Whey Finance

Local supply of factories, machinery: elimination of sales tax zero-rating

ISLAMABAD: The Federal Board of Revenue (FBR) has removed the zero rate of sales tax on the local supply of plant and machinery to export processing zones (EPZ), duty free shops, local supplies to exports covered by the export facilitation program and the supply/repair/maintenance of vessels and related equipment and machinery from January 16, 2022.

The FBR has issued Circular Number 6 of 2022, here on Thursday for the explanation of the significant amendments to the Sales Tax Act 1990, the ICT (Services Tax) Ordinance 2001 and the Federal Excise Act 2005.

The FBR said that the zero-rating of crude oil, which was abolished by the 2021 finance law, was also reinstated from January 16, 2022.

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For the purposes of tax rationalization and broadening of the tax base, while retaining the exemptions on essential foodstuffs, basic health care and education, a number of exemptions in Table 1 of the Sixth Schedule of the Sales Tax Act 1990 have been removed.

Goods on which GST at the standard rate has been imposed can broadly be classified as imported/branded foodstuffs or plant and machinery and industrial inputs.

Imported live animals/poultry, imported uncooked meat/poultry, imported eggs, imported seeds and various types of agricultural equipment, plant and machinery of field industries are some of the items which are now subject to the standard regime.

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Thanks to a new insertion in Table 2 of the Sixth Annex, the local supply of food products such as cereals, meat, poultry, vegetables, fruits, eggs, etc. has been exempted from the levy of sales tax.

Similarly, supplies of locally produced laptop computers and newspapers are also exempt. An exemption for the local supply of sugar cane has also been provided for. On the other hand, some of the existing exemptions available in Table 2 have been removed on raw cotton, whey and sausages (sold other than in retail packaging), matchboxes among others.

In addition, prior to the Finance (Supplementary) Act 2022, bread, sheermal, vermicelli, buns and rusks sold in all bakeries and confectioneries were exempt under section 7 of the relevant table. However, said provision has now been amended so that the standard rate tax has become payable on such items when sold in bakeries, restaurants, food chains and confectioneries falling under the category of Tier 1 retailers. Exemptions for various plants, machinery and equipment, often involving huge tax expenditures, are available in Table 3 of the Sixth Schedule.

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Some of these exemptions have been removed.

The FBR stated that the Eighth Schedule of the Sales Tax Act 1990 provided rates lower than the standard GST rate and that prior to the Finance (Supplementary) Act 2022 a wide range of rates ranging from 1 % to 16.9% were available under said appendix.

This has led to a distortion of the tax system.

Differential rates were difficult to administer and susceptible to misuse. The eighth schedule has now been simplified and a number of reduced rates and preferential regimes have been removed, bringing these goods under the normal regime.

The rate of sales tax on cellular/mobile devices is specified under the provisions of Table 2 of the Ninth Schedule to the Sales Tax Act 1990. sales tax ranging from Rs1,740 to Rs9,270 per device.

There was little justification for a reduced rate on the importation of expensive/high-end branded mobile devices. Therefore, a 17 percent ad valorem tax was introduced for imported mobile devices worth more than $200, the FBR added. Said amendments to legislation and tax/FED rates are applicable as of January 16, 2022.

Copyright Business Recorder, 2022