KARACHI: The Federal Board of Revenue is cognizant of all issues emanating out of SRO 98I/2013 dated 14 February 2013 and steps are being taken to address all problematic issues in consultation with Institute of Chartered Accountants of Pakistan ICAP so that businesses may not be adversely affected due to new set of sales tax withholding rules.
This was stated by Khawaja Tanveer Ahmad, Chief Commissioner, Regional Tax Office, and Karachi while addressing a jam packed seminar organized by ICAP Southern Region Committee SRC here at Karachi. During his address, the top sales tax official of FBR dilated upon reasons why government failed to introduce a broad based Value Added Tax VAT in 2009.
He explained that in the past FBR’s enforcement arm was frozen for sometime resulting in suspension of tax audits; as a result most of the field officers forgot techniques for conducting meaningful tax audits. However, he agreed that collection of sales tax through withholding schemes was negation of self assessment, which should be discouraged.
Aimed huge applause, Khawaja Tanveer Ahmad categorically declared that SRO 98 will be amended to cater and suit business operations and no business needs to modify its operations due to the new withholding tax scheme. Upon a question, the Chief Commissioner also clarified that FBR has no objection to allow input tax credits to its taxpayers whose corresponding output tax was being paid in SRB or PRA kitty.
Earlier, while making a comprehensive and elaborative presentation on SRO 09, M. Adnan Mufti FCA, CPD Convener SRC dilated at length about legislative history of Sales Tax Withholding Tax Rules 2007. He highlighted that due to rescinding of SRO 603, the requirement of tax deduction on purchase from unregistered sectors has been done away with.
He also explained the background of Sections 221a and 7 of Federal Excise Act 2005 read with RSO 543I/2008 dated 11 June 2008 and contended that excusable goods and services are outside the purview of Sales Tax Withholding Rules 2007.
He apprehended that as a result of new measures, corporate withholding agents might start / shift business in the name of AOP / Individuals; thus, corporatization would be hampered and adversely affected. Alternatively, manufacturers / importers might prefer sales to unregistered sectors or to AOPs / Individuals not liable to withhold tax.
On the issue of income tax / excise duty assesses being classified as sales tax withholding agents, Mufti emphasized that the provisions of Income Tax Ordinance 2001 and Federal Excise Act 2005 do not provide any reference, authority or reliance upon Sales Tax Act 1990 and rules made thereunder for collection of sales tax for a company, not otherwise in sales tax fold, which may be made liable to withhold sales tax. On the contrary, such reciprocity or counter reference only finds place in Sections 221a & 7 of Federal Excise Act 2005 and Section 214c of Sales Tax Act 1990 whereby excise duty is made adjustable as sales tax and vice versa.
Taking up a key issue regarding applicability of SRO 98 on invoices issued prior to 14 February 2013, Adnan Mufti referred to FBR’s clarification dated 17 August 2009 whereby it was clarified that old invoices will not attract withholding tax. He elaborated that under SRO 98, 1/5th of the amount of sales tax, shown on the face of tax invoice, needs to be deducted. For instance, extra tax @ 0.75% would also undergo tax withholding over and above 16%.
In his presentation, Adnan Mufti explained with practical examples that unless a business earns 25% profit on cost, it will be exposed to liquidity pressures under SRO 98. In particular, he referred to Rule 58C of Sales Tax Special Procedure Rules 2007 whereby commercial importers are not entitled to claim refund in any circumstances. In this way, SRO 98 directly hits cash flows of commercial importers, he claimed.
On the legal touch tone, Mufti explained that no specific provision exists in the statute to claim refund of withheld tax. In particular, law is silent where tax was withheld at the time of making payments and subsequently the goods were returned back to the supplier. How supplier may claim adjustment / refund of such withheld tax, he questioned.
In the end, Mufti addressed the penal provisions of the sales tax law and explained SRO 660 does not prescribe any specific penalty for non deduction of withholding tax. However, such an act may attract misc. penal provisions envisaged under Section 33 of the Act. He went on to say that in numerous cases, assessment orders have been issued whereby tax @ 1% not withheld by the taxpayers under SRO 660/97 was added back to their own liability. If the corresponding supplier had discharged his entire liability @ 16%, this addition would mean 17% tax to the exchequer. Penalty should not be levied till it is proved that the supplier has also defaulted in his liability to the state and a revenue dent was caused to the exchequer, he maintained. The seminar was widely attended by Members of ICAP & ICMA, Tax Bar, CFOs and Tax Managers of reputed businesses.