Are you looking for major changes made by Finance Act 2021 for Value Added Tax (VAT) and Supplementary Duty (SD)?
In my last article, I have published major changes in income tax by the Finance Act 2021. In that article, all the important issues for corporate taxpayers and individual taxpayers are included.
Today, in this article, I will discuss topics wise major VAT changes in 2021 step by step in a short brief so that you could go through easily.
So, let’s start!
VAT Agent of non-resident
You may know that in existing VAT and SD Act 2012, there is a responsibility of tax liabilities by the VAT agent of non-resident in case of failure to recover from such non-resident. But in Finance Act 2021, this liability has been removed and now shall be liable by the non-resident himself.
VAT Agent of non-resident shall bear all responsibilities and carry out all activities of the non-resident, but for the payment of all dues including taxes, fines, penalties and interest that may be imposed shall be liable by the non-resident.
Advance Tax (AT)
You may know that at import stage, Advance Tax (AT) has to pay at 5% irrespective of registered or not registered. The registered person has the option to adjust the amount paid during the import as adjustment but in other cases shall apply for refund.
The businessman has raised their concern about the high rate at import stage and hence the rate has been reduced by 1% only for the manufacturing industries through Finance Act 2020.
Again, in this year, advance tax has been reduced on imported raw materials for manufacturing industries from existing 4% to 3% but 5% remain unchanged for other cases.
Additionally, exemption of Advance Tax (AT) will enjoy on certain raw materials of iron products, scarp vessel and ethylene glycol, terephthalic acid, ethylene/propylene which are used for manufacturing of PVC and PET resin; and also, AT exemption facility is applicable on thresher machine, power reaper, power tiller, operated seeder, combined harvester, rotary tiller, weeder and winnower.
Input-output coefficient shall make mandatory through VAT and SD Act 2012 which was price declaration in VAT Act 1991. Finance Act 2021 has enacted that input-output coefficient will be applicable only for supply of goods. So, if your organization render any services then it is not applicable for your organization.
Decreasing adjustment by the supplier after the tax withheld at source
If any VAT deducted from registered person by withholding entity against any supply, then the registered person had the option to make a decreasing adjustment in the tax period in which the VAT was deposited to the government treasury or next six tax periods. It was a good time to adjust the deducted amount in Mushak 9.1. The Mushak form 9.1 has also changed. So, know the changes and identify how the changes will impact your organization.
But the Finance Act 2021 reduced this period and now the adjustment shall be claimed in the tax period in which the tax payable on a supply is paid or the following month after such tax period is over and a claim for such adjustment after such period shall be time-barred.
Annual financial statement filing
You know financial statements require to submit during annual corporate tax filing. From now, annual financial statement shall file to VAT authority by the companies.
Limited companies shall mandatorily submit the Annual Financial Statement for the purpose of proper audit within six tax period of the current financial year of the previous year. However, Commissioner may extend the above time period upto six tax period subject to the application by the company with reasonable cause.
Penalty and punishment
The amount and rate of penalty have been reduced by the Finance Act 2021. As per section 85(1), the amount pf penalty was twice for non-compliance or irregularity for not making inclusion of the output tax in the return; irregularities for taking more input tax credit than entitled in the return; irregularity relating to making an increase of a decreasing adjustment or making a decrease of an increasing adjustment in the return and irregularity for willingly evading or attempting to evade assessment and payment of taxes. But now the amount of penalty shall be equal instead of twice.
And also, the interest rate has been reduced for failure to pay tax payable to the Commissioner on or before the due date of payment. As per section 127(1), the person shall be liable to pay an interest at a sample rate of 1% per month instead of 2% on the amount of payable tax from the next day after the payment becomes due to the date of the payment made to the Commissioner.
The area of punishment has been extended through Finance Act 2021. As per section 111(1), whoever dishonestly involve the following activities, shall be punished with imprisonment upto one year or a fine equal to the amount of tax payable or both:
- Makes or uses a fake VAT registration certificate, turnover tax certificate or tax invoice and withholding certificate with forged or false business identification number; or
- Makes or uses a forged or false tax invoice, credit note, debit note, tax invoice and withholding certificate;
- Marketing or uses a forged or false or reuse stamp or bandrol production, preserve, transport or help for similar activities;
- Forged or false or reuse stamp or bandrol Production, storage transport, marketing or selling or help in similar activities;
- Where the use of stamp and bandrol is mandatory but make production, marketing, transport or selling without stamp and bandrol or help in similar activities;
- Evades payment of the payable tax otherwise; or
- Claims a tax refund without such person being entitled to such fund
VAT exemption extended
Each year government provides VAT exemption facilities to encourage the domestic economy. This year, government has extended the existing exemption period for following areas.
- VAT exemption facility for manufacturing of refrigerator, freezer and its compressor has been extended for another one year;
- VAT exemption facility for manufacturing of polypropylene staple fiber has been extended for another two years;
- VAT exemption facility for manufacturing of air conditioner and its compressor has been extended for another three years;
- VAT exemption facility for manufacturing of motor car and motor vehicle has been extended for another five years;
- VAT exemption facility will enjoy by ocean-going vessels not more than 25 years instead of existing 22 years old;
- VAT exemption facility on manufacturing and assembling of mobile phone has been extended for another two years;
- VAT exemption has been extended for another two years on importation of certain raw materials used for production of sanitary napkin and diaper;
- VAT exemption facility will continue at import, manufacturing and trading stage on covid-19 test kit, PPE and vaccine;
- Existing VAT exemption will continue on “Meditation service” to protect mental health.
VAT exemption facility for new areas
In addition to the above existing VAT exemption facilities, following areas will enjoy VAT exemption benefits from financial year 2021-22:
- VAT exemption facility is provided at local production stage in manufacturing of blender, juicer, mixer, grinder, electric kettle, rice cooker, multi cooker, pressure cooker;
- VAT exemption facility is provided at production level in manufacturing of washing machine, microwave oven and electric oven;
- VAT exemption facility is provided on manufacturing of puffed rice and fresh fruit at trading stage;
- VAT exemption facility is provided on local manufacturing of printer, toner cartridge, inkjet cartridge, parts of computer printer, computer, laptop, AIO, desktop, notebook, notepad, tab, keyboard, mouse, barcode/QR scanner, RAM, PCBA/motherboard, power bank, router, network switch, network device/hub, speaker, sound system, ear phone, head phone, SSD/portable SSD, hard disk drive, pen drive, micro SD card, flash memory card, CCTV, monitor (not exceeding 22”), projector, printed circuit board, e-writing pad, USB cable, data cable, digital watch, loaded PCB;
- E-learning and e-book have been included within the scope of Information Technology Enable Services (ITES);
- VAT exemption facility has been provided at manufacturing and trading stages of weeder and winnower;
- VAT exemption facility is provided at local manufacturing stage on the production of sanitary napkin to ensure health protection of women.
- VAT exemption facility provided on autism related services;
Input Tax Credit
The VAT registered person who pays VAT at 15% on input is eligible to get the credit from output VAT. And the input VAT is adjustable during the filing of VAT return. When the Value Added Tax (VAT) and Supplementary Duty (SD) Act 2012 was introduced in 2019, then the adjustment was permissible for the two periods means two months.
Last year, the time limit for the input tax credit has been extended upto 4 tax periods from 2 tax periods. And another facility was, 80% of the expenditure incurred on transportation services is considered as input credit. However, Finance Act 2021 prohibits rebate if the price of any goods or service is less than the price of its raw materials;
A new SRO 240 has been issued on 29 June 2021 which has been enacted from 01 July 2021. And previous SRO 149 has been deleted. So, SRO 240 shall be called as Value Added Tax Deduction and Collection at Source Rules 2021.
As per new SRO 240, VAT rate for furniture manufacturer shall be 7.5% but if manufacturer directly delivers to consumer, then 15% VAT shall be applicable. And in case of furniture selling showroom, VAT at source shall be 7.5% subject to the VAT payment invoice present at manufacturing stage otherwise 15%.
And in another case, the rate of VAT has been reduced. Now AC restaurant will pay VAT at 10% instead of 15% and non-AC restaurant will pay VAT at 5% instead of 7.5%.
There is also a change in case of procurement provider. All persons except registered manufacturer who supplies goods or services to the withholding entity through quotation or tender or work order or by any other means, shall be treated as procurement provider. However, services for which specified definition has been provided shall not be considered as procurement provider.
Reduced VAT Rates under Third Schedule and Supplementary Duty (SD)
Each year reduced VAT rates or specified VAT amount changed and also Supplementary Duty (SD) changed through Finance Act. The changes for VAT rates or specified amount are provided in annexure 01 and 02. The changes of SD rates are provided in annexure 03 and 04. Please see the annexures below. You will also be happy that I have composed full SD Rates Chart FY 2021-22 in this blog.
Please note that the changes made by the Finance Act 2021 are accumulated here, mainly the major areas are covered in a summary basis. So, do not reach any decision based on solely depends on this article without professional advice.
Annexure 01: VAT Imposable Goods
|Heading No.||H. S. Code||Description of Goods||VAT Rate %|
|15.14||Concerned HS Code||Rapeseed oil, Colza seed oil, Canola oil||5%|
|48.22||Concerned HS Code||Paper Cone||5%|
Annexure 02: VAT Imposable Service
|Heading No.||H. S. Code||Description of Goods||VAT Rate %|
|S024||S024.10||Furniture Manufacturer (If manufacturer directly delivers to consumer, then 15% VAT applicable.||7.5%|
|S024||S024.20||Furniture Selling showroom (If VAT payment invoice is present at manufacturing stage at 7.5% rate, otherwise 15%)||7.5%|
Annexure 03: Goods subject to Supplementary Duty at import stage
|Heading No.||H.S. Code||Description of goods||SD Rate (%)|
|02.01 02.02 02.04 02.06 & 02.07||All concerned HS Code||Meat and edible offal of bovine animals, sheep or goats||20%|
|07.06||0706.10.10||Carrots and Turnips, Fresh or Chilled, Wrapped/Canned upto 2.5 kg||20%|
|0706.10.90||Carrots And Turnips, Fresh Or Chilled, in bulk||20%|
|08.01 & 08.01||0802.80.10 & 0802.80.90||Areca Nut||30%|
|17.04||1704.10.90 & 1704.90.90||Sugar confectionery (including white chocolate), not containing cocoa, excluding put up for retail sale||45%|
|25.01||2501.00.91||Denatured salt (colored)||20%|
|27.10||2710.19.22||Recycled lube base oil||20%|
|2710.19.32||Recycled lubricating oil||20%|
|34.01||All concerned HS Code||Soaps and used as soaps sulphate active products and related products||45%|
|34.02||3402.20.00||Preparations put up for retail sale||20%|
|72.14||All H.S Code||Other bars and rods of iron or nonalloy steel, not further worked than forged, hot-rolled, hot-drawn or hotextruded, but including those twisted after rolling. (Except LPG Cylinder Bulb and Bang manufacturer’s raw materials HS Code 7214.99.00 under Carbon steel S20c/SAE 1020 (42mmRD) in import stage||45%|
|87.03||Motor car and other motor vehicle, including station wagon|
|Concerned HS Code||(Cha) Cylinder Capacity up to 1800 cc microbus||20%|
|Concerned HS Code||(Chaa) Cylinder Capacity up to 1801-2500 cc microbus||45%|
|Fully manufactured hybrid motor car and other motor vehicle including station wagon|
|Concerned HS Code||(Ga) Cylinder Capacity from 2501 to 3000 cc||60%|
|Concerned HS Code||(Cha) Cylinder Capacity up to 1800 cc microbus||0%|
|Concerned HS Code||(Chaa) Cylinder Capacity up to 1801-2000 cc microbus||30%|
|Concerned HS Code||(Ja) Cylinder Capacity 2000cc or more microbus||45%|
|87.11||Concerned HS Code Except 8711.20.32 & 8711.20.42||Motorcycles, in CBU with four-stroke engine||60%|
|Motorcycles, in CKD with four-stroke engine||20%|
|95.05||9505.90.00||Carnival or other entertainment articles||20%|
Annexure 04: Supplementary duty imposable services at supply stage
|Heading No||Service code||Services||SD Rate (%)|
|69.10||All concerned HS Code||Ceram Silk. Basin, Pedestal Basin, Commode or its parts or other bathroom fittings and fixtures (except long pan)||10|
|All concerned HS Code||Ceramic Bathtub and Jacuzzi, Shower, Shower Tray||30|