Raw Materials Purchased from Un-regd Person and Used Exclusively in Taxable Supplies

Q: What are the provisions of Sales Tax Law in case raw material is purchased from un-registered person and is exclusively used in taxable supplies?

Ans: If raw material is purchased from an un-registered person, input tax (if any) is not admissible, but output tax is to be charged and paid on such supplies regardless of the fact  whether the supplies are made to a registered person or to a non-registered person.

With respect to the fact that a certain amount of raw materials purchased from unregistered person is wholly used in taxable supplies, it must be noted that this fact does not have any effect on the computation and it cannot be used to reduce the input tax credit.

The ‘purchase/sale ratio’ has been invented and used by some to limit the input tax paid on purchases from registered persons. There is no such ratio in the Sales Tax Act, 1990, or Sales Tax Rules, 2006, and the restriction on input tax in such a way in not intended by the law maker. (I must say it’s a smart idea, though, but without any legal basis.)

The whole concept has been derived from Rule 25 of the Sales Tax Rules, 2006, which relates to allocation/proration of input tax. The said rule says:

-         Input tax paid on raw materials relating wholly to taxable supplies is wholly admissible.

-         Input tax paid on raw materials relating wholly to exempt supplies is not admissible.

-         Input tax paid on raw materials relating to both taxable supplies and exempt supplies (called ‘residual input tax’) is to be apportioned according to the following formula.

Residual input tax credit on taxable supplies

=

Value      of    Taxable    supplies           (Value of Taxable + Exempt Supplies)

×

Residual input tax

Here, the gross value of taxable supplies for the month is to be taken for denominator and numerator (as computation is done on monthly basis) and not the value reduced by any ‘purchase/sale ratio’.

Note that ICAP has examined this point at least twice in Spring 2011 and Autumn 2009 and in its suggested answers has not used any ‘ratio’ to reduce the input tax credit. ICAP suggested answer is correct and in accordance with law and rules of sale tax.

To sum up:

-         Input tax (if any) on purchases from unregistered person is not allowable.

-         Output tax is chargeable on supplies made to registered person, as well as un-registered person.

-         If it is given that a specified amount of raw material is purchased from unregistered person and is used exclusively in taxable supplies, ignore it and don’t use any formula not provided in the law/rules to reduce the input tax credit.

-         Input tax paid on raw materials relating wholly o taxable supplies is wholly admissible as adjustment.

-         Input tax paid on raw material relating to wholly exempt supplies is not admissible.

-         Input tax paid on raw materials relating to both taxable supplies and exempt supplies (called ‘residual input tax’) is to be apportioned according to the aforesaid formula.

Interest-free Loan Used in Property Producing Taxable Income

Q: What is the tax treatment of concessionary/interest-free loan which is used by the employee in acquiring an asset or property producing income chargeable to tax? (Section 13(8) of ITO-2001)

Ans: If concessionary/interest-free loan acquired by employee from employer is used by him in acquiring an asset or property which produces income chargeable to tax under ITO-2001, following provions shall apply:

(1) An amount equal to the bench mark rate in case of interest-free loan and difference of the bench mark rate and the interest charged by employer in case of concessionary loan, shall be charged to tax under the head Salary in accordance with Section 13(7).

(2) The amount of profit on loan equal to the bench mark rate shall be DEEMED to have been PAID by the employee to employer.

(3) Although the employee may not have actually paid any amount to employer on account of the profit on loan, but an amount equal to the bench mark rate is assumed to have been paid to the employer owing to the reason that DEDUCTION for profit on loan equal to the benchmark rate may be allowed to employee under the head in which income arising from the asset/property is charged to tax.

Example: Mr. A is an employee at XYZ Ltd. He has received interest free loan at Rs. 800,000 from his employer and has purchased a car from that loan. The car, being used in rent-a-car, produces income from business at Rs. 350,000. Bechmark rate is 13%.

Solution:

Amount chargeable under Salary   800,000 x 13% = 104,000

Amount chargeable under IFB    350,000
Deduction for profit on loan        104,000
Income under IFB                       246,000

Note: In case the property purchased from loan is land or building and rental income is generated from the said property, then there will be no benefit of the aforesaid provision of law to the employee as no deduction is allowed under Income from Property.      

Gain on Disposal of Immovable Property

Q: An immovable property is sold for Rs. 20 (m). The cost of the said property was Rs. 10 (m). Accumulaed Depreciation is Rs. 1(m). What will be the tax gain?

Ans:

Consideration Recieved   10
WDV (10-1=9)                 09
Tax Gain                          01

According to Section 22(14) if consideration recieved on disposal of an immovable property exceeds the cost of the property, the consideration recieved is to be taken equal to the cost. Due to this provision of law, gain shall always be equal to the depreciation deduction claimed by the taxpayer, the maount of gain over and above the claimed deprecation will not be charged to tax. This provision is designed only to re-coup the amount of depreciation deductions claimed by the taxpayer.

Rent in Kind

Q: If rent for a building is recieved in kind by the owner, will it be taxable under Income from Property?
Ans: Yes, it will taxable at fair market value under the head Income from Property, except when the building is Agricultural Building, in which case rent will be exempt u/s 41 of the ITO-2001.

Sales Tax as Deduction in Computation of Income Tax

Q: Is Sales Tax allowed as Deduction under Income Tax Law?
Ans: No, Sales Tax is not normally allowed as deduction in the computation of Income Tax liabiliy of a person, for the reason that it is not borne by the person but rather is passed on to others i.e. the final  consumers. However, sales tax shall be allowed as deductible expense when it has been borne by the person and not passed on to any other person and is incurred wholly and exclusively for the purpose of businss.

Commissioner Vs. Collector

Q: What is the difference between Commissioner and Collector?
Ans: Both are Grade-20 officers of  the Federal Board of Revenue, but each belonging to a different department of the FBR.  The Commissioner is an officer of Inland Revenue Service (IRS) and is responsible for enforcement of the Income Tax Ordinance, 2001, and Sales Tax Act 1990. The Collector is an officer of Customs Department and is and authority only under Customs Act, 1969. Previously, the Collector was responsible for enforecement of Sale Tax as well, but the said function/task is now performed by the Commossioner. Hence, any reference to 'Collector' in the Sales Tax Act 1990 and Sales Tax Rules 2006 should be read as 'Commissionr'.

Input Tax is Adjustable Even When Paid on Goods Used in Supply to Non-registered Persons

Q: Is Input Tax ajustable if it is paid on purchase of goods that are used in supply to non-registered person?
Ans: Yes, Input Tax will be adjustable in this case for the reason that the supply of goods to a non-registered person is also a taxable supply and Output Tax is required to be charged/paid on the said supplies. Input Tax is not allowed adjustment when it is paid on goods used or to be used in supply other than taxable supply i.e. exempt supply.