The Federal Board of Revenue (FBR) is set to file a reference with the Law and Justice Division to clarify the legality of SRO 706 (I)/2010, which exempted input tax on agricultural tractors for manufacturers through refunds, according to a news report. Â
FBR Member Inland Revenue (Operations) Dr. Hamid Ateeq Sarwar informed the Public Accounts Committee (PAC) on Friday that the SRO was issued to prevent price hikes for tractors at that time.
However, to resolve any ambiguity surrounding the exemption, both the FBR and the Auditor General of Pakistan (AGP) have decided to seek clarification from the Law and Justice Division regarding whether this SRO was issued legally.
The issue came up during a PAC meeting when AGP officials directed the FBR to provide an update on a demand of Rs18 billion raised against a tractor manufacturer, which was the result of an internal audit by the Federal Tax Ombudsman (FTO). The AGP also questioned whether farmers benefited from the tax exemption granted under SRO 706 (I)/2010.
The AGP’s audit brief indicated a potential conflict with the law, as tractors were exempted from sales tax under Section 13(1) and the Sixth Schedule of the Sales Tax Act, 1990. However, SRO 706 (I)/2010, issued under Section 13(2), turned the supply of tractors into zero-rated goods, which conflicted with the tax-exempt status provided in the law. This resulted in the refund of input tax, causing a loss of Rs7.07 billion in government revenue for one manufacturer alone.
The LTU, Lahore, explained that the refund was allowed according to FBR’s existing rules, but the AGP pointed out that FBR officers should have adhered to the provisions of the Sales Tax Act in the public interest, instead of simply following FBR instructions.
The audit also revealed that a special excise duty (SED) refund of Rs242.8 million was allowed to Millat Tractors (Pvt) Ltd from July 2007 to May 2011. The AGP contested that Section 16(2) of the Federal Excise Act does not allow for retrospective duty exemptions, making the SED refund unlawful. The tractor manufacturers were also accused of passing on the SED cost to consumers, effectively benefiting from both higher prices and the refund.
The FBR has issued a recovery notice to Millat Tractors Ltd for the sales tax amount of Rs1.84 million, and the matter is under further review. The PAC has directed FBR to expedite the recovery, justify the issuance of conflicting SROs, and submit them for parliamentary approval. Additionally, the committee has called for a fact-finding inquiry into the issue, following the internal audit of the tractor company and the subsequent Rs18.7 billion demand raised by the FTO.
