A tax practitioner has asked the Federal Board of Revenue (FBR) to pass an order to waive off the levy of 'further tax' on electricity bills of flour mills (exempted units) under Sales Tax Act 1990 as directed by Lahore High Court and directed the power distribution company to do away with the levy.
According to a presentation of the CA firm to Chairman FBR Tariq Bajwa, an application had been moved before the Commissioner Inland Revenue (IR) Zone, RTO-Multan requesting to waive off the levy of further tax on electricity bills of a flour mills as directed by Lahore High Court. Responding, Commissioner IR, Multan Zone, RTO-Multan has directed the unit to make an application to the FBR in this regard.
Brief facts of the case are that the unit resort to business activity, ie running a flour Mills, which is not subject to sales tax in terms of Section 13 of the Sales Tax Act 1990 read with Schedule Sixth of the Act as per item 19. Whereas the Power Distribution Companies are charging further tax in terms of Section 3(IA) of the Act due to alleged failure at the end of the taxpayer to get enrolled under the Sales Tax Act.
The treatment being meted out to the taxpayer is not inconsonance with the statutory provisions as refer to supra inter alia the Lahore High Court in the case titled M/s Zia Brothers V/S Federation of Pakistan and etc has held the levy of further tax ibid illegal 'void ab initio'. The respondent in the instant petition has been directed to delete the levy of the further tax subject to application by the taxpayer.
It is, therefore, requested to pass necessary direction to MEPCO" to waive off the levy in the case as directed by Lahore High Court. According to the judgement of the LHC in WP 27097/2013 in case of petitioners, who are manufacturers and sellers of flour (products of milling industry) and admittedly stand exempted under section 13 read with item No 19 of the 6th Schedule to the Sales Tax Act, 1990 ("Act") have challenged the applicability of further tax under Section 3 (IA) to their case. It is submitted that as the petitioners do not make any taxable supplies under section 2(41) of the Act, they are not bound to obtain Sales Tax registration under the Act, as a consequence, they are under no obligation to pay "further tax" and section 3(1A) has no application to their case.
Supporting their agreement, the lawyer of the petitioners, referred to section 14 of the Act read with rule 4 of Chapter 1 of the Sales Tax Rules, 2006 ("Rules") which provides that only persons engaged in making taxable supplies are required to be registered under the Act. It is clarified that the petitioners are paying sales tax on the taxable supplies purchased by them but are not liable to pay the additional amount of further tax on account of non-registration.
The LHC judgement said that the scope and purpose of the above sub-section is to broaden the tax net by incentivizing registration under the Act. Legislature has achieved this by building a disincentive for persons who have not obtained registration number under the Act by enhancing and loading the price of the taxable supplies made to them with "further tax" at the rate of one per cent of the value of taxable supplies.
The proviso to the above sub-section provides that the Federal Government is empowered to exclude certain taxable supplies from the scope of Section 3(1A). A notification (SRO No 648 (1)/2013 dated 09.07.2013) has already been issued in this regard. The LHC said that the question that requires determination is whether a person, who is not under a legal obligation under the Act to obtain registration number can be burdened with further tax for not obtaining the registration number? Admittedly the petitioners, who are manufacturers and sellers of flour (product of milling industry) stand exempt from payment of sales tax under section 13 read with item No 19 of the 6" Schedule of the Act. By virtue of the above exemption the petitioners fall outside the scope and meaning of "taxable supplies" under Section 2 (41) of the Act. As the petitioners don't make any "taxable supplies" they are not bound to register under the Act. Section 14 of the Act provides that registration is required of such persons and regulated in such a manner as is prescribed under the Rules. Chapter-1 of the Rules, litter alia, deals with Registration. Rule 3 explaining the applicability of the Chapter states that it is applicable to persons liable to be registered under the Act. Rule 4 provides that only persons making "taxable supplies" are under an obligation to register.
Under section 2(41) of the Act "taxable supply" means supply of taxable goods other than a supply of goods which is exempt under section 13 of the Act, which is the case of the petitioners.
The LHC added that the purpose of Section 3(1A) imposing further tax on a person who fails to obtain registration number is to incentivize such a person to register and implies that the person is under a lawful obligation to obtain registration number and has for some reason failed to do so. This carrot and stick policy is to induce a person to register and also to enforce the legislative intent of registering persons making taxable supplies. On a policy level, the wisdom behind this is to move towards a more documented economy and help expand the tax base. Petitioners, who do not make taxable supplies under the law are tinder no legal obligation register and, therefore, section 3(1A) does not relate to them. The petitioners cannot be burdened with the charge of further tax for not doing an act they are, under the law, not supposed to do, unless, of course, the law undergoes an amendment to this effect. The case law relied upon by the learned counsel for the respondent department is not relevant to the present controversy.
For the above reasons, it is declared that Section 3 (1A) of the Act has no applicability to the case of the petitioners who enjoy exemption under the Act and are not making any "taxable supplies" in terms of section 2(41) of the Act, it said.
The court is also aware that a duty cannot be cast upon a supplier to verify the antecedents of a buyer or confirm whether the buyer enjoys an exemption under the Act before making a transaction. It is, therefore, painted out that the petitioners have paid "further tax" during the pendency of these petitions and claim refund/ adjustment of the said amount.
After the above declaration that further tax is not applicable to the case of the petitioners who enjoy an exemption under the Act, the procedure and functionality of this principle can best be left to the FBR who shall devise a mechanism to provide relief to the Petitioners who do not fall within the ambit of section 3 (1A) of the Act. Petitioners shall make an application to the FBR in this regard which shall be decided within two months from the receipt of this judgement, LHC added.