‘Sup­ply chain, man­u­fac­tur­ing, sub­jected to Sales Tax by Govt’

The Pak Banker - - NATIONAL -

In re­sponse to con­tentions ex­pressed over dou­ble tax­a­tion by a KCCI del­e­ga­tion dur­ing its re­cent meet­ing with Chair­man FBR, the Fed­eral Board of Rev­enue (FBR) has is­sued a de­tailed clar­i­fi­ca­tion which clearly de­fines that the fed­eral govern­ment is au­tho­rized to levy sales tax on sup­ply and man­u­fac­tur­ing of goods whereas the power to levy sales tax on ser­vices have been vested with Provinces.

KCCI del­e­ga­tion headed by Mr. Ha­roon Fa­rooki, Vice Chair­man Busi­ness­men Group and For­mer Pres­i­dent KCCI along with Pres­i­dent KCCI Mr. Younus Muham­mad Bashir and Mr. So­haib Ahmed Faridi, Chair­man GST & Re­funds Sub­Com­mit­tee KCCI re­cently met Mr. Nisar Muham­mad Khan, Chair­man FBR re­cently in Is­lam­abad to ex­press deep con­cerns over dou­ble tax­a­tion by fed­eral and pro­vin­cial au­thor­i­ties, which re­sults in in­ten­si­fy­ing the hard­ships be­ing faced by the busi­ness and in­dus­trial com­mu­nity of Karachi.

Con­se­quently, a clar­i­fi­ca­tion vide let­ter # C.No.3(2)ST-L&P/2011(Pt-II) dated Jan­uary 8, 2016 was is­sued by the FBR, declar­ing com­pre­hen­sive def­i­ni­tion of Sales Tax levy by the Fed­eral Govern­ment and Provinces un­der the Con­sti­tu­tion of Pak­istan. FBR pointed out that the man­u­fac­tur­ers of five zero rated sec­tors are be­ing charged by FBR @ 3 per­cent of the pro­cess­ing charges, which is be­ing paid by the tex­tile and other zero rated in­dus­tries. Since, sales tax on Ser­vices Act has levied tax on toll man­u­fac­tur­ing of goods, which fall out- side 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 is not cor­rect.

Ac­cord­ing to FBR, the sup­ply chain of tex­tile in­dus­try starts with the pro­duc­tion of cot­ton, which is 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.

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 large num­ber of cases all th­ese pro­cesses are out­sourced due to lack of ex­per­tise and paucity of funds to fi­nance all th­ese manu- fac­tur­ing 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 is to man­u­fac­ture the goods which are sold and ex­ported as per re­quire­ments of the cus­tomers, FBR added.

FBR's let­ter fur­ther stated that th­ese man­u­fac­tur­ing ac­tiv­i­ties can­not be ex­cluded from the sup­ply chain ac­tiv­ity of goods and are not cov­ered un­der any def­i­ni­tion of ser­vice. There­fore, the con­tention of the prov­ince is 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 can­not take place, hence, the ar­gu­ment ten­dered by the prov­ince does not seems to be log­i­cal.

FBR let­ter fur­ther re­ferred to Ar­ti­cle 143 of the Con­sti­tu­tion of Is­lamic Re­pub­lic of Pak­istan which says, "If any pro­vi­sion of act of pro­vin­cial as­sem­bly is re­pug­nant to the 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, FBR said that Part B of the Se­cond Sched­ule to the Sindh Sales Ser­vices Act, 2011 is in vi­o­la­tion of sec­tion 2(16)(a) of the Sales Tax Act, 1990. There­fore the provinces are not com­pe­tent to levy such il­le­gal tax on pro­cess­ing/ man­u­fac­tur­ing of the goods by the reg­is­tered per­sons who are al­ready pay­ing sales tax on such ac­tiv­i­ties.

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