Faulty tax rules bar local steelmakers from Gwadar projects

ISLAMABAD: Pakistan’s local industry remains unable to supply steel to Chinese companies for the construction of various projects in Gwadar under much-hyped China Pakistan Economic Corridor (CPEC), including a free zone, an airport, and others, mainly as a result of flawed sales tax rules.

Special Assistant to PM on CPEC Khalid Mansoor brought this issue to the notice of relevant authorities but it remains unresolved so far.

Pakistan Association of Large Steel Producers (PALSP) approached authorities including FBR and recorded the industry’s concerns regarding the Sales Tax Rules, 2006 and Chapter IV - Apportionment of Input Sales Tax, sub rule (1) and sub-rule (2).

According to the sub rule (1) of Chapter IV, the Sales Tax Rules totally disallow adjustment of sales paid at the input stage against any other supply.

Also, the sub-rule 2 of Chapter IV says the manufacturer shall not be entitled to adjust the input sales to the extent of exempted sales tax amount under this law, in any other supplies, which not only runs counter to the law, but was also unwarranted.

In a letter written to Chairman FBR Dr Mohammad Ashfaque the local steel industry representatives said they were well aware of the Sales Tax Rules, 2006 and Chapter IV - Apportionment of Input Sales Tax.

“However, we are quite concerned on the Chapter IV sub rule (1) of the Sales Tax Rules, 2006. We consider this rule as contrary to the law and also it is highly unfriendly to the industry, which pays sales tax on their raw materials whether local or imported,” the steel industry officials wrote in the letter.

“The sub rule 2 of Chapter IV, which says manufacturer shall not be entitled to adjust the input sales to the extent of exempted sales tax amount under this law, in any other supplies, is contrary to the law as well as unjustified.”

They said their point of concern was what kind of exemption was it that aimed at punishing the manufacturer and benefiting the buyer only.

“The sales tax input amount equal to exempted amount is dis-allowed under this Rule then from whom will the manufacturer recover this amount of sales tax paid? Why should the manufacturer be punished for any tax exemption that the government intends to extend to any class of tax payers?”

They strongly recommend revision of the law questioning why was a manufacturer being punished and restrained from the right of adjustment and recovery of sales tax amount paid to benefit a buyer whom the government wanted to oblige.

“We request you to look into the matter and make it a workable law in which manufacturers ae not deprived of their right of adjustment of sales tax paid amounts on raw materials and other Inputs.”

Practically, sales tax input amount, equal to exempted amount, was disallowed under this rule and as a result, the manufacture had no way to recover the amount of sales tax paid, the PALSP said adding that such rules must be rectified.

The government gives exemptions to Special Economic Zones (SEZs), Gwadar Projects Under CPEC, Export Processing Zones (EPZs) and other Big Government Projects with the intension to facilitate domestic industry for supplying world class materials available in surplus in the country. The added benefits are job creation, expansion of domestic industry’s capacity, and more investment.

But on ground the reality is totally different. The contractors of the Gwadar Free Zones are not engaging the local steel industry instead they are importing materials. They are completely ignoring local Industry that has ample capacity for producing world-class steel. Steelmakers believe import of finished materials for the exempted mega projects was extremely detrimental to the local Industry.

PALSP, in the end of their letter, pleaded with the government to revise the rules in the favour of local industry to boost economy.