FBR Tightens Procedure for Issuance of Sales Tax Refunds to Exporters

The Federal Board of Revenue (FBR) has tightened the procedure for the issuance of sales tax refunds to the exporters of five leading sectors of textile, carpets, leather, surgical and sports goods.

Through the sales tax general order 9 of 2023 issued by the FBR on Thursday, the new procedure will be applicable with effect from the sales tax returns filed in March 2023.

After the abolition of the zero-rated tax regime under SRO 1125(l)12011, purchases (whether through imports or domestic supplies) in textile sector were subjected to sales tax @ 17 percent and the inputs consumed in exported goods, thus, became liable to be refunded to the exporters.

In order to facilitate the cash flow requirements of export-oriented sectors, particularly textile exporters, an automated Sales Tax e-Refund System (FASTER) was introduced to process and sanction exporters’ refunds expeditiously.

However, it continued to malfunction on multiple counts producing suboptimal outcomes and was found deficient in effectively analyzing the admissibility of refund in relation to the quantity and quality of inputs claimed by the taxpayers, resulting in allowing a portion of refund relating to such inputs which otherwise were not liable to be allowed either on the basis of excess consumption or otherwise being inadmissible under the law.

These system glitches created problems for exporters in terms of uncertainty and stuck-up liquidity, and for the tax administration in terms of a credibility deficit.

Hence, in order to ensure certainty, transparency and truthfulness in the processing of sales tax refunds across-the-board and issuance of valid and legitimate refunds to the exporting units, and also to safeguard the government revenue, FBR has decided to upgrade the automated system by incorporating benchmarks and input/output ratios which were finalized after due deliberations made with members from Customs authorities, Textile Exporters Association of Pakistan, Hosier Manufacturer Association, IOCO Directorate, Consultants on Textile Sector study and Inland Revenue officers.

Therefore, the Federal Board of Revenue has made the following alterations in the fully automated system-FASTER:

1. Value addition check shall be 15 percent both for exports and local supplies for filing of Annex-H for the current tax period.
2. The total amount of refund paid against the claims filed and processed shall not exceed the lower of the two amounts, namely, the amount of input tax actually consumed in goods as exported/supplied at a zero-rated rate, or 12 percent of the exports.
3. Inadmissible inputs in terms of Section 8 of the Sales Tax Act, 1990 shall not be allowed during the processing of refunds through FASTER.
4. Input tax adjustment shall not be allowed to the manufacturers of these sectors on goods that are not related to their business activity. The negative list of such unrelated goods is annexed.
5. The suppliers who have attained the status of abnormal tax profile or are blacklisted shall not be processed by the automated system FASTER.

In addition to the checks/risk parameters already implemented through FASTER, the following new risk parameters shall be applied in the automated refund processing system:

1. FASTER shall defer proportionate input tax refund against export GD under objection.
2. A logical check shall be enabled in the system to cross-match the date of export GD with the date of purchase invoices.
3. The total amount of refund sanctioned and refund deferred shall not exceed the total amount of the refund claim. The first claim of refund by newly-registered exporters for the first twelve months shall be excluded from FASTER and be processed through STARR / ERS. Refund claims once excluded from FASTER shall not be allowed to roll back. It shall be processed only through STARR / ERS.
4. For refund claims of commercial exporters, the payment of such refund shall be made after the realization of export proceeds.
5. Refunds to the exporters against fixed assets shall not be processed through FASTER and shall be paid after verification of installation/utilization by the field formations
6. Expenses incurred on utilities shall be prorated on the basis of consumption between zero-rated supplies and domestic sales.

The Board shall add or delete or modify the Annexures or conditions/ benchmarks mentioned therein as and when deemed necessary after recommendations of the field formations holding jurisdiction over the export-oriented sectors.