PTBA presents proposals for additional budget; harmonizing sales tax rate recommended

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KARACHI: Pakistan Tax Bar Association (PTBA) has submitted its proposals for additional budget that may be presented in the next week. The PTBA has focused on indirect taxes and proposed several amendments in the expected finance bill.

In a letter to Finance Minister Asad Umar, the PTBA on Saturday said that it had presented important proposals related to indirect taxes for the consideration in the forthcoming additional budget to be presented in the national assembly.
The PTBA, the apex tax bar in the country, recommended harmonization of federal and provincial taxes and said that all four provinces and Federal Government have introduced distinct service tax laws for their respective jurisdictions which is undesirable and unworkable in Pakistan.
This distinction also paves ways for transfer of business from one jurisdiction to another where the tax rate(s) is low or particular services is not taxable. This situation is causing a lot of confusion, harassment, litigation, extreme unrest and problems amongst the business community.
The PTBA recommended that a uniform service tax law may be drafted and agreed upon by all Provincial and Federal Government for implementation in their respective jurisdiction by respective tax authorities. Further, a uniform tax return may also be introduced for the taxpayers. Moreover a registered person should deal with one agency instead of dealing with four revenue authorities for filing of return, audit, monitoring and verification of payment.
Regarding sales tax rate in the country the PTBA recommended its rationalization. The apex tax bar said that present standard rate of 17 percent sales tax with an additional 3 percent value addition on commercial importers is too high. It is a bottle-neck in inducing people to come with in tax net, besides also contributing towards inflation. “There is a narrow tax base due to the high rate of tax, which induces tax evasion, under invoicing, corruption and smuggling,” it added.
In this regard the association recommended that standard tax rate should be reduced to 15 percent and should further gradually be reduced to 12.5 percent in the subsequent five years of present government.
The PTBA said that reduction of tax rate would result in significant decrease in the government’s revenues. Hence, in order to bridge the potential revenue gap as a result of slash in tax rate, it recommended the following measures:-
a. Value addition tax (i.e ., 3 percent) may be levied on import of luxury goods I items, which are expected to be sold at a higher value addition in the local market as compared to other goods;
b. Exemptions presently available under 6th Schedule of the Act and through various SROs should be minimized and unwarranted subsidies should be done away with;
c. All taxable goods I activities should be taxed across the board without any threshold, as the same is creating distortion and encouraging evasion of tax under the garb of threshold;
d. Zero ratings and reduced ratings awarded to certain sectors I classes of goods should be rationalized and accordingly minimized;
e. the Government should move towards automation of data, research and analysis of various sectors of economy and their respective contribution to tax revenue through specialized techniques;
f. Proper administration in order to avoid revenue leakages and inadmissible refunds;
g. the government should strengthen its audit capacity both at field formation and at the Board level; and
h. Media campaign be started to highlight regarding benefits of registration and to be a Filer, with success stories from businessmen having sales tax registration.
The tax bar said Section 25 and Section 38 of the Sales Tax Act empowers tax authorities to conduct sales tax Audit I Investigation. In terms of Section 25 of the STA an audit of a registered person may be conducted once in a year. On the other hand, Section 38 of the STA empowers the tax department to conduct investigation of registered persons without any time limitation and allied framework.
It recommended that no audit may be initiated unless specific scope, guidelines and mechanism of Investigation is available in the law. Likewise, if detailed investigation of a registered person has already been conducted under Section 38 of the STA there should be no need to conduct audit of that person under Section 25 of the STA again or vice versa.
Regarding sales tax refunds, it said that unadjusted input tax has to be carried forward for consecutive twelve months period before it can be claimed as refund by filing a refund application. Moreover, Sales Tax Rules, 2006 prohibits refund to commercial importers. New businesses who have paid input tax especially on acquisition of plant & machinery and have not started production or the production is very minimum or in trial phase are unable to claim input tax.
In cases, where there is a change in rate of sales tax on particular goods, then there may be situation where imports were made at higher sales tax rate but sold in local market at lower sales tax rate due to change in sales tax rate. There is no mechanism in the law to claim refund by commercial importers in case of change in sales tax rate during the period when goods are imported and the time when goods are supplied.
Moreover, it is against the principle of justice and equity that a taxpayer is allowed to claim the refund of unadjusted input tax in the respective month. The registered person has to wait for the period of consecutive twelve months.
The PTBA recommended that the time limit of twelve months for carry forward of excess input tax should be abolished or alternatively it may please be reduced to three months.
Proper procedure should be prescribed in the law for claim of refunds by commercial importers due the change in rate of sales tax.

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