Tax Ombudsman asks Revenue Board to clarify sales tax issue

ISLAMABAD (March 10 2004): The Federal Tax Ombudsman former justice Saleem Akhtar has urged the Central Board of Revenue (CBR) to issue a clarification on the issue of sales tax after its exemption on cement production was withdrawn from September 5, 2000.

The issue arose, the FTO said, as Cherat Cement Company, Nowshera, complained that its refund of over Rs 6.4 million is being delayed pending such a clarification.

The collectorate had informed the complainant that the refund would be made pending CBR's clarification. But later, the collectorate refused the refund saying that it was time barred – a plea rejected by the FTO in his finding.

The cement company had filed a complaint with the FTO that the Peshawar Collectorate had delayed the refund of Rs 6.4 million being the input tax paid on stocks acquired during the period of sales tax exemption, but subsequently used in taxable supplies.

The complainant said that cement was granted sales tax exemption under Section 66 of Sales Tax Act 1997, but it was withdrawn on September 5, 2000. Thus, the sales tax paid on the existing stock became refundable as it was to be used in taxable supply.

The stocks of the company were duly verified and the company claimed refund of sales tax on September 1, 2001 and September 28, of Rs 9.3 million as input tax adjustment.

The complainant also said that after two years, the Sales Tax allowed a refund of Rs 2.9 million by way of input adjustment and the order said that remaining amount of Rs 6.4 million had been deferred for want of clarification from the CBR.

As the complainant pursued the matter with the department, the latter observed that the claim of Rs 6.4 million was involved in purchase invoices obtained prior to September 6, 1999.

The claim has been lodged after one year of purchase of goods, which is time barred under Section 66 of the Sales Tax Act.

During hearing before the FTO, the department suggested that the complainant should pursue the matter with the adjudicating authority, instead of the FTO.

After hearing both the sides, the FTO observed that the main contention of the complainant was that the original order dated August 7, 2003, allowed partial refund adjustment clearly mentioning that an amount of Rs 6.4 million had been deferred for want of clarification from the CBR.

This clarification was not sought from the CBR and after discussion with the senior officers of the collectorate, it was decided that since the one-year limitation contained in Section 66 was quite clear, there was no need to refer the matter to the CBR.

UNIFORM TREATMENT NEEDED: The order said the contentions of the two sides have been considered and substance has been found in the complainant's contention that when in the original order dated 07-08-2003 a clear reference was made to the need for a clarification from the CBR there was no reason why such a clarification should not have been obtained by the Peshawar Collectorate.

The deputy collector (refunds) has, thus, acted in an unreasonable manner and the matter is, therefore, covered by Section 2 (3) (i) (b) of the Establishment of the Office of Federal Tax Ombudsman Ordinance, 2000.

It is added that the language of Section 66 of the Sales Tax Act suggested that the one-year limitation apply in cases of a refund having not been claimed due to inadvertence, error or misconstruction or input tax deduction not having been claimed where it was otherwise allowable.

In the instant case, however, the input tax could not have been claimed at the time of the purchase of the raw material since the end-product was exempted from sales tax and it is, therefore, doubtful whether the limitation in Section 66 would apply in such cases.

Obviously, this issue would probably be involved in many cases of manufacturers of cement after the withdrawal of exemption and a uniform treatment would be desirable in the cases.

For this reason also a reference by the collectorate to the Revenue Division/Central Board of Revenue can be considered as necessary.

In the light of the above, it is recommended that:

The matter be referred by the collectorate of sales tax, Peshawar, to the Central Board of Revenue who may consider the issuance of such clarification as may be considered appropriate.

Compliance be reported within 60 days.

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