Taxation

All set to grant exemption of multi-billion rupees in taxes to erstwhile Fata, Pata

The government is all set to grant exemption of multi-billion rupees in federal taxes to erstwhile FATA and PATA sans consultation with existing industry in KP, well informed sources in FBR told Business Recorder.

Giving the background, the sources said after the passage of 25th Amendment to the Constitution and consequent merger of Federally Administered Tribal Areas (FATA) and Provincially Administered Tribal Areas (PATA) in the provinces of Khyber Pakhtunkhwa and Balochistan, all the four major Federal tax laws i.e. Customs Act, 1969, Sales Tax Act, 1990, Federal Excise Act, 2005 and Income Tax Ordinance 2001 stand extended to erstwhile FATA/PATA.

However, keeping in view the peculiar nature, geography as well as economic backwardness of erstwhile FATA/PATA, a phased approach for enforcement of Federal tax laws was necessitated and in pursuance thereof Revenue Division moved a summary for ECC of the Cabinet tax exemptions, approved by ECC on May 31, 2018 and subsequently ratified by the Federal Government. The corresponding notifications, however, could not be issued on the verbal directions of Senate Standing Committee on Finance, Revenue and Economic Affairs as the issue of taxation was pending on its agenda.

Later, a committee was constituted by the Prime Minister under the chairmanship of Federal Minister for Law and Justice to facilitate the post-merger issues of FATA/PATA including improvements in tax exemption regime. In the light of recommendations of the committee, a set of proposals has been forwarded by Federal Minister for Law and Justice which includes granting exemption from sales tax on supply of electricity to two steel re-rolling mills in Malakand District and 5 mills in Dargai. However as per Board’s information, there is no steel re-rolling mill in Malakand District. In fact, there are tire steel melting units, composite units of steel melting and re-rolling in Malakand District.

“There are steel melting units in Barn. Therefore, exemption from sales tax has to be provided to existing steel industry as a whole in addition to ghee industry in erstwhile FATA/PATA,” the sources added.

The earlier exemptions from dunes and taxes for erstwhile FATA/PATA were approved by the ECC, the powers to notify exemptions rested with the Board with the approval of Federal Minister-in-charge but pursuant to approval of ECC of the Cabinet.

According to FBR, corresponding notifications have not been issued in compliance with verbal directions of Senate Standing Committee on Finance, Revenue, Economics Affairs and Narcotics Control. The powers to grant exemptions from duties and taxes have been delegated to the Federal Government with effect from July 1, 2018, which implies that approval of the Federal Cabinet has also to be solicited in respect of already approved exemption by ECC of the Cabinet. Keeping in view the recommendations of the Federal Minister for Law and Justice, the following exemptions are proposed for consideration by the Federal Cabinet to be provided to erstwhile FATA/PATA: (i) non customs paid vehicles may be allowed to be used in erstwhile FATA/PATA for a period of five years ending on June 30, 2023. However these vehicles may be seized if they cross over to other areas of Pakistan; (ii) on the expiry of five years, the vehicles may be surrendered and an option may be given to residents of the newly merged areas wherein the vehicles may be regularized on payment of leviable duty, taxes along with surcharge provided that the local administration of pre merger tribal areas has verified/authenticated the number of such vehicles along with the details of make, model chassis number and to the custom authorities by the September 30, 2018; (iii) Federal Excise Duty shall replace the erstwhile Central Excise Act 1944 and be applicable in its entirety in the erstwhile FATA and PATA; (iv) exemption from sales tax on supply of electricity to domestic, commercial and industrial consumers of erstwhile FATA/PATA may be provided upto June 30, 2023. Exemption from electricity may, however, be provided only to those industrial consumers who have set up industries prior to May 31, 2018 and industrial production has been started by the said date; (v) exemption from sales tax may also be granted to retailers to facilitate the general consumers; (vi) exemption of income tax on profits and gains of existing businesses conducted by individuals, association of persons and companies in the erstwhile FATA and PATA, may be provided for a period of five years till June 30, 2023 provided that existing business set-ups have registered themselves with field offices of FBR by September 30, 2018. Exemption may be granted only to those association of persons and companies which have their registered offices in erstwhile FATA/PATA;( vii) exemption from all withholding taxes may also be granted, if the payer and the recipient are residents of the territories constituting the erstwhile FATA/PATA, even if the payer resides outside FATA/PATA; (viii) any person seeking to set up a new industrial undertaking may also be granted exemption from Income Tax subject to prior approval of the Federal Cabinet; and (ix) exemption from sales tax may be provided on goods produced and supplied by industrial units set up in erstwhile FATA/PATA prior to May 31, 2018 and industrial production and supplies have been commenced from the said date. Exemption may be provided till June 30, 2023.

FBR maintained that the exemptions/concessions will have negative revenue impact of approximately Rs 20 billion per annum. However, additional concessions/exemptions including exemption from sales tax on supply of electricity to industrial and commercial consumers, exemption from income tax on profits and gains of AOPs and companies, exemption from withholding tax on payment of salaries and exemption from sales tax to industrial units are being proposed.

The sources quoted Chairperson FBR Rukhsana Yasmeen as saying that caretaker government must keep in mind protests from rest of industry in Khyber Pakhtunkhwa, as pointed out by Federal Minister for Law and Justice before approving the proposed exemptions.

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