Erstwhile FATA/PATA: Tax issues — II

The FBR has recently issued the following circulars in respect of streamlining the exemptions available in the erstwhile FATA/PATA as discussed above. These are reproduced below for ready reference:

“C.No.7(1)TIPU/IR/2020

GOVERNMENT OF PAKISTAN

REVENUE DIVISION

FEDERAL BOARD REVENUE

Islamabad, the 26th March, 2021

INCOME TAX CIRCULAR NO. 13/2021

Subject: Procedure for issuance of exemption certificate for import of industrial inputs/machinery by FATA/PATA-resident tax persons.

In pursuance to the amalgamation of FATA/PATA regions via 25th Amendment to the Constitution, in order to boost economic development therein, the Government of Pakistan, vide Clause (146) of Part I of 2nd Schedule to the Income Tax Ordinance, 2001 (hereinafter “the I.T.O, 2001”), exempted income “of any individual domiciled or company and association of persons resident in the Tribal Areas forming part of the Provinces of Khyber Pakhtunkhwa and Balochistan…with effect from the 1st day of June, 2018 to the 30th day of June, 2023.” The “provisions of sections in Division III of Part V of Chapter X and Chapter XII” of the I.T.O, 2001, pertaining to withholding taxes have also been rendered inapplicable to FATA/PATA-domiciled tax persons vide Clause (110) of Part IV of 2nd Schedule to the I.T.O, 2001.

1. Although, FBR’s stated position continues to be that section 148 by dint of its being in Division II (instead of Division III) of Part V of Chapter X of the I.T.O, 2001, it has consciously been excluded from the nexus of Clause (110) by the Legislature as also emphatically articulated by FBR vide letter No.DOC.No.1(1)-M(IR-Ops)/2020/165904-R dated 21-09-2020, yet in view of Peshawar High Court’s judgment in W.P.No.442-M of 2020 to the contrary, and till its reversal by the Supreme Court of Pakistan in a CPLA filed by FBR, FATA/PATA-domiciled tax persons could avail exemption u/s 148 of the I.T.O, 2001.

2. There, however, does exist significant confusion as to the mechanism of operationalization of the exemptions enshrined in the law. In particular, a controversy has recently raged vis-à-vis application of withholding tax at the import stage as to whether it would be available to a FATA/PATA-domiciled persons per se or it would trigger on issuance (and production) of exemption certificate as stipulated in section 148/159 of the I.T.O, 2001.

3. The Peshawar High Court in W.P.No.442-M of 2020 titled as the Hadi Khan Silk Mills Vs. Federation of Pakistan has also categorically held that FATA/PATA-domiciled tax persons “shall be exempt from levy and imposition of advance tax payable under section 148…at import stage, till the period mentioned in Clause 146” of Part 1 of 2nd Schedule to the I.T.O, 2001. More importantly, the High Court, in the same judgement, has gone on to address the critical question as to how this particular exemption would operationalize by mandating “that for seeking exemption from payment of advance income tax under section 148 of the Ordinance at import stage, the petitioners shall have to seek exemption from the levy thereof, under section 159 of the Ordinance.” The High Court has re-affirmed this mechanism in W.P.No.1219-M of 2020 titled the Sohrab Sons & Co. Vs. Government of Pakistan & Others and W.P.No.2009-P of 2020 titled M/s Dawood Steel Vs. Federation of Pakistan & Others.

4. Foregoing in view, a standardized procedure for the issuance of Exemption Certificate on a quarterly basis is being rolled out so as to ensure fair operationalization of the exemptions enshrined in the law. Accordingly, a FATA/PATA-domiciled person appearing on the “active taxpayers’ list” instituted by FBR in terms of section 181A of the I.T.O, 2001, in intending to import “plant, machinery, equipment” or “industrial inputs” for installation or consumption at his own manufacturing site would lodge a written application to the Commissioner Inland Revenue (CIR) concerned providing therein:–

(i) Production capacity of the manufacturing unit, and if the same has increased over time, the month from which the enhanced production capacity was installed along with particulars of the additional manufacturing capacity;

(ii) Month-wise quantity of (a) raw material imported, and (b) purchased locally since July, 2020 (or 1st month of the tax year);

(iii) Quantity of stock available form earlier imports;

(iv) Month-wise details of Gas and Electricity consumed since July, 2020 (or 1st month of the tax year);

(v) Month-wise particulars of goods produced;

(vi) Month-wise details of post-dated cheques (PDCs) deposited earlier with Customs authorities, if any;

(vii) List of buyers of the goods produced;

(viii) Bank statement for the past quarter;

(ix) Electricity/Gas bills for the past quarter; and

(x) Month-wise proof of Federal Excise paid – only in case of goods covered under the Federal Excise Act, 2005.

1. The CIR would ensure that particulars supplied by the taxpayer are verified before the issuance of Exemption Certificate. In case any data are not verified, the taxpayer would be given an opportunity to complete the application, provide the required information, and make up the deficiency. The Exemption Certificate issued will be directly mailed to the Collector Customs concerned with a copy thereof being duly marked to member (IR Operations) and Member (Customs Operations), and under no circumstances will be handed over to the taxpayer. If the CIR decides to reject the application for an Exemption Certificate, the previous PDCs deposited would be encashed”.

Note: in above circular of FBR omitted clause (146), Part I of the Second Schedule. The existing one is clause (145A) inserted by the Finance Act, 2019. The FBR must immediately take note of it.

“C.No.7(1)TIPU/IR/2020

GOVERNMENT OF PAKISTAN

REVENUE DIVISION

FEDERAL BOARD REVENUE

Islamabad, the 26th March, 2021

SALES TAX/FEDERAL EXCISE CIRCULAR NO. 05/2021

Subject: Procedure for issuance of consumption certificate for import of industrial inputs by FATA/PATA-Domiciled industries.

In order to earnestly implement and enforce the tax-related incentives and benefits extended by the Parliament to residents of FATA/PATA, Circular No. 9 of 2021 dated March 1, 2021, has been issued. The Circular takes account of safe arrival of industrial inputs imported by FATA/PATA-domiciled industries form the port to the intended manufacturing sites. Section 13(1) read with serial No. 151 of Table I of Sixth Schedule to the Sales Tax Act, 1990, exempts import of “industrial inputs” to FATA/PATA-located industries “on presentation of a post-dated cheque for the amount of sales tax payable under…, and the same shall be returned to the importer after presentation of a consumption…certificate…in respect of goods imported as issued by the Commissioner Inland Revenue having jurisdiction.” This particular benefit is subject to a further condition that if the goods produced form the exempted raw materials as “transferred or supplied outside the tribal areas, the tax exempted shall be paid at the applicable rate.”

1. This makes CONSUMPTION CERTIFICATE issued by Commissioner Inland Revenue (CIR) the centerpiece of the tax-exempt cycle of importation of industrial inputs, production of finished goods by FATA/PATA-domiciled industries and their ultimate consumption within the FATA/PATA regions. It is therefore that a standardized procedure for the issuance of Consumption Certificate is being rolled out so as to ensure fair operationalization of the exemptions enshrined in the law.

2. A FATA/PATA-based manufacturer/Registered Person (RP), who is also an “active taxpayer” in terms of section 2(1) of the Sales Tax Act, 1990 (hereinafter “the STA, 1990”), and intending to import raw materials for consumption at his own manufacturing site would make a written application to the CIR concerned providing therein:–

(i) Production capacity of the manufacturing unit, and if the same has increased over time, the month from which the enhanced production capacity was installed along with particulars of the additional manufacturing capacity;

(ii) Month-wise quantity of (a) raw material imported, and (b) purchased locally since July, 2020 (or 1st month of the tax year);

(iii) quantity of stock available from earlier imports:

(iv) Month-wise details of Gas and Electricity consumed since July, 2020 (or 1st month of the tax year);

(v) Month-wise particulars of goods produced;

(vi) Month-wise details of post-dated cheques (PDCs) deposited with Customs authorities, if any;

(vii) List of buyers of the goods produced;

(viii) Bank statement for the relevant periods;

(ix) Electricity & Gas bill for the relevant period; and

(x) Month-wise proof of Federal Excise paid – only in case of goods covered under the Federal Excise Act, 2005.

1. The CIR would ensure that particulars supplied by the RP are verified before the issuance of Consumption Certificate. In case any data are not verified, the RP would be given an opportunity to complete the application, provide the required information, and make up the deficiency. The Consumption Certificate issued will be directly mailed to the Collector Customs concerned with a copy thereof being duly marked to Member (IR Operations) and Member (Customs Operations), and under no circumstances will be handed over to the taxpayer. If the CIR decides to reject the application for a Consumption Certificate, the previous PDCs deposited would be encashed.

C.No.7(1)TIPU/IR/2020

GOVERNMENT OF PAKISTAN

REVENUE DIVISION

FEDERAL BOARD REVENUE

Islamabad, the 1st March, 2021

INCOME TAX CIRCULAR NO. 09/2021

Subject: Mechanism to be adopted for the release of Consignment of FATA/PATA residents stuck at the Karachi Ports.

A meeting was held under the Chairmanship of the Chairman, FBR with Inland Revenue-Operations and Customs Operations Wings to sort out the issues of imported goods of FATA/PATA residents stuck at Karachi Ports, Consumption/Installation Certificates, Postdated Cheques and Exemption Certificates under Section 148 of the Income Tax Ordinance, 2021.

1. After thorough deliberations between the Chairman, Member (IR-Operations) and Member (Customs-Operations) following mechanism was devised for the release of consignments of FATA/PATA residents stuck at the Karachi Ports:–

(i) The stuck containers are to be released by Customs authorities against Postdated Cheques (PDCs) and sent to their destination (FATA/PATA) under standard tracker mechanism.

(ii) The Collector Customs (Enforcement & Compliance), Peshawar, will issue detention orders of the raw materials effective from day the consignment reaches the manufacturing premise of importers.

(iii) The importer/manufacturer will be responsible to take the import documents along with detention order to the CIR Corporate Zone, RTO, Peshawar and make arrangements to have the manufacturing premises/raw material/machinery/goods imported verified.

(iv) The CIR Corporate Zone, RTO, Peshawar will be liable to verify/undertake physical visit as conducted by the importer/manufacturer to the manufacturing premises where the goods are kept under detention, and allow the raw material to be consumed/utilized in writing.

(v) The CIR, Corporate Zone, RTO, Peshawar will ensure the monthly stock-taking of the raw materials to consumed in the production of manufactured goods by these manufacturing units. This stock-taking will facilitate in issuance of the Consumption Certificate under S.No.151 of the Sixth Schedule of the Sales Tax Act, 1990.

(vi) The residents of FATA/PATA will apply for tax exemption certificates under section 159 of the Income Tax Ordinance, 2001 for the import of raw material/machinery in light of the Peshawar High Court, Mingora Bench, (Dara-ul-Qaza), Swat’s decision dated 24.11.2020.

1. Commissioner Corporate, RTO, Peshawar and Collector Customs (Enforcement & Compliance), Peshawar would keep a close liaison to successfully implement the laid down mechanism”.

The decision cited of Peshawar High Court, Mingora Bench, (Dara-ul-Qaza), Swat dated 24.11.2020 by FBR in Income Tax Circular 9 of 2021 needs reconsideration in the light of judgement of the Supreme Court of Pakistan in Pakistan through Chairman FBR and others v Hazrat Hussain and others [(2018) 118 TAX 260 (S.C.Pak)] has apparently escaped attention. The Supreme Court has held in this case that the FBR cannot impose any condition through instructions to curtail or dilute exemptions given under the law. The exemption clause inserted by the Finance Act, 2019 in the Ordinance says that no withholding of income tax will be done. The imposing of condition of obtaining exemption certificate under section 159 of the Ordinance is thus a violation of law and order of the Supreme Court. Same is the case for sales tax as exemption inserted vide SRO 1212(I)/2018 clearly says: “exemption from whole of sales tax, by whatever name called, as levied under the Sales Tax Act 1990, or notifications issued thereunder, on supplies made until 30 June 2023, to which the provisions of the Sales Tax Act 1990 or related notifications would not have applied had article 247 of the Constitution not been omitted”.

The exemption clauses reproduced above related to sales tax and income tax, including the withholding taxes under the Ordinance, are not imposing any condition to seek tax exemption certificates under section 159 of the Ordinance or other conditions imposed in above circulars. These instructions are thus not binding on the taxpayers as provided in section 206(3) of the Ordinance.

There is a common misconception that only ratio decidendi of the orders of Supreme Court is applicable and an obiter dictum is to be ignored while applying judgements of the apex court. The legal sweep of Article 189 of the Constitution of Pakistan takes the situation out of the usual circular limits of ratio decidendi, obiter dictum and casual observations. Once the declaration of law that includes obiter dictum is succinct and clear, any attempt to distinguish decisions on facts or to say factual position is almost impermissible. In a case reported as the Shahid Pervaiz v Ejaz Ahmad and others 2017 SCMR 206, the Supreme Court of Pakistan held as under:

“A fourteen Member Bench of this Court in the case of Justice Khurshid Anwar Bhinder v. Federation of Pakistan (PLD 2010 SC 483), has concluded that where the Supreme Court deliberately and with the intention of settling the law, pronounces upon a question of law, such pronouncement is the law declared by the Supreme Court within the meaning of Article 189 and is binding on all the Courts of Pakistan. It cannot be treated as mere obiter dictum. Even obiter dictum of the Supreme Court, due to high place which the Court holds in the hierarchy in the country enjoys a highly respected position as if it contains a definite expression of the Court’s view on a legal principle, or the meaning of law”.

The solution is simple: These backward areas are in dire need of investment for infrastructure, industrial and business development, especially after economic toll of Covid-19 endemic. For creating jobs, especially for the youth, the investors, no matter to which area they belong to or are resident of, should be given a complete tax holiday unconditionally to the extent of incomes accruing and arising, and on goods and services rendered in these areas. This will attract investment and remove the loopholes created by exemption clauses and eliminate discretionary powers and bargaining tools available to tax officials through instructions issued by FBR, reproduced above. The provincial governments should also waive all taxes within the areas mentioned in Article 246 of the Constitution to attract domestic and foreign investment for rapid development and job opportunities that are urgently needed for local residents of these areas facing miseries since long, accentuated after 9/11 and many other reasons. These areas need integration through economic prosperity with the rest of the country and not merely through political clichés, slogans and empty promises.

(Concluded)

(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS))

Copyright Business Recorder, 2021