Presentation Anomalies In SalesTax&FederalExcise

8/14/2019 Presentation Anomalies In SalesTax&FederalExcise

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ANOMALIES IN SALES TAX& FEDERAL EXCISE

Adnan Mufti FCAPartner, Shekha & Mufti

The Institute of Chartered Accountants of Pakistan24 February 2009

SHEKHA &MUFTI

CHARTERED ACCOUNTANTS

An independent member firm of

MOORE STEPHENSINTRNATIONAL LIMITED

members in principles citiesacross the world


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OVERVIEW

SALES TAX

POLICY & INTERPRETATION OF ISSUES

Audit by Directorate of Revenue Receipt Audit (DRRA)

Export Refunds Refund on Building Materials, Steel, etc

Refunds under Section 66

Multiple Audits

Record Keeping & Audit

Toll Manufacturing

Work Back Assessment

Consumption of Procured Goods vs. Taxable Activity

Accounting for Refunds

SHEKHA & MUFTICHARTERED ACCOUNTANTS


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OVERVIEW

SALES TAX (cont)

PROCEDURAL MATTERS

Apportionment of Input Tax on Exports

Audit Report

Verification of Transactions

Alternative Dispute Resolution



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OVERVIEW

FEDERAL EXCISE

LEGAL ISSUES

Duty Adjustment

Basis of Duty Adjustment

Credit & Debit Note

SED Drawback

Mandatory Payment Before Filing Appeals

PROCEDURAL MATTERS Duty on Franchise Fee / Royalty



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SALES TAX



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Policy & Interpretation of Issues



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AUDIT BY DIRECTORATE OF REVENUE RECEIPT

AUDIT (DRRA)The Sales Tax Appellate Tribunals and Peshawar High Court have held that DRRA has no powersof audit of taxpayers records. Despite this, the department continues to issue DRRA audit notices tothe taxpayers.

Suggested Action

Article 201 of the Constitution prescribes that any decision of a High Court shall, to the extent that itdecides a question of law or is based upon or enunciates a principle of law, be binding on all courtssubordinate to it. Accordingly, the Federal Board of Revenue should clarify that henceforth DRRAshall not undertake any audit of taxpayers sales tax and excise records.



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EXPORT REFUNDS

Apart from the list of supportive documents prescribed in Rule 38 of Sales Tax Rules2006, the department requires the refund claimant to furnish records, returns, accounts,statements, summaries pertaining to his suppliers to cross match the payment of outputtax. This has created the following problems:

The desired documents are not prescribed under the law or the rules

Under the law, the supplier is not bound to furnish his returns, summaries and otherstatutory declarations to his buyer

In certain cases, the department directly contacts the respective supplier to verify thegenuineness of the disputed transaction; however in other cases, the onus ofverification is transferred upon the refund claimant himself.

Recently, the Large Taxpayers Unit Karachi has discontinued the above refundverification mechanism which has resulted in 2 sets of practices prevailing in RegionalTax Office and Large Taxpayers Unit (LTU). The LTU now requires the refund claimantsto get the invoice summary statements, sales tax returns, etc. of their suppliers verified /

authenticated from their respective Collectorates, otherwise Bank Guarantees furnishedby refund claimants may be encashed.

Suggested Action

To streamline the entire refund verification and sanctioning process, the FBR shoulddevice necessary mechanism for the whole country in the light of the Section 10 and SalesTax Rules 2006 thus ending practical hassles, liquidity problems for refund claimants andfrivolous litigation pertaining to refunds.



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REFUND ON BUILDING MATERIALS, STEEL, ETC

After the suppression of SRO 578(I)/98 dated 12 June 1998 through SRO 490(I)/2004dated 12 June 2004, sales tax paid on building materials has become eligible for refund /adjustment purposes. However, the RTO has placed certain other conditions attached tothe refund claim such as filing of Approved Building Plan, BOQ, Counter Confirmationfrom respective Trade Association, etc. Such requirements are not spelled out either in thestatute or the rules. Besides, they are against the superior courts decisions. The LTU, likebefore, does not require such additional documents.

Suggested Action

In line with the statute and the related judgments of the superior courts, the said StandingOrder may be withdrawn forthwith and refunds may be allowed on building materials

without any exception.



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REFUNDS UNDER SECTION 66

Legal Position:

No refund of tax claimed to have been paid or over paid through inadvertence, error ormisconception shall be allowed, unless the claim is made within one year of thedate of payment

Departmental Interpretation

No refund of tax claimed ..shall be allowed, unless the claim is madewithin one year of the date of payment

Suggested Action

In line with an identical pronouncement by the High Court, the FBR should clarify thatwhere the tax claimed as refund was not paid due to inadvertence, error or misconception,the time limit of 1 year will not be applicable. Accordingly, all claims not falling under theabove, should be admissible and entertained without any time limit as already held by HighCourt. The Supreme Court has already held that no limitation of time can be placed uponfiling and sanctioning refunds.



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MULTIPLE AUDITS

The tax authorities conduct multiple audits of same tax period under different names, i.e.,investigative audit, desk audit, audit for abnormal profile, etc. Under section 25, the taxdepartment may conduct audit of registered person only once a year. Also, the terms DeskAudit, Investigative Audit Abnormal Tax Profile have not been defined in the statute.

Recently the Federal Tax Ombudsman (FTO) has also held that abnormal tax profile is

not defined in the Law and thus no scrutiny may be made by the department on thisaccount.

Suggested Action

All audits or scrutiny other than the usual audit prescribed under section 25 may bewithdrawn.



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RECORD KEEPING & AUDIT

During the audit exercise, sometimes the tax authorities call for documents like Audited Accounts, CostAudit Report, Minutes of BOD, Income Tax Records, etc which are not prescribed records in section 22of the Act. In certain cases, cases have been established out of the information so sought and show causenotices issued to the taxpayers.

Suggested ActionThe FBR and Federation of Pakistan Chamber of Commerce & Industry (FPCCI) have already agreedupon records which may be sought by the tax administration during tax audit. This agreement was alsomade public vide FBRs letter dated 17 November 2001. It is suggested that the suitable amendmentsmade be made in section 22 of the Act by incorporating the above FBR letter as part of the statute.



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TOLL MANUFACTURING

The amended definition of the term supply does not include Other Disposition as partof supply. Other Disposition was discussed in Para 1(E) of Sales Tax General Order(STGO) No. 3/2004 dated 12 June 2004 wherein the FBR had opined that return of goodsby the vendor back to the principal tantamount to Other Disposition and accordinglyliable to sales tax. Hence, it appears that Toll Manufacturing is out of the tax ambit.

Suggested Action

Since now toll manufacturing is out of supply, it is suggested that Part I(E) of aboveSTGO may also be withdrawn to avoid potential problems for the taxpayers during audit.



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WORK BACK ASSESSMENT

In many cases, the department creates tax demands based on work back method. Underthe law, except in cases where the taxpayer fails to file the return, no officer can make aworked back assessment and create liabilities.

Suggested ActionThe superior courts have held in numerous judgments that unless supply of taxable goodsis established, no tax can be levied. The Supreme Court has also held that work backassessment under Rule 226 of (repealed) Central Excise Act 1944 is illegal.

It is, therefore, suggested FBR should clarify that except in case of section 11(5) read withPara D of STGO 3/2004, no assessment may be made on presumptive basis.



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CONSUMPTION OF PROCURED GOODS VS.

TAXABLE ACTIVITYPrior to Finance Act 2008, the act of putting to private, business or non business use ofgoods acquired or manufactured in the course of business was treated as supply. VideFinance Act 2008, goods acquired is out of the definition meaning thereby no sales taxis leviable on non business consumption of purchased goods. However, the presentdefinition is in conflict with the term taxable activity which also includes anything doneduring commencement or termination of economic activity.

Suggested Action

Clause 2(33)(a) should be brought in harmony with section 2(35) to avoid unnecessarylitigation on this account.



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ACCOUNTING FOR REFUNDS

In recent cases, the tax authorities have started rejecting refund claims where such claimswere not booked as receivable in the taxpayers audited accounts. In support of suchcontention, the tax authorities contend that non recording of refund as receivable fromgovernment tantamount that the sum of claimed was charged off in cost of sales; thus becoming part of selling price which was ultimately recovered from the customers.Therefore, such claims were rejected under Section 3B of the Act.

Suggested Action

The above appears to be an attempt to override the explicit provisions of the Act whichmakes no distinction between corporate and non corporate taxpayers. In quite a few cases, because of the contingent nature of refunds due to interpretational / legal issues, the

taxpayer could not book it as receivable in the accounts. This is the internationallyaccepted and practiced accounting convention. It is, therefore, suggested that refund casesmay be examined only in the light of books required under section 22 of the Act andagreement reached between FBR and FPCCI.



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VALUE OF SUPPLY

In terms of Federal Excise Notification 655(I)/2007 dated 29 June 2007, Special ExciseDuty (SED) is not taken into account for the purpose of computing value of supplyunder Sales Tax Act 1990. This exemption is incorrectly placed in Federal Excise Lawinstead of Sales Tax and thus lacks due intended legal support

Suggested Action

It is suggested that section 2(46)(a) of Sales Tax Act 1990 should be modified as follows:

value of supply means;- in respect of taxable supply, the consideration in moneyincluding all Federal and Provincial duties except special excise duty levied under section3A of Federal Excise Act 2005 and taxes, if any, which the supplier receives from the

recipient for that supply excluding the amount of tax.



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MARKET VALUES

In case where there is sufficient reason to believe that value of supply has not been declaredcorrectly, the dispute is resolved by forming valuation committee comprising representativeof business community and the tax department. Nevertheless, in most of the cases, thedepartment continues to dispute valuation on the basis of available market price withadjudication orders passed without forming valuation committees.

Suggested Action

Identical to ADRC, a panel comprising of business community may be formed by FBR

and all disputes regarding the value of supply may be referred to such committees under2(46)(e).



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TAXATION OF RETAILERS

A registered retailer is required to pay turnover tax on value of supplies specified in 3rd Schedule of theAct on which the respective manufacturer had already discharged the entire tax liability.

Further, 5(3) of Sales Tax Rules 2006 allows corporate buyer / income tax withholding agents to claim

sales tax paid to retailers. This Sub Rule is in conflict with Section 2(28) and Rule 3 whereby retailers arethe persons supplying goods to general public for consumption purposes. Thus, according to the statute,no input tax becomes admissible to the buyer / end consumer.

Suggested Action

Double taxation on 3rd schedule items should be removed at retail stage. Further, Rule 5(3) should beamended keeping in view the ancillary specific provisions and the spirit of Retail Taxation.



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RECOVERY OF ADJUDGED TAX

Section 48 read with Rule 71 empower initiation of recovery proceedings at the end of 30days from the date of order in which government dues are adjudged against the taxpayer.On the other hand, section 45B allows the taxpayer to file an appeal with the Office ofCollector (Appeals) within 30 days from the date of receipt of order. Thus, Rule 71 is inconflict with section 45B of the Act.

Suggested Action

Due to secretarial formalities, adjudicating orders are served to the taxpayer long aftertheir pronouncements. It is, therefore, suggested that Recovery Rules may be amendedand recovery proceedings may only be enforced after 30 days of service of order to thetaxpayer. This amendment is also required in the best interest of natural justice.



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REVISED RETURN

Section 26(3) allows the registered person to file a revised return with the permission ofthe Collector to rectify any omission or wrong declaration made in his monthly tax return.However, there is no mechanism for revising the monthly special return, which is filed by42 sectors of the economy.

Suggested Action

It is suggested that necessary amendments may be made and reference of section 27 mayalso be incorporated in section 26(3) of the Act.



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WASTAGE

There is no provision in the statute governing both visible and non visible wastage that occurs duringmanufacturing process. The audited accounts also do not separately disclose wastages; rather the same isreported as part of stock consumed. Quite often, cases are established against the taxpayers on account ofdifference in stock figures which usually is due to the element of wastage.

Suggested Action

To address this critical issue, it is suggested that Industrial Notes may be drawn by the FBR in consultationwith trade, industry and tax consultants encompassing business processes of significant sectors andstandard ratios of wastage occurring during such processes.



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INPUT TAX CREDIT ON FIXED ASSETS

Under Section 8B, input tax attributed on fixed assets is adjustable in 12 equal monthlyinstallments. However, the term fixed assets has not been defined in the statute.

Capitalisation policy of businesses differs from each other. Especially in case of noncorporate taxpayers, due to non availability of audited accounts, disputes may arise as towhat constitutes fixed assets. Consequently, cases could be established where the taxpayer

had claimed the entire sales tax in a single return instead of prorating it over 12 monthstime.

Suggested Action

The term fixed assets may be defined in the same fashion as plant and machinery isdefined in the Customs Act 1969.



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INPUT TAX ON GOODS DESTROYED

Rule 23 of Sales Tax Rules 2006, disallows input tax credit in respect of goods destroyedbeing unfit for human consumption..

Suggested Action

Except for above change brought in vide Finance Act 2008, the legal position has beenconsistent for destruction of goods since 1990. Further, we understand input tax has beendeclared as vested right of the taxpayer under the main statute and the same cannot betaken away by subordinate legislation. It is suggested that the disallowance, being ultravires of section 8 of the Act, may be withdrawn.



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MISMATCHING OF PENAL INTEREST

A registered person can be penalized with default surcharge @18% p.a if he fails to payoff the tax liability by due date. On the other hand, failure of the department to pay off thedue tax refunds in time only costs it 6% p.a

Suggested Action

Keeping in view the rate of inflation, cost of funds and above all natural justice, theinterest on delayed refund may be enhanced to atleast 12% p.a thus compensating thetaxpayers for the departmental delays / non compliances.



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Procedural Matters



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APPORTIONMENT OF INPUT TAX ON EXPORTS

Tax attributed to exports and zero rated supplies is refundable to the registered person.However, the law does not prescribe any formula / method of proration of input tax betweenexports and local supplies.

Suggested Action

A formula / mechanism identical to the Apportionment of Input Tax Rules should beintroduced in the statute. Else the exporter may be allowed to carry forward entire excessinput tax to the next tax period without any exception.



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AUDIT REPORT

Upon completion of departmental audit, the audit report prepared by the auditors andreviewed and approved by the Additional Collector, is required to be sent to the registeredperson followed by an Audit Completion Certificate in the prescribed format. However, inpractice, no such audit report is discussed or shared with the taxpayers. The departmentalso does not issue Audit Completion Certificate and huge demands are created withoutproper compliance of the law.

Suggested Action

The taxpayer should be aware of the results of department audit. This would be not onlyin compliance with the legal framework but might also facilitate quick payment(s) ofunpaid tax by the taxpayer alongwith reduced penalty under section 33.



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VERIFICATION OF TRANSACTIONS

Section 73 fails to address cases where payments are knocked off through contra bookentries between buyer and sellers.

The provision does not cater situations where payments become doubtful or eventuallyturns irrecoverable for the supplier

The law does not take into account transactions where payments are made by creditors

/ guarantors / 3rd parties on behalf of the buyer.

Suggested Action

We understand that the basic intent of section 73 has been to document the economic and business transactions. This objective may well be achieved within sophisticatedaccounting and corporate environment and the growing business realities. Thus, section73 may be amended to cater the inter company (book) transactions and the issue of baddebts.



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ALTERNATIVE DISPUTE RESOLUTION

The law does not provide a comprehensive framework for ADRCs. Resultantly, noconcrete solution is available to the following problems confronting the mechanics ofADR:

Too centralized mechanism

CBR holds powers to accept or reject the recommendations of ADRC withoutassigning any reason thereby wiping of the entire process of deliberations and efforts

Powers of ADR have not been specified; for instance, legally ADRC cannot orderinspection of books of accounts of a 3rd party

No provision exists requiring appellate forums to put the judicial proceedings inabeyance till the outcome of ADR

Can documents exchanged / agreement reached at the ADR stage be put as evidenceat any judicial proceedings ?

Suggested Action

A comprehensive ADR framework should be developed encompassing the extent andscope of both the Committees and FBR respectively. For this purpose, liaison may bemade with Karachi Centre for Dispute Resolution, constituted with the assistance ofInternational Finance Corporation (IFC) and Sindh High Court.



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FEDERAL EXCISE



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Legal Issues



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BASIS OF DUTY ADJUSTMENT

FED paid on excisable goods, which are used directly as input goods for the manufactureof dutiable goods, is adjustable against the final liability. On the other hand, SED paid onindustrial inputs is adjustable against the SED chargeable on the goods manufacturedtherefrom. The term industrial input has not been specified under the law.

Suggested Action

In the absence of any definition of industrial inputs, it could be construed to includeeverything consumed for the manufacturing / allied activity like spares, printing, stores,equipment, etc. In order to avoid litigation on this account, it is suggested the termindustrial inputs may be defined in the law.



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CREDIT & DEBIT NOTE

Identical to section 9 of Sales Tax Act 1990, Rule 14A also allows adjustment(s) in taxinvoice or return for dutiable goods. However, the benefit of such Rule has not beenextended to dutiable services.

Suggested Action

To bring harmony in application of duty provisions to both and services, it is suggestednecessary amendments may be made in Rule 14A to include reference of dutiable goodsand dutiable services.



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SED DRAWBACK

Under SRO 655(I)/2007 read with Federal Excise General Order (FEGO) 1 of 2008, incase of exports, the SED paid on purchases / import shall be paid to the exporter asdrawback. However, since July 2007, no such drawback is paid to the exporters.

Suggested Action

It is suggested that necessary instructions may be passed onto field formations to processoutstanding SED drawbacks. To expedite around 2 years pending claims, it is alsoproposed that SED Drawback may be sanctioned to the large taxpayers upon submissionof revolving bank guarantee..



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MANDOTORY PAYMENT BEFORE FILING APPEAL

Under Section 37, before preferring appeal before Office of Collector (Appeals) orAppellate Tribunal, a taxpayer is required to deposit the impugned duty demanded orpenalty imposed in the appealable order. This mandatory compulsion is considered as ahindrance in the dispensation of justice.

Suggested Action

The identical provisions in Income Tax and Sales Tax have already been repealed.Therefore, it is suggested the same is also removed from the excise law.



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Procedural Matters


SHEKHA & MUFTI


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DUTY ON FRANCHISE FEE / ROYALTY

In terms of Rule 43A(7), the franchisee is entitled to take credit of the duty on franchisefee, technical service or royalty so deducted by bank making remittance on his behalf.However, the tax return does not contain any column for such credit.

Suggested Action

Annexure E of the return may be amended and a column should be incorporated so thatdue credit may be availed by the franchisee for duty so deducted by banks.


SHEKHA & MUFTI


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THANK YOU


Presentation Anomalies In SalesTax&FederalExcise

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