FBR clarifies KCCI’s objections on double taxation

KARACHI: On the objections raised by the Karachi Chamber of Commerce and Industry (KCCI) on double taxation under federal and provincial laws, the Federal Board of Revenue (FBR) clarified the legal position under which the board was authorised to levy sales tax on supply and manufacturing of goods whereas the power to levy sales tax on services has been vested with the provinces.

According to a statement issue by the KCCI on Thursday, a delegation headed by Businessmen Group Vice Chairman Haroon Farooki, along with KCCI President Younus Muhammad Bashir and KCCI GST & Refunds Sub-Committee Chairman Sohaib Ahmed Faridi, recently met FBR Chairman Nisar Muhammad Khan, in Islamabad. They expressed their deep concerns over double taxation by the federal and provincial authorities, which results in intensifying the hardships faced by the business and industrial community of Karachi.

Consequently, a clarification was issued by the FBR, declaring comprehensive definition of Sales Tax levy by the federal government and provinces under the Constitution of Pakistan.

The FBR pointed out that the manufacturers of five zero rated sectors were being charged by FBR at 3 percent of the processing charges, which was being paid by the textile and other zero rated industries.

Since, sales tax on Services Act, levied tax on manufacturing of goods, which fall outside the ambit of the provinces as per Serial No 49 of the Federal Legislative List of the Constitution of Pakistan, hence, the contention of province was not correct.

The FBR said the supply chain of textile industry starts with the production of cotton, which was converted into finished product after going through various processes. The garments/ made-ups cannot be manufactured without ancillary industries such as spinning, weaving, sizing, dyeing and stitching etc.

The FBR elaborated that only in large manufacturing houses the factory encompasses all these processes in one or more premises owned by the manufacturer. However, in a large number of cases, all these processes were outsourced due to lack of expertise and paucity of funds to finance all these manufacturing activities by a single owner.

Therefore, the owner of the goods forward raw material to other manufacturers for processing and converting the same into finished goods. The main thrust of all these processes was to manufacture the goods which were sold and exported as per the requirements of the customers.

These manufacturing activities could not be excluded from the supply chain activity of goods and were not covered under any definition of service, the statement quoted the FBR clarification. Therefore, the contention of the province was not valid on the grounds that without performing the activity of spinning, weaving, sizing, knitting and stitching etc, finished form of a good in manufacturing was impossible, hence, the argument tendered by the province was illogical, it added.

The FBR letter further referred to Article 143 of the Constitution of Pakistan which says, “If any provision of act of provincial assembly is repugnant to any provision of an act of Majlis-e-Shura (Parliament) which is competent in enact, then the act of parliament shall prevail and the act of provincial assembly shall, to the extent of repugnancy, be void.”  

Referring to various legal and constitutional facts, the FBR said that Part B of the Second Schedule to the Sindh Sales Services Act, 2011 was in violation of section 2(16)(a) of the Sales Tax Act, 1990. Therefore the provinces were not competent to levy such illegal tax on processing/ manufacturing of the goods by the registered persons who were already paying sales tax on such activities.