1, 2012 when the higher rate regime was eliminated / harmonize vide Finance Act, 2012. However, the registered persons having accumulated carry forward amount pertaining to previous higher input sales tax rate regime were not provided any provisions for its adjustment in their sales tax return. Previously they were excluded from the applicability of section 8B of Sales Tax Act 1990 vide SRO 647(I)/2007 dated June 27, 2007, thus allowing them adjustment. However, after the levy of uniform Sales Tax @ 16percent carry forward cannot be adjusted since condition u/s 8B of Sales Tax Act 1990 is now applicable on them allowing 90percent of refund. Consequently the taxpayer would be unnecessarily burdened to pay 10percent Sales Tax despite of accumulated carry forward amount, available to them due to payment of higher input tax. We understand that refund of carry forward is not the solution at the present time when Government of Pakistan has fixed a staggering tax target of Rs. 2.475 trillion for the current fiscal year. Further FPCCI also apprehends that refund of unadjusted carry forward amount shall increase the cost of compliance of taxpayers, consequently leading to corruption.
It proposed that the plastic industry be allowed to adjust their carry forward amount till the period it is consumed completely by inserting a new category i.e. manufacturer having accumulated amount of carry forward on account of higher rate of input tax i.e. 22percent in notification 647(I)/2007 as explained above.
The FPCCI also demanded of including tanner manufacturer exporter under SRO 505 because a tanner manufacturer exporter has been made withholding agent to collect 17 percent Sales Tax from all purchases of taxable goods from the unregistered person.
Leather Sector is Zero Rated under SRO 1125(I) 2011 Dated December 2011 and all suppliers are zero rated but after the amendment made in SRO 1125(I) 2011 under SRO 154(I) 2013 dated Feb 28, 2013 2percent sales tax is payable on all purchases which in refundable to the exporter.
After levy of 2percent Sales Tax under SRO 154(I) 2013 above the Zero Rated Sector is not now Completely Zero Rated and 2percent Sales Tax is payable on all purchase as such the status of goods has changed from NON-TAXABLE TO TAXABLE.
However, the SRO 505(I) 2013 says, “A withholding agent shall on purchase of taxable goods from unregistered persons, deduct sales tax at the applicable rate of the value of taxable supplies made to him from the payment due to the supplier and unless otherwise specified in the contract between the buyer and the supplier, the amount of sales tax for the purpose of this rule shall be worked out on the basis of gross value of taxable supply.”
Presently Tanner Manufacturer Exporters are paying 2percent Sales Tax on all imported inputs including imported Hides and Skins under SRO 154(I) 2013 and SRO 504(I) 2013 dated June 12, 2013.
Keeping in view above, following questions need clarification:-
Hides/Skins are exempted from payment of duties and taxes being Agriculture produce like Live Animal Beef/Meat, and PHUTTI (Raw Cotton). Will SRO 505(I) 2013 have any impact on raw skin purchases from unregistered person. Under SRO 551(I) 2008 import of Hides & Skins are also exempted from payment of Sales Tax.
Secondly, on purchases from unregistered person Tax Collected by withholding agent must be refundable to the exporters but SRO 505(I) 2013 is silent on this issue.
Thirdly, foreign suppliers are also unregistered in Pakistan then how SRO 505 (I) 2013 will be applicable. In case they are treated as unregistered by the Tax Authorities then status of Zero Rating under SRO 1125(I) 2011 will also go completely.
Under Sales Tax rules an individual having turnover of less than Rs. 5 Million are exempted from registration but under SRO 505(I) 2013 such person will be considered unregistered and it is binding on Exporter to act as withholding agent of such person having turnover of less than Rs. 5 Million.
The FPCCI noted problem in SRO 1125(I)/2011 and said that as amended by SRO 682, the rate of Sales tax for the items included in the Schedule 1 & Schedule 2 of the Notification are subject to three different rates. Finished products of textile and leather are subject to Sales Tax @ 5percent, raw material of all five export oriented industrial sectors are subject to Sales Tax @2percent if sold within these five sectors and 17percent if sold outside of these five sectors.
All items included in Schedule 1 & 2 of the notification are only those items which have minimum use (70percent or more) in these five sectors.
Sale of these items are allowed @2percent sales tax to registered as well as unregistered persons dealing in these five sectors.
The FPCCI proposed that it is very difficult to ascertain that weather the registered/unregistered buyers are dealing in these five sectors as these items are more than 70percent consumed in these five sectors therefore, rate of 17percent is restricted to the extent of registered buyer not dealing in these five sector.
The Sales Tax rule 5 pertaining with place / jurisdiction of ST registration is amended which now provides that in case of a corporate or non corporate person having a single manufacturing unit or business would be registered in Regional Tax Office or Large Taxpayers Unit, as the case may be, in whose jurisdiction the manufacturing unit or business premises is actually located. The registration of units falling in this category stands transferred in accordance with the amended provisions w.e.f 1-7-2013.
A person whose premise is situated at Hub would now be transferred within the jurisdiction of Quetta Collectorate. In view of law and order situation of Quetta it is difficult for such persons to deal their sales tax affairs over there.
It proposed that the persons having manufacturing facility at Hub should be allowed to operate and deal their tax related affairs within the jurisdiction Karachi Collectorates.
Regarding audit of commercial importers, the FPCCI said that immunity from audit to Commercial importers even after payment of 3percent VAT at import stage has been withdrawn by omitting Clause 58-E(2) from Special Procedure for Payment of Sales Tax by Commercial Importer Rule 2006 vide Finance Act 2012.
Unilateral withdrawal of audit immunity is against the agreement of trade and FBR on this issue. Clause 58-E(2) pertaining to immunity of audit to commercial importers be restored.