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FBR-PRA joint body to settle toll manufacturing sales tax issue

Updated March 23, 2019

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Many factory owners have filed cases against provincial tax collector to avoid double taxation. — Reuters/File
Many factory owners have filed cases against provincial tax collector to avoid double taxation. — Reuters/File

LAHORE: The Federal Board of Revenue (FBR) and the Punjab Revenue Authority (PRA) have finally agreed to constitute a joint committee for settling their longstanding dispute over who should collect sales tax from toll manufacturers who add value to product(s) for others.

Squeezed between the two tax administrators, many factory owners have filed cases against the provincial tax collector in the courts to avoid double taxation.

The dispute arises out of different interpretation or definition of toll manufacturing employed by the FBR and PRA to suit their interests. For example, the FBR considers toll manufacturing a ‘goods producing activity’ and collects sales tax (on goods) from the manufacturers under the federal Sales Tax Act, 1990 that deals with tax on sale, import, export, production, manufacturing and consumption of goods.

The PRA, on the other hand, classifies the same activity as a ‘service’ and has issued show-cause notices to scores of factory owners for not “withholding and paying 16 per cent provincial sales tax on toll manufacturing” in spite of a clarification by the FBR in January 2016 that it was not a service.

“We have received a letter from the FBR for naming our representatives on the proposed joint committee to discuss the issue (and determine who – the federal government or the province – actually has a legal claim on sales tax collection on toll manufacturing),” PRA Chairman Javed Ahmed told Dawn.

Manufacturers say the PRA has long been trying to extend its jurisdiction on areas such as toll manufacturing that are being treated by the FBR as its territory for charging federal sales tax from the industry.

“The authority has in the last two years issued show-cause notices to a large number of manufacturers across the province, raising tax demands to the tune of several hundred millions of rupees against each firm. This is despite the fact we are engaged in supply of goods and not services, and regularly paying sales tax on toll manufacturing to the FBR,” former Pakistan Hosiery Manufacturers Association (PHMA) chairman and leading knitwear exporter, MI Khurram, told Dawn.

Like the FBR, the manufacturers also insist that toll manufacturing is not a service as they are adding value to goods to be sold in the domestic or foreign markets, and thus the provincial sales tax law does not apply on them.

“The PRA demand to the extent of withholding (sales tax) on toll manufacturing is an encroachment on the power of federal legislature. When we are paying tax to the federal government how can the province also charge it from us? Besides, the constitution says the federal statuettes override provincial law to the extent of repugnancy or inconsistency,” he explained.

The dispute between the FBR and the PRA on toll manufacturing isn’t the only issue adding to the cost of doing business for manufacturers, especially exporters, in Punjab. The PRA is also claiming from them tax on the ‘foreign commission’ exporters pay outside the country and services like insurance they buy from a company based outside Punjab.

“When we buy a service from out of Punjab, say from a firm registered in Karachi with the Sindh Board of Revenue (SBR), the service provider charges us 13 per cent sales tax on service. But then enters the PRA demanding we pay it 16pc sales tax because we are located within its jurisdiction,” Mr Khurram said. “Consequently, the manufacturers-cum-exporters are forced to hire lawyers to file cases to avoid double taxation, which adds heavily to our costs.”

The PRA chief admits the existence of the problem, but says Punjab had taken an initiative with the help of other provinces to address this issue as early as possible.

Published in Dawn, March 23rd, 2019