Royalty, technical fee: PJBF asks FBR to de-notify FED levy

Pakistan-Japan Business Forum has recommended to the Federal Board of Revenue (FBR) to immediately de-notify Federal Excise Duty (FED) on royalty and technical fee, which is now chargeable under the provincial legislation promulgated in Sindh, Punjab and KP, as sales tax on services.

Sources told Business Recorder on Saturday that PJBF has submitted its budget proposals (2015-16) to the FBR.

According to the proposal, the main issue is related to the de-notification of FED on royalty and technical fee already taxable under Provincial Sales Tax laws. The FBR should immediately de-notify FED on royalty and technical fee which is now chargeable under the provincial legislation, in Sindh, Punjab and KP, which have promulgated laws on sales tax on services. This has affected the taxpayers, as they have to pay double taxation on account of FED & sales tax and engaged them in unnecessary litigation. The unnecessary burden on taxpayers will reduce on de-notification of such services.

It said that all pharmaceutical finished products (local and imported) are exempted from sales tax. There is no issue on imported products as no sales tax is paid at import stage. However, for locally manufactured products, though sales tax is exempted at import stage on raw materials only, sales tax is payable on all packaging materials, consumable stores, plant and machinery as well as utilities” bills.

It is recommended that pharmaceutical products to be zero-rated for sales tax purpose, so that the manufacturers may claim the sales tax paid at procurement stage from the FBR or all packaging materials plant and machinery and consumables purchased/imported by registered pharmaceutical manufacturers should be exempted from payment of sales tax. Similarly, there should be no sales tax levied on utility bills of registered pharmaceutical manufacturers.

As there is no sales tax on sale of finished goods, the sales tax paid on procurement stage can”t be passed on to the customer and has to be borne by manufacturer to control the prices of medicines.

It said that the sales tax on automobiles makes the prices of these products very high. It is recommended that sales tax on cars be reduced to 12 percent.

It will increase volume for the auto industry by about 30% with increase in revenue to GoP, as about 30 percent cost of the vehicle contains government levies.

Cars are high priced products. Levy of high sales tax makes them still costlier. This makes people go for used imported vehicles because lower taxes have been levied on them, it added.

Pakistan-Japan Business Forum said that the withholding tax on import of raw materials and plant and machinery was increased gradually from 1 percent to 5.5 percent over a period of 2-3 years, which is creating significant cash flow impact for manufacturers and results in generation of income tax refunds only. Further, positive measure of issuance of exemption certificates on imports by Commissioner income Tax was introduced in Finance Act, 2013 and rules introduced vide Finance Act 2014, however, very stringent rules were made, which are rarely applicable, thereby providing no relief to a genuine taxpayer facing hardships of income tax refunds.

It is recommended that withholding tax on import of raw materials and plant and machinery by industrial undertakings be reduced from 5.5 percent to one percent. The commissioner may issue an exemption certificate to a Sales Tax registered manufacturer, who is liable to pay advance tax u/s 147 and falls under jurisdiction of Large Taxpayers Unit, against import of raw materials for their own use and plant machinery, for quarter, half yearly and annually. A lower withholding tax rate, with options of availing exemption certificate from such withholding tax would strongly support the industrial base against commercial importers and extra burden of refunds will be reduced.

As advance tax liability under section 147 of the Income Tax Ordinance is already being discharged and it is also subject to minimum payment of 90 percent of the tax liability to avoid default surcharge under section 205 of the Income Tax Ordinance 2001, there would be no negative impact.

It further recommended that commercially imported goods be allowed to be sold at 15% higher than declared prices to any person contesting the import price. This will bring more revenue to GoP and curtail under invoicing and misdeclaration.

Both GoP and the industry are being hurt by excessive under invoicing and misdeclaration.