Indirect Tax Policy Considerations

When I use the word indirect taxation, I would mean to include sales tax (Federal and Provincial), excise tax and custom duty broadly speaking and in one sense can be effectively categorized as consumption taxes.

Consumption taxes have grown to be a major source of tax revenue for governments around the globe. Tax authorities worldwide are gradually migrating the overall tax burden from direct tax to the less visible indirect taxes and are the sole big reason of increasing inflation. In a recent survey, consumption taxes constituted approximately 30 percent of total taxation in OECD countries while in some countries these constituted more than 50 percent of the total tax revenue.

As the honorable chairman of proposed FBR has said that excise and customs are dying levies, hence, I will concentrate my efforts over sales tax act, 1990 which is about to be replaced with value added tax in near future and a committee is working in CBR over this law.

As now that consumption taxes are taking more prominent role, currently our government is also more focused on deriving maximum benefit from these taxes like consumption tax policies, legislation and auditing are all under increased scrutiny by government and tax officials.

Currently, we are moving ahead in the right direction recommended by the World Bank which covers four broad measures to progressively reform taxation in general.

Consolidation of the number of taxes
Cutting back on special exemptions and privileges
Simplifying filing requirement
Broadening the tax base by keeping rates moderate in the developing countries
However, I would recommend something more in the light of directions given by working party No. 9 of OECD – double taxation treaties of indirect taxes. We must prepare such treaties with an aim to avoid double taxation, promote harmonization of rules, mutual co-operation, simplification of administration and above all certainty for business.

CONSUMPTION TAX POLICIES
At the moment a consistent indirect policy keeping an eye over literacy rate and geographical segregation of urban and rural population is not reflective from any document. I think that CBR is not the only institution which is responsible for reduced tax to GDP ratio. Other institutions are also responsible for this reduced tax to GDP ration owing to the low literacy rate. There is a dire need to increase the literacy rate not only to increase the tax to GDP ratio but also the civic sense.

Efforts must not only be concentrated towards illiterates, I am not forgetting the literate portion of society – CBR must work with ministry of education to include the concept of tax, need for imposing tax, types of taxes in Pakistan, basic tax calculation of direct and indirect taxes etc in the appropriate portion of syllabus at various classes or stages at school and college level and do not limit it like a 30 marks portion in B. Com.

From the administrative front, I would recommend replacing the use of designation of collectors, assistant collectors, Inspectors, commissioner, taxation officers with assistant manager, manager, senior manager like tax facilitation manager, tax audit manager and taxpayer care manager. This will have a deep impact over the mind set of tax machinery.

The training at DOT must not concentrate only on law but the difference between wrong decisions, that is, an order of an economic manager and finance manager also need to be crystal clear in their mindset by experience sharing. Moreover, there must be a process of consultation within tax machinery for complex issues and not just throwing the ball for appeal forums.

The three dimensional strategy of Excise Tax and five dimensional strategy of Sales tax needs to be principally based instead rule based facilitation to bring certainty in Business Planning and removal of unnecessary doubts about the discrimination and transparency issues. Such conflicting rule based facilitation with dimensional tax legislation makes the excise and sales tax law the most difficult piece of legislation to comprehend.

You will appreciate the fact that strategies are hard to apply and hard to manage, however, principle based strategy is much easier to apply then a rule based strategy.

TAX ON TAX and RATES OF TAX
Tax on tax issue is not limited to section 148 of Income Tax Ordinance, 2001 but has its roots in Sales Tax and Excise tax also.

On the excise front, excise tax machinery now days taking a view that according to section 12(4), excise tax needs to be inclusive for the purpose of determination of value for the purpose of duty under section 12. Although various precedence in field at the moment, however, things need to be cleared with efficient advice mechanism for machinery by the CBR as it deteriorates the image.

Section 2 (46) – value of supply, clause (a) and (d) clearly enunciates the fact that sales tax needs to be levied on value inclusive of all taxes specially federal excise.

Such tax on tax needs to be removed and have a considerable effect over consumer price and sensitive price index issued by state bank of Pakistan. A levy needs to be independent in order to calculate its impact tax on tax is clearly an impediment for the tax administration owing to the variability in tax rates.

It is worthwhile here to note that rates of tax coupled with tax on tax varies the prices considerably when the items covered in sensitive price index are now manufactured and becomes the indispensable part of life of urban population. Removal of tax on tax and reduction in tax rates of indirect taxes, especially 15% rate of sales tax will greatly relieve the SPI which is continuously moving upward.

EXCISE TAX
Rule 40A (4) of Federal Excise Rules, 2005 [FER, 2005] and section 12(2) of FEA, 2005 are highly debated in the professional circles of banking industry.

Some professionals believe rule 40A (4) of FER, 2005 read with section 12(2) of the FEA, 2005 creates two fictions while others believe in three in respect of chargeability of excise duty on normal rates irrespective of following.

Provided free of charge
At discounted rate or
Normal rate.
A clarification needs to be issued to avoid plethora of cases in this regards. These will also bringing certainty. However, banks are at safer side owing to precedence available in this regard.

According to section 7 of Federal Excise Act, 2005, there are only some manufacturers which are authorized to claim input under Sales Tax Act, 1990 on payment of excise tax. This list needs to include other manufacturers also to move in the direction of burying this law and increased consolidation towards sales tax and administration.

As we know that the sales tax on services is moving in the right direction and constitutional impediment was overcome through effective arrangement, however, this may not a long term solution.

RECORD KEEPING
The strategy for prescribing the necessary records should be principle based instead of existing rule based methodology. In a principle based methodology, the taxpayers can effectively be categorized as large, medium and small.

Large taxpayers normally maintain detailed records not only for tax purposes but for effective data mining to ascertain their business share in the market and effective marketing plan for future potential. CBR should prescribe the postulates of their documents instead of the document itself.

Medium taxpayers are requested to closely align their documentation according to law while the prescription of document method needs to be left for small taxpayers.

Currently, there is no time limit needs to be prescribed in section 22 of Sales Tax Act, 1990 like section 17 of Federal Excise Act, 2005. In this regard, I would like to quote the recent judgment of Honorable Supreme Court whereby fixed asset and scrap are liable for output sales tax at the point of sales.

Unfortunately, none of the appellant tried to took the direction from Honorable Supreme Court for CBR in respect of inconsistent treatment of input and output of fixed asset. Moreover, the constraint of minimum ten years record keeping requirement under section 230(6) of Companies’ Ordinance, 1984 has not been brought to the lime light as there is not notification available under section 22 of Sales Tax Act, 1990 which clearly specifies the holding period of records.

However, from the face of the judgment, in some cases much more than ten years have elapsed and in the absence of any prescribed time limit in fiscal laws, the Companies Ordinance, 1984 becomes the base law for such companies. Let’s hope for a good review petition taking appropriate direction from the courts as it can not provide for the deficiency in law in view of Article 4 of the constitution, while exercising powers under Article 199 of the constitution.

I would strongly request CBR to resolve this matter amicably and neither revenue should discuss the fact that liability arise because of taxpayers’ incorrect interpretation nor taxpayer will argue that their understanding is based on varying notifications in the field

AUDIT
Moreover, the existing audit section needs to be rephrased under one chapter which may include audit management, taxpayers’ obligation, authorized representative obligation, modus operandi of audit, modus operandi of audit decision, postulates of an audit order and time frame to conduct & complete the audit.

From the corporatisation front, Section 96, 97 and 98 of Income Tax Ordinance, 2001 relating to promotion of corporatisation is neither harmonized with sales tax nor with excise tax. I would specifically stress over sub-section (2) of section 49 of Sales Tax Act, 1990 which needs to be suitably amended in order to avoid the timing difference and problems currently being faced by the taxpayers.

TAX REFUND INFORMATION SYSTEM
It is really applaud able that CBR is making experience adjustment starting from STARR, RCPS and now CREST, however, taxpayers are still suffering. This is just because of lack of efficient IT policy which do not use appropriate system analysis methodology.

I would suggest that CBR must consider accepting the refund related reports in MS Excel format apart from any new software; hence, the most distinguishing feature of any new software is its capability of importing such MS Excel report. By this way the taxpayers will be relieved from current practice of hectic data entry into STARR then RCPS now CREST.

Moreover, CBR may stick to its current practice of refund claim during current year but must allow adjustment of refund against various different taxes during same fiscal year – income, sale, excise and custom. A detailed modus operandi may be formulated which may include notifying different departments etc. This will have a considerable impact not only over the working capital cycle of business in avoiding liquidity crunch and taking unnecessary high cost loans but also help CBR in showing true revenue collection less tax refundable.

GROUP RELIEF
I would like to suggest that Group relief needs to be incorporated into the Sales and Excise Tax Acts whereby intermediate supply related transactions falling within the ambit of Sales Tax needs to be zero rated while intermediate goods used by another group needs to be exempted from excise tax.

SHARIAH COMPLIANT FINANCIAL PRODUCT
I am using the terminology Shariah Compliant Financial Product instead of Islamic Banks deliberately as Securities and Exchange Commission of Pakistan is currently working over a framework whereby NBFC will also be able to undertake and offer Shariah compliant financial product resembling to their current financial product.

The sales tax treatment of Shariah compliant financial products is somewhat uncertain and produces anomalous results. These anomalies can put the providers of Shariah compliant financial products at a commercial disadvantage.

Conventional financial institutions are at ease to structure the transaction, for instance, consumer finance, and hire purchase etc in such a manner that it does not fall within the ambit of Sales Tax Act, 1990. It is suggested that Shariah compliant financial products need to be brought out specifically from the preview not by implication which is the current state. This will bring the Shariah compliant financial product providers at par with conventional financial products providers and remove uncertainty. To my knowledge, there are many new investments are in the offing and waiting for clarity.

RECTIFICATION OF ERROR OR MISTAKE BROUGHT TO THE NOTICE
Currently, Sales Tax Act, 1990 do not contain any specific provision parallel to section 221 of the Income Tax Ordinance, 2001. Although the concept is present in various section but in the absence of such specific provision claim of refund under complex situations remain unresolved for instance correction of errors, revision of return, issuance of debit and credit note etc. Apart from refund claim, appeal stages also feel handicapped when any mistake was brought to their notice.

CUSTOM TARRIF
Rationalization of tariff after the WTO regime and continual Free Trade Agreements make this an unobservable secondary issue and this is also realized by CBR, hence, honorable chairman of CBR has stated that it is a dying levy.

It is suggested that tariffs needs to be suitably amended which promote investment in manufacturing and IT sector not only to become the regional hub, not only relying over textile export but a diversified product base exporter resulting in increased GDP, facilitation of transfer of modern technology including research not just technological equipment.

Moreover, CBR may not be able to reap any benefit from IT related efforts in customs unless and until there databases are attached through a key field to fetch the data and are connected through a secure intranet with the use WAN.

I personally appreciate the efforts of CBR who is trying to provide developed countries facilities in a developing country but it must adopt the practice and thoughts as tactical cum strategic economic managers not finance managers. On productivity front of masses, I would like to end up on the borrowed phrases from the preamble of History of Ibn e Khaldoon.

“if the government gives top priority or keeps an eye over facilitation and judicial system then the boldness, sense of honor and self respect remains the personality trait of the masses. However, if the government takes help from chastisement and conquest then boldness, sense of honor and self respect gradually extinct from the personality masses and the ability of guardianship and striving to repel an assailant would become almost absent. In other words, this procedure conquers their personality traits and sooner or later they become lazy and good for nothing – that is non-productive.”

The author is an International Tax Advisor.

Article courtesy of Muhammad Ashraf