LAHORE, May 23: The objection by the tax authorities on the “admissibility of whole input tax adjustment in respect of sugar cleared at a reduced rate of 8 per cent” since August 2009 would put an additional financial burden of Rs1.2 billion or more on the mills across the country.

The belated objection, according to the industry, has been raised on the ground that the Sales Tax Act 1990 does not allow input tax adjustment on “exempt supplies”.

“The Federal Board of Revenue (FBR) has hurriedly and without considering the actual policy background of the issue confirmed the historically and legally wrong viewpoint of the LTU, Lahore,” says a representation sent by Javed Kayani, chairman of the Pakistan Sugar Mills Association (PSMA), to Finance Minister Abdul Hafeez Shaikh on Wednesday.

The copies of the representation have also been sent to President Asif Zardari and FBR Chairman Mumtaz Haider Rizvi.

The PSMA has urged the minister to personally intervene in the matter and advise the FBR to withdraw the objection.

“However, if you (the minister) are of the view that in future, the (sugar) industry should not take the whole input tax adjustment, which is less than 3 per cent of the output tax, necessary amendment in the law may be introduced for future application. The industry will adjust the change in its prices accordingly and pass on the additional tax burden to the consumers,” it says.

The representation argues that the government had from 2006 to mid 2009 fixed the assessable price of sugar for sales tax purposes to give a consumer welfare-based GST treatment. The assessable value was periodically reviewed and re-fixed from time to time with appropriate reductions to accommodate inflationary hikes and tax rate increases.

But immediately after the budget 2009-10, the ceiling or capping over tax incidence through price fixation was discontinued and as an alternative measure, the tax rate was reduced by 50 percent from 16 per cent to 18 per cent.

Still in the budget 2011-12, the duality of sales tax rate on local supplies and imports of sugar (which were chargeable to sales tax at standard rate of 16 percent) was considered discriminatory and out of accord with WTO obligations.

In order to overcome such policy aberration, the government exempted sugar from sales tax and levied Federal Excise Duty at 8 per cent on both local supply and imports, creating a fiscal equity between local production and import substitute. However, FED was made chargeable in GST mode.

It argues that when the government took decision to stabilise sugar prices and to benefit the low income consumers by reducing GST incidence, no condition whatsoever was attached with the decision, which means rest of the GST system was to operate in a normal manner for sugar industry.

“Thus, we are of the firm belief that the FBR has taken a mistaken view in the matter. Input-output tax ratio in sugar industry is that under no circumstances, the input tax component constitutes more than 3 per cent of the output tax.

The LTU Lahore and other Inland Revenue field offices are declining 50 per cent of input tax adjustment. Even on 50 per cent sales tax rate, sugar industry has annually been contributing almost Rs24 billion towards national exchequer.

The issue of inadmissibly of input tax adjustment commensurate with the 50 per cent of standard tax rate was consciously ignored in 2009 (and even prior to that) and no restriction or condition to this affect was incorporated in the notification because through fixing of price or application of reduced rate, the taxability of supply of sugar was not impacted. Supply of sugar was neither treated as exempt nor as non-taxable. Only reduced rate of 8 per cent was applied.

Further, during 2009 the question of disallowing 50 per cent input tax adjustment was not raised primarily because component of input tax in sugar industry is always on lower side and the government as a matter of policy agreed to forego the issue of restricting input tax adjustment as the purpose of applying reduced rate was to stabilise sugar prices and to facilitate the poor segments of society.