Fakhri Associates

The Federal Board of Revenue (FBR), Sindh Revenue Board (SRB) and Punjab Revenue Authority (PRA) Thursday signed Memorandum of Understandings (MoUs) on the cross-adjustment of sales tax on goods and services levied by the federal and provincial governments.

A signing ceremony was held at the FBR House here on Friday in the presence of Finance Minister Ishaq Dar. The MoUs were signed by Chairman FBR Tariq Bajwa, Chairperson Punjab Revenue Authority Iftikhar Qutab and Chairman Sindh Revenue Board Tashfeen Khalid Niaz. With the signing of these MoUs, a long outstanding issue regarding cross-adjustment of sales tax on goods and services levied by the Federal and Provincial Governments has been resolved.

Chairman FBR signed the MoU regarding adjustment of sales tax on services against sales tax on supplied goods with Sindh Revenue Board and Punjab Revenue Authority.

When contacted, Arshad Shehzad, a prominent sales tax expert explained that a prolonged dispute over inter-federal/provincial input tax adjustment has now been settled amicably after mutual understanding and signing of MoU between the Federal Board of Revenue and respective sales tax collecting authorities of provincial government.

Details revealed, after the 18th Amendment, Federal government delegated/transferred powers for collection and levy of sales tax on services to the respective provincial governments. Sindh was the first province which formed an
independent revenue collection body and legislated the provincial Sales Tax Act along with Sindh Finance Bill 2011. Later on, Punjab and Khyber Pakhtunkhwa governments followed suit and established their sales tax authorities in 2012 and 2013, respectively.

In spite of this revolutionary development, federal and provincial governments were unable to enlarge mutual understanding for intra federal/provincial input tax adjustment. The issue was debated threadbare among the highest sales tax collection authorities over last couple of years and settled today with the singing of MoU.

Arshad Shehzad termed the MoU as a ‘landmark’ achievement. He said sales tax on services is a new subject in Pakistan. After provincial autonomy and independent administration multi-dimensional and complex administrative, jurisdictional and legal issues arose between federal and provincial governments. Intra federal/provincial input adjustment was one of it with serious difference of opinion among the stakeholders.

He said though details has to be released after issuance of notifications, expectedly one thing is pretty much clear that taxpayer would now be able to claim input tax adjustment in sales tax mode without any hassle through filing of sales tax returns in their respective jurisdictions of FBR, SRB, PRA or KPRA. Electronic link among Federal and provincial boards would be established for smooth and real time basis cross-matching of sales tax input and output. This is one of the major problems which caused non-adjustment of sales tax paid on services to taxpayers registered with FBR.

He informed that due to this single issue more than 126 petitioners approached Sindh High Court alone, the numbers are increasing after each passing day. The petitioner taxpayers are filing manual sales tax return since last couple of months after securing interim orders from the honorable High Courts. The amicable settlement of the issue by the government entails ultimate disposal of all these petitions.

Arshad Shehzad said since there appears a principle understanding among the federal and provincial government, they may specifically notify with retrospective effect to avoid unnecessary litigation as well as to facilitate the taxpayers. He further says in that case one time condonation under section 74 would require for reporting of all such unreported purchases since under section 7 of the Sales Tax Act 1990 such reporting of purchases could only be done with six tax periods whereas this issue is looming over more than 8 months.

Date	Subject	News
14-02-2014	Cross-adjustment of sales tax on goods and services levied by the federal and provincial governments.	The Federal Board of Revenue (FBR), Sindh Revenue Board (SRB) and Punjab Revenue Authority (PRA) Thursday signed Memorandum of Understandings (MoUs) on the cross-adjustment of sales tax on goods and services levied by the federal and provincial governments. A signing ceremony was held at the FBR House here on Friday in the presence of Finance Minister Ishaq Dar. The MoUs were signed by Chairman FBR Tariq Bajwa, Chairperson Punjab Revenue Authority Iftikhar Qutab and Chairman Sindh Revenue Board Tashfeen Khalid Niaz. With the signing of these MoUs, a long outstanding issue regarding cross-adjustment of sales tax on goods and services levied by the Federal and Provincial Governments has been resolved. Chairman FBR signed the MoU regarding adjustment of sales tax on services against sales tax on supplied goods with Sindh Revenue Board and Punjab Revenue Authority. When contacted, Arshad Shehzad, a prominent sales tax expert explained that a prolonged dispute over inter-federal/provincial input tax adjustment has now been settled amicably after mutual understanding and signing of MoU between the Federal Board of Revenue and respective sales tax collecting authorities of provincial government. Details revealed, after the 18th Amendment, Federal government delegated/transferred powers for collection and levy of sales tax on services to the respective provincial governments. Sindh was the first province which formed an independent revenue collection body and legislated the provincial Sales Tax Act along with Sindh Finance Bill 2011. Later on, Punjab and Khyber Pakhtunkhwa governments followed suit and established their sales tax authorities in 2012 and 2013, respectively. In spite of this revolutionary development, federal and provincial governments were unable to enlarge mutual understanding for intra federal/provincial input tax adjustment. The issue was debated threadbare among the highest sales tax collection authorities over last couple of years and settled today with the singing of MoU. Arshad Shehzad termed the MoU as a ‘landmark’ achievement. He said sales tax on services is a new subject in Pakistan. After provincial autonomy and independent administration multi-dimensional and complex administrative, jurisdictional and legal issues arose between federal and provincial governments. Intra federal/provincial input adjustment was one of it with serious difference of opinion among the stakeholders. He said though details has to be released after issuance of notifications, expectedly one thing is pretty much clear that taxpayer would now be able to claim input tax adjustment in sales tax mode without any hassle through filing of sales tax returns in their respective jurisdictions of FBR, SRB, PRA or KPRA. Electronic link among Federal and provincial boards would be established for smooth and real time basis cross-matching of sales tax input and output. This is one of the major problems which caused non-adjustment of sales tax paid on services to taxpayers registered with FBR. He informed that due to this single issue more than 126 petitioners approached Sindh High Court alone, the numbers are increasing after each passing day. The petitioner taxpayers are filing manual sales tax return since last couple of months after securing interim orders from the honorable High Courts. The amicable settlement of the issue by the government entails ultimate disposal of all these petitions. Arshad Shehzad said since there appears a principle understanding among the federal and provincial government, they may specifically notify with retrospective effect to avoid unnecessary litigation as well as to facilitate the taxpayers. He further says in that case one time condonation under section 74 would require for reporting of all such unreported purchases since under section 7 of the Sales Tax Act 1990 such reporting of purchases could only be done with six tax periods whereas this issue is looming over more than 8 months.
07-Sep 2012	Section 8B	The Federal Board of Revenue (FBR) is likely to allow 97 percent input tax adjustment to wholesalers, instead of existing 90 percent to offset their low profit margins, sources told Business Recorder on Thursday.
25-Aug 2012	20 Key risk-based parameters for audit of Non-corporate/ AOPs cases	The Federal Board of Revenue has drafted 20 key risk-based parameters for selection of non-corporate cases for audit under Annual Audit Plan (2012-13). Sources told Business Recorder here on Friday that the FBR has drafted 20 risk-based selection parameters for income tax and sales tax audit of the non-companies cases including Association of Persons (AOPs). These risk-based parameters for selection of non-corporate cases are being discussed with the experts and senior tax officials for addition or deletion of any clause under the Annual Audit Plan (2012-13). The final risk-based selection parameters for income tax and sales tax audit of the non-corporate sector would be communicated to the field formations for initiation of audit. So far, the FBR has selected the following risk based selection parameters for non-corporate cases – AOPs for audit purposes: 1. Opening Balance not matching with closing balance of previous year. 2. Cost of Sales is more than 80% of total sales. 3. Cost of sales is less than 60% of total sales. 4. Net profit to sales ratio differs from sector ratio by 10%. 5. Percentage of expense to gross profit differs from sector ratio by 10 percent. 6. Gross profit to total sales ratio differs from sector ratio by 10 percent. 7. Total sales on Income Tax Returns differ from total sales from Sales Tax return by 10 percent. 8. Total sales declared in ‘Sales Tax Return’ differs from total Sales declared in Income Tax Return by 10 percent. 9. Continuously declaring loss for the last two years. 10. Continuously declaring declined income for the last two years. 11. Total supplies are less than previous year by 10%. 12. Output tax is less than the previous year by 5%. 13. Input tax is more than the previous year by 5%. 14. Output tax is different from 15% of taxable supplies. 15. Input tax is different from 15% of taxable purchases. 16. Output tax minus input tax differs from net payment by 5%. 17. Percentage of input/output ratio differs with sectors’ ratio by 10 percent. 18. Refund claim is 5 percent more than previous year. 19. Export sales differ from value of export in customs data by 5 percent. 20. Import purchase differs from value of import in customs data by 5 percent.
07-July 2012	Composite Audit	There is no 'composite audit' provision of sales tax, federal excise duty and income tax in the Income Tax Ordinance 2011, Sales Tax Act 1990 and Federal Excise Act 2005, exposing illegal notices of 'composite audit' issued to the registered persons by the Federal Board of Revenue's (FBR) field formations. This important order has been issued by Dr Muhammad Shoaib Suddle Federal Tax Ombudsman (FTO) on a recent complaint No.24/ISD/ST(08)/242/2012. The FTO has clearly ruled that there is no cavil with the proposition that the Commissioner IR is competent under Section 177(1) of the Income Tax Ordinance, 2001, to issue notice for audit. However, while exercising this power, he cannot invoke the said provision of other laws. Both Sales Tax and Federal Excise laws have independent sections for audit proceedings; their consequences are different and they cannot be subjected to the provisions of Income Tax law. There is no provision of 'composite audit' available in Income Tax, Sales Tax or Federal Excise laws. The action of Commissioner IR, Regional tax Office (RTO), Islamabad, to issue notice for 'composite audit' covering sales tax and federal excise matters simultaneously with the complainants of Income Tax affairs being without jurisdiction, and also in violation of the Sindh High Court (SHC) judgment. This tantamount to maladministration defined as under Section 2(3) of the FTO Ordinance, 2000. The FTO has recommended the FBR to withdraw notices issued for conduct of 'composite audit' in the Complainant's case within 15 days and report compliance within five days thereafter. The complainant is aggrieved on the Commissioner IR, RTO, Islamabad's letter, informing him that his case had been selected for 'Composite Audit' for tax year 2010. He was further informed by the Assistant Commissioner Audit, Zone-I, RTO, Islamabad to produce the relevant record relating income tax, sales tax and federal excise. The complaint was sent for comments to Secretary, Revenue Division, in terms of Section 10(4) of the FTO Ordinance 2000. In response, the FBR forwarded comments by Commissioner IR, Zone-I, Islamabad. During the hearing, the authorised representative (AR) submitted that the mode of selection of composite audit by the Commissioner IR, RTO, Islamabad, was unjustified, illegal and in violation of the principles laid down by the superior courts. There was no provision of composite audit in the Income Tax Ordinance, 2001, Sales Tax Act, 1990, or Federal Excise Act, 2005. He further submitted that the judgment of Hon'ble Sindh High Court (2011 PTD 1558) had been followed by the Hon'ble Federal Tax Ombudsman while deciding the complaint No.572/Lhr/IT(449/1157/2011. He further contended that even otherwise the RTO, Islamabad, did not have the jurisdiction in the case to issue notice for conducting audit of sales tax and federal excise matters as the same lay with the Large Taxpayers Unit (LTU), Islamabad. He finally prayed that the impugned notice of selection for composite audit be vacated. The departmental representative (DR) submitted that the Commissioner IR, RTO, Islamabad, was competent under Section 177(1) of the Income Tax Ordinance, 2001, to select any case for audit falling in his jurisdiction including the case of the complainant. He further submitted that the notices for audit were issued on merit and in line with the criteria laid down by the FBR. He also submitted that the matter in hand was beyond the scope and jurisdiction of Hon'ble FTO as per Section 9(2) (b) of the FTO Ordinance, 2000. As regards Departmental objection in terms of bar laid down in Section 9(2)(b) of the FTO Ordinance 2000, the matter has been examined and the objection found to be misconceived. Assessment of income per se is not the moot point in the complaint. Rather, the method adopted to determine the Complainant's income for purposes of levy of income tax and sales tax simultaneously through conduct of a 'composite audit' is what is complained against. The 'composite audit' method exposes the Complainant to double jeopardy. The departmental objection in this regard is rejected, being without merit, FTO maintained. The contention of the Complainant that the Commissioner IR, RTO, Islamabad, did not have the jurisdiction to issue the notice of audit for Sales Tax and Federal Excise was conceded by the DR, stating that for audit proceedings of Sales Tax and Federal Excise, the LTU, Islamabad, had the jurisdiction, FTO added(Business Recorder 7July 2012)