Principal amount of sales tax: IR officers cannot impose penalty, levy surcharge

ISLAMABAD: The Inland Revenue officers of the Federal Board of Revenue (FBR) cannot levy penalty and default surcharge alone without first determining the principal amount of sales tax under the Sales Tax Act 1990.

This has been adjudicated in a recent judgement of the Appellate Tribunal Inland Revenue Karachi.

The tribunal has issued judgement in the case number STA No. 362/KB/2018 (Quetta Electricity Supply Company Limited versus Commis-sioner Inland Revenue Zone-I LTO Karachi) and settled the legal point on the charging of penalty and default surcharge that where liability on account of principal amount of tax stands discharged voluntarily prior to initiation of proceedings under section 11(1) of the Sales Tax Act. The Sales Tax Act 990 does not allow recovery and imposition of penalty and default surcharge alone.

The relevant Para of the Tribunal's judgement revealed, "We are of the considered view that the provisions of section 11(1) of the Act do not allow recovery and imposition of penalty and default surcharge alone where the liability on account of principal amount of tax stands discharged voluntarily prior to initiation of proceedings under section 11(1) of the Act.

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If the amount of penalty is considered to be a part of "tax" as used in the provisions, then there was no need for legislature to use words penalty and default surcharge separately and independently. The intention of the legislature is manifestly clear that such registered persons who deposit the due amount of sales tax, the provision of section 11 of the Act are therefore ab-initio not attracted."

Tax expert Yawar Muhammad of Rafaqat Babar & Co. Chartered Accountants told Business Recorder that even when assessment of tax sections of sales tax acts on service of Sindh, Balochistan, Punjab and KPK is read then it can be clearly said that all these Acts do not allow the levying of penalty and default surcharge alone too as principal amount must be determined first and then the penalty and default surcharge can be levied.

But once taxpayer has paid the principal amount voluntarily then the officer has no power to levy penalty and default surcharge alone without the presence of assessment of principal amount.

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Yawar Muhammad referred to section 23 (assessment of tax) of the Sindh sales tax act on services; section 24 (assessment of tax) of Balochistan sales tax act on services; section 24 (assessment of tax) of Punjab sales tax act on services and section 40 (assessment of tax) of the KPK Sales tax act on services.

By reading the relevant sections of provincial sales tax laws, it can be easily inferred that officer has no power to levy penalty and default surcharge without first determining the principal amount and there will be no principal amount once the taxpayer pays it first prior to assessment notice and default surcharge and penalty go in vain, tax expert added.

Copyright Business Recorder, 2021