The Lahore High Court (LHC) has granted stay against direct show cause notices for recovery of sales tax under sections 11(2) and 11(3) of the Sales Tax Act, 1990 (Act) as there is no mechanism to pick a case for adjudication under the said section of the Act.
It is learnt here on Sunday that a Lahore-based taxpayer engaged with 3-S business of vehicles through Waheed Shahzad Butt, Advocate had challenged the direct show cause notices under sections 11(2) and 11(3) of the Act for tax years 2010, 2011, 2013 & 2014 issued by IRS officials of RTO-I Lahore wherein after hearing parties stay has been granted by the LHC with the directions that operation of the impugned four show cause notices shall remain suspended.
LHC observed and admitted the crucial question that Sales Tax Act, 1990 is based on self assessment system and investigation into the case of a taxpayer can only be carried out through the process prescribed under sections 25 and 72-B of the Sales Tax Act, 1990 and there is no other mechanism under the Act to pick a case for adjudication under section 11 of the Act.
Tax lawyer added that present move by the field formations of FBR specifically RTO-I Lahore is an attempt to generate additional revenue to meet budgetary targets without releasing the legality of proceedings. The petitioner has not contravened any of the provisions of the Act or the notification issued there under, the treatment with the Petitioner is equivalent to severe mal-administration of justice, causing undue harassment.
Under the Act it is inevitable that the petitioner shall first be selected for audit by the FBR and only then would the field formations conduct its audit in accordance with a procedure given in Section 25 of the Act and thereafter, due tax (if any) may be recovered after issuing show cause notices under section 11. The present move is illegal and without lawful jurisdiction, being against the guarantees given in Articles 4, 10A, 18 & 25 of the Constitution of Pakistan and in contradiction to the provisions of the Act. Issuance of direct show cause notices is in fact selecting the petitioner for audit of its sales tax affairs, hence, these are not only illegal but also violative of Constitution, Waheed added.
Tax lawyer further added that sales tax is premised on a self-assessment paradigm, where the tax due is self-assessed by a taxpayer and deposited along with the monthly sales tax return. Supervision and monitoring of the self-assessment regime is through the process of audit provided under sections 25 of the Act. Once the taxpayer is selected through audit and the department is of the view that the taxpayer has an outstanding of tax liability, the case undergoes assessment of tax through the process of adjudication under section 11 of the Act. Therefore, the self-assessed amount of tax due by the taxpayer in its sales tax return can only be altered through fresh assessment of tax under the section 11 of the Act, subject to the process of selection of a taxpayer though audit. Section 11 provides for assessment of tax where a taxpayer fails to file a return, or pays an amount which is less than the amount of tax due or has made short payment or has claimed input tax credit or refund which is not admissible. The section further provides that where by reason of collusion or deliberate act any tax has not been levied or has been short levied or has been erroneously refunded, or by reason of inadvertence, error or misconstruction any tax has not been levied or short levied or has been erroneously refunded, the Officer of Inland Revenue passes an assessment order along with penalty and default surcharge. Section 11 is the only provision under the Act which provides for assessment of tax through adjudication in case the self-assessed tax of the taxpayer, according to the department, is unpaid or short paid for the above reasons.
LHC in its order dated September 24, 2014 issued directions that office will reflect this case in the cause list as "Section 11/Selection for Audit Case". Till the next date of hearing, operation of the impugned four show cause notices, all dated, August 8, 2014 shall remain suspended.
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