The General Sales Tax (GST) Bill, 2010 introduced in the Parliament on 12 November 2010, has been referred to the Standing Committee on Finance for scrutiny before coming back to the house for approval to become law. The bill was introduced two days before meeting of the Pakistan Development Forum of international donors in Islamabad to consider Pakistan's need for reconstruction in areas devastated by the country's worst floods.
The bill seeks to usher in a uniform GST of 15% on sales and import of goods, as compared to the present rates, varying between 7 and 26 percent. It is, however, designed to bring additional revenue by doing away with lot of exemptions. We produce a bird eye view of the bill on the basis of available information, while news regarding amendments to be introduced in the bill keep pouring.
The GST Bill, 2010 proposes to replace the present Sales Tax Act, 1990. While the issues of collection and administration of sales tax on services are being separately negotiated with the provisions in the light of recent NFC award, a provision has been included in the Federal Bill to integrate provincial sales taxes on services with the federal sales tax on goods as and when the provinces authorise the FBR to collect and administer sales tax on services.
Presently, apart from sales tax on the supply and import of goods, federal excise duty is chargeable on communication (including telecom) services, certain categories of advertisements, insurance services, banking services, franchise services and services provided by property developers/promoters, stockbrokers and port/terminal operators.
Besides, provincial sales tax is chargeable on services provided by hotels/clubs/ caterers, customs agents, ship chandlers and stevedores, courier services and advertisements on TV and radio. Federal excise duty and provincial sales tax on all the aforesaid services is being collected under the GST mode with backward and forward cross-crediting (inter-tax adjustment) with federal sales tax.
The federal government has been levying excise duty on services. However, after passage of the 18th Constitutional Amendment, taxation of services now wholly falls in the domain of provincial governments. Under the existing constitutional framework, the federal government can impose taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed.
The GST will replace existing regimes of sales tax and excise on services. The GST will apply to both imports and local supplies at the standard rate of 15 percent. There shall be no fixed tax, reduced tax, enhanced tax, retail price-based tax or special tax scheme under the GST system.
The GST will be chargeable only on value-added component at each stage of the goods supply chain. Due to the provision for set-off of the tax paid at earlier stages in the chain, net tax incidence remains as a single-stage levy. The GST system will work on "self-assessment and self-policing" basis.
Adjudication, appeal and alternative dispute resolution (ADR) systems have been retained in the proposed law. Rules to regulate the GST procedures and processes will be issued in due course. The GST Bill, 2010 shall take effect from the date notified by the federal government. The new GST system will be applied in FATA/PATA, the province of Gilgit-Baltistan and AJ&K in due course.
Uniform enhanced annual exemption threshold of Rs 7.5 million (which is presently Rs 5 million) is proposed to be applicable. All exports shall be zero-rated. Input tax adjustment of both direct and indirect constituents shall be allowed on "totals" basis. Under the propose law, sales tax on goods and services, where so authorised by the provinces, shall be mutually adjustable, to avoid double taxation. No general zero-rating shall be admissible on any commercial form of domestic supplies or on any local consumption.
Exemptions: Under the new GST law, exemptions in respect of basic food items including wheat, rice, pulses, vegetables, fruits, live animals, meat, poultry etc, have been kept intact. Edible oil chargeable to federal excise duty, will continue to be exempt from GST. Exemptions to philanthropic, charitable, educational, health or scientific research purposes or under international commitments/ agreements, including grants-in-aid, will continue. Life-saving drugs, books and other printed materials, including newspapers and periodicals, will also be exempt.
Local consumption of goods, produced by sectors like textile (including carpets), leather, surgical and sports goods is, however, proposed to be subjected to tax. Similarly, defence stores, stationery items, dairy products, (other than life-saving) pharmaceuticals, agricultural inputs, agricultural machinery and implements, aviation/navigation equipments including ships and aircraft etc, have also been proposed to be taxed.
Input tax adjustment: Procedure for obtaining input tax adjustments by the registered persons under the new GST Bill, 2010 has been tightened. According to Section 28 (restrictions on input tax deductions) of the GST Bill, 2010, no deduction for input tax is allowed unless, at the time of filing the return in which the input tax is deducted, the person making the deduction holds, in the case of goods imported by that person, a bill of entry or goods declaration bearing the name and active registration number of the importer, duly cleared by the Customs Department - under Section 79 or Section 104 of the Customs Act.
In the case of a supply of goods, a valid tax invoice, issued by the supplier, is mandated. In case of supply of services to the registered person, if the supply is made in Pakistan, a valid tax invoice shall be issued by the supplier. However, the Board may allow a person to provide alternative evidence to the effect that he had incurred input tax for which a deduction was sought. Where a supply of services that is not made in Pakistan is a taxable supply, the recipient of the supply may not deduct the input tax for that supply unless the recipient has also paid the output tax levied on the supply.
Unless payment for the supply is made through a verifiable banking instrument, which includes on-line or credit card payment - showing transfer of money from a bank account of the recipient to a bank account of the seller, deduction for input tax is not allowed for a taxable supply the price of which exceeds Rs 50,000 (including tax).
No deduction for input tax incurred on a purchase or import is allowed if or to the extent that the purchase or import is of a passenger vehicle or of spare parts or repair and maintenance services for such vehicle, unless the registered person's economic activity involves dealing in or hiring out such vehicles and the vehicle was purchased for that purpose.
Additional tax returns: The General Sales Tax Bill 2010 has introduced the concept of 'additional tax returns', to direct the taxpayers to file additional sales tax returns "as required by the Tax Department". This provision of 'additional tax returns' has been introduced in terms of Section 60 of the GST Bill 2010 which provides that the Board may, by notice, require a person, whether on that person's own behalf or as agent or trustee of another person, to file, within such time as the Board considers appropriate, such additional tax return for a tax period as the FBR requires.
Under the provision of amended tax returns, if a registered person who has filed a tax return requests the Board to amend the return to correct any genuine omission or incorrect declaration made therein, the Board may allow that person to amend the original tax return and accept filing the amended tax return. Provided, however, that no such permission of the Board shall be required in a case where amendment in the return results in enhancement of the tax liability of the registered person.
Request for submission of the new return is required to be in writing, specifying in detail the grounds on which it is made. The request must be made within three years after the end of the tax period to which the tax return relates. Where before the receipt of notice for audit, a request for an amendment to a tax return is filed by a registered person and the unpaid amount of tax is paid along with the applicable default surcharge, no penalty shall apply, so goes the GST Bill 2010.
Companies in liquidation: owners, partners to ray sales tax liabilities: All owners and partners of private companies or businesses under liquidation or winding up process shall be jointly responsible for payment of sales tax liabilities.
The General Sales Tax Bill, 2010 has introduced a section (68) for working out the tax liability in case of private companies or business. "Where any private company or business is wound up and any tax chargeable on the company or business, whether before or in the course or after its liquidation, in respect of any tax period or periods, cannot be recovered from the company or business, every person who was the owner of, or partner in or director of the company or business during the relevant period or periods shall, jointly and severally, be liable for the payment of such tax", the proposed law draft provides.
Where any defaulter resides or the property is situated in the jurisdiction of another officer of Inland Revenue, the officer of Inland Revenue in whose jurisdiction the arrears are due may authorise such other officer of Inland Revenue to make recovery of any or whole amount of such arrears as if these are due in his jurisdiction.
Nothing in sub-section (1) shall prohibit any defaulter to pay his arrears to the officer of Inland Revenue in whose jurisdiction these were due at any stage of the process or proceedings for recovery by the other officer of Inland Revenue. If any registered person is declared bankrupt, his outstanding tax liability shall pass on to the estate in bankruptcy whether or not it continues to operate as a business, the proposed law states.
The Board may grant permission to any defaulter to pay his arrears in suitable instalments along with default surcharge, if payable, and cancel any such permission in case of default in payment of any instalment, the GST Bill 2010 proposes.
Recovery of sales tax: IR officials to have powers of civil court: The officials of the Inland Revenue would have powers of a civil court for recovery of sales tax under a decree in terms of Code of Civil Procedure, 1908. According to a new Section 64 of the GST Bill, 2010, an officer of Inland Revenue can act as court in recovery matters:
"For the purpose of recovery of unpaid amounts of tax recoverable under this Act or the rules made thereunder, the officer of Inland Revenue shall have the same powers, which a civil court has for the purpose of recovery of an amount due under a decree under the Code of Civil Procedure, 1908. Provided that in case of any matter, if there is conflict or variance in the code and this act or rules made thereunder, the later shall prevail".
Where any amount of tax is due from any person, the officer of Inland Revenue, authorised by the Board in this behalf, may take all or any of the following actions to recover such amount:
--- Deduct the amount from any money owing to defaulter at his disposal or under his control or under the control of any other officer of Inland Revenue.
--- Require any person who holds or may subsequently hold any money for or on account of the defaulter to pay the amount.
--- Stop removal of any goods from the business premises of the defaulter or the associated person till such time as the recoverable amount is paid or recovered in full.
--- Require any person to stop clearance of imported goods or manufactured goods and attach bank accounts of the defaulter or his associated person. The officer of Inland Revenue, authorised by the Board in this behalf, may as well take all or any of the following actions to recover such amount:
--- Seal the business premises of the defaulter till such time the recoverable amount is paid or recovered in full
--- Attach and sell or sell without attachment any moveable or immovable property of the defaulter
--- Recover such amount by attachment and sale of any moveable or immovable property of the guarantor, person, company, bank or financial institution where a guarantor or any other person, company, bank or financial institution fails to make payment under such guarantee, bond or instrument.
For the purpose of attachment under this section, the concerned moveable property may be seized and dealt with in such manner, including auction, as may be specified by the Board.
FBR gets legal backing to use computerised system: According to Section 99 of the GST Bill 2010, the FBR may generally or otherwise specify the computerised system for use to carry out purposes of this act and rules made thereunder, including the receipt of applications for registration, returns or other declarations, statements or information required in this behalf, from such date and for such registered person or class of registered persons as may be specified. Thus the Federal Board of Revenue (FBR) has obtained legal backing for use of computerised system - to electronically receive returns or other declarations, statements or information required from registered persons.
The FBR may conditionally or otherwise appoint a person to electronically file any returns, declarations or statements and other specified documents prescribed from time to time on behalf of a registered person or class of registered persons. Any registered person could authorise such an e-intermediary to electronically file his returns or documents etc and all such returns and documents shall be deemed to have been filed by such registered person.
If the act requires anything to be done by a registered person and if such thing is done by an e-intermediary authorised by him, unless the contrary is proved, it shall be deemed to have been done with the knowledge and consent of such registered person and he shall be liable and accountable accordingly. Where an e-intermediary authorised by a registered person on his behalf, knowingly or wilfully submits a false or incorrect return, document, declaration, statement or information with intent to avoid payment of tax due or any part thereof or to claim any adjustment or refund of tax or other entitlement that is not due to the registered person, such e-intermediary shall be jointly and severally responsible for recovery of the amount of tax short paid or the amount adjusted or refunded in excess as a result of such fake, false or incorrect submission without prejudice to any other action as may be taken against him under the law.
The Board may make rules on any matter or matters necessary to regulate the conduct and transactions of business in relation to the submission of returns or other information to the FBR or the commissioner through computerised system. These may include authorisation, de-authorisation and security of information and data, by the persons required to transmit or receive any information.
IR officials empowered to demand tax record: The Federal Board of Revenue (FBR) has empowered all officials of Inland Revenue, authorised by the concerned Commissioner, to direct taxpayers to submit tax records/documents to conduct sales tax audit under section 25 of the Sales Tax Act, 1990.
Under Section 25 of the Sales Tax Act, as amended by Finance Act 2010, registered person is bound to submit record, documents or electronic data whenever required by the officials of the Inland Revenue.
Some questions had been raised by the LTU, Islamabad, regarding audit under Section 25 of the act. The following were the queries of LTU, Islamabad, and response of the FBR:
Query: Whether only the Commissioner can invoke provision of Section 25 and require production of record from the person or any other officer authorised by him can also require production of record?
FBR clarification: The commissioner of Inland Revenue, as well as any officer authorised by the commissioner, can require production of record for audit u/s 25 of the Sales Tax Act, 1990.
Query: Whether the authorisation accorded by the commissioner to the officer of Inland Revenue to conduct the audit is an internal correspondence and whether the person whose audit is to be conducted can acquire a copy of the authorisation order/approval?
FBR clarification: The person whose audit is to be conducted may demand a copy of the audit authorisation by the commissioner to an officer of Inland Revenue, which should be provided. However, there is no requirement under the law to routinely provide such authorisation to the taxpayer prior to start of audit.
Query: Whether similar authorisation u/s 68 of the Federal Excise Act 2005 is also required from the commissioner for conducting audit u/s 68 of the Federal Excise Act, 2005 or only authorisation under Section 25 of Sales Tax Act, 1990 will suffice.
FBR clarification: Separate authorisations by the commissioner to the officer of Inland Revenue, under section 25 of the Sales Tax Act as well as Section 46 of the Federal Excise Act, 2005, are required for conduct of respective audits. The above clarifications are based on legal parameters set by the statute. However, the current audit policy issued by Taxpayers Audit Wing may be consulted, the FBR added.