UNIFORMITY IN SALES TAX RATES: A WOLF IN SHEEP'S SKIN

UNIFORMITY IN SALES TAX RATES: <!--[if gte mso 10]> UNIFORMITY IN SALES TAX RATES: A WOLF IN SHEEP'S SKIN By Huzaima Bukhari & Dr. Ikramul Haq, Advocates, Lahore There was much hype with the passing of Finance Act, 2004 that the Government had announced a major concession for the people by reducing burden of sales tax through introduction of uniform rate of 15% and eliminating further tax 3% on supplies made to the non‑registered persons. Amendments were made in the Sales Tax Act, 1990 (hereinafter "the Act") in various sections through the Finance Act, 2004 to these effects. Indeed, many heaved a sigh of relief for being rescued from the torment of checking the credentials of parties they were transacting with in order to determine the quantum of rate of tax ‑‑ different for registered and unregistered persons. But do the much‑publicised amendments reflect the true situation vis‑a‑vis claim of reduction in sales tax incidence or are we in for another deceptive trap laid down by the crafty financial managers and wicked tax machinery? Section 7A of the Act which was introduced vide Finance Act, 2003, read with rules 8 to 14 contained in Chapter II of the Special Procedure Rules, 2004, brought with it the concept of compulsory value addition on specified goods for levy and collection of tax. Although subsection (2) of section 7A, empowers the Federal Government to specify minimum value addition required to be declared by certain persons or categories of persons. At present commercial importers and retailers have been subjected to compulsory value addition of 10% by S.R.O. 592(I)/2004 dated 8th July, 2004 and S.R.O. 673(I)/2004 dated 9th August, 2004 respectively. At the time of announcement of budget for 2004‑2005 the rate for compulsory value addition in the case of commercial importers was 14%. It is pertinent to mention that this compulsory value added tax does not qualify for input unless it is paid in excess of 10 per cent as explained by the C.B.R. in a recent ruling. Is this not another means of imposing `further tax' in addition to 15 % sales tax on value of imports? Isn't the commercial importer being forced to pay a higher rate of tax? 'Won't the end‑user/consumer be burdened by paying higher price for goods which could have been much cheaper had they not been subjected to fictional value addition? Will this not adversely affect market competition for cheaper products? Will it not encourage the 'sale of cheaper smuggled items from across the borders rather than boost legal trade? These questions merit answers from the policy makers and those at the helm of affairs. Their attention is drawn to the following two examples. Example A taken from rule 10 for payment of sales tax on value addition and Example B assuming that the provision of compulsory value addition does not apply. Example A (a) Value of imported goods = Rs. 100 determined under section 25 or 25B of the Customs Act, 1969 (b) Customs Duty (@ 20 %) = Rs : 20 Assessed import value (a + b) = Rs.120 (d) Sales tax @ 15 % payable on = Rs 18 bill of entry (e) Value of supplies, with value = Rs. 132 addition of 10% [c + (c x 10%)] [120 + 12] (f) Value addition on. which S.T. = Rs. 12 is payable (e ‑ c) [132 ‑ 120] (g) S.T. on value addition (f x = Rs.01.80 15%) [12 x 15%] Total cost of goods inclusive of indirect taxes only = Rs.133.80 indirect taxes and 6% withholding tax under section 148 of the Income Tax Ordinance, 2001 [133.80 + 8] = Rs.141.80 Example B (a) Value of imported goods= Rs. 100 determined under section 25 or 25B of the Customs Act, 1969 (b) Customs Duty (@ 20%) = Rs. 20 Assessed import value (a + b) = Rs.120 (c) Assessed import value (a+b) =Rs.120 (d) Sales tax @ 15 % payable on. =Rs.18 bill of entry Total cost of goods inclusive of: indirect taxes only =Rs.128 indirect taxes and 6% withholding tax under section 148 of the Income Tax Ordinance, 2001 [128 + 7.68] =Rs.135.68 The incidence of .all the taxes in Example A on import of an item having landed cost of Rs.100 is 41.8%. This includes Rs.20 (customs duty), Rs.18 (15% sales tax), Rs.1.80 (15% sales tax on compulsory value addition) and Rs.8 (6% presumptive income‑tax). Last but not least, this provision brought in its wake an amazing exemption tag, viz. that those who complied with it were exempt from audit and those who dared to defy it were to be subjected to audit. In other words, the Government had openly admitted that since it had made audit so loathsome and horrendous for the taxpayers they should give preference to paying higher rate of tax rather than undergo the torture of audit. To put it more crudely, one can say that the State was encouraging people to, freely manipulate/restructure transactions and then ignore their actions by asking them. to pay some Bhatta [extortion tax]. Now the State has gone a step ahead and has done away with this option. Through the promulgation of S.R.Os. 592(I)/2004 8th July 2004 and 657(I)/2004 dated August 4, 2004 all commercial importers have no choice but to pay additional sales tax on 10 % compulsory value addition. The same thing was later on done with the retailers through S.R.O. 673(I)/2004 dated 9th August, 2004 imposing condition of minimum value addition of 10%. In return, the Government has given immunity from audit to all those commercial importers who pay sales tax on the basis of compulsory value‑addition. The condition of detailed audit of commercial importers under the newly amended rules has been withdrawn through S.R.O. 657(I)/2004 issued, on August 4, 2004. The commercial importers were confused over the term `detailed audit' as specified in tile procedure for collection of sales tax. They opined that the sales tax auditors have the authority to conduct audit even in cases where the commercial importers pay sales tax on minimum value addition of 10 per cent. Under the previous rule (Exemption from Audit), a commercial importer who paid sales tax on value‑addition basis as prescribed under these rules for a year was not subjected to any audit for that year, and detailed audit was conducted in the case of a commercial importer who paid sales tax in a manner other than prescribed in the rules. Now, the C.B.R. has redrafted the rule, which says that payment of sales tax on value‑addition basis shall be mandatory and the commercial importer shall be exempt from the requirements of audit'. According to C.B.R. officials, the immunity from sales tax audit does not mean that the auditors may not conduct audit in cases where there is definite information, of evasion or fraud etc. under Act. There would be detailed audit in cases of information, while immunity from audit would continue provided the commercial importers pay sales tax on 10 per cent value addition. Following is the text of the notification issued on August 4, 2004. "In exercise of the powers conferred by section 71 of the Sales Tax Act, 1990, read with clause (9) of section 2, sections 3, 3AA and 4, subsection (2) of section 6, section 7A, clause (b) of subsection (1) of section 8, clause (a) of subsection (2) of section 13, sections 26AA and 34A, and the first and second provisos to section 45 thereof, the Federal Government is pleased to direct that the following further amendment shall be made in the Sales Tax Special Procedure Rules, 2004, namely:‑‑ In the aforesaid Rules, for rule 14, the following has been substituted namely:‑‑ "14 Exemption from audit.‑‑‑Payment of sales tax on value addition basis as prescribed under these rules shall be mandatory and the commercial importer shall be exempt from the requirements of audit." This brings us back to the tall claims of the Government of having made 15 % uniform rate of tax. Indeed it does remain 15%, once on import value and then again on compulsory value addition both in the case‑of importers and retailers. It is clear from the above example that a higher rate is concealed in the garb of the so‑called uniform rate. On an imported article of public consumption the effective rate of tax before any further supply is 41.80 % [nowhere in the world such a high rate of tax is prevalent on imported goods which is to be borne by the poor citizens of Pakistan who are neither aware of this colossal tax burden nor possess means to defy it. By taking upon the role of an extortionist, the State is forcing itself on the unsuspecting citizens for achieving irrational revenue targets and receiving kudos from the foreign donors.