A uniform rate of 5 percent withholding tax on imports made by industrial and commercial importers has created a distortion in the edible oil sector, which may be removed by the Federal Board of Revenue (FBR) through issuance of an income tax circular or notification.
Tax experts told Business Recorder here on Wednesday that the industrial importers of edible oil are now liable to pay 5 percent minimum tax on the import of edible oil. Prior to issuance of SRO 140(I)/2013, industrial importers were paying 3 percent withholding tax as ‘minimum tax’. ‘Minimum Mode’ is still intact whereas the withholding tax has been enhanced from 3 to 5 percent.
An option has been provided to commercial importer to be taxed on net income basis over & above 60 percent along with certain conditions as explained in income tax circular number 02 of 2012. Prior to such amendment through Finance Act 2012, commercial imports of edible oil were in presumptive tax regime and tax collected or deducted at import stage was treated as a final tax liability.
Although vide SRO 140(I)/2013 dated February 26, 2013, FBR has removed discrimination among industrial and commercial imports, but a major distortion has been witnessed in edible oil sector, which was earlier governed by edible oil specific sub-section (8) of Section 148, Income Tax Ordinance, 2001.
The edible oil industry in its communication to Ministry of Finance and FBR stated that vide SRO 140(I)/2013 dated 26th February, 2013 clause (9A), Second Schedule of Income Tax Ordinance, 2001 has been omitted, thereby meaning that industrial concern shall be charged with income tax @ 5% in ‘Minimum Mode’ on import under edible oil specific sub section (8) of section 148 of said ordinance.
However through Finance Act, 2012 Clause (41A) has been inserted in Part IV of the second schedule, wherein commercial imports of edible oil under sub-section (7) of section 148 have been provided an option to be taxed on net income basis, after fulfilling certain conditions. The explanation/clarification of the option was rendered by FBR through Income Tax Circular No 02 of 2012, bearing C. No ITP/B-2012-13-EC dated 27th July, 2012.
The scenario developed after the issuance of S.R.O 140 has incentivised the commercial imports and putting industry at disadvantage, which is against the national policy of promoting industrial activities in Pakistan, sources said.
The association said that the industrial concern is extremely vulnerable during the import, transportation, production and marketing/sale activities as against only import course of any commercial importer. Contrary to this margins of commercial importers are relatively high and lucrative when compared to industry. The concerned ghee and cooking oil industry has already informed the FBR that even income tax @ 3 percent is very high, since it translates up to 80% of their income as against 35 percent tax on the net income. Now after the raise of another 2 percent, the levied income tax would become even more than the actual net income.
Tax experts opined that FBR holds an inbuilt power to rectify technically created distortion through fresh Income Tax circular or even issuance of edible oil specific notification. They quoted the example of levying of edible oil specific FED in value addition mode on edible oil vides notification no. SRO 24(I)/2006.
When contacted, industry sources said that the current distortion, if continues, till the budget 2013-14 will cause irreparable damage to vegetable ghee/cooking oil industry and escalation of price by Rs 2-3 per kg, which shall be borne by end consumers. In this regard the revenue of national exchequer may receive additional Rs 2-3 billion, since in any quarter of calendar year the national consumption of ghee/cooking oil hovers around 800,000 metric tons, out of which 80% is produced from imported edible oil and oil seeds.
The distortion in applicable rate of WHT at import stage of edible oil also attracts the involvement of Competition Commission of Pakistan (CCP) as well, given that import of identical product (edible oil) by industrial and commercial entities with dissimilar rate of taxation defeats the legislation of competition regime in Pakistan, hence anti-competitive in nature and appears to be null and void as per stipulations of Competition Act, 2010, they added.