TAX FRAUDThe Finance Act 2004 introduced an amendment in clause 37 of section 2 of the Sales Tax Act 1990 (the Act) whereby the supply of taxable goods without registration with the department was treated as 'tax fraud' on the part of the supplier. Simultaneously by virtue of the Sales Tax Rules 2004, the government came up with the concept of making centralised registration process, on the pattern of the National tax Number. This was done by creating Local Registration Offices (LRO) at the regional level and the Central Registration Offices (CRO) at the Central Board of Revenue (the Board).
The newly adopted system has completely failed to address taxpayers' hassles. The procedure of getting registration has now become even more difficult because of the lack of co-ordination between the LRO and the CRO, enhanced interference of the bureaucracy at both the centre and region, ineffective system of verification of taxpayers' credentials, etc.
The newly amended version of 'tax fraud' has, thus, added to the taxpayers' miseries. With all the hassles involved in registration, a genuine businessman has no alternative other than to stop his business till the time he is awarded his sales tax registration number along with the certificate. On the contrary the supply of taxable goods without getting actually registered could penalise him with the most serious offence of Tax Fraud under the Act.
In this scenario, it is proposed that the wordings of the proposed amendment be modified to "making of taxable supply without applying for registration". It is further recommended that the department may complete its routine verification of the applicant's identity but once the verification is completed, he may be awarded registration from the day he filed his application for registration. This is expected to save thousands of applicants from departmental harassment and penal provision applicable to Tax Fraud.
DELAYED REFUNDS By virtue of section 67 of the Act, in cases where due tax refunds are not awarded to taxpayers on time, the exchequer is bound to pay a compensation @ 6% alongwith the principal sum to the registered person.
This has created inconsistency and disparity between section 34 and section 67 of the Act. In accordance with section 34, a registered person is penalised for additional tax @12% p.a if he fails to pay off the tax liability on time. On the other hand, failure of the department to pay off the due tax refunds costs it only 6% p.a.
It is a known fact that the Department has seldom paid the surcharge admissible under Section 67 of the Act even when the genuine refunds were delayed in contravention of the provisions of Section 66 of the Act and Sales Tax Refund Rules. Keeping in view the disparity apparent in the Law, it is proposed that the rate of additional tax under Section 34 of the Act should be brought down to 6% per annum (ie 0.5% per month) in accordance with the rate applicable under Section 67 of the Act.
This would facilitate the taxpayers who were always deprived of the benefit admissible to them under Section 67 of the Act.
APPEAL TO COLLECTOR: The much debated and controversial mandatory payment of 15% of alleged liability before preferring appeals, which was required under the Income Tax Ordinance 2001, had been done away with in the Finance Act, 2004. However, the corresponding provision, as contained in section 45B(4) of the Act, is still very much intact and applicable.
It is imperative that, in order to streamline the fiscal laws and to provide cheap and speedy justice, the condition of mandatory payment of 15% in section 45B should be withdrawn forthwith.
ALTERNATE DISPUTE RESOLUTION: The government has shown substantial efforts during the year 2004-2005 to avoid unnecessary litigation and reduce frivolous departmental appeals lying at various adjudicating forums.
In this respect, the government had come up with the scheme of resolving the disputes between the department and the taxpayers through the Alternate Dispute Resolution Committee (ADRC) comprising of departmental representatives and nominees from the private sector.
In this connection, section 47A was inserted in the Finance Bill 2003. However, the mechanism of ADRC still suffers from certain basic drawbacks which are vital to be removed to make this idea popular and a success among the taxpayers.
a) The entire design of the ADRC scheme is too centralised. The taxpayer willing to prefer his case under section 47A is bound to submit his application to the Chairman of the Board. The Board is empowered to accept or reject the application before even referring to the ADRC.
To make the concept of ARDC more effective and acceptable, it is necessary to set up Regional ADRCs so that all classes of registered person may avail benefit of this scheme. This would also decentralise the mechanism thereby resulting in deeper taxpayers' confidence in the system.
b) Under the present structure of the ADRC, the application sent by the taxpayer to the Chairman is sent back by the Board to the concerned Collectorate for its comments and assent. The Collectorate is asked to advice whether the constitution of an ADRC in the particular case is justified and necessary. In case the department agrees with the application (the possibility of which is very remote), an ADRC is constituted amongst the panel.
On the contrary, the case is sent back to the taxpayer without any further debate or hearing.
It is proposed that the law may be suitably amended to remove this anomaly. The Board should nominate a member from the private sector to be the Administrative Chairman of the ADRC at each Regional Collectorate. The application forwarded by the taxpayer should be addressed to such a Chairman who would set up an ADRC amongst the notified panel of members.
There should be no point in referring the case to the respective tax department with whom a dispute is referred to the forum under section 47A.
c) In terms of section 47A, a right of appeal to the applicant is being provided in case he remains aggrieved with the decision of the Board based on findings of the ADRC. Such an appeal is to be filed within 60 days after the receipt of the relevant orders by the Board.
Such a proposition has created confusion and a conflict with the existing provisions of law. To illustrate one such area, suppose a person is served with a show cause notice under section 11 or 36 by the Collectorate of the Sales Tax (Adjudication) and eventually the case is decided against him. According to section 46, he has 60 days to prefer an appeal with the Customs, Excise & Sales Tax Appellate Tribunal (CESTAT), starting from the date of receipt of such orders.
Suppose, under the new scenario, after the receipt of appealable orders he moves his case to the ADRC and it meets the same fate after consuming 30 days. It is here that the potential problem lies.
If the situation is viewed in terms of section 46, the applicant has only 30 days at his disposal to file an appeal before CESTAT since 30 days have already been consumed by the ADRC. On the contrary, a perusal of section 47A would still give him a time of 60 days for further exhausting the appeal forums under the Act.
It is, therefore, pertinent that the provision of section 46 be suitably amended to provide for cases decided by the ADRC, which have otherwise become time-barred.
d) As earlier discussed above, the Board is empowered to constitute an ADRC in any specific case or to reject the setting up of a committee. In cases where the taxpayer loses his case before the departmental appellate forums, he can prefer an appeal within 60 days before the CESTAT. If suppose, at this stage he decides to approach the ADRC for the resolution of any matter, this obviously would mean he has deferred his right of appeal at the CESTAT.
This taxpayer would be at a complete loss if the Board consumes more than 60 days for processing his petition and finally rejects the same without referring the case to the ADRC. Hence, it is proposed that suitable amendments be made in section 46 of the Act so that the taxpayer, whose application for the constitution of committee was turned down by the Board after 60 days of the issuance of orders by the departmental appellate forums, is not affected by the limitation of time of the preferring of appeal before the Tribunal.
CERTAIN TRANSACTIONS NOT ADMISSIBLE: Section 73 is proposed to be amended to cater to the following practical eventualities surrounding businesses:
a) Sub section 1 of section 73 states that payment of the amount for a transaction exceeding the value of Rs 50,000 would be disallowed if not routed through a banking channel. It also states that the banking instrument should show the transfer of the amount of the sales tax invoice by the buyer to the supplier's business bank account.
The term 'value of supply' as envisaged in section 2(46) of the Act is money consideration excluding sales tax. By this virtue, the value of Rs 50,000 apparently means exclusive of tax. However, the amount of sales tax invoice would obviously mean the final price of goods, including the incidence of tax.
In other words, on the one hand the law binds payment (without sales tax) to be routed through the banking channel; on the other hand, such banking channels are required to show the transfer of money (including sales tax).
It is proposed that that the provision of section 73(1) may be revisited to make the wordings consistent and harmonised.
b) The law binds both the buyers and sellers to notify their business bank accounts to the Collectorate. If this is not done, buyers have been threatened to be denied relevant tax credits. The suppliers have been asked to deposit the consideration received in his declared business bank account failing which they would be penalised in a similar fashion.
A question arises as to whether a payment received by the seller made from the undeclared business bank account of the buyer could also hit the supplier. Strictly speaking, this should never happen and is also not provided by the wordings of the law. However, necessary clarification is requested from the Board over the issue before the auditors raise audit observations to the registered persons.
c) The provision of section 73 fails to address cases where the payments are knocked off through the contra book entries between the buyer and seller. In this era of highly mechanised corporate environment, it is imminent that taxations laws should also cater to the accounting doctrines practised commonly in the country.
d) Similarly, the law is silent about situations involving more than 2 parties in a transaction and payments are made by creditors or guarantors of the buyer on his behalf.
e) Unlike similar provisions in the VAT laws of the UK, the sales tax law in Pakistan does not address the issue where debt becomes bad or doubtful for the supplier.
f) The very condition of mandatory payment within 180 days is highly illogical, unwarranted and inconsistent with the remaining provisions of the Act. In accordance with section 2(44), a supplier pays the due tax at the earlier of the time of delivery of goods or the time of receipt of money. This tax becomes the input for the buyer who claims it in his tax return.
Since the tax attributed to the transaction is paid off by the supplier, the matter of settlement of credit remains very much between the parties thereto. In other words, settlement and the period of credit allowed are highly commercial matters which are and should always be decided by the buyer and sellers. Hence, it is proposed that the mandatory credit limit of 180 days be omitted from the law as it fails to serve any purpose besides making compliance difficult and impractical for the taxpayer.
PAYMENT OF SALES TAX BY COMMERCIAL IMPORTERS ON VALUE ADDITION: The Special Procedure provides persons registered exclusively as commercial importers to pay sales tax on a value addition of minimum 10%. However, taxpayers not exclusively registered as 'commercial importers' and importing fixed assets or plant for their own use and not for commercial purposes are also subject to this sword.
Hence, it is proposed that necessary amendments be made in the rules so that only persons importing taxable goods for trading purposes are made subjected to the special procedure.
TAX CREDIT NOT ALLOWED: In pursuance of clause (e) of section 8(1) purchases made by a registered person shall not be eligible for relevant tax credit if he fails to furnish the information required through a notification of section 26 (5) of the Act. By virtue of section 26(5) of the Act, read with SRO 508 (I)/2004, textile manufacturers are required to furnish details of their buyers and suppliers to the Collectorate along with their monthly tax returns.
The apparent intent of the legislature in section 26(5) is to broaden the tax net and bring the undocumented economy into documentation. However, as a first step, instead of the harsh conditions of denying tax credits to suppliers, in case they fail to submit the desired information, it is proposed that the provision be reworded to deny input tax if the registered person, without reasonable excuse, fails to furnish such information to the department.
This would prove to be beneficial to those registered persons who, due to any genuine reasons, fail to gather and submit details of their buyers and suppliers on time. With this slight modification of the provision, genuinely registered persons would not be denied their legitimate input tax credits.
DEFINITION OF INPUT TAX: The law should admit no ambiguity about the principle that the incidence of tax is on the ultimate consumer and that the input is what adds directly or indirectly to the value of goods offered for sale.
It is, therefore, proposed that in order to set the controversy at rest, the term 'input' may be redefined in the Act in accordance with the International Accounting Standards.
This proposed new definition is also expected to put an end to a major debate regarding section 8(1)(a) of the Act as to what inputs fall under the mischief of inadmissible credits.
(To be concluded)
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