Generally speaking, tax reforms are meant to reduce burden of taxes on poor and middle class, to attract investment, to increase burden on non-compliant taxable persons, to minimize discretionary powers of tax authorities, to remove sectoral distortions in domestic taxes, to broaden the tax base and to maximize the size of formal economy.
On 21st June 2017, in order to implement financial proposals for the financial year beginning on 1st July 2017, Finance Act, 2017 (hereinafter Finance Act), was published in the Official Gazette. The Finance Act has introduced various tax reforms in the Income Tax Ordinance, 2001, the Sales Tax Act, 1990, the Federal Excise Act, 2005, and the Customs Act, 1969.
Since imposition of sales tax can influence imports and domestic consumption, the government can change certain economic variables through sales tax reforms. Pursuant to the Finance Act, major sales tax reforms introduced in the Sales Tax Act, 1990 (Act) relate to reduced rates, exemptions, fixed rates, turnover sales tax, further tax and tax authorities.
Reduced rate of sales tax
Instead of paying tax at the standard rate of 17pc, businesses in five sectors including textile, leather, carpets and surgical and sports goods have been given the benefit of paying sales tax at the rate of 0pc. However, retail sales of these five export-oriented sectors will be taxable at the rate of 6pc instead of 5pc. Similarly, commercial import of fabric is taxable at the rate of 6pc plus 2pc value addition tax.
A reduced rate of 7pc is chargeable on import of seven type of poultry machinery including machinery for preparing feeding stuff, incubators, brooders, insulated sandwich panes, poultry sheds, evaporative air cooling system and evaporative cooling pad.
To end discrimination between local and imported Hybrid Electric Vehicles (HEVs), a reduced rate of 8.5pc is applicable on HEVs with engine capacity up to 1800CC and 12.75pc on HEVs with engine capacity ranging between 1801CC and 2500CC.
Exemption from sales tax
Sales tax will not be chargeable on import and supply of combined harvesters up to five years old. Previously, such imports or supplies were chargeable at the rate of 7pc ad valorem. The purpose seems to facilitate farming community to adopt mechanized farming to reduce post harvest losses.
Likewise, exemption from payment of sales tax has been provided on import of sunflower and canola hybrid seeds meant for sowing. Previously, imported oilseeds were chargeable to sales tax at the rate of 5pc.
Domestic supply of single cylinder agriculture diesel engines of 3 to 36HP is exempted from the whole of sales tax.
To promote renewable sources of energy, exemption has been provided on import and supply of systems or items for use with solar energy such as solar power systems. Likewise, supplies of goods in the Gwadar Free Zone (GFZ) will be exempt from sales tax for 23 years.
Specific rate of sales tax
Owing to complications in payment of subsidy to fertilizer manufacturers and importers, the subsidy has been substituted with reduction in sales tax rates on different types of fertilizers per 50kg bag. For example, Rs100 on DAP, Rs 165 on NP (22-20), Rs165 on NP (18-18), Rs 251 on NPK-I, Rs 222 on NPK-II, Rs 341 on NPK-III, Rs 31 on SSP and Rs 98 on CAN fertilizers, respectively.
To promote the use of information technology and to minimize the chances of disputes on categorization of mobile phones, sales tax rates of Rs 300 and Rs 1000 chargeable on low- and medium-priced cellular or satellite phones have been merged into Rs 650 per mobile phone.
Turnover sales tax
Tier-1 retailers are provided the option to pay sales tax at the rate of 2pc of their total turnover including turnover relating to exempt supplies without the facility of input tax adjustment. Once the option has been availed, it will remain enforced for the whole financial year 2017-18.
In addition to applicable sales tax rates, import and supply of prescribed goods will also be subject to further tax of 2pc or 1pc, as the case may be. The Finance Act has imposed further tax at the rate of 1pc on supplies of five export-oriented sectors under SRO 1125, except on finished goods which will attract further tax at the rate of 2pc. To remove ambiguity regarding application of further tax in respect of taxable persons making zero-rated supplies, clarificatory amendment has been made regarding application of further tax under section 3(1A) of the Act on zero-rated supplies covered under section 4 of the Act. However, zero-rated supplies made to diplomats, privileged persons and duty-free shops have been excluded from the purview of further tax.
To facilitate taxable persons, the statutory notices sent to companies by the tax authorities through electronic medium will be treated as proper service in addition to other prescribed methods and in case an amount of sales tax is due from taxable person and the case is pending before the Commissioner Inland Revenue (Appeals) for decision under section 45B of the Act, taxable persons will have an automatic stay against recovery by tax authorities provided they deposit 25pc of the amount of sales tax demand in the government treasury.
Incentives in the form of reduced sales tax rates or exemptions in the fields of poultry, agriculture and renewable sources of energy are of crucial importance. The investors can benefit from these incentives by injecting capital in these fields to bridge the gap between demand and supply. There is no denying the fact that there is a sizeable gap between demand and supply particularly in the field of renewable sources of energy and poultry sector.
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