Jurisdiction issue: SC sends back toll manufacturing sales tax case to high court

ISLAMABAD: The Supreme Court of Pakistan has referred back the jurisdiction matter for the levy and collection of sales tax on “toll manufacturing” to the Sindh High Court for deciding its legality.

This decision was announced by the Supreme Court after hearing an appeal of the Sindh Board of Revenue in Civil Petition Number 1684, along with several attached cases.

In this regard, the dispute over jurisdiction for levy and collection of sales tax between federal and provincial governments was remanded back by Supreme Court.

ST on services against toll makers: SHC disposes of all proceedings initiated by SRB

In its judgment dated June 6, 2024, the Supreme Court remanded the matters to the Sindh High Court to decide the case on its merits.

Additionally, the Court is optimistic that the matter may be resolved outside the court through further negotiations between the Federal and provincial governments to determine whether the jurisdiction of “toll manufacturing” is taxable under either laws, or just one of the laws.

Moreover, the Court expects a determination on whether the understanding arrived at between the governments is prospective in nature. If the issue is not resolved by the governments, the Sindh High Court is directed to decide the cases purely on their merits in light of the two taxing statutes.

“We are hopeful that the matter will be resolved outside court by the two governments before the matter is taken up by the Sindh High Court”, SC judgement said.

When contacted, Arshad Shehzad, Advocate Supreme Court, explained that the province of Sindh has levied sales tax on services provided in the matter of toll manufacturing or processing for others on a toll basis under tariff heading (9830.0000) through the Sindh Finance Act 2013. This led to the issuance of notices to the taxpayers.

However, the taxpayers have argued that they were already paying sales tax to the Federal government on this business activity under the Federal Sales Tax Act, 1990 since its inception. Thus, they contend that the demand for sales tax registration and payment under the Sindh Sales Tax Act contradicts entry # 49 of the Fourth Schedule of the Constitution.

This disagreement led to litigation, eventually leading the matter to the Sindh High Court. In the Sindh High Court, taxpayers relied on sections 2(16) and 2(17) of the Federal Sales Tax Act, 1990, which define any process in which an article, singly or in combination with other articles, material, or component, is either converted into a distinct article or product, or so changed, transformed, or reshaped that it becomes capable of being put to a different or distinct use. It is the taxpayers’ case that they are actually manufacturing goods in terms of the definition provided in the Federal Sales Tax Act on supplies of goods in terms of section 3 of the Sales Tax Act 1990, and so they cannot fall within the ambit and scope of the Sindh sales tax on services Act.

The issue subsequently came into discussion in the National Tax Council meeting dated June 9th, 2022. It was agreed upon between the Federal and Provincial governments that jurisdiction of collection and levy of sales tax on “toll manufacturing” rest with the Federal Board of Revenue. Consequently, the province of Sindh subsequently withdrew its right to levy sales tax on toll manufacturing, and a notification to this effect was issued on June 28th, 2022.

The Sindh High Court, in light of these developments, allowed the petitions of the taxpayers, holding that the jurisdiction of sales tax on toll manufacturing always rests with the Federal Government. The court further observed that it would not be possible for an activity that was once treated as a supply of goods to then be treated as a service.

The Sindh province did not agree with the findings of the Sindh High Court and has filed an appeal before the Supreme Court of Pakistan.

In their appeal, they contended that they had issued a notification for exemption with prospective effect and had not withdrawn their claim of collecting sales tax prior to the issuance of the notification. Considering that one party of the agreement with the Federation is challenging the terms, the apex court deemed it appropriate to remand the case back to the Sindh High Court, giving another opportunity to both the Federal and Provincial governments to settle the dispute outside of court through further negotiation.

The court has also directed the Sindh High Court to decide the matter on its own if the issue remains unsettled, Arshad Shehzad added.

Copyright Business Recorder, 2024