ISLAMABAD: President Dr Arif Alvi has confirmed a landmark order of the Federal Tax Ombudsman (FTO) to refund the amount of sales tax collected in excess of 12.5 percent from the consumers/middle-income buyers of motor vehicles.

Addressing a press conference here on Tuesday at the FTO Office, Dr Asif Mahmood Jah said the president has upheld the decision and rejected the Federal Board of Revenue’s (FBR) pleas against recommendation for refund. President’s order will benefit a large number of buyers of cars across the Pakistan, who paid excess amount of sales tax.

To a question on action against owners of un-declared offshore companies who evaded taxes or not availed the tax amnesty scheme, he added that the systemic failure of the FBR needs to be checked at any cost. However, the FTO office cannot intervene into the matters of global tax jurisdictions where international taxation is involved under global treaties. However, the FTO can take notice of the matter and make recommendations to the FBR in this regard.

Responding to a question, Dr Asif Mahmood Jah stated that the FTO office has disposed of 1806 complaints filed against the FBR during October 2021 to March 15, 2022.

FTO informed media that 24 complaints were filed against FBR and a vehicle company, in terms of Section 10(1) of the Federal Tax Ombudsman Ordinance, 2000 (FTO Ordinance) for charging 17 percent sales tax on purchase of vehicle 998 CC in August, 2021 as against 12.5 percent, which was the actual rate at that time. In this way the taxpayers were constrained to pay in excess of what was actually due.

FTO had recommended that collection of the sales tax in excess of being legislated in the Finance Act 2021 and delay in setting the tax refund tantamount to maladministration.

Precisely, the Complainants booked cars 998 CC, prior June 2021 at 100% advance payment of Rs.2.145 million, with tentative date of delivery after July 2021. Meanwhile, the rate of Sales Tax on such cars was revised downwards, from erstwhile 17% to 12.5% and the FED chargeable @ 2.5% was waived off altogether through the Finance Act, 2021 with effect from 01.07.2021. Further, the term “time of supply” defined in Section 2(44) of the Sales Tax Act, 1990 was also amended from “time of sale” to the “time of delivery”.

The vehicles were delivered to the Complainants, along with invoice of Rs2.069 million the new rate applicable after July, 2021, and not the one, at the time of booking of the car in June 2021. However the company charged Sales Tax on old rates rather than invoice date “the time of sale” and refused to refund the difference, hence depriving Middle Income Complainants of due effect of the reduced tax burden.

He said the complainant contacted FBR as well, on its helpline through email dated 17.08.2021, requesting for refund of the differential amount of sales tax. In response thereof, the FBR communicated through email dated 20.08.2021 that sales tax had been reduced to 12.5% on cars up to 1000cc. However, the FBR restricted its response to this e-mail and did not resolve the issue by arranging for refund of the differential amount of sales tax. Complaint to the FTO and FBR’s print of view when the Complainants made complaint to the FTO seeking that the department may be directed to refund the over charged sales tax and FED.

FBR admitted, “there was lack of clarity with regard to the definition of “time of supply” at the time of booking of the vehicle in June 2021 and that at the time of its delivery in August 2021. As per the definition in June 2021, the relevant time for determining the rate of taxation was the time when payment was received by the supplier, wherein Sales Tax was @ 17% and FED @ 2.5%. However, both the definition and the applicable rates of taxes had been changed in the budget 2022-2023 and now “supply of goods, other than under hire purchase agreement, means the time at which the goods are delivered or made available to the recipient of the supply”. This despite the fact that amendment in the act was intended to favour the tax payers benefit was denied to the complaints.

After hearing the point of view of the complainant and FBR FTO thrashed out the subject as under:

“In the Finance Act, 2021, after amendments in Sales Tax Act, 1990, Section 2(44)(a) was enforced w.e.f July 1, 2021 and it is clear that:

The time of receipt of payment by supplier becomes irrelevant, if the supply is made on or after July 1, 2021 In accordance with Section 5 of the said Act.

Thus “If there is a change in the rate of tax, a taxable supply made by a registered person shall be charged to tax at such rate as is in force at the time of supply” which in the subject case was July to August 2021. He also held that “Collection of Sales Tax in excess of being legislated in Finance Act, 2021 and delay in settling the refund, tantamount to maladministration, in terms of Section 2(3)(i)(a) of the FTO Ordinance and made recommendation to FBR to refund the amount of Sales Tax collected in excess of 12.5% from the Complainants as per law”.

Instead of resolving the issue and allowing refund to middle income buyers FBR took refuge under non clarity of law and filed representations to the President of Pakistan, FTO maintained.

While concluding the subject proceedings, the President of Pakistan confirmed the grant of refund by the Federal Tax Ombudsman as under:

“the approach adopted by the FTO in deciding the complaints that collection of sales tax in excess of due tax is contrary to the law and direction of refund the amount of sales tax collected in excess of 12.5 % from the complainants is absolutely lawful and in accordance with law. He further held that representations by FBR were bereft of any merits or justifications and are liable to be rejected.

Federal Tax Ombudsman has issued instructions to all advisors to decide all similar cases according to decision by the President of Pakistan and hopes that FBR would ensure prompt compliance of the Presidents directives, as the decision is of far reaching impact by providing relief to not only the complaints but many others who may not have so far opted such relief, FTO added.

Copyright Business Recorder, 2022