1. PRESENTATION ON Legislative Amendments in the Indirect Tax Regime The Income Tax Bar Association Karachi June 17, 2008 Presented by: Mehmood A. Razzak Managing Partner

2. 2 Anomalies and repetitions, especially with respect to the inclusion of default surcharge and arrears as part of the definition of sales tax have sought to be removed. The term Tax has been redefined to mean sales tax, which in turn shall mean tax, additional tax, default surcharge, fine, penalty, fee and any other sum charged, levied or payable. Any unpaid amount of sales tax on particular day shall be termed as Arrears TAX, SALES TAX & ARREARS Section 2(34)/ (29A) & (2A)

3. 3 Definitions of Person, AOP, Firm, Company, Trust, Unit Trust and Associates (Associated Persons) have been adopted from the Income Tax Ordinance.

4. 4 A person who is engaged in lawful imports of goods into Pakistan has been termed as an importer thus far. The condition of lawfulness has been proposed to be eliminated. IMPORTER Section 2(13)

5. 5 The condition of import and clearance of goods under section 79 or 104 of the Customs Act is proposed to be withdrawn. Accordingly, tax paid on goods imported through any mean shall be treated as input tax. FED levied on goods or services in sales tax mode and sales tax paid on various services under provincial ordinances shall continue to be treated as input tax. Tax levied under the Act as adopted in Azad Jammu and Kashmir on the supply of goods received by that person shall not be an input tax. Similar amendments have also been proposed in the definition of output tax. INPUT & OUTPUT TAX Section 2(14) & (20)

6. 6 The concept of Retail Tax, being redundant, has been proposed to be done away with. All sections and provisions dealing with the matters related to the definition of Retail Tax, charging of Retail Tax, Retail Tax Return and its audit have been proposed to be omitted from the regime. RETAIL TAX Section 2(28A), 3AA & 32AA

7. 7 Supply shall now mean sale or other transfer of the right to dispose of goods as owner, including the one carried out under a hire purchase agreement. The new definition has no mention with regards to consideration. The Federal Government shall remain empowered to specify other transactions which shall or shall not constitute supply. SUPPLY Section 2(33)

8. 8 This new definition to mean any economic activity, for profit or otherwise, carried on by a person. It shall also include business, trade, manufacture, supply of goods, rendering of services, a one-off adventure or concern in the nature of trade and anything done or undertaken during the commencement or termination of any economic activity. The term economic activity has not been defined. Services of an employee, private recreational pursuits and hobbies shall remain out of the ambit. TAXABLE ACTIVITY Section 2(35)

9. 9 In addition of delivery, the time when goods are made available to the recipient of supply shall also be treated as time of supply. Thus far, this condition was attached only to supplies made to an associated person. No amendment in the provisions dealing with supplies made under hire purchase agreement is sought. In case of services, time of supply shall be reckoned when these are rendered or provided. TIME OF SUPPLY Section 2(44)

10. 10 A registered person who is engaged in both retail and wholesale business shall no more be classified as a wholesaler. A registered person has to deal exclusively in wholesale business in order to qualify as a wholesaler. WHOLESALER Section 2(47)

11. 11 The rate of sales tax is proposed to be increased to 16%. A significant revenue measure intended to meet, to some extent, the budget deficit. How far this will add to the cost of doing business and already soaring inflation rate in Pakistan, is yet to be seen. Withdrawal of subsidy on electricity bills is already a talk of the town. RATE OF SALES TAX ENHANCED Section 3

12. 12 Adjustment of unadjusted input tax is allowed in the immediate following twelve tax periods with a condition of specifying the reasons for such delayed adjustment in the revised return. This time limit is proposed to be reduced to six months. The condition of specifying reasons for delayed adjustment is also proposed to be waived. ADJUSTMENT OF UNADJUSTED INPUT TAX Section 7

13. 13 Input tax paid on acquisition of fixed assets has been allowed to be adjusted against output tax in 12 equal monthly installments after a new unit has commenced production. This condition of commencement of production is proposed to be waived. Therefore, the adjustment shall now be allowed even prior to commencement of production of a new unit. ADJUSTMENT INPUT TAX ON FIXED ASSETS Section 8B

14. 14 This concept, eliminated earlier vide Finance Act 2005, is proposed to be reintroduced. This will provide some relief to the registered persons paying at least 10% of output tax under section 8B. The Board shall be empowered to prescribe procedure for refund of such excess input tax. CARRY FORWARD OF EXCESS INPUT TAX Section 10

15. 15 The Time limits and extended time limits stipulated in the following sections have been proposed to be enhanced from 90 days to 120 days.  Assessment of Tax – Section 11  Filing of revised return – Section 26  Recovery proceedings – Section 36  Appeal to Collector (Appeals) – Section 45B Similar amendments have also been proposed in the Federal Excise Regime. The records of a registered person shall be subject to audit by the Officer of Sales Tax irrespective of the fact that the same were already audited by the office of the Auditor General of Pakistan. SALES TAX AUDIT Section 25

16. 16 Failure to submit summary of sale and purchase invoices shall no more be an offence subject to penalty under this section. OFFENCES AND PENALTIES Section 30 A uniform rate of one and a half percent as default surcharge is proposed to be made applicable from first month of default. Similar amendment has also been proposed in Federal Excise Act. The scope of this section will continue to cover both willful and inadvertent errors. DEFAULT SURCHARGE Section 34

17. 17 The time limit of 6 months imposed on the Appellate Tribunal for issuance of order under this section is proposed to be increased to 8 months. Except for the cases involving the issues of determining the rate of sales tax or the value of taxable goods, the Chairman or any other member of the Tribunal authorized by the Chairman is allowed to dispose of the appeals through a single bench if the difference in tax involved does not exceed fifteen hundred thousand rupees. This threshold is proposed to be increased to ten million rupees. APPEALS TO APPELLATE TRIBUNAL Section 46

18. 18 Another attempt has been made towards improvisation of the committee. The Chairman shall now be authorized to pass rectification order if satisfied with regards to existence of an error in the order or decision made by the Board on the recommendation of the committee. Such an order shall be passed only on the basis of an application by the aggrieved person and the Chairman will have to record the reasons for such an order. Similar amendments have also been proposed in the federal excise regime. ALTERNATIVE DISPUT RESOLUTION Section 47A

19. 19 A new concept of representatives of a registered person is proposed to be introduced for the first time in sales tax regime. Accordingly, another section dealing explicitly with liabilities and obligations of a representative is also proposed to be introduced. These are similar to those contained in the income tax regime. REPRESENTATIVES & THEIR LIABILITIES & OBLIGATIONS Section 58A & 58B

20. 20 Supplies of biscuits, confectionary, electric bulbs including energy saving lamps and fluorescent tube lights and snacks including potato chips sold in retail packing shall no more be subject to levy of tax on the basis of retail price. Accordingly, amount of sales tax and the price of the commodity shall also not be required to be printed on each article, packet or container. THE THIRD SCHEDULE

21. 21 Various exemptions have been announced by way of proposing amendments in the Sixth Schedule and issuing S.R.O notifications. Those exemptions are enumerated below: Edible Oils, vegetable ghee and cooking oil on which FED is levied in sales tax mode. Blocks of cement and ready mix concrete. Energy saving lamps. EXEMPTIONS (Contd…)

22. 22 Goods supplied to hospitals of 50 or more beds run by the Federal or Provincial governments or charitable organizations. Cardiology/cardiac surgery disposables and other equipments. Import of tractors, bulldozers and combined harvesters (including their CKD Kits) by recognized local manufacturers under deletion program. Goods and services purchased by non-resident entrepreneurs and traders visiting Pakistan to participate in trade exhibitions subject to reciprocity and the conditions specified by the Board. Import and supply of fertilizers, pesticides and their active ingredients. Import of Dextrose and saline infusion giving sets by an importer- cum-manufacturer having suitable in-house facilities. Import of supply of cellular phones (sales tax has been fixed at Rs. 500). EXEMPTIONS

23. 23 Registration of a manufacturer shall be subject to the verification of manufacturing facility. Single sales tax registration shall prevail. E-filing of returns shall be mandatory across the board. Input tax credit on goods destroyed under this rule will not be allowed. New quarterly slab for retailers has been announced. Importers, other than manufacturers, to pay 2% tax on value addition in addition to sales tax at the rate of 16% at the time of import. Rates of sales tax for steel melter, steel re-roller and composite unit of steel melting and re-rolling have been enhanced. SIGNIFICANT AMENDMENTS IN RULES & SPECIAL PROCEDURES RULES

24. 24 From the whole amount of sales tax, default surcharge and penalty in respect of supplies made prior to 11th June 2008, if a person applies for voluntary registration during the period 1st June2008 to 31st July 2008. Waiver of default surcharge and penalty if the principal amount of tax is paid on or before 30th June 2008. AMNESTIES

25. 25 Significant amendments in this regime are summarized below: The term duty due has been improvised to include duty in respect of services provided also. A broader definition of the term “franchise” is proposed to be introduced for the first time. Scope of duty is proposed to be extended to services rendered outside Pakistan but terminating in Pakistan. The Federal Government shall be empowered to declare any other provision of the Sales Tax Act relating to levy of and exemption from sales tax, registration, book-keeping, invoicing, return filing, offences, penalties, appeals and recovery of arrears as applicable in respect of federal excise duty. FEDERAL EXCISE (Contd…)

26. 26 The definition of value of supply as stipulated in the sales tax regime is proposed to be adopted in the federal excise regime. Show cause notice for recovery of unpaid duty or erroneously refunded could now be issued within five years in case of willful default on these counts. The Federal Government, the Board of any Federal Excise Office shall be empowered to issue rectification order within five years of passing of original order. FEDERAL EXCISE

27. 27 FED on edible oils, vegetable ghee and cooking oil enhanced to 16%. FED on locally produced cigarettes has also been enhanced. On cement, FED rate has been enhanced from Rs. 750 to Rs. 900 per metric ton. 5% FED ad. val is proposed to be levied on motor cars and other motor vehicles principally designed for transport of persons, including station wagons and racing cars of cylinder capacity exceeding 850 cc. FIRST SCHEDULE (Contd…)

28. 28 Rate of FED on CC TV, Cable TV network, inland carriage of goods by air and services rendered by other categories of shipping agents has been proposed to be enhanced from 15% to 16%. Facilities for travel have been made subject to higher rate of FED. Rate of FED leviable on all prescribed telecommunication services is proposed to be enhanced from 15% to 21%. Services provided in respect of insurance, re-insurance, non-fund services provided by banking companies or NBFCs and franchise services shall now be subject to levy of FED at the rate of 10%. FIRST SCHEDULE

29. 29 Import of carbon black oil (carbon black feedstock) if imported by a duly registered manufacturer of carbon black. Goods for further manufacture of goods in the EPZs. Life, health and crop insurances. THIRD SCHEDULE

30. 30 Thank You