BUDGETARY MEASURES, 2003

LIST OF NOTIFICATIONS REPRODUCED IN THE <!--[if gte mso 9]> BUDGETARY MEASURES, 2003 By Mr. Akhtar Javed, Advocate, Lahore SALES TAX LAWS This Memorandum has been prepared as a general guide for the benefit of our clients. This is not an exhaustive treatise as it sets out interpretation of the amendments proposed through the Finance Bill, 2003 in the Sales Tax Act, 1990 in a concise form sufficient to amplify the important aspects of the changes proposed. It is suggested that the text of the Bill and the relevant notifications, where applicable, be referred to, in considering the interpretation of any provision. Since these are only general comments, no final conclusion on any issue should be drawn without further consideration and consultation. For additional information or guidance on the issues, dealt with in these comments, specific professional advice should be sought before any action is taken. In terms of section 3 of Provisional Collection of Taxes Act, 1931, the amendments in Sr. Nos. 4 and 6 of the Sixth Schedule to the Sales Tax Act, 1990 have been given immediate effect meaning thereby that the exemption of sales tax on import of soya bean, rape-seed, sunflower seed, palm nuts and kernels, safflower seeds and canola seed has been withdrawn with immediate effect. Under Sr. No. 6 of the Sixth Schedule, exemption of sales tax was available on supply of locally produced crude vegetable oil whether manufactured from imported or locally produced seeds. The exemption has been restricted to supply of locally produced crude vegetable oil obtained only from locally produced seeds and this measure has also been given immediate effect. The rest of the provisions of the Finance Bill, 2003 will be given effect once the bill is passed by the Parliament and is given assent by the President of Pakistan. Comments on major changes brought in Sales Tax Act, 1990 and notifications through Budgetary Measures, 2003 are offered in the following paragraphs: 1. LEGAL AMENDMENTS IN SALES TAX ACT, 1990 1.1 AMENDMENTS IN SECTION 2 1.1.1. Clause (27) -- Retail Price.---In terms of clause (a) of subsection (2) of section 3 of the Act, the taxable supplies specified in the Third Schedule to the Act are charged to tax @ 15% of the retail price. Clause (27) of section 2 defines the term "retail price" as the price fixed by the manufacturer, inclusive of all charges and taxes other than sales tax at which a particular brand of any article is sold to general body of consumers. The concept of levying sales tax on the basis of retail price was restricted to locally produced goods. Through an amendment, the word "importer" has been inserted in the definition of retail price, hence in case of imported goods, the retail price can be fixed by the importer. As has been explained by CBR in the Budget Instructions, the definition of retail price has been amended for the purpose of charging sales tax on retail price of imported goods mentioned in the Third Schedule. However, unless a suitable amendment is not made in clause (a) of subsection (2) of section 3, sales tax on the basis of retail price cannot be levied on imported goods. 1.1.2. Clause (28) -- Retailer.---Clause (28) of section 2 defines the term "retailer". Various legislative measures were introduced through the Finance Act, 1998 viz; the scope of Sales Tax Act was extended to the retailers; subsection (IA) was inserted in section 3 which provided that in case the taxable supplies were made in Pakistan to a person other than a registered person, there would be charged, levied and paid a further tax @ 1% of the value in addition to standard rate specified in subsection (1) of section 3; the definition of term "retailer" was also amended and it defined "retailer" as a person, not being a manufacturer or producer or an importer supplying goods to general public for the purpose of consumption. The words which are underlined were inserted through Finance Act, 1998. The field formations of CBR were of the view that a person operating as manufacturer or producer or an importer cannot be treated as retailer even if he is supplying goods directly to general public for consumption. A question had arisen as to whether or not the manufacturers-cum-retailers supplying their own manufactured goods as retailers were liable to further tax as in the capacity of retailers, they were supplying goods to members of general public who were not registered under the Act. In response to a letter from Messrs A.F. Ferguson & Co., Chartered Accountants, CBR vide its letter C. No. 1(33)STP/93 dated 4-7-1998 clarified that the manufacturers supplying goods as retailers to the end consumers would not be required to charge further tax in case they supplied goods to the end consumers. Messrs A.F. Ferguson & Co., Chartered Accountants vide its letter BT 399 dated 20-7-1998 requested CBR to clarify as to whether Board's above referred letter dated 4-7-1998 was also applicable in case a person was operating as wholesaler-cum-retailer. In the opinion of the learned Chartered Accountant, when the person operating as wholesaler-cum-retailer was supplying goods to the ultimate consumers, he was not required to pay further tax. Vide letter C. No. 3(62)STP/97(Pt.I) dated 10-9-1998, CBR clarified that its letter dated 4-7-1998 applied to an importer-cum-retailer and also to a wholesaler-cum-retailer. The companies like Servis, Bata, Chen One, Firhaj Footwears which are operating as manufacturer and also sell their own products as retailers through their own retail outlets had been facing difficulties as the sales tax officers were of the view that as per the amendment in the definition of the term "retailer", they cannot be registered as manufacturer-cum-retailer and their supplies from their retail outlets were also liable to further tax because in those outlets, they have been selling goods to unregistered persons and in terms of clause (1) 'of subsection (IA) of section 3, exemption of further tax is available only to those persons who are registered as retailers. Feeling the hardship being faced by such registered persons, the words "not being manufacturer or producer or an importer" have been omitted from the definition of the term "retailer". In order to make a clarity, a proviso has also been added in the definition which provides that a person, who combines business of import and retail or manufacture or production with retail, shall, notify and advertise wholesale prices and retail prices separately. He has also been required to declare the addresses of his retail outlets and his total annual turnover per annum shall be taken into account for the purpose of registration under the Sales Tax Act, 1990. 1.1.3 Clause (33) - Supply.---The issue of levy of sales tax on fixed' assets by a company has been a historical dispute between the taxpayers and CBR. CBR and its field formations were of the view that the disposal of fixed assets came within the ambit of taxable supply as has been defined in the Act, therefore, it attracted levy of sales tax. The legal experts held a different view. In their opinion, disposal of fixed assets including vehicles and plant and machinery did not come within the definition of supply as the disposal of fixed assets does not result into furtherance of any business or taxable activity. The Honourable High Court of Sindh in SPL Sales Tax Appeal No. 62 of 2001 held that there can be no sales tax on the disposal of fixed assets. An appeal against the aforesaid judgment is pending in Supreme Court of Pakistan. However, in order to nullify the ratio laid down by Sindh High Court in its judgment referred to above, the term "supply" as has been defined in clause (33) of section 2 has been amended and the words "in furtherance of business" have been omitted in the definition of term "supply". The argument placed before the High Court and other judicial and quasi judicial forums is no more available and the disposal of fixed asset has become a taxable supply within the meaning of the Sales Tax Act. However, a corresponding' amendment has been made in the Sixth Schedule to the Act, where a new Sr. No. 60 has been added which grants exemption on supply of such fixed assets against which input tax adjustment is not available under a notification issued in terms of clause (b) of section 8(1) of the Act. So disposal of vehicles and other fixed assets notified by the Federal Government in S.R.O. 578(I)/98 dated 12-6-1998 will be exempt from sales tax. 1.1.4 Clause (35) - Taxable Activity.---Clause (35) defines the term "taxable activity" as any activity which is carried on by any person, whether or not for a pecuniary profit, and involve in whole or in part, the supply of goods to any other person, whether for any consideration or otherwise, and includes any activity carried on in the form of business, trade or manufacture. After the levy of sales tax on services through various provincial Ordinances of 2000, the definition needed proper amendment. A suitable amendment has been made and rendering of taxable services has also been made a taxable activity. The amendment has been made to include the taxable services for the purpose of allowing input tax adjustment. The amendment further provides that use of goods for private purposes or for manufacture of exempt goods without making supplies will also be a taxable activity within the meaning of Sales Tax Act. 1.1.5 Clause (41) Taxable Supply & Clause (44). Time of Supply.--- Under section 3 of the Sales Tax Act, 1990, sales tax is to be charged, levied and paid @ 15% of the value of taxable supplies made in Pakistan by a registered person in the course or furtherance of any taxable activity carried on by him. It is clear from the narration of section 3 of the Act that sales tax is to be charged only in case the taxable supplies are made in Pakistan. In terms of section 4 of the Act, the goods exported from of Pakistan shall be charged to tax @ zero percent. Clause (iii) of the first proviso to section 4 provides that the goods exported to a country specified by the Federal Government through a notification shall not be zero rated. In exercise of those powers, vide S.R.O. 190(I)/2002 dated 2-4-2002, the Federal Government has specified that the provisions of section 4 shall not apply in respect of supply of certain goods exported by air or via land route to Afghanistan and through Afghanistan to Central Asian Republics. A question had arisen whether or not tax would be charged @ 15% under section 3 of the Act in case the goods specified in the aforesaid notification are exported to Afghanistan or CAR which have become outside the ambit of section 4. The term "taxable supply" as has been defined in section 2(41) of the Act, means a supply of taxable goods made in Pakistan by an importer, manufacturer, wholesaler (including dealer), distributor or retailer other than the supply of goods which is exempt under section 30 of the Act and includes a supply of goods chargeable to tax @ 0% under section 4. As evident from the aforesaid definition of the term, taxable supply is constituted when supply of taxable good is made in Pakistan by an importer manufacturer, wholesaler, distributor or retailer. A supply of taxable good to Afghanistan and CAR does not constitute taxable supply within the meaning of section 2(41) of the Act. Section 2(44) of the Act defines the term "time of supply" as the supply made in Pakistan shall be deemed to have taken place at the earlier of time of delivery of goods or the time when any payment is received by the supplier in respect of that supply. The terms "taxable supply" and "time of supply" have been amended and the words "in Pakistan" in the definition of "taxable supply" and the words "made in Pakistan" in the definition of time of supply" have been omitted. Prima facie these amendments have been made in order to bring those supplies within the ambit of section 3 of the Act which have been specified in the notification issued under clause (iii) of the first proviso to section 4 of the Act. 1.2 AMENDMENTS IN SECTION 3 1.2.1 The words "in Pakistan" wherever occurring in section 3 have been omitted, prima facie in order to bring those supplies within the ambit of section 3 of the Act which have been specified in the notification issued under clause (iii) of the first proviso to section 4 of the Act. 1.2.2 Under subsection (IA) of section 3 further tax @ 3% of the value is to be charged in addition to the standard rate of sales tax in case supplies are made to a person other than a registered person. It has been provided in the proviso to subsection (IA) that the further tax shall not be charged if supplies are made by certain categories of persons inter alia including the supplies made by a registered person whose income is not liable to tax under the Income Tax Ordinance, 1979 but has deducted income tax at source under subsection (4) of section 50 of the Ordinance. Since the Ordinance of 1979 has been repealed through Income Tax Ordinance, 2001 (XLIX of 2001). A proper amendment has been made and the words "Income Tax Ordinance, 1979" have been substituted by "Income Tax Ordinance, 2001". As the income tax at source is deducted under section 153 of the new Ordinance, the words "subsection (4) of section 50" have also beet substituted by the words "section 153". 1.2.3 In terms of sub-clause (iv) of clause (3) of the proviso to subsection (lA) of section 3, the supplies of all the petroleum products were exempt from payment of further tax even if these are supplied to persons not registered under the Act. Through an amendment, the exemption of further tax has been withdrawn on supplies of "asphalt, bitumen and lubricants all sorts" if such supplies are made by a registered person to a person not registered under the Act. 1.3 AMENDMENTS IN SECTION 3A 1.3.1 Under section 3A of the Act, the retailers whose total turnover did not exceed Rs.5 million in any period during the last twelve months were liable to pay turnover tax @ 2% of the taxable turnover. The threshold of Rs.5 million has been enhanced to Rs.20 million. Now the supplies of those retailers are totally exempt from sales tax whose annual turnover from supplies, whether taxable or otherwise, made in any tax period during the last twelve months ending any tax period does not exceed Rs.1 million. However the retailer, who is making taxable supply and his total turnover ranges from Rs.1 million to Rs.20 million, is liable to pay turnover tax @ 2% of the taxable turnover. The retailers whose annual turnover exceeds Rs.5 million but does not exceed Rs.20 million can apply for de-registration and may make a fresh application for enrolment. 1.3.2 Subsection (3) of section 3A provides that the manufacturer or producer and a retailer whose taxable turnover does not exceed the specified threshold, may after voluntary registration under section 18, opt for paying tax at the standard rate under section 3 of the Act instead of paying turnover tax under section 3A. It was further provided that in case a manufacturer or producer and a retailer opted for voluntary registration, he would not be entitled to be deregistered until expiry of two years from the date of registration. Through an amendment, the words "subject to the condition that he shall not thereafter be entitled to be de-registered until the expiry of two years from the date of such registration" have been omitted. Now the manufacturer or producer and a retailer having taxable turnover less than the prescribed threshold opting for voluntary registration under section 18 can get himself de-registered before the expiry of two years. 1.4 AMENDMENTS IN SECTION 3AA 1.4.1 Under section 3AA of the Act, the retailers whose value of supply in any period during the last twelve months ending any tax period exceeded Rs.5 million was liable to be registered and was required to pay retail tax at the standard rate of 15% of the value of supplies. 1.4.2 Subsection (4) of section 3AA provided that a retailer whose taxable turnover did not exceed the specified threshold, may after voluntary registration under section 18, opt for paying tax at the standard rate under section 3 of the Act instead of paying turnover tax under section 3A. It was further, provided that in case a retailer opts for voluntary registration, he would not be entitled to be deregistered until expiry of two years from the date of registration. Through an amendment, the words "subject to the condition that he shall not thereafter be entitled to be de-registered until the expiry of two years from the date of such registration" have been omitted. Now the retailer having turnover less than the prescribed threshold opting for voluntary registration under section 18 can get himself de-registered before the expiry of two years. 1.5 AMENDMENT IN SECTION 5 Through an amendment, the words "in Pakistan" have also been omitted in clause (a) of section 5. Now if there is a change in the rate of tax, the taxable supply made by a registered person shall be charged to tax at such rate as is in force at the time of supply. 1.6 AMENDMENT IN SECTION 6 Corresponding amendments have also been made in sub-sections (2) and (3) of section 6 and the words "in Pakistan" and "made in Pakistan" have been omitted. 1.7 AMENDMENT IN SECTION 7 1.7.1 Section 7 of the Act provides that in order to determine the tax liability in respect of taxable supplies made during a tax period, a registered person is entitled to deduct input tax paid during the tax period from output tax. Section 7 reads as follows:--‑ For the purpose of determining his tax liability in respect of taxable supplies made during a tax period, a registered person shall, subject to the provisions of section 73, be entitled to deduct input tax paid during the tax period for the purpose of taxable supplies made, or to be made, by him from the output tax that is due from him in respect of that tax period and to make such other adjustments as are specified in section 9. 1.7.2 Through an amendment, words ", excluding the amount of further tax" have been inserted after the word "tax" occurring for the second time. After inserting the aforesaid amending words after the word "tax" occurring for the second time, section 7 will read as follows: For the purpose of determining his tax liability in respect of taxable supplies made during a tax, excluding the amount of further tax period, a registered person shall, subject to the provisions of section 73, be entitled to deduct input tax paid during the tax period for the purpose of taxable supplies made, or to be made, by him from the output tax that is due from him in respect of that tax period and to make such other adjustments as are specified in section 9. 1.7.3 It appears that the draftman has made a mistake as by inserting the said words after the word "tax" occurring for the second time does not make any sense. Prima. facie, it appears that CBR wanted to disallow a registered person to make adjustment of further tax from his liability of output tax. If it is so, then the aforesaid words should have been inserted after the word "tax" occurring for the fifth time. 1.7.4 In Budget Instructions, it has been clarified that the amendment in section 7 has been made in order to disallow the adjustment of further tax against output tax and now the further tax charged on supplies has to be deposited along with the return for the tax period. If a registered person makes taxable supplies during a tax period in which his output tax,' for example, @ 15% is Rs.500,000 and his further tax @ 3% is Rs.100,000. In case, during that tax period, his input tax is Rs.1,000,000, he was entitled to carry forward an amount of Rs.400,000 after deducting his output of Rs.600,000 from his input of Rs.1,000,000. After the present amendment in section 7, he will not be entitled to deduct further tax of Rs.100,000 from the input tax. Rather he will be required to pay further tax of Rs.100,000 in cash and will carry forward an amount of Rs.500,000 after deducting his 15% output of Rs.500,000 from his input of Rs.I,000,000. The manufacturers of goods whose input goods/raw materials are liable to tax @ 20% and their output goods/finished products are liable to tax @ 15% will face such situation as in routine their input tax exceeds the output tax and if they are making supplies to unregistered persons, they will be required to pay 3% further tax in cash and will carry forward the balance of difference of input and output. Similar situation will be faced by the exporters who will claim refund of their input tax incurred in connection with zero rated supplies and simultaneously will pay further tax in cash incurred in connection with local supplies made to unregistered person. 1.7.5 A proviso has also been added under subsection (1) of section 7 through which a taxpayer has been entitled to make adjustment input tax paid on the purchases in the immediate three preceding tax periods from the output tax subject to the condition that the taxpayers specifies the reasons for such delayed input tax adjustment in the revised sales tax return for such period or in the return for immediately succeeding tax period. 1.7.6 The newly added proviso will give relief to the taxpayers who failed to account for all their invoices in the return of the relevant tax period before the insertion of the said proviso, such taxpayers were required to file a separate refund claim under section 66 of the Act. In case where the taxpayer had claimed adjustment of input tax pertaining to the invoices for any of the preceding tax period, the department had made cases of "out of tax period adjustment" and had initiated recovery of such input tax alongwith with additional tax. After the insertion of proviso in subsection (1), the taxpayer may adjust input tax paid on the purchases in the immediate three preceding tax periods from the output tax but he has to specify the reason for such a delayed input tax adjustment in the revised sales tax return. A large number of refund claims under section 66 were also arising whose disposal was inordinately delayed. The concept of revised sales tax return has been introduced in the sale tax law for the first time. 1.7.7 Clause (i) of subsection (2) of section 7 provides that a registered person shall not be entitled to deduct input tax from output tax unless in case of claim for input tax in respect of a taxable supply made in Pakistan, he holds a tax invoice in respect of such supply. The words "in Pakistan" have been omitted. After the word "invoice" the words "in his name and bearing his registration number" have been inserted. The registered person is now entitled to deduct input tax from his output tax only if the tax invoice bears his name and his registration number. In recent past, the Appellate Tribunal has given relief to certain taxpayers who had made adjustment of input tax on the strength of electricity bills which did not bear their sales tax registration numbers. Through the present amendment, CBR has made an attempt to nullify the ratio laid down by the Appellate Tribunal in such judgments. 1.7.8 Clause (ii) of subsection (2) of section 7 provides that a registered person shall not be entitled to deduct input tax from output tax unless in case of goods imported into Pakistan, he holds the bill of entry duly cleared by the Customs. The said clause (ii) has been substituted and the registered person has been restricted to claim input tax on imported goods only if the bill of entry bears his name and his sales tax registration number. 1.8 INSERTION OF SECTION 7A 1.8.1 A new section 7A has been inserted through Finance Bill, 2003 which provides that "Levy and collection of tax on specified goods on value addition.---Notwithstanding anything contained in this Act or the rules made thereunder, the Federal Government may specify, by notification in the official gazette, that sales tax chargeable on the supply of goods of such description or class shall, with such limitations or restrictions as may be prescribed, be levied and collected on the difference between the value of supply for which the goods hre. acquired and the value of supply for which the goods, either in the same state or on further manufacture, are supplied." 1.8.2 The provision contained in newly inserted section 7A has empowered the Federal Government to levy sales tax on supply of specified goods on the difference between the purchase value and the sale value. Such mode of levying sales tax is totally against the spirit of VAT mode of sales tax. The sales tax has to be charged on the value of supply which means the consideration received by the supplier from its buyer. The legislation already covers such situations where the value of supplies is suppressed or cannot be determined. Empowering the Federal Government to levy and collect sales tax on specified goods on value addition will create harassment in the business community. 1.9 AMENDMENT IN SECTION 11 1.9.1 Section 11 pertains to assessment of tax. Subsection (4) of section 11 provides that assessment order shall be made by an officer of sales tax within 45 days of the issuance of the show-cause notice or within such extended period as an officer of sales tax may fix provided that such extended period shall in no case exceed 90 days. 1.9.2 Through an amendment, the words "45 days" have been substituted by the words e90 days". Now an officer of sales tax making assessment of tax under section 11 of the Act is required to pass order within 90 days of the issuance of show-cause notice. 1.9.3 The words "an officer of sales tax" have been substituted by the words "the Collector or, as the case may be, Collector (Adjudication)". After the amendment, the officer of sales tax making assessment of tax under section 11 of the Act is required to pass order within 90 days but he himself cannot extend the period. It is only the Collector or Collector. (Adjudication) who can extend the period of further 90 days. 1.9.4 After subsection (4) a new subsection (5) has been added in section 11 of the Act which provides that if a registered person fails to " file a return, an officer of sales tax, not below the rank of an Assistant Collector, shall subject to such conditions as may be specified by CBR, determine the minimum tax liability of the registered person. Such powers given to the officers to the rank of Assistant Collector and above are against the principles of natural justice and are otherwise not practicable. Determining the tax liability without issuing the show cause