In compliance with the much-talked about directives of the International Monetary Fund (IMF) and the World Bank, the President has promulgated the Finance [Amendment] Ordinance 2009, which has come into force at one.
One of the rationales of this Ordinance, as explained in the World Bank's recently published Pakistan Economic Update 2009, is to harmonise the three federal tax laws, ie, Income Tax, Sales Tax and Federal Excise Duty and to remove 'distortions and overlapping' therein.
In its report, the World Bank asked the government to harmonise the three taxes through an ordinance, as according to the World Bank, "tabling them in parliament would be time consuming and may bring undesired consequences". In this backdrop, one may imagine the state of helplessness and weakness of the present government in policymaking, let alone the role of the apex tax regulator - the Federal Board of Revenue.
In a bid to integrate the legal framework of all federal taxes, the Ordinance has made certain vital changes in the Income Tax Ordinance 2001, Sales Tax Act 1990 and Federal Excise Act 2005. Consequently, the service group of income tax has been merged with sales tax and excise and renamed as the Inland Revenue Service (IRS). The other service group would be the Pakistan Customs, exclusively dealing with Customs matters.
The haste in the promulgation of the Ordinance could be judged from the fact that even the high officials of the Federal Board of Revenue have not been officially notified about their changed role and responsibilities under the IRS.
No roadmap has been prescribed for the transition phase, especially for the Commissioners/Collectors who have ceased to hold their respective offices and accordingly been renamed as Commissioners Inland Revenue Service, responsible for handling income tax and sales tax matters simultaneously. We discuss herein certain significant matters, especially in sales tax and federal excise laws and the unanswered questions/resultant confusion emanating from the ordinance likely to be faced by the field formations, tax consultants and the taxpayers:
TECHNICAL KNOWLEDGE AND EXPERTISE The Customs and Excise Group has been exclusively handling the administration of sales tax and excise functions for a very long time in the country. The officers of this group have rich experience of indirect tax laws, changes brought therein from time to time, together with the background of such changes and the judicial views thereon expressed by the superior courts.
By virtue of the ordinance, such officers have become officers of Inland Revenue meaning thereby, they would also become responsible for the income tax matters - a law which most of them have not even read in their entire service career. This situation has caused a lot of unrest among the concerned hierarchy of revenue officers.
It would have been better had the government introduced the integration of income tax and sales tax in piecemeal, with officers first undergoing technical training of the law and procedure of income tax. In the absence of technical skills and related experience, the officers of sales tax and excise would not be in a position to do justice with income tax matters. This is expected to yield improper assessments and disposal of cases and resultant burden at the appellate forums.
SALES TAX AUDIT AND POWERS OF ADJUDICATION A new sub-section 4A has been inserted in section 25 of Sales Tax Act 1990, whereby the officer conducting audit of taxpayer under section 21, 25, 38, 32A has been empowered to pass an order under section 11 or section 36 and to impose correct amount of tax, default surcharge and penalty. However, before passing such orders, such officer is required to consider taxpayer's explanations vis-à-vis points/issues raised during audit.
Simultaneous to the amendment, section 45 of the Sales Tax Act 1990 has been omitted. Section 45 envisaged powers of Adjudication to be exercised by various levels of sales tax officers under sections 11 and 36 of the Sales Tax Act 1990. For instance, the Additional Collector could adjudicate cases without any restriction as to the amount of tax involved or amount erroneously refunded. Likewise, the Deputy Collector, Assistant Collector and Superintendent had certain monetary ceilings for adjudication.
A plain and combined reading of the amendments made in sections 25 and 45 would reveal that now onward, any officer of Inland Revenue would be allowed to issue show cause notice to the registered person without any distinction as to his designation and pass an adjudicating order without any monetary ceiling.
We reckon this amendment at highly improper, which will only create chaos at the time of adjudication with the Superintendent might also handling and disposing significant cases, which were previously dealt only be senior officers, like the Additional Collector and above.
With omission of section 45 from the statute book, the Federal Board of Revenue is also deprived of its powers to transfer adjudication cases, vary the jurisdiction and powers of any officer(s) of Sales Tax and extension of time limit in adjudication, due to exceptional circumstances.
It is pertinent to note that the aforesaid changes have become effective from the date of promulgation of the Ordinance. Besides, the million dollar unanswered question why such amendments have been brought in the law, we are also cognisant of the absence of any saving clauses, which are usually part of any amending statute.
In the wake of such a vague picture, one wonders what would be the status of thousands of show cause notices pending adjudication, which involved matters such as change of jurisdiction, time extension, etc. Ideally speaking, it would have been better if the aforesaid amendments were made applicable on audits conducted and show cause notices issued after the promulgation of the Ordinance.
MERGER OF SALES TAX APPELLATE TRIBUNAL INTO INCOME TAX APPELLATE TRIBUNAL The constitution of "Customs, Excise and Sales Tax Appellate Tribunal" was governed under sections 194A, 194B and 194C of the Customs Act 1969. To facilitate proper functioning and removal of overlapping in indirect taxes, the Finance Act 2009 recently introduced harmonisation steps in the Sales Tax Act 1990 and Federal Excise Act 2005, whereby identical procedure for Appellate Tribunal was prescribed for all indirect tax laws.
This jurisdiction has now been changed after a brief span of just over 3 months and now onward, the Appellate Tribunal shall be established, under section 130 of the Income Tax Ordinance 2001 with the new name as "Appellate Tribunal Inland Revenue". Further, all appeals and proceedings under the Sales Tax Act 1990 and Federal Excise Act 2005 pending before the Customs, Excise and Sales Tax Appellate Tribunal have been transferred to the Appellate Tribunal Inland Revenue forthwith and files are being transferred to the Appellate Tribunal Inland Revenue.
However, the procedure to be adopted for the handling such cases at the new forum has not been explained as yet. We understand under section 130 of the Income Tax Ordinance 2001 read with the respective rules, the Tribunal comprises of Accountant Members possessing experience of income tax law and Judicial Members having professional background of the judiciary.
However, there appears to be no stipulation/directive from the Ministry of Law and Justice regarding the (modified) qualification of members sitting on the bench under the new setup and the fate of existing members of the Sales Tax Appellate Tribunal. Consequently, in the present state of affairs, one might construe that the Accountant/Judicial Members would hear all cases relating to sales tax/excise so transferred to them.
Presently, due to the vague picture surrounding the functioning of the Tribunal, virtually no case is being fixed for hearing. In particular, this might adversely affect urgent matters involving stay applications filed against recovery of tax demands.
RECORD-KEEPING The time frame for the retention of the past year's record has been increased from 5 years to 6 years. However, in cases where the matter is before any proceedings for assessment, appeal, revision, reference, petition and Alternative Dispute Resolution Committee, the taxpayer would need to retain records till the time the said proceedings are over.
In the year 2003, the identical amendment was made in sub-section 1 and 2 of section 36 of Sales Tax Act 1990, whereby the time for issuance of show cause notice was enhanced from 3 and 5 years respectively. However, this created a lot of litigation, whereby all disputed cases falling near the cut-off date were subsequently taken to the court of law for clarification whether the amendment was prospective or retrospective in nature. To avoid such a situation again, the law ought to clarify the issue once and for all.
TRANSACTIONS BETWEEN ASSOCIATES A new section 25AA has been inserted after section 25 whereby, in respect of any transaction between associated persons, the tax department may determine the transfer price of taxable supplies between them as is necessary to reflect the fair market value of supplies in an arm's length transaction.
We understand the aforesaid transactions are already catered under section 2(46)(a)(ii) of the Sales Tax Act 1990. So, the basis of this amendment is not known as yet. Secondly, as against the definition of 'open market price' defined under the law, the term 'fair market value' is a new term introduced under the Ordinance for which no definition exists, either under the Sales Tax Act 1990 or under the Ordinance.
One may anticipate misuse of this amendment by the revenue officers unless proper definition and underlying idea, if different from the existing law, is explained by the government. We are mindful that the country's economic condition is getting precarious and vulnerable day by day.
In view of the rising cost of doing business, inflation, falling demand, exchange rate pressures, etc, we need to build and retain investors' confidence so as to keep the economic ball rolling. An effective way of achieving this goal is to simplify the tax laws and make them taxpayer-friendly by eliminating discretionary powers. Unless, these vital steps are taken, implementation of VAT legislation across the board by July 2010 would remain a dream.
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