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Ombudsman holds medicine trader's registration for general sales tax illegal

ISLAMABAD (October 27 2002) : Since medicines are exempt from sales tax, the Federal Tax Ombudsman, Justice Saleem Akhtar, has held that registration of a wholesaler of medicines with turnover exceeding Rs five million is not legal.

The complainant, Kamran Distributors, of Rawalpindi, had submitted that when sales tax on medicines was levied on manufacturers from February 2, 2002, the sales tax department compulsorily registered him under the Sales Tax Act and imposed a penalty of Rs 25,000 for not filing the return. The complainant challenged the legality of registration and imposition of penalty.

In response to FTO's notice, the department replied that show-cause notice for non-filing of monthly returns was issued on the basis of the survey, which indicated that the turnover was above Rs 5.49 million.

At the same time, the department submitted that the order- in -original dated May 28, 2002 was sent to the complainant through UMS, which perhaps did not reach him. The department admitted that the case had been re-opened because the order-in-original and the imposition of penalty had been set aside because the complainant did not receive the sales tax registration certificate and that the show-cause notice and the order-in-original were passed without hearing the complainant.

The department further pleaded that since the cause of the complaint has been removed, the complaint be disposed of accordingly.

While appreciating the prompt action taken by the Collector, the FTO stated that the main grievance of the complainant still continued, namely the registration under sales tax was illegal as the complainant deals with medicines, which are exempted from sales tax. He also submitted to the FTO that no inquiry was conducted under section 19 of the Sales Tax Act before registration and as such it should be cancelled.

The department's representative contended that registration was made on the basis of survey form, which can be treated as enquiry for the purposes of section 19.

Procedure for enquiry: In his order the Tax Ombudsman stated: From the reply of the Department it is clear that the complainant is dealing in medicines which is exempt from sales tax and was registered on the basis of the survey form prepared under the Documentation of Economy Ordinance, 2000. It has been admitted by the Department, correctly, that the survey form does not mention the nature of business in which the complainant was dealing. Thus, it could be identified only after enquiry. Section 19 provides a procedure for compulsory registration, which requires an enquiry to be made to satisfy the person who is liable to be registered. The purpose of enquiry required under section 19 is to obtain correct information and full particulars of the person to determine whether he falls within the category for registration or not.

No registration can be made automatically on the basis of survey form because all the particulars required for registration are not mentioned in it and mere reliance on it would not amount to enquiry for purposes of registration.

The survey form cannot be used as a substitute for an enquiry, nor can survey form be treated as an application for registration as contended by complainant's attorney, Amer Rashid. On the facts, it is clear that the registration of the complainant was illegal, void and contrary to law. As the order for penalty has been set aside I need not deal with that aspect of the case which stands closed by the order of the Collector.

It is, therefore, recommended that: –

(i) The Collector in exercise of power under section 45A of the Sales Tax Act, 1990 cancel the registration of the complainant.

(ii) Compliance be reported within 30 days.

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