The new procedure introduced by the Federal Board of Revenue (FBR) to ascertain identity of unregistered persons, to broaden the tax base, suffers from serious legal flaws in relation to disallowance of input tax, levy of penalty and seller's liability for collection of genuine CNIC/NTN from their unregistered buyers, Business Recorder learnt on Wednesday.
The new mechanism is explained in SRO 191(I)/2012, which does not address the fate of identical SRO 821 dated September 6, 2011 thereby bringing the entire business community to a virtual halt. They said the board had made it mandatory for all registered manufacturers, importers and exporters selling taxable or dutiable goods to unregistered persons to issue invoice containing "Computerised National Identity Card No or National Tax Number" of their unregistered buyers through SRO 821(I)/2011 dated September 6, 2011.
However, it is astonishingly noted that while SRO 821 has not been rescinded; yet the FBR has issued another SRO 191 on the same issue. Another factor which has arisen relates to the effective date of compliance with the scheme. Again, while SRO 821 is operative since September 6, 2011, Notification 191 will be effective from March 1, 2012 onward.
Sources said the FBR had also issued a ruling dated September 19, 2011 whereby implementation of SRO 821(I)/2011 was suspended to sugar sector until the finalisation of the discussion between FBR and Pakistan Sugar Mills Association (PSMA). An analysis of SRO 821, SRO 191 and the said ruling issued for sugar sector could mean that all above are in field and sugar sector may continue to enjoy immunity from disclosing their buyers' NTN/CNIC even after March 1, 2012.
When contacted, Adnan Mufti FCA, Partner - Shekha & Mufti confirmed that SRO 191 envisages phased implementation of scheme for broadening of tax base. With effect from March 1, 2012 registered seller of taxable/dutiable/exempt goods is obliged to report NTN/CNIC of his buyer in the specified proportion.
He cited that if the seller fails to collect and report CNIC/NTN of his unregistered buyer in a particular month, his current month's input tax credits would be disallowed. In this way, non-compliance at sales stage will jeopardise his purchase related credit.
He further said the input tax, paid for the purpose of taxable supplies, had been held to be a vested right by superior courts which could not be taken away except necessary enactment in the statute itself.
Coming towards the associated legal support, Adnan said the above input tax disallowance had been framed under the powers conferred upon the Federal Government under section 8(1)(b) of the Sales Tax Act 1990 (the Act). However, SRO 191 has been issued by FBR and not by the Federal Government. In other words, the apex tax authority has attempted to exercise a right beyond its statutory powers. Consequently, the input tax may not legally be denied on such defective legislation.
Highlighting another legal defect in the SRO, he said the section 8(I)(b) of the Act, the federal government needs to specify goods on which it desires to restrict taxpayers' tax credit. A list of such negative items is specified in SRO 490(I)/2004 dated 12 June 2004. However, SRO 191 does not contain any such list of goods; rather disallows input tax credit on generic and proportionate basis.
In an identical case reported as 94 TAX 222, the Sindh High Court (SHC) had held that the board could not disallow any input tax on generic terms under section 8(1)(b) of the Act unless goods falling in the negative list are clearly specified. Based on such dictum, the SHC had struck down identical SRO 1307/97 dated December 20, 1997. In the given case, the litigation history repeating itself, unless necessary modifications are not made in the SRO, Mufti added.
As regards penal provision, SRO 191 provides that where any registered person gives a false NTN or CNIC, which is not verified from the FBR database or Nadra database respectively, a penalty of Rs 5,000 or three percent of the tax involved, whichever is higher, for each such transaction will be imposed.
He said the language applied in the SRO was technically flawed as it suggests that penalty would be levied upon the person giving his CNIC/NTN, ie, the buyer. This obviously may not be the intent of the SRO; as such the target of such penal clause would be the seller.
He emphasised that the registered person had no authority or access over Nadra's database to the veracity of his buyer's CNIC. In the absence of any such an access, it would be both impossible and impractical for the seller to confirm the genuineness of CNIC furnished by his customer(s). Interestingly, the SRO suggests penalty when the buyer furnishes his CNIC/NTN to the seller but it remains unverified. However, apparently no explicit penalty is prescribed if the said NTN/CNIC is not provided to the seller at all.
The SRO also provides a mechanism for settlement of invoices by unregistered buyers via banking channel irrespective of the sum involved. He said the section 73 of the Act calls for settlement of tax invoices through banking channels, in cases where the amount of a single transaction exceeds Rs 50,000.
However, vide its ruling C. No 3(36) STP/99 dated July 14, 2004, the FBR has already clarified that where buyers are not liable to be registered, the provisions of section 73 of the Act will not apply. In such a way, the newly introduced law is both contradictory to the provision of section 73 of the Act as well as against the said ruling which holds the field, he maintained.