March 27, 2014

Misuse of SROs: recovery action against textile units, companies launched

The Federal Board of Revenue has launched a recovery action against textile units and other companies in leading export-oriented sectors, which massively misused SRO.283(I)/2011 and SRO.1125(I)/2011 to avail zerorating or reduced sales tax facility by supplying goods to non-zero rated sector or un registered persons. In this regard, the FBR has issued instructions to the Chief Commissioners of the Large Taxpayer Units (LTUs) and Regional Tax Offices (RTOs) for taking action against the companies involved in misuse of SRO.283(1)/2011 dated 1-4-2011 as amended by SRO 1125(1)/2011 dated 31-12-2011 in zero rated sector specifically in textile industry. The FBR has further said that the strict enforcement action would be taken against the involved units taking into account the report of Rehmatullah Khan Wazir Chief Commissioner Large Taxpayer Units (LTU) Karachi. In this connection, the FBR has directed the LTUs/RTOs that strict scrutiny of the registered persons/ taxpayers may be done and registered persons involved in misuse of aforementioned SRO(s) be identified with a view to checking such misuse and taking action against the defaulters as per law for recovery of the revenue. Furthermore, the Board may be kept abreast about the progress on this account on monthly basis, FBR''s instructions added. Chief Commissioner Large Taxpayer Units Karachi informed the FBR that zero- rating on local supply and import was introduced in five sector, ie, textile, leather, sports, surgical goods and carpets through SRO.509(1)/2007 dated 9th June, 2007. Thus SRO allowed local sales/supply of goods at the rate of zero percent without any condition. Later on, this SRO 509(1)/2007 was superseded by SRO.283(1)/2001 dated 1st April 2011 and zero rating as well as reduced rate was allowed on specific sectors under certain conditions. One of the important conditions as referred to in para (c) (i) of

the SRO. 283 is that the benefit of zero rating or reduced rate shall be admissible only if the goods are usable and are used in these specified sectors for trading and manufacturing purposes. According to the para (c ) (i) of SRO.283(I)/2011 dated 1st April, 2011, "Benefit of zero rating or reduced rate shall be admissible only if the goods covered in this notification are usable and are used in the aforesaid sectors for trading and manufacturing purposes. No other sector or industry shall be entitled to the benefit of this notification," it added. The examination of summary of domestic sales invoices monthly Sales Tax return of a manufacturer of polypropylene fibres and yarns revealed that the registered person made supplies of Rs 1.122 billion during the period from April 2011 to December 2013 @ 0 percent of 2 percent to three companies and unregistered persons. The supplies were made to companies who were not engaged in the textile sector (one of the five zero rated sectors). On the contrary, these companies were engaged in manufacturing of building materials, flexible bulk container, bags & packing materials respectively. The company misused the SRO.283(I)/2011 dated 1st April, 2011 and charged sales tax @0 percent or 2 percent instead of standard rate of 16 percent or 17 percent. Evidences were collected from FBR database as well as Google. LTU Karachi has issued statutory notices to the companies and after providing opportunity of being heard, an amount of Rs 139.429 million was imposed along with penalty of 100% in view of tax fraud in terms of section 2(37) of Sales Tax Act. This is for information of the Board and if found appropriate may be shared with other field formations for looking into the possibility of taking action against any such misuse by other registered persons, Rehmatullah Khan Wazir added.