Says, entire supply chain and manufacturing activities subject to Sales Tax by federation only
In response to reservations expressed over double taxation by a KCCI delegation during a recent meeting with the Federal Board of Revenue (FBR) chairman, the FBR has issued a detailed clarification saying that the federal government is authorised to levy sales tax on supply and manufacturing of goods whereas the power to levy sales tax on services has been vested with the provinces.
KCCI delegation headed by former KCCI president and Businessmen Group Vice Chairman Haroon Farooki along with KCCI President Younus Muhammad Bashir and KCCI GST and Refunds Sub-Committee Chairman Sohaib Ahmed Faridi recently met FBR Chairman Nisar Muhammad Khan in Islamabad to express concerns over double taxation by the federal and provincial authorities, which they said made the difficulties faced by the business and industrial communities of Karachi harder.
Consequently, a clarification vide letter # C.No.3(2)ST-L&P/2011(Pt-II) dated January 8, 2016 was issued by the FBR, outlining comprehensive definition of Sales Tax levied by the federal government and the provinces under the constitution of Pakistan.
FBR pointed out that the manufacturers of five zero rated sectors were being charged by FBR at 3 per cent of the processing charges, which was 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 outside the ambit of the provinces as per Serial No 49 of the Federal Legislative List of the constitution of Pakistan, hence, the contention of the 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 a large number of cases all these processes are outsourced due to lack of expertise and paucity of funds to finance all these manufacturing activities by a single owner. Therefore, the owners of the goods forward raw material to other manufacturers for processing and converting 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 item in manufacturing cannot take place, hence, the argument tendered by the provinces does not seems to be logical.
FBR letter further referred to Article 143 of the constitution, which says, “If any provision of an Act of a Provincial Assembly is repugnant to any provision of an Act of Majlis-e-Shoora (Parliament) which Majlis-e-Shoora (Parliament) is competent to enact, then the Act of Majlis-e-Shoora (Parliament), whether passed before or after the Act of the Provincial Assembly, shall prevail and the Act of the Provincial Assembly shall, to the extent of the repugnancy, be void.”
Referring to various legal and constitutional facts, FBR said that Part B of the Second Schedule of 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.