The Federal Board of Revenue (FBR) has been given ample powers, through Finance Act, 2007, to exempt any transaction from the provisions of 'Missing Trading Fraud' under which all partners in the supply chain would be jointly liable to deposit the unpaid amount of tax at any stage of supply.
Sources told Business Recorder on Tuesday that the amended section 8A of the Sales Tax Act, 1990 is entirely different from the UK VAT law. Pakistani tax authorities had copied this law from section 77A of the UK Value Added Tax Act, 1994. Later, the FBR amended the law to suit its own business environment for incorporation in the 2007-08 budget.
Under the British law, 77A (joint and several liability of traders in a supply chain where tax unpaid) was applicable on telephone, any other equipment including parts/accessories and computers and related equipment. British tax department has to notify specific transaction of goods for applying strict provisions of this law.
Contrary to this, the FBR has obtained powers to exempt any transaction from 'Missing Traders Fraud' bringing all other transactions under the purview of section 8A of the Sales Tax Act.
Interestingly, British tax authorities have to take the approval of their Parliament for levying harsh provisions of section 77A of the UK Value Added Tax Act, 1994. The FBR has tried to act as a supreme body for deciding on its own about the applicability of section 8A of the Sales Tax Act. The FBR can exempt any transaction from this law without consulting the Parliament.
As the section 8A of the Sales Tax Act was merely a copy of UK law, the FBR ignored the important provision of obtaining prior approval of Parliament before taking extreme action against the entire chain of suppliers.
Under amended section 8A, the Board may exempt transaction or transactions from the provisions of 'joint liability for payment of unpaid tax'. This amendment was introduced in 2007-08 budget with the objective to obtain powers for exempting any transaction from this provision.
The law is in vogue in European countries to punish persons involved in obtaining fraudulent refund on fake invoices of blacklisted units etc. Even European Supreme Court has upheld the law in favour of the tax authorities. It seems that the Board wanted to invoke the provisions of 'Missing Traders Fraud' in 2007-08. So far, the law was not suspended and no cases were framed against the taxpayers.
Business community had strongly criticised this law, which restrained the CBR from enforcing it at the level of Collectorate of Sales Tax and Federal Excise. Under the 'Missing Traders Fraud', both the buyer and the seller would be liable to depositing the due tax amount. Prior to this amendment, the buyer was not held responsible, even if his supplier had not deposited the tax already recovered.
The Board introduced several strict provisions in the Sales Tax Act, 1990 to reject the fraudulent refund claims where the amount has not been actually deposited by the supplier in the national exchequer. Section 8 of the Sales Tax Act was amended to disallow refund or 'input tax adjustment' in case the claimed tax has not been deposited by the respective supplier.