Many registered taxpayers opt to deposit sales tax only after the Directorates of Intelligence and Investigation (Inland Revenue) and other field formations resume records from their business premises.
Many registered taxpayers opt to deposit sales tax only after the Directorates of Intelligence and Investigation (Inland Revenue) and other field formations resume records from their business premises.

With more than 45pc share in federal tax receipts, the sales tax is a major source of tax revenue.

Like value added tax, sales tax is collected on self assessed taxable supplies after allowing adjustment of input tax on purchases.

However, tax authorities can audit taxable persons pursuant to section 25 of the Sales Tax Act 1990 (Act) or section 38 of the Act as the case may be.

Under section 25 of the Act, tax authorities can assess sales tax liability in respect of registered taxpayers only.

However, investigative audit under section 38 of the Act can be conducted in respect of persons making taxable supplies in the course of business but not registered under the Act, despite the value of such taxable supplies exceeding the registration threshold.

The registration threshold for manufacturers is a turnover in excess of Rs10 million or if their annual utilities (electricity, gas and telephone bills) exceed Rs 800,000.

Retailers must register if their annual turnover exceeds Rs10m. Importantly; no registration threshold applies to importers and wholesalers, including dealers and distributors.

In this context, taxable supplies include zero-rated exports as well as zero-rated domestic supplies pursuant to section 4 of the Act, but do not include exempt supplies of goods as stipulated in section 13 of the Act.

Following registration, the tax authorities assign each taxable person a sales tax registration number (STRN), which enables them to file periodic sales tax returns electronically and remit the sales tax due.

If a taxable person has not timely remitted the sales tax that is legally due (or has claimed a high amount of deductible input tax), the tax authorities have the power pursuant to section 11(2) of the Act to issue an order of assessment for the under remitted or over claimed sales tax.

In addition, the tax authorities will impose a penalty under section 33 of the Act and default surcharge under section 34 of the Act.

Importantly, almost all taxable persons that are being assessed by the tax authorities for unremitted or under remitted sales tax challenge the assessment, albeit in various circumstances and on various grounds.

In fact, sales tax assessments must be based on actual transactions as reflected in registered taxpayers’ business records.

However, the circumstances in the country are not ideal because the informal economy is considerably large and the use of fake and flying invoices for input-tax adjustments or for refunds claims is incredibly huge.

Many registered taxpayers manipulate their business records in order to reduce their sales tax liabilities.

For example, many registered taxpayers opt to deposit sales tax after the Directorates of Intelligence and Investigation (Inland Revenue) and other field formations resume records from their business premises under section 38 of the Act.

Official assessment is an important tool to check the veracity of the declared parameters including supplies, purchases, input tax and output tax.

However, assessment work has not been yielding the desired results due to a number of reasons.

Owing to the poor quality of assessment work, taxpayers tend to challenge almost every assessment order before the appellate courts. A considerable proportion of the assessment orders have been cancelled either at first or second stage of appeal without yielding any revenue.

Many factors contribute to this.

The capacity of the tax authorities is too limited to carry out the assessment work in an efficient and effective manner.

In many disputed cases, huge sales tax liability has been raised on the basis of third party information such as credit entries appearing in the bank account statements or supplies declared in the income tax returns; without bringing on record evidences for delivery of goods and receipt of money against supply of goods.

Little or no effort is being made to establish that the data gathered from third party sources constitute taxable supplies before passing assessment orders, owing to limited resources.

There are a huge number of taxable persons being selected for audits. On the other hand, the number of auditors is not enough to inspect / examine huge records of corporate and non-corporate businesses to detect all discrepancies.

For example, about 987 corporate and 7,976 non-corporate businesses were selected for audit for the tax period July 2014 to June 2015 under Taxpayers’ Audit Policy 2016.

Furthermore financial and technical resources are too limited to provide periodic trainings to auditors essential for improving capacity of doing examination work in an efficient and skillful manner.

The tax authorities also remain under persistent pressure to report as many assessment orders as possible as a gauge for performances since the criteria used for measuring performance is the number of assessment orders and quantum of tax demand created and not the quality of assessment work.

Consequently, the tax authorities do not always adhere to legal provisions and prescribed procedures, ignoring rulings of the appellate authorities while framing assessment orders.

Published in Dawn, The Business and Finance Weekly, August 28th, 2017

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