Anomaly in sales tax law may cause revenue loss

KARACHI: Tax officials have identified an anomaly in the sales tax law that is giving a way to the conflicting tax adjustment claims filed by taxpayers, fearing revenue loss if it is not rectified.
An amendment, introduced to the Sales Tax Special Procedure, 2007 through SRO 484(I)/2015, dated June 30, 2015, has allowed sales tax input adjustment on purchase of consumer goods to registered persons belonging to manufacturing and other allied industries, said sources in the Federal Board of Revenue (FBR) on Thursday.
However, supplies of such goods have already been exempted from sales tax with additional two percent extra sales tax at wholesale/retail stage.
“Therefore there is no question of tax invoice on such sales for claiming input adjustment,” said a source.
The sources in FBR said taxpayers are taking advantage of the situation and submitting flying invoices to claim input adjustments.
Tax officials have so far rejected such claims as they have power to do so in cases where an acceptance could result in corruption.
The Chapter XII of Sales Tax Special Procedure Rules, 2007 explains the procedure of sales tax collection by wholesaler-cum-retailers from end consumers.
However, the tax rate is zero on supplies to diplomatic missions.
Interestingly, the said amendment was made into Chapter XII for explaining the procedure for claiming input adjustment defined in Chapter XIII.
The Chapter XIII of the Rules defined those goods where extra tax of 2 percent is levied and those are mainly finished products/consumer products.
The goods include household electrical goods, gas appliances, foam and spring mattresses, auto-parts and accessories, lubricant oils, tyres and tubes, storage batteries, arms and ammunitions, paints, tiles, and biscuits and confectionary items.
The purpose of 19 percent sales tax on manufacturing sector at supply stage was to end the complications of input adjustments.
The Clause 5 of the Chapter XIII clearly explained: “The specified goods on which extra sales tax has been paid in the aforesaid manner shall be exempted from payment of sales tax on subsequent supplies, including those made by a retailer.”
Both tax officials and practitioners are surprised over the amendments. They said FBR should issue clarification on the subject.
Adnan Mufti, fellow chartered accountant at Shekha and Mufti Chartered Accountants said the amendment was introduced to facilitate manufacturing sector because for them some consumer goods were raw material.
“The present situation will create problems for both taxpayers and tax department,” Mufti said.
“The FBR should introduce proper amendment to the Sixth Schedule of Sales Tax Act, 1990 to remove the anomaly.”