Issues On The Introduction Of New Gst Law

ISSUES ON THE INTRODUCTION OF NEW GST LAW ISSUES ON THE INTRODUCTION OF NEW GST LAW By Nooruddin Pradhan, LLM, Tax Expert, Lahore Issues which are expected to crop up after enforcement of new value added tax law i.e. "The General Sales Tax Bill, 2010" [new GST Law] which is claimed to be based on full system of VAT. Detailed discussion was made by the writer in his thesis submitted for LLM Program-2010 on the topic: "Comparative Study of Value Added Tax in Pakistan vis-a-vis GST". The Article focuses on the selected issues extracted from the Chapter 8 "MAJOR IRRITANTS" of the thesis: Sales Tax on advances Under Section 19(1)(c) of the new GST Law, the concept of tax on advance payment has again been proposed to be brought into. The writer, in his Article: "Legality of Sales Tax on Advance - An analysis", published in Business Recorder on August 22, 2005 and 2005 PTD 210 (Journal) has analyzed that though the sales tax on advance payment corroborate to the VAT Principle it does not have the harmony with the term 'tax on sale' used in Entry No. 49 of Part I of Federal Legislative List of the Constitution of Pakistan and recognition of sale in International Accounting Standard. The writer explained that if the provision of sales tax on advance payment is removed there would not be any loss of revenue and the taxpayer would get great relief from duplication of work and from bearing extra compliance cost. The writer opined that if the points highlighted in the Article were brought before the Supreme Court of Pakistan, the judgment would probably be different. It is pertinent to mention here that the Sales Tax on advances was introduced with the enforcement of Sales Tax Act, 1990 i.e. since 1990. However, its implementation was a matter of dispute until November 2003 when the Supreme Court of Pakistan finally decided that sales tax shall be leviable on the advance payment.1 However, the legislature through Finance Act, 2007 has deleted the provision of applicability of sales tax on advances. Thus, the provision of tax on advance payment remained enforced for less than four years out of 20 years. Besides, under section 19(1)(c) of the new GST Law, the tax on advances has become payable in an awkward manner as: at the earliest of - 1 D.G.Khan Cement Company Ltd and other's case (2004 PTD 1179) (a) the time of supply; (b) the time when an invoice for the supply is issued; or (c) the time when any part of the consideration for the supply is paid. The wordings of the section 19(1)(c) of the new GST Law has bees y so drafted which would prime facie mean that when a person has made the full advance payment against taxable supply, sales tax shall not be required to be charged. Thus, the provision appears to be restricted to levy the sales tax on part payment received in advance. The above provision of law does not only create anomaly but also against the VAT Principle on advances i.e. the time when any advance payment is received shall be considered for the discharge of VAT liability. Overlapping situation in calculation of value of imported Goods Under section 14 of the new GST Law, the value of imported goods shall be the sum of value of the goods determined under section 25 of the Customs Act, 1969 plus cost of insurance and freight including the following: (a) Cost of services that shall be treated as part of the import of the goods. (b) The amounts, if any of customs duties, federal excise duties or other taxes, levies or fiscal charges other than the sales tax. In the existing sales tax law, sales tax is applicable on the value of imported goods which includes amount of applicable customs duty and excise duty with the exclusion of income tax. However, the new GST Law appears that the amount of income tax shall also be included in the value on which sales tax is to be imposed through "other taxes" highlighted hereinabove in bold letters. On the other hand, under section 148(9) of the Income Tax Ordinance, 2001, Income Tax on imported goods is levied on the value including amount of sales tax. Thus it creates overlapping situation unless suitable amendment is made. Withholding Agent Under section 38 of the new GST Law, the FBR may specify any person who shall be the withholding agent and shall be required to withhold upto 25 % of the rate of sales tax (15 %) / 3.75 % of selling value i.e. 33.33 % value addition is essential for the supply to withholding agents otherwise it would create unnecessary refund. Illustration: Description Value Tax Value Tax Purchases 100.00 15 100.00 15 Sales with without 33.33% value addition 133.33 20 120.00 18 Payable to Treasury 05 03 Withheld by withholding agent 05 04.5 Payable/(Refundable XX (1.5) Advance Payment of Tax Under Section 37 of the new GST Law, the FBR may require any person to make advance payment of tax on imported goods upto 25 % of the rate of sales tax (15%) for prospective value addition i.e. 25% value addition/3.75% of the value. Currently, 2% sales tax of the value is applicable as value addition. In case imported goods supplied to withholding agent and the 25 % of the sales tax is withheld by him, then the same pall only be adjusted if the value addition is or more than 66.66% in the following manner otherwise it would create unnecessary refund: Description Sales with 66.66% value addition Sales below 66.66% value addition Value Tax Value Tax Value at import stage 100.00 15.00 100.00 15.00 Advance Tax upto 25% 25.00 03.75 25.00 03.75 Deemed sales value on which sales tax collected at import 125.00 18.75 125.00 18.75 Sales 166.66 25.00 140.00 21.00 Payable to Treasury after adjustment 06.25 02.25 Withheld by Withholding Agent 06.25 05.25 Payable /(Refundable) XXX (3.00) It is pertinent to mention that concepts of withholding and advance payment are against the VAT Principle. Irregular adjustment technique The following adjustment technique is used in the section 31 of the new GST Law in case of increase or decrease of tax on account of increase of value, return of supply, cancellation of supply, etc: Supplier Debit Note when prices are changed upward, etc. - Increase Output Tax Credit Note when goods are returned, etc. - Decrease Output Tax Buyer On receipt of Debit Note - Decrease Output Tax On receipt of Credit Note - Increase Output Tax In case the goods are returned to the supplier the accounting treatment shall decrease the purchases of the buyer whereas in the VAT return, on the basis of above methodology, the output tax of the buyer shall be reduced or in other words sales shall be reduced, thereby the sales tax return would not reflect the true picture of net purchases and sales. The following method is in line with the International Accounting Principle as well as VAT Principle and is currently in vogue under Sales Tax Act, 1990: Supplier Debit Note when prices are changed upward, etc. Increase Output Tax On receipt of Debit Note - Decrease Output Tax Buyer On receipt of Debit Note - Increase Input Tax Debit Note when goods are returned, etc. - Decrease Input Tax Apart from on-line verification, the sales tax auditor would have to face difficulties in physical verification of sales tax return with the Company's Financial in case adjustment technique remains in the statute of new GST Law. Over-regulation in the new GST Law Under provisions of the new GST Law, it is apprehended that following sales tax audits can be conducted: (1) The Inland Revenue Officer authorized by the FBR may conduct audit including forensic audit of any registered person - Section 71. (2) The FBR may appoint an accountant for conducting special audit whether or not such registered person has been audited earlier by any Inland Revenue Officer or other department -Section 72. (3) Where the Commissioner has any reliable information or otherwise believes about any tax fraud by any registered person during the said audited period specifically orders for re-audit -Section 73. (4) Any Inland Revenue Officer duly authorized by the FBR may enter any premises or place where any stocks, records, accounts, etc. are kept or maintained for the purpose of audit, explanation and possession - Section 84 (5) Power of the FBR and Commissioner Inland Revenue to reopen cases except where an appeal is pending before Appellate Tribunal - Section 86. (6) The Commissioner (Appeals) while deciding an appeal may make further audit, enquiry or verification - Section 87(5) (7) The Committee under alternative dispute resolution shall examine the issue and may if it deems fit inter alia direct any Inland Revenue Officer to conduct audit - Section 91(3). Such numerous sales tax audits show underlined feeling of distrust over taxpayers on the tax administration side and enhancement of compliance cost coupled with creation of harassment on the taxpayer side. Besides, such overlapping sales tax audits under VAT Principle are very rare. Conclusion The Government should consider the above issues before enforcement of the new GST Law which are not only against the VAT Principle but will also create hurdles at the time of its implementation.