Memorandum on the draft finance law (complementary), 2021 – Opinion

S. No.         Description
==========================================================
               Table II-Local supplies
==========================================================
1              Supply of cotton seed exclusively meant
               for sowing purposes, subject to such
               conditions as the Board may specify.
2              Supply of locally produced crude vegetable
               oil obtained from the locally produced
               seeds other than cotton seed, except
               cooking oil, without having undergone
               any process except the process of washing.
4              Raw material and intermediary goods
               manufactured or produced, and services
               provided or rendered, by a registered
               person, consumed in-house for the
               manufacture of goods subject to sales tax
9              Foodstuff and other eatables prepared
               in the flight kitchens and supplied
               for consumption on-board in local flights
15             a) Sprinkler Equipment
               b) Drip Equipment.
               c) Spray Pumps and nozzles
16             Raw cotton
22             Single cylinder agriculture diesel
               engines (compression-ignition internal
               combustion piston engines) of 3 to 36 HP.
23             Match boxes
33             Whey, excluding that sold in retail
               packing under a brand name
38             Sausages and similar products of
               poultry meat or meat offal excluding
               sold in retail packing under a brand
               name or trademark
==========================================================
================================================================
S. No.         Description
================================================================
               Table III - Capital goods and Plant and Machinery
================================================================
1              Machinery and equipment for initial
               installation, balancing, modernization,
               replacement or expansion of desalination
               plants, coal firing system, gas processing
               plants and oil and gas field prospecting.
2              Machinery, equipment, apparatus, and
               medical, surgical, dental and Veterinary
               furniture, materials, fixtures and
               fittings imported by hospitals and
               medical or diagnostic institutes,
               broadly categorized as:-
               A. Medical Equipment.
               B. Cardiology/Cardiac Surgery Equipment
               C. Disposable Medical Devices
               D. Other Related Equipment
2A             Specified raw materials imported
               by registered manufacturer of
               auto disabled syringes.
3              Machinery, equipment, materials,
               capital goods, specialized vehicles
               (4x4 non-luxury) i.e., single or double
               cabin pickups, accessories, spares,
               chemicals and consumables meant for
               mine construction phase or extraction
               phase and construction machinery,
               equipment and specialized vehicles,
               excluding passenger vehicles, imported
               on temporary basis as required for such projects.
4              Coal mining machinery, equipment,
               spares, including vehicles for site
               use i.e., single or double cabin
               pick-ups and dump trucks, imported
               for Thar Coal Field
5              Machinery, equipment and spares meant
               for initial installation, balancing,
               modernization, replacement or expansion
               of projects for power generation through
               oil, gas, coal, wind and wave energy
               including under construction projects,
               which entered into an implementation
               agreement with the Government of Pakistan
               and construction machinery, equipment
               and specialized vehicles, excluding
               passenger vehicles, imported on
               temporary basis as required for the
               construction of project.
6              Machinery, equipment and spares meant
               for initial installation, balancing,
               modernization, replacement or expansion
               of projects for power generation through
               gas, coal, hydel, and oil including
               under construction projects and
               construction machinery, equipment
               and specialized vehicles, excluding
               passenger vehicles, imported on
               temporary basis as required for
               the construction of project.
7              Machinery, equipment and spares
               meant for initial Installation,
               balancing, modernization, replacement
               or expansion of projects for power
               generation through nuclear and renewable
               energy sources like solar, wind,
               micro-hydel bio-energy, ocean,
               waste-to-energy and hydrogen cell
               and construction machinery, equipment
               and specialized vehicles, excluding
               passenger vehicles, imported on
               temporary basis as required for
               the construction of project.
8              Machinery and equipment meant for
               power transmission and grid stations
               including under construction projects
               and construction machinery, equipment
               and specialized vehicles, excluding
               passenger vehicles, imported on
               temporary basis as required for
               the construction of project.
9              Machinery, equipment and other
               education and research related items
               imported by technical, training
               institutes, research institutes,
               schools, colleges and universities.
11             Machinery and equipment for marble,
               granite and gemstone extraction
               and processing industries
13             Effluent treatment plants
14             Items for use with solar power
               systems and water purification
               plants operating on solar energy.
14A            Specified systems and items for
               dedicated use with renewable source
               of energy like solar, wind, geothermal
               as imported on or before
               the 30th June, 2023.
15             Items for promotion of renewable
               energy technologies or for
               conservation of energy.
15A            Parts and Components for
               manufacturing LED lights.
15B            CKD kits for single cylinder
               agriculture diesel engines
                (compression-ignition internal
               combustion piston engines)
               of 3 to 36 HP.
17             Machinery, equipment, raw materials,
               components and other capital goods
               for use in building, fittings,
               repairing or refitting of ships,
               boats or floating structures imported
               by Karachi Shipyard and
               Engineering Works Limited
21             Import of POS machines
================================================================

Exemption limited to local supplies only

Read the first part here: Memorandum on the (additional) finance bill, 2021

Importation and local supplies of the following goods were exempt from sales tax. It is now proposed to restrict the exemption from this to only local supplies, with certain modifications as below:

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S.No.          Description
==================================================
40             Live Animals and live poultry
41             Meat of bovine animals, sheep, goat
               and uncooked poultry meat excluding
               those sold in retail packing
               under a brand name
42             Fish and crustaceans excluding
               those sold in retail packaging
               under a brand name
43             Live plants including bulbs,
               roots and the like
44             Cereals other than rice, wheat,
               wheat and meslin flour
45             Edible vegetables including
               roots and tubers, except ware
               potato and onions, whether fresh,
               frozen or otherwise preserved
                (e.g. in cold storage) but
               excluding those bottled or canned.
46             Edible fruits
47             Sugar cane
48             Eggs including eggs for hatching
49             Compost (non-commercial fertilizer)
50             Locally manufactured laptops,
               computers, notebooks whether or
               not incorporating multimedia
               kit and personal computers
51             Newspaper
==================================================

Modification of the perimeter of existing entrances

It is proposed to replace the following entries in Tables I and II of the Sixth Schedule to the Law:

============================================================================================================
S. No.         Existing entry                                         Proposed entry
============================================================================================================
               Table I-Import and supply
============================================================================================================
13             Edible vegetables including roots and                  Edible vegetables imported from
               tubers, except ware potato and onions,                 Afghanistan including roots and
               whether fresh, frozen or otherwise preserved           tubers, except ware potato and onions,
               (e.g., in cold storage) but excluding those            whether fresh, frozen or otherwise
               bottled or canned                                      preserved (e.g., in cold storage) but
                                                                      excluding those bottled or canned
15             Edible fruits excluding imported fruits                Fruit imported from Afghanistan
               whether fresh, frozen or otherwise                     excluding apples PCT 0808.1
               preserved but excluding those bottled
               or canned.
19             cereals and products of milling industr                Rice, wheat, wheat and meslin flour
32             Newsprint, newspapers, journals,                       Newsprint and educational textbooks
               periodicals, books but excluding directories.          but excluding brochures, leaflets and
                                                                      directories
               Table-II-local supply
7              Breads prepared in tandoors and                        Bread, Nan, Chapatti, Sheer mal
               bakeries, vermicllies, nans, chapattis,                prepared in tandoors excluding
               sheer mal, bun, rusk.                                  those prepared in bakeries, restaurants,
                                                                      food chains and sweet shops.
============================================================================================================

REDUCED SALES TAX RATES – SCHEDULE 8

The bill proposes to omit the entries below from the Eighth Schedule according to which said goods are now offered to be subject to sales tax at the standard rate of 17%:

=============================================================================================================
S.No.          Description                                                         Existing rate of sales tax
=============================================================================================================
4              Oilseeds meant for sowing.                                                                  5%
6              Plant and machinery not manufactured locally
               and having no compatible local substitutes                                                 10%
7              Flavoured milk                                                                             10%
8              Yogurt                                                                                     10%
9              Cheese                                                                                     10%
10             Butter                                                                                     10%
11             Cream                                                                                      10%
12             Desi ghee                                                                                  10%
13             Whey                                                                                       10%
14             Milk and cream, concentrated or containing
               added sugar or other sweetening matter                                                     10%
15             Ingredients of poultry feed, cattle feed,
               except soya bean meal of PCT heading 2304.0000
               and oil-cake of cotton-seed falling under PCT
               heading 2306.1000                                                                          10%
16             Incinerators of disposal of waste management,
               motorized sweepers and snow ploughs                                                         5%
17             Re-importation of foreign origin goods which were
               temporarily exported out of Pakistan                                                        5%
20             Plant, machinery, and equipment used in production
               of bio-diesel                                                                               5%
26             Tillage and seed bed preparation equipment.                                                 5%
27             Seeding or planting equipment.                                                              5%
28             Irrigation, drainage and agro-chemical
               application equipment.                                                                      5%
29             Harvesting, threshing and storage equipment.                                                5%
30             Post-harvest handling and processing & miscellaneous
               machinery.                                                                                  5%
34             1. Set top boxes for gaining access to internet                                             5%
               2. TV broadcast transmitter
               3. Reception apparatus for receiving satellite signals
               of a kind used with
               TV (satellite dish receivers)
               4. Other set top boxes                                                                      5%
45             Following machinery for poultry sector:
               (i) Machinery for preparing feeding stuff
               (ii) Incubators, brooders and other poultry equipment
               (iii) Insulated sandwich panels
               (iv) Poultry sheds
               (v) Evaporative air cooling system
               (vi) Evaporative cooling pad                                                                7%
46             Multimedia projectors                                                                      10%
54             lithium iron phosphate battery (LiFe-PO4)                                                  12%
55             Fish babies/seedlings                                                                       5%
59             Products of milling industry
               except wheat and meslin flour                                                              10%
61             Silver, in unworked condition                                                               1%
62             Gold, in unworked condition                                                                 1%
63             Articles of jewellery, or parts thereof, of precious                          1.5% of value of
               metal or of metal clad with precious metal.                                   gold, plus 2% of
                                                                                            value of diamond,
                                                                                           used therein, plus
                                                                                                 3% of making
                                                                                                      charges
64             Prepared Food, foodstuff and sweetmeats supplied
               by restaurants, bakeries, caterers and sweetmeat shops                                    7.5%
66A            Supplies excluding those specified in S. No. 66, as
               made from retail outlets integrated with Board's
               Computerized System for real time reporting of sales                                       16%
66B            Import of remeltable scrap                                                                 14%
68             Frozen prepared or preserved sausages and similar
               products of poultry meat or meat offal                                                      8%
69             Meat and similar products of prepared frozen or
               preserved meat or meat offal of all types including
               poultry, meat and fish.                                                                     8%
75             Import of electric vehicle in CBU conditions                                                5%
76             Business to business transactions specified by the
               Board through a notification in official Gazette subject
               to such conditions and restrictions as specified therein.                                16.9%
=============================================================================================================

It is proposed to increase the reduced rate of sales tax applicable to the following products:

=====================================================================================================================
S.No.          Description                                                       Existing rate          Proposed rate
                                                                                        of tax                 of tax
=====================================================================================================================
66             Supplies as made from retail outlets                                        10%                    12%
               as are integrated with Board's
               computerized system for real-time
               reporting of sales (subject to prescribed
               conditions)
73             Import and local supply of Hybrid Electric Vehicles:
               (a) Upto 1800 cc                                                           8.5%                  12.5%
               (b) From 1801 cc to 2500 cc                                              12.75%                    17%
=====================================================================================================================

• Automobiles currently manufactured or assembled locally with a cylinder capacity of up to 1000 cm3 are subject to a reduced rate of 12.5%. It has been proposed that the said benefit of the reduced rate be limited only to cars with a cylinder capacity of up to 850 cc.

• Currently, the local supply and importation of personal computers, laptops and notebooks are exempt from sales tax under Schedule Six of the Act. The bill proposed to remove this exemption, however, the supply of locally manufactured personal computers, laptops and notebooks would continue to benefit from the said exemption. On the other hand, it has been proposed that the importation of personal computers, laptops and notebooks be subject to a reduced rate of 5% by means of the new entry below in the eighth annex:

===================================================================================================================
S. No.         Description                                       Heading Nos.            Rate of tax      Condition
===================================================================================================================
77             Personal computers and laptop                    8471.3020 and                     5%    If imported
               computers, notebooks whether                         8471.3010                                in CBU
               or not incorporating multimedia kit                                                        condition
===================================================================================================================

• Table 2 of the eighth annex to the law specifies the installations, machinery, equipment and apparatus, including capital goods, which are subject to reduced tax rates subject to compliance with prescribed conditions. . The bill proposed to omit Table 2 of the Eighth Schedule, and therefore the goods specified below are proposed to be subject to the standard tax rate of 17%.

=============================================================================================================
S. No.         Description                                                                        Rate of tax
=============================================================================================================
1              Machinery and equipment for development of
               grain handling and storage facilities including silos                                      10%
2              Cool chain machinery and equipment.                                                         5%
4              1. Machinery, equipment, materials, capital                                                 5%
               goods, specialized vehicles (4x4 non luxury)
               i.e. single or double cabin pickups, accessories,
               spares, chemicals and consumables meant
               for mineral exploration phase.
               2. Construction machinery, equipment and
               specialized vehicles, excluding passenger vehicles,
               imported on temporary basis as required for
               the exploration phase.                                                                      5%
5              Complete plants for relocated industries.                                                  10%
6              Machinery, equipment and other capital goods                                               10%
               meant for initial installation, balancing,
               modernization, replacement or expansion of
               oil refining (mineral oil, hydro-cracking and
               other value added petroleum products),
               petrochemical and petrochemical downstream
               products including fibers and heavy chemical
               industry, cryogenic facility for ethylene storage
               and handling.
8              1. Milk chillers                                                                            5%
               2. Tubular heat exchanger (for pasteurization).
               3. Milk processing plant, milk spray drying plant, Milk UHT plant.
               4. Milk filters
               5. Any other machinery and equipment for manufacturing of dairy products
9              Capital goods otherwise not exempted, for Transmission Line Pr                              5%
=============================================================================================================

CELLULAR MOBILE PHONES – NINTH SCHEDULE

The bill seeks to amend the sales tax on the importation of cellular mobile phones whereby, instead of the fixed tax amounts for each category, a standard rate of 17% sales tax is proposed as shown below. below.

==========================================================================================================================
Sales Tax on CBUs at the time of
==========================================================================================================================
                                                                        import or registration
                                                                        (IMEI number by CMOs)
                                                                             Rate of tax
==========================================================================================================================
Description/specification of goods                                          Existing rate                    Proposed rate
==========================================================================================================================
Cellular mobile phones or satellite phones to be charged on the
basis of import value per set, or equivalent value in rupees in
case of supply by the manufacturer, at the rate as indicated
against each category:
E. Exceeding US$ 200 but not exceeding US$ 350                                 Rs 1,740
F. Exceeding US$ 350 but not exceeding US$ 500                                 Rs 5,400                     17% ad valorem
G. Exceeding US$ 500                                                           Rs 9,270
==========================================================================================================================

The bill proposes to increase the rate of DEF applicable on vehicles imported or manufactured / assembled locally, as indicated below:

=================================================================================================================================
S.No.            Description of Goods                                                 Tarif        Rate of Federal
                                                                                    Heading            Excise Duty
=================================================================================================================================
                                                                                                          Existing       Proposed
=================================================================================================================================
55               Imported motor cars, SUVs and other                                  87.03
                 motor vehicles, excluding auto rickshaws,
                 principally designed for the transport of
                 persons (other than those of headings 87.02),
                 including station wagons and racing cars:
                 (a) of cylinder capacity up to 1000cc                                                        2.5%           2.5%
                 (b) of cylinder capacity from 1001cc to 1799cc                                                 5%            10%
                 (c) of cylinder capacity 1800cc to 3000cc                                                     25%            30%
                 (d) of cylinder capacity exceeding 3001cc                                                     30%            40%
55B              Locally manufactured or assembled                                    87.03
                 motor cars, SUVs and other motor
                 vehicles, excluding auto rickshaws
                 principally designed for the transport
                 of persons (other than those of headings
                 87.02), including station wagons and
                 racing cars:
                 (a) of cylinder capacity up to 1000cc                                                          0%             0%
                 (b) of cylinder capacity from 1001cc to 2000cc                                               2.5%             5%
                 (c) of cylinder capacity 2001cc and above                                                      5%            10%
55C              Imported double cabin (4x4)pick-up                               8704.2190
                 vehicles                                                         8704.3190                    25%            30%
55D              Locally manufactured double cabin                                8704.2190                   7.5%            10%
                 (4x4) pickup vehicles except the                                 8704.3190
                 vehicles booked on or before
                 the 30th June, 2020 subject to
                 the restriction or conditions specified
                 by the Board.
=================================================================================================================================

CHECKING THE GOODS DECLARATION BY CUSTOMS

Article 80 provides for the reassessment of goods for the duties, taxes and other charges levied on them (in addition to any other action) if, during the verification of the declaration of goods, it turns out that any declaration in this statement or document or any information so provided is not correct.

An amendment has been made to the Third Amendment Order of 2021 providing for a specific period of three years (from the release of the goods) for the reassessment of the goods in such circumstances. The bill proposed to overturn the said amendment.

PROVISIONAL DETERMINATION OF LIABILITY

For the provisional determination of liability in certain circumstances, the importer is notably required to provide a bank guarantee for the additional amount of duty determined.

The Tax Laws (Third Amendment) Order 2021 authorized the acceptance of a corporate guarantee, instead of a bank guarantee or payment order, for the purpose of clearing goods on the basis of a provisional assessment of duties, taxes and other charges.

It is now proposed to withdraw the acceptance of the corporate guarantee to avoid complications in securing government revenue.

AUTHORITY TO DETERMINE CUSTOMS VALUE

The finance law for 2021 extended the powers of valuation of goods to the customs collector, in addition to the director of valuation.

It is now proposed to withdraw the power granted to the customs collector in order to standardize the process of determining the value of goods.

RIGHT OF APPEAL AGAINST THE ORDER OF THE DIRECTOR GENERAL ASSESSMENT

The finance law for 2021 has empowered the director general of valuation to cancel or determine the value of any goods imported or exported. The appeal against such an order could have been brought before the Appeals Tribunal.

Through the Tax Laws (Third Amendment) Order 2021, the Valuation Order was made appealable to member Customs (policy), which could be appealed against to the High Court. . The bill proposes to cancel the said amendment (introduced in the ordinance on the third amendment); consequently, an appeal against a review order (issued by the director general of evaluation) would be contestable before the special chamber of the appeal tribunal.

ISLAMABAD CAPITAL TERRITORY – SALES TAX ON SERVICES

SCOPE OF THE TAX

The sales tax on services rendered or provided in the provinces is regulated by provincial laws, while the sales tax on services in the Capital Territory of Islamabad (TIC) is regulated by the Ordinance of 2001 on the territory of the capital of Islamabad (sales tax on services).

At present, the ordinance lists 59 taxable services in its tax schedule at the standard rate of 16%, with the exception of services provided by real estate developers and developers (taxed at Rs 100 per square meter for the land development and Rs 50 per square foot for construction construction) and freight forwarders etc. (taxed at 16% or Rs 400 per bill of lading, whichever is greater).

Through SRO 495 (I) / 2016, 12 (out of 59) services have been notified that are subject to taxes at preferential rates subject to the conditions and restrictions provided therein.

Through the (additional) finance bill, 2021; the list of these 12 services has been transposed into the Ordinance, without modification of the tax rates / consequences. To this end, the existing schedule has been divided into Tables 1 and 2, according to which Table 1 includes all existing taxable services while the services subject to a reduced rate are now listed in Table 2.

The list of 12 services subject to the reduced rate of sales tax, as listed in Table 2 is given below

=================================================================================================================================
S.No.            Description                                                   PCT Heading                      Rate of Tax
=================================================================================================================================
1                Construction services, excluding:                             9814.2000                        0% subject to
                 (i) Construction projects (industrial and                     and 9824.0000                    the condition
                 commercial) of the value (excluding actual                                                     that no input
                 and documented cost of land) not exceeding                                                     tax adjustment
                 Rs 50 million per annum.                                                                       or refund
                 (ii) The cases where sales tax is otherwise paid                                               shall be
                 as property developers or promoters.                                                           admissible
                 (iii) Government civil works including
                 cantonment boards.
                 (iv) Construction of industrial zones, consular
                 building and other organizations exempt from
                 income tax.
                 (v) Residential construction projects where the
                 covered area does not exceed 10,000 square feet
                 for houses and 20,000 square feet for apartments.
2                Services provided for personal care by beauty                 9810.0000,                       5% subject to
                 parlours, clinics and slimming clinics, body                  9821.4000                        the condition
                 massage centres, pedicure centres, including                  and 9821.5000                    that no input
                 cosmetic and plastic surgery by such parlours/                                                 tax adjustment
                 clinics, but excluding cases where-                                                            or refund shall
                 (i) annual turnover does not exceed                                                            be admissible
                 Rs 3.6 million; or
                 (ii) the facility of air-conditioning is not
                 installed or available in the premises
3                Services provided by freight forwarding                       9805.3000                        5% or Rs 1,000
                 agents, and packers and movers                                and 9819.1400                    per bill of
                                                                                                                lading,
                                                                                                                whichever is
                                                                                                                higher subject
                                                                                                                to the condition
                                                                                                                that no input
                                                                                                                tax adjustment
                                                                                                                or refund shall
                                                                                                                be admissible
4                Services provided by tour operators and travel                9803.9000,                       5% subject to
                 agents including all their allied services or                 9805.5000                        the condition
                 facilities (other than Hajj and Umrah)                        and 9805.5100                    that no input
                                                                                                                tax adjustment
                                                                                                                or refund shall
                                                                                                                be admissible
5                Services provided by specialized workshops or                 98.20                            5% subject to
                 undertakings (auto workshops; workshops for                                                    the condition
                 industrial machinery, construction and                                                         that no input
                 earthmoving machinery or other special                                                         tax adjustment
                 purpose machinery etc; workshops for electric                                                  or refund shall
                 or electronic equipment or appliances etc.                                                     be admissible
                 Including computer hardware; car washing
                 or similar service stations and other workshops)
6                Services provided by health clubs, gyms,                      9821.1000,                       5% subject to
                 physical fitness centres, indoor sports and                   9821.2000                        the condition
                 games centres and body or sauna massage centres               and 9821.4000                    that no input
                                                                                                                tax adjustment
                                                                                                                or refund shall
                                                                                                                be admissible
7                Services provided by laundries and dry cleaners               9811.0000                        5% subject to
                                                                                                                the condition
                                                                                                                that no input
                                                                                                                tax adjustment
                                                                                                                or refund shall
                                                                                                                be admissible
8                Services provided by property                                 Respective                       0% subject to
                 dealers and realtors                                          headings                         the condition
                                                                                                                that no input
                                                                                                                tax adjustment
                                                                                                                or refund shall
                                                                                                                be admissible
9                Services provided by car/automobile dealers                   Respective                       5% subject to
                                                                               headings                         the condition
                                                                                                                that no input
                                                                                                                tax adjustment
                                                                                                                or refund shall
                                                                                                                be admissible
10               Services provided or rendered by marriage                     Respective                       5% subject to
                 halls and lawns, by whatever name called,                     headings                         the condition
                 including "pandal" and "shamiana" services                                                     that no input
                 and caterers                                                                                   tax adjustment
                                                                                                                or refund shall
                                                                                                                be admissible
11               IT services and IT-enabled services.                          Respective                       5%
                 Explanation.-For the purpose of this entry":                  headings
                 (a) "IT services" include software
                 development, software maintenance, system
                 integration, web design, web development,
                 web hosting and network design; and
                 (b) "IT enabled services" include inbound
                 or outbound call centres, medical
                 transcription, remote monitoring, graphics
                 design, accounting services, HR services,
                 telemedicine centers, data entry operations,
                 locally produced television programs and
                 insurance claims processing
12               Services provided by property developers and                  9807.0000 and                    0% subject to
                 promoters (including allied services) relating                respective                       the condition
                 to low cost housing schemes sponsored or                      subheadings                      that no input
                 approved by Naya Pakistan Housing and                         of heading 98.14                 tax adjustment
                 Development Authority or under Government's                                                    or refund shall
                 Ehsaas programme                                                                               be admissible
=================================================================================================================================

It is suggested to introduce a definition of taxable services under the ICT Ordinance. At present, these services are not defined. In addition, the tariff headings and description of these services should also be aligned between provinces and ICT.

(Ended)

Copyright Business Recorder, 2021

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