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Flaws pointed out in amended Sales Tax Refund Rules

ISLAMABAD (January 23 2003) : The commercial exporters have pointed out serious flaws in the recently amended Sales Tax Refund Rules 2002, and asked the Ministry of Commerce, through the Export Promotion Bureau (EPB), to intervene and rectify the ambiguities in the sales tax laws.

The amended rules, claimed as incentives for the exporters, were framed without taking realising the practical difficulties being faced by the business community, the EBP maintained.

The Central Board of Revenue (CBR) is the final authority to make any amendment in the light of recommendations, made by the commercial exporters through the EPB.

According to the details, the commercial exporters have been allowed to file their refund claims in respect of their exports made until December 31, 2002 and that these claims will be sanctioned under the old Sales Tax Refund Rules 2000 (SRO-417/2000) as per SRO (02)/2003.

The commercial exporters, operating under the old SRO 417 until December 31, 2002, have demanded that they should be allowed to make shipments until March 31, 2003 of the finished goods for which the supplies received until December 31, 2002 would actually be used up in production of finished goods and their export.

In other words, they request that they should be allowed to work under old SRO-417, in respect of procurement of their supplies of taxable goods for exports.

Such goods, they maintained, would take at least three months to be used up in export production, hence they should be allowed to make shipments up to March 31, 2003.

The EBP has also pointed out to the Commerce Ministry that another important issue was the case of the commercial exporters for refund of sales tax and their treatment at par with the manufacturer-exporters.

Until now, the refund to commercial exporters was limited to their exports of “same-state goods”.

The CBR has recently given further accommodation to the commercial exporters, vide amendments through SRO-02 (I)/2003 of January 1, 2003.

Since the commercial exporters often had to do some processing on the goods procured from the manufacturers, like embroidery, labelling, packing, the aforesaid amendment allows them refund of sales tax on such processing if they deposit the amount of sales tax on their purchases from sales tax registered persons by filing tax returns on behalf of the suppliers.

However, the condition of providing Bank Credit Advice (BCA) as evidence of repatriation of export proceeds, has been retained.

Interestingly, the requirement of the BCA does not apply to the manufacturer-exporters.

The case of the commercial exporters is that, like manufacturer-exporters, they are also making export shipments on Usance LCs (30 days, 60 days, 90 days or longer), or on DA/DP basis, but their refunds are blocked until full repatriation of export proceeds.

Since the sales tax, paid by the commercial exporters, is documented, and they submit sales tax-paid invoices for claiming refunds there should be little difficulty in allowing them refunds even before the full repatriation of export proceeds.

Accordingly, the EPB recommends that the condition of the BCA, for sales tax refunds, should not be applicable to commercial exporters and thus bring them at par with the manufacturer-exporters.

The Export Promotion Bureau (EPB) has asked the Commerce Ministry to resolve the exporters' issues regarding SRO 575/2002 immediately so that they could get their sales tax refunds, informed sources told Business Recorder here on Tuesday.

The issues, which have been brought in the notice of the Commerce Ministry, are as under:

(a) An important issue, highlighted by the Towel Manufacturers Association (TMA), relates to Section 73 of the Sales Tax Act 1990 regarding payments for sales taxable supplies exceeding Rs 50,000 by crossed cheque/bank draft/pay order or any other banking instrument showing transfer of payment in favour of seller from the business account of the buyer. Non-compliance with this provision would make the transactions inadmissible for input tax credit or adjustment or refund or zero rating.

To meet the demands of the exporters, an amendment was made in Section 73 to allow transactions on credit, provided that the payment was transferred to the seller's account within 120 days of issuance of tax invoice.

TMA has represented that government should not bind the sellers and buyers to a maximum credit period of 120 days. They argue that the period of credit should be freely negotiable between the seller and the buyer.

The only mandatory requirement should be the payment of sales tax. Once the sales tax has been paid, and is documented, the exporter should be able to claim adjustment or refund regardless of the date on which the payment is made/transferred. Whenever the payment is made, it would be through crossed cheque etc.

EPB feels that the exporters have a valid case. So long as the payment is made by crossed cheque, whenever it takes place, the requirement of the sales tax law is met. The need for documentation is also fulfilled. We would therefore recommend that a suitable amendment be made in Section 73 through an Ordinance without waiting for the next Budget.

(b) Connected with the above issue of credit period, another aspect is that the exporters also through book adjustments in the accounts make payments for supplies between the buyers and the sellers.

The sales tax auditors have been disallowing refunds in respect of such book adjustments on the ground that the payment has not been made through banking channels.

Since book adjustments are a normal trade practice, CBR may please consider accommodating such book adjustments by allowing acceptance of evidenced book adjustments as valid documentation for the purpose of Section 73.

(c) Still another aspect is that Section 73 enjoins transfer of payment in favour of seller from the business account of the buyer. However, at times, more than two-parties are involved in the transaction and the payments are made, not by the buyers, but by some creditors or brokers or agents or guarantors instead of, but on behalf of, the buyers.

To illustrate, PTV renders taxable advertisement services through their sole agents. PTV issues the invoice but the payment is made to the agent who ultimately transfers it to PTV.

The department does not allow adjustment of such input tax, although the payment is transferred from the business account of the buyer to the PTV but through the agent.

Such cases need also to be provided for, possibly through an explanation or clarification of Section 73.

(d) Lastly, again with reference to Section 73, the law is silent on the case where no payment is made, particularly in case of bad debts. In such cases also, the sales tax-paid invoice should be accepted as sufficient documentation for the purpose of sales tax refund, even though the payment is never made.

(e) I should also mention here an ambiguity in the definition of 'business account'. The department has defined 'business account' as an account of the buyer in the name of the buying company. The exporters are of the view that the companies, by general practice, maintain several bank accounts, all of them not necessarily in the name of the particular company which is the buyer, and that they should be allowed to make transfer payments from any of their business accounts, whether in the name of the buying company or a sister company. CBR made a ruling on this issue and revised it later. That case calls for further examination.

(f) There could also be a case where an indirect exporter receives payment on a Usance inland LC, on negotiation basis.

The bank makes the payment on such a Usance LC and reimburses itself later on maturity of the LC. For the purpose of sales tax refunds, the negotiation of a Usance LC, before maturity, should be considered as a payment from the buyers account to the sellers account, although the negotiating book makes the payment initially.

(g) The question of stock statements, to be filed with refund claims, has not yet been fully resolved. True, in its simplified form, it seeks the position on stocks of major inputs and outputs, in terms of opening balance, additions, consumption and closing balance.

Although, not specifically provided in the new SRO-575/2002, the dept insists that the exporters give the position of stocks in process with values and the sales tax thereon.

The exporters find it impossible to comply with this, for the reason that the taxable supplies procured by them for export production are in various stages of processing and it is impossible to segregate their supplies in process and give their values.

These cases would presumably be those that are dealt with under the old SRO-417/2000. It would only be fair that the simplified stock statement, as provided under the new SRO-575/2002, be allowed also for the old refund claims filed before 31st August, 2002 which is the date of the new SRO.

Sources said that the Commerce Ministry is likely to put forward the issues of exporters for their early resolution.

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