The concept of capacity based taxation is not defined in the Sales Tax Act, 1990 whereas it is present in the Federal Excise Act, 2005. To harmonise these two laws, the concept of capacity based taxation has also been introduced in Sales Tax Act, 1990 by insertion of sub-section (1 B) in section 3 thereof.
Sources said that the Board has agreed to the proposal of the industry to collect sales tax/excise duty on capacity basis of the sugar mills. In this regard, a notification is likely to be issued before July 1, 2013. Officials said that sugar industry has always been meted out a preferential and favourable treatment for tax purposes. All goods are chargeable to sales tax or FED at standard rate but sugar is currently chargeable to 8 percent FED. Additionally, local supply of sugar equivalent to the quantity exported is chargeable to Federal Excise Duty at a further reduced rate of 0.5 percent. This special tax treatment results in loss to the exchequer and leads to undue enrichment of sugar manufacturers at the expense of exchequer.
Sources said that sugar industry has intimated that some of the sugar manufacturers are indulged in evasion which distorts the market as well as puts extra burden on fair taxpayers. To arrest the menace of evasion, the FBR placed sugar industry under supervised clearance in February 2013 which positively contributed towards revenue collection. In order to curb this evasion some members of the industry have proposed that tax/duty on sugar may be charged on capacity basis so that all sugar mills are equally taxed with no room available for evasion or leakage of revenue.
In case the proposal of sugar industry appears feasible, the scheme of charging tax/duty on capacity basis can be later on implemented through a notification under section 3(3)(a) of the Federal Excise Act, 2005 which empowers the Board to charge FED on any good on production capacity basis through a notification.