Sales tax to be levied on entire supply chain, manufacturing

The Pakistani Federal Board of Revenue (FBR) has issued a detailed clarification in response to contentions expressed over double taxation by a Karachi Chamber of Commerce and Industry (KCCI) delegation during its recent meeting with the FBR chairman. It defines that the federal government is authorized to levy sales tax on supply and manufacturing of goods, whereas the power to levy sales tax on services have been vested with provinces.

The KCCI delegation, headed by Businessmen Group Vice Chairman Haroon Farooki, included KCCI President Younus Muhammad Bashir and KCCI sub-committee on GST & Refunds Chairman Sohaib Ahmed Faridi, who met FBR Chairman Nisar Muhammad Khan recently in Islamabad to express deep concerns over double taxation by federal and provincial authorities, which resulted in intensifying the hardships being faced by the business and industrial community of Karachi.

Consequently, a clarification vide letter was issued by the FBR, declaring comprehensive definition of sales tax levy by the federal government and provinces under the constitution.

FBR pointed out that the manufacturers of five zero-rated sectors are being charged by the board at 3% of the processing charges, which is being paid by the textile and other zero-rated industries. Sales tax on Services Act has levied tax on toll manufacturing of goods, which falls outside the ambit of the provinces as per serial no. 49 of the Federal Legislative List of the Constitution of Pakistan, hence, the contention of province is not correct.

According to FBR, the supply chain of textile industry starts with the production of cotton, which is converted into finished product after going through various processes. The garments/ made-ups cannot be manufactured without ancillary industries such as spinning, weaving, sizing, dyeing and stitching etc.

FBR elaborated that only in large manufacturing houses, the factory encompasses all these processes in one or more premises owned by the manufacturer. However, in large number of cases, all these processes are outsourced due to lack of expertise and paucity of funds to finance manufacturing activities by a single owner. Therefore, the owner of the goods forward raw material to other manufacturers for processing and converting the same into finished goods. The main thrust of all these processes is to manufacture the goods, which are sold and exported as per requirements of the customers.

These manufacturing activities cannot be excluded from the supply chain activity of goods and are not covered under any definition of service. Therefore, the contention of the province is not valid on the grounds that without performing the activity of spinning, weaving, sizing, knitting and stitching etc., finished form of a good in manufacturing cannot take place, hence, the argument tendered by the province does not seems to be logical.

FBR also referring to Article 143 of the Constitution of Pakistan which says that if any provision of act of provincial assembly is repugnant to the any provision of an act of Majlis-e-Shura (Parliament) which is competent in enact, then the act of parliament shall prevail and the act of provincial assembly shall, to the extent of repugnancy, be void.”

FBR further referring to various legal and constitutional facts, said that the provinces are not competent to levy such illegal tax on processing/ manufacturing of the goods by the registered persons who are already paying sales tax on such activities as Part B of the Second Schedule to the Sindh Sales Services Act, 2011 is in violation of section 2(16)(a) of the Sales Tax Act, 1990.