Local sales of raw material: APTMA accuses some assessing officers of flouting rules


The established past practice of the tax department of treating local sales of raw material to exporters as 'exports', falling under presumptive tax regime, is being deviated by some assessing officers who say that concession is available only to supplies of finished goods. Shahid Jami, Tax Consultant of All Pakistan Textile Mills Association (APTMA)  Tuesday that APTMA seeks intervention of FBR so that established past practice is not deviated by the assessing officers.

The proceedings have been initiated by the tax authorities on the basis that sub-section (3) of section 154 of the Income Tax Ordinance, 2001 allows indirect exporters of finished goods only to avail the benefit of final taxation regime; therefore, the suppliers of input/raw material to direct exporters cannot be classified as indirect exporters. Whereas, when contacted, Shahid Jami was of the opinion that view of the assessing officer raising this objection is not only against the letter and spirit of law but is also contrary to rationale of the policymaker to the extent of the Presumptive Tax Regime to indirect exporters.

The relevant section says: "Every banking company shall, at the time of realisation of the proceeds on account of a sale of goods to an exporter under an inland back-to-back letter of credit or any other arrangement as prescribed by the Board, deduct tax from the amount of the proceeds at the rate specified in Division IV of Part III of the First Schedule." The above quoted sub-section provides where a person sells goods to an exporter under an inland back to back letter of credit or any other arrangement as prescribed by the Board, the said sales shall be considered as indirect exports under the Ordinance.

Moreover, the Federal Board of Revenue (FBR), vide Circular no. 24 of 1999 dated 17 September 1999, has prescribed the procedure for issuance of standard purchase order (SPO) and making payment through crossed cheque in order to categorize such local sales as indirect exports chargeable to tax under the section 154 of the Ordinance.

The relevant circular said that at present, tax is deductible from indirect exporters by banks when realizing proceeds of inland back to back letters of credit under which goods have been supplied to the direct exporters. In view of the fact, that the State Bank of Pakistan has, vide its BPRD circular no. 24 dated 28-06-1999 and no. 31 dated 13-08-1999, allowed the direct exporters the option to either establish an inland letter of credit or issue a standard purchase order and make payments by crossed cheques to indirect exporters, the banks may deduct tax at the same rates as may be applicable to direct exporter of the said goods while realizing the payments made through crossed cheques to indirect exporters against such standard purchase orders (in the format prescribed by SBP's aforementioned circular no. 24).

Jami stated that it is important to highlight that the scheme was initially designed by State Bank of Pakistan (SBP) to provide short-term financing facilities to direct exporters through banks for the exports of all manufacturing goods. However, the facility was extended to indirect exporters vide BPRD circular no. 44 dated 17 December 1998. Subsequently, in order to formalize the payment procedure to indirect exporters, the SBP introduced circular no. 24 dated 28 June 1999 which outlined the procedure as to how the direct exporters shall make payments to the indirect exporters for the purchase of input to be used in manufacturing of goods that are meant for export. A format of standardized purchase order (SPO) was prescribed through the same circular. The header of the prescribed format for SPO included "Inputs by the Direct Exporter from Indirect Exporter." Furthermore, it included tables for "Reference of the Firm Export Order/ L/C for which inputs are required" and "Particulars of commodity to be purchased."

It is evident from above that wording and format of the SPO was specifically designed for the purchase of raw material/inputs from indirect exports required by a direct exporter for the production of goods meant for export. "Further, if we read the serial 5 of the SPO, it requires the applicant to fill in the details of export order for which inputs are required."

The above facts reveal that the FBR, vide Circular no. 24 of 1999 dated 17 September 1999, has adopted the same procedure of SBP that the direct exporters have an option to either establish inland letter of credit or issuance of SPO and make payments by crossed cheques to the indirect exporters, the banks may deduct tax at the same rates as may be applicable to direct exporter of the said goods while realizing the payments made through crossed cheques to indirect exporters against such SPO.

Keeping in view the above submissions, it is clear that any sales including raw material/input and finished goods made to the direct exporter through inland back to back letter of credit or through SPO as provided in section 154(3) of the Ordinance and abovementioned circulars shall be considered as indirect exports.

Jami explained that the essential test to determine the status of 'indirect exporter' is that the goods supplied by the indirect exporter have been made parts of exports which can be supplied in finished form for direct exports or raw material/component can be supplied for manufacturing of finished goods exported by the direct exporters. Indirect exporter is one who supplies goods or material used as an input for exports. The condition of supply of finished good is neither mentioned in section 154 (3) nor in FBR circular no. 24 of 1999 and is contrary to the established past practice of the department and the industry as well.

In this backdrop, Jami requested the FBR to issue positive clarification so there is no unnecessary litigation and the rationale of giving benefit to the indirect exporters contributing to exports for earning of valuable foreign exchange is not get defeated due to erroneous understanding of field formation and that too after established past practice of twenty years. As per him, the exact query for clarification is as under:

Whether sub-section 3 of section 154 of the Income Tax Ordinance, 2001 ("the Ordinance") only allows indirect exporters of finished goods to avail the benefit of final taxation regime; or, the suppliers of input/raw material to direct exporters should also be classified as indirect exporters.