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CBR consultants recommend amendments in sales tax law

ISLAMABAD (January 29 2003) : Maxwell Stamps, tax consultants of Central Board of Revenue (CBR), have recommended ten comprehensive amendments in the Sales Tax Act, including strict monitoring of newly introduced Sales Tax Refund Repository (STARR) system, and suggested setting up of intelligence organisation in the sales tax department on the lines of Director General Customs and Intelligence.

Scrutinising the case of non-filers, who were registered under the tax survey two years ago and have been trading below the registration threshold, or disappeared, the consultants have proposed that non-filers be dealt through computerised assessment in cases where they fail to submit returns on time.

It is tempting to disband the turnover regime, whereas there are several reasons in the context of Pakistan for not doing so, the consultants said.

First, some amount of sales tax is being generated through this scheme.

The procedure of enrolment in the turnover regime identifies new taxpayers and abandonment of this system would send wrong signal to the public.

Criticising 'Voluntary Registration and De-registration Rules 1996', the consultants said that SRO 550(I)/96 is very permissive on the requirement of a business registered in branches etc, dealing only with the maintenance of record of records and the submission of returns.

There is always a risk with any business registered in separate parts that the taxpayer is tempted to manipulate the situation to his advantage.

For example, if a businessman makes exempt supplies (Sixth Schedule) it could, unless properly controlled, maximise its entitlement to input tax deduction in a way that is not in accordance with section 8(2).

Pertaining to refunds, the consultants are of the view that the system of refund relating to exports has not functioned very well in the past, giving rise to delays, resulting in complaints.

It has also been noted with concern that refunds were paid without entitlement.

This is a very sensitive area and stern efforts have to be made to improve the situation.

A computerised Sales Tax Refund Repository (STARR) system has been introduced in Lahore.

It is now working satisfactorily and will be replicated in other Collectorates.

The only unsatisfactory feature of the system at present is that an auditor has to calculate manually the degree to which a refund relates to purchases for export or stock.

In the latter case, refund is delayed for refund in two instalments.

There is scope for some personal intervention here that is better avoided. The rules relating to refunds appear to be overcomplicated and it is recommended that they should be reviewed with the objective of simplifying them.

It has been recommended that the 'STARR' system should be kept under close review so that any teething problems can be identified and dealt with quickly.

The consultants have recommended the following amendments in different sections of the Sales Tax Act, 1990:

Section 2(33): Cases arise from time to time where, for example, a government department disposes of, by auction or tender process, vehicles or other goods. This is done “for a consideration” but not “in furtherance of a business”.

The definition should be reviewed and the reference to business removed. The effect should be that anyone selling goods to an annual level exceeding the Sales Tax threshold should be required to account for tax on them.

Section 2(44): It defines when a supply is regarded as taking place for tax purposes.

In a case three years ago in The Lahore High Court the judge commented that this definition should be in the main body of the Act, and not where it is.

The same argument applies to (46), which defines the basis of value. Consider relocation.

Section 8(1): This section deals with a registered person's right to deduct. In the last line there is a reference to “goods under sub-section (1A) of section 3”.

This appears not to make sense because sub-section (1A) refers to non-registered persons. Review is suggested.

Section 9: Deals with common commercial practices where goods are returned, or found faulty.

However, SRO 696(I)96 is much more limited in scope to return of goods that are damaged or substandard.

The Task Force report drew attention to this limitation and recommended that the SRO be amended to reflect the full range of possibilities in section 9 of the Act.

Section 11: Deals with treatment of “non” and "short” filers. The arguments for revising this provision are set out in the earlier section of this report dealing with return processing.

It is recommended that section 11 be substantially revised so that the “show-cause” procedure no longer applies to short and non-filers.

Section 14: Deals with registration. It is not clear why an annual turnover limit is not applied to (iii) importers and (iv) wholesalers and distributors, especially when section 21 (which deals with de-registration) makes no distinction in sub-section(2).

This needs to be clarified. More importantly in the section it is recommended that there should be added at the end of sub-section (1)(I) “or is likely to exceed that amount within the next month”.

This proposal is intended to catch a business with a large start-up operation.

Section 16: This enables a taxpayer to register separately parts of a business. The dangers of this procedure are discussed under “Registration” earlier in this report.

The section itself enables conditions to be imposed. However, the SRO in which conditions are imposed, SRO 550(I)/96, is limited in this respect in Rule 4.

It is recommended that a further condition be added to require a summary record of all the activities of the business to be maintained at the registered office of the business if a registered company or in any case at the office from which all the activities of the business are controlled.

If this last location is different from any of the individual registrations, it and the records kept there are to be subject to all the provisions of the Sales Tax Act.

It should be noted that any business organised in this way will maintain a central record for the purposes of business control and the requirement suggested will add little to its administration.

Section 33(4)(d): It is recommended that to this offence provision be added a reference to refusal to permit examination, copying or removal of documents.

Section 34: The imposition of additional tax gives rise (rightly or wrongly) to a feeling of injustice and gives rise to a large number of appeals.

The present rate of charging additional tax is two percent per month. This is a heavy imposition, especially in cases where the fault being penalised is discovered some time after the event.

It is recommended that this provision be reviewed with the purpose of splitting the additional tax penalty into two categories. First, where an error or mis-declaration is discovered that does not demand the penalty provisions of section 33 (subsection (1) aside), the penalty should be five percent (or ten percent at most).

If the case relates to 'non or late submission of a return' sub-section (1) of section 33 already applies.

This could be strengthened by adding something like “and, in addition to the tax due shall pay additional tax under section 34 at the rate of two percent of the tax due on the first occasion in any period of 12 months on which a return is late, followed by additional tax at the rate of five percent of the tax due on each successive occasion until a period of 12 months is achieved during which all returns have been submitted by the due date”.

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