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ASSESSMENT AUDIT & ADJUDICATION UNDER THE SALES TAX ACT

ASSESSMENT AUDIT & ADJUDICATION UNDER THE SALES TAX ACT. A presentation by: Mr. Muhammad Mansha Sukhera B.Com , DCMA, MBA, LLB, FCA Senior Partner Rafaqat Mansha Mohsin Dossani Masoom & Co. Chartered Accountants . SALES TAX LAW ASSESSMENT AUDIT ADJUDICATION.

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ASSESSMENT AUDIT & ADJUDICATION UNDER THE SALES TAX ACT

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  1. ASSESSMENT AUDIT & ADJUDICATION UNDER THE SALES TAX ACT A presentation by: Mr. Muhammad Mansha Sukhera B.Com, DCMA, MBA, LLB, FCA Senior Partner Rafaqat Mansha Mohsin Dossani Masoom & Co. Chartered Accountants

  2. SALES TAX LAW ASSESSMENT AUDIT ADJUDICATION

  3. SALES TAX LAW • FISCAL STATUTES • CONSTITUTIONAL VALIDITY • ENECTMENT/PROMALGATION • HISTORY • CONCEPT OF SALES TAX • STAGES OF ENFORCEMENT

  4. FISCAL STATUTES • Main • Sales Tax Act, 1990 • Federal Excise Act, 2005 • Customs Act, 1969 • Income Tax Ordinance, 2001 • Helping • Constitution of Pakistan, 1973 • General Clauses Act, 1897 • Limitation Act, 1908 • Rules of interpretation • Code of Civil/ Criminal procedures – selected provisions – search, service of notice etc. • Precedents.

  5. CONSTITUTIONAL VALIDITY • Preamble • Fundamental rights Art. 8 to 28 • Legislation power Art. 77 • Rule of law Art 4, 25, 2A • Islamic Provision. Art. 227

  6. ENACTMENT/ PROMULGATION TAX LEGISLATION POWER. ART. 77 • “No tax shall be levied for the purposes of the Federation except by or under the authority of Act of Majlis-e-Shoora (Parliament).” Federal Legislative List Entry 49 • “Taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed.” • Other taxes (Entry 43-50), 59 incidental or ancillary matter Legislation Power– Article 141 • Law for whole or part of Pakistan including extra territorial operation - Majlis-e-Shoora (Parliament • Law for Province or any its part –Provincial Assembly

  7. ENACTMENT/ PROMULGATION Article 142 Subject matter of Federal legislative and concurrent list • Matter in Federal legislative list- Parliament • Matter in Concurrent List- Parliament and Provincial Assembly. • Matter not mentioned in both Lists- Provincial Assembly • Federation area not included in any province and matter not mention in the above lists- Parliament. Tax to be levied on the basis of ability to pay. Legislature prerogatives • quantum of tax • Conditions subject to which tax is levied • Manner of assessment and recovery

  8. ENACTMENT/ PROMULGATION Taxing statute may be declared unconstitutional if • plainly discriminatory • No machinery for levy and assessment • Confiscatory- acquisition of property PLD 1997 SC 582=1997PTD 1555 SC Interpretation of entry in legislative lists. • Living and permanent document, wide construction not narrow, Harmonise construction, promote economic and social activities. • summary of items and no detail, power of legislation for associated, ancillary and related matter. 1999PTCL 645 (SC) =1999 PTD 1135 = 79 TAX 433, 1997PTD 1555 (SC) Delegation tax legislation power • No delegation of legislation power of enacting taxing statute and imposition of tax except exemption and procedure of assessment and recovery. PLD 1977 Lahore 1327, PTCL 99 CL 493 SC

  9. HISTORY World History • Before 1St world war • Excise tax was very old tax • Excise tax was major source of Revenue in the European countries • Custom duties was the major source of revenue in State (USA) • After 1st world war • Modern multistage turnover taxes were developed during and after 1st world war • VAT began when France adopted in 1954 • Subsequently vat was taken up by other European countries. • Rate of tax 10 to 23 % • In United state sales tax remain major source of revenue since 2nd world war • In USA single stage taxes existed in more than 40 states and only 2 states adopted multistage turnover taxes upto 1971

  10. HISTORY IndoPak. • Pre-partition- Sales tax was Provincial subject under the Government of India Act 1935 • After Independence Pakistan adapted • the Government of India Act 1935 • Pakistan General sales tax 1948 enacted and enforce from April 1, 1948 • Standard rate 6 pies per Rupee • Sales Tax Act 1951 enacted and enforce from July 1,1951. • rate 12.50% • Sales tax Act 1990 enacted and enforce from July 1, 1990- Vat Historical Construction • What was the law before • what was the mischief and defects in the earlier law • What is the new law • What remedies has been provided in the new to suppress the mischief in the old law.

  11. HISTORY Other Canon of Construction • Cannon of literal construction • Letter of law and not sprite of law • Language plain no matter what ever consequence • ambiguity or doubt in favour of subject • Purposes interpretation • Contextual interpretation • Golden interpretation – as a whole • Harmonized Construction • Construction to save and not to destroy the LAW • Construction agreeable to justice and reason.

  12. CONCEPT • Direct vs.. Indirect tax • VAT (Value Added Tax) • Multi-stage vs.. Single Stage Tax • Consumer Tax. • Exceptions

  13. Direct vs.. Indirect tax • That a direct tax is one which is demanded from the very person, who it is intended or desired should pay it whereas indirect taxes are those, which are demanded from one person in the expectation and intention that he shall indemnify himself at the expenses of another, like custom duties, excise taxes and sales tax, which are born by the consumer. ((1997) 76 Tax 5(S.P), Elahi Cotton case, pg.678. • Burden of tax (PTCL 2005 CL 754(S.C) Fecto Belarus case) purchaser vs.. vender • Component of Cost/Sales price – explicit or implicit.(

  14. VAT (Value added tax) • Mechanism of levy and crystallizing the liability by allowing the adjustment of input tax provided in the provisions of sales tax Act 1990 is a VAT system. • In nutshell sales tax is payable on value addition • Importer-manufacturer-distributor-retailer State tax collecting Agents purchase supply value ad. Value -ex 100 150.0 50.0 Tax 15 22.5 7.5 Value –inc. 115 175.5 57.5 • Sales tax is going in treasury of State on value addition basis other than import.

  15. Multi-stage tax • Sales tax levied and collected under the Sales Tax Act 1990 on each stage of taxable supply made till it reached to consumer or ultimate user. • Sales tax charged and collected under the Sales Tax Act 1951 was ONE POINT LEVY usually called single stage tax. • Illustration as follows:

  16. Consumer tax • Sales tax is a tax on consumption because the incident of tax charged under section 3 has to pass on the consumer ultimately. • The provision regarding input as well as out put as defined in the definition clause of the Act read with section 7and 8 thereof are on the modalities prescribed to protect interest of the exchequer against any pilferage, evasion or fraud. • Every maker of a taxable supply is an agent of the State to receive the amount on its behalf and then pass it on to the next supplier till finally the consumer bear the burden. • PTCL 2002 CL 115 (LHC) Mayfair Spinning Mill Case.

  17. Exceptions • Taxable supplies specified in the Third schedule. S.3(2a), 21 items, juices. Ice cream, beverages, syrups, cigarettes, toilet soap, biscuits, tissue paper etc. • Special procedure for scope and payment of tax S.71 • Disallowing Input S. 7, 8, 8B and 73.

  18. STAGES OF ENFORCEMENT • Charging / Imposition of Tax • Assessment • Collection / Recovery

  19. Charging / Imposition of tax • Subject matter – persons, goods, event, transitions, object – value or volume etc. • Rate of tax – single rate, different rates, range of rates. • Period – month, quarter, years etc. • Timing – time of delivery, accrual, receipt, clearing, deeming, agreement etc.

  20. Construction of charging section • Strict construction – strictly construed in favour the subject and against the State. • Words of law vs. Import of provision. “We may here observe that the taxing statue the courts must look to the words of the statue and interpret it in the light of what is clearly expressed. It cannot imply anything which is not expressed, it cannot import provisions in the statue so as to support assumed deficiency” (1975) 31 Tax 78 (SC) Hirjna & Co case. • Letter of law vs.. Spirit of law. • “ In determining whether or not a particular matter comes within a taxing statute it is only the letter of law be looked into. There is ample authority for the proposition that in a fiscal case, form is of primary importance, the principle being that if the person sought to be taxed comes within the letter of law, he must be taxed, however great a hardship may thereby be involved but on the other hand if the Crown cannot bring the subject within the letter of law he is free, however, apparent may be that his case comes within what might be called the spirit of law.” (1974) 29 TAX 188 (SC) Mst. Wazirunissa Begum case.

  21. Construction of charging section • Benefit of doubt, ambiguity, alternative or several interpretation should be given the taxpayer. • “ The cardinal principle of interpretation of a fiscal statue seem to be that all charge upon the subject are to be imposed by clear and unambiguous words. There is no room for any intendment nor there is any equity or presumption as to a tax. A fiscal provision of a statue is to be construed liberally in favour of the taxpayer and in case of any substantial doubt, same is to be resolved in favour of the citizen.” (1992) 66 TAX 246 (SC) Mehran Associates case, (1996) 74 TAX 81 (SC) B.P Biscuit case. • “ all charge upon the subject must be imposed by clear and unambiguous language because in some degree they operate as penalties; the subject is not to be taxed unless the language of the statute clearly imposes the obligation and language must not be strained in order to tax a transaction, which had the legislature thought of , it would have covered by appropriate words, B. P Biscuit case

  22. Strict construction rules • Property right effected. • Imposition of tax deprive of the subject from their property rights protected and guaranteed by the Constitution- Art. 24 • Tax is a compulsory execution of money from the subject • Tax is a penalty • Burden of proof – Initial burden is on the Authority to prove that the person falls within the ambit of charging section, once it is discharged the onus is shifted on the person to prove that he is entitled to exemption .

  23. Strict construction rules • Level of compliance – charging sections are mandatory in nature and required to comply completely. • Benefit of doubt, ambiguity, two or several interpretation of charging section is to be given to the citizens. • Exemption provision are opponent to charging provision and are construed liberally in favour of the State and against the subject because their burden of tax is to be borne by the other citizen paying tax.

  24. Charging vs. Exemption • Exemption provision are opponent of charging provision. • Exemption provision are liberally construed in favour of the State and against the subject because the burden of tax is to be borne by other member of the State. • Burden is on the person claiming exemption to prove that he falls within the exemption provision and fulfils the exemption requirements and conditions. • Benefit of doubt, ambiguity, or alternative interpretation of exemption provision is to be given to the State except claimant of exemption is State or state divisions, charitable institutions, or meant for economic development.

  25. Assessment • Assessment stage of a fiscal statue is a part of machinery provision and procedural in nature dealing with determination of tax liability of the taxpayer as well as value of the subject matter and all other proceeding and steps involved and culminate into assessment order. • Component of assessment • Registration provision • Filing of Returns • Audit • Assessment proceedings – SCN – Reply – submission – proofs. • Assessment order. • Revision/ review, appeal effect • Cannon of construction of assessment provisions –Liberal construction in favour of the State and against the subject to crystallize and effect the recovery. (2002) 86 TAX 138 (KHC) Deans Associates case. 2002 PTD 2112 LHC), PLD 1961 SC 119, PTCL 1990 CL 386 • Original vs.. revised assessment / assessment vs.. re-assessment.

  26. Recovery • Recovery and collection provision of the fiscal statue are also part of machinery provision and are construed in the same manner as assessment provision in order to make the recovery of tax efficient and effective – Liberal construction – in favour of the state and against the subject. • Mode of Recovery and collection of tax • Pre- assessment / adjudication • Advance payment of tax • Withholding or collection of tax at source • Payment with return • Post assessment / adjudication • Demand Notice • Deduction or adjustment from refund or money of the taxpayer in the control of income, custom, excise authority

  27. Recovery • By notice from the person holding money of the taxpayer • By stopping removal of good from business premises. • By notice to any person to stop clearance of imported or manufactured goods or attachment of bank accounts. • Seal of business premises • Attach and sell or sell without attachment movable or immovable property • Attach and sell movable and immovable property of guarantor where such guarantor has failed to make the payment of tax under guarantee, bond or instrument. • Write off of arrears by the Board or authorised officer by the Board as prescribed. S. 48(1A) • Sales tax officer has the power of Civil Court for recovery of tax . S. 48(2) • Section 48 – Sales Tax Rules, 2006, Cheaper XI

  28. ASSESSMENT • DEFINITION • KINDS/CLASIFICATION • SCOPE & PROCEEDINGS • ASSESSMENT ORDER/ EFFECTS

  29. Definition /meaning • Statutory • The expression “ Assessment” has not been defined in the Sales Tax Act 1990. However, the word assessment was defined in the repealed Income tax Ordinance 1979 as “ Assessment includes re-assessment and additional assessment and the cognate expression shall be construed accordingly.” S. 2(7) • Dictionary meaning: • Black law dictionary, seventh edition, page 111 • “Determination of the rate or amount of something, such as a tax or damages (assessment of losses covered by insurance). 2) Imposition of something, such as tax or fine, according to as established rate; the tax or fine so imposed.

  30. Definition / meaning • Longman’s dictionary of contemporary English, New edition, page 64 • “ The act of assessing; the value or amount at which something is calculated.” • Excellent Legal Words and Phrases by Mian Muhibullah Kakakhel, volume 1, page 557 & 559 • “ Assessment” in relation to taxation or revenue means the process of ascertaining or adjusting ; determining the share of a tax or duty to be paid by the person or apportioning the same among different taxable persons.”

  31. Definition /meaning • Judicial Meaning: • 1992 PTD 513 (HC) ref. Muhammad Amjad vs.. The Commissioner of Income tax. • “ The word ‘Assessment’ is uses in the statute as meaning sometime, the computation of Income, sometime the determination of the amount of tax payable, sometime the whole procedure laid down in the statue for imposing liability on the taxpayer. The word assessment must be understood in each section of the statute with reference to the context in which it is used; in some sections it has a restricted meaning and is used as distinct from reassessment. The method prescribed by the statute for making an assessment of tax, using the word assessment in its most comprehensive sense as including the whole procedure for imposing liability upon the taxpayer consist of the following steps:

  32. Definition /meaning • In the first place, taxable income of the assessee has to be computed • In the next place, the sum payable by him on the basis of such computation has to be determined. • Finally , a notice of demand in the prescribed form specifying the sum so payable has to be served upon the assessee. (pg 518) • PLD 1989 Lah. 121, Punjab Cables vs.. G.O.P • The word assessment in relation to taxation or Revenue means the process of ascertaining, adjusting, determining the share of a tax or duty to be paid by a person or apportioning the same among different taxable persons. Further, that assessment in relation to taxation includes all steps necessary which are taken in the legitimate exercise of power to tax.” 2002 PTD 750(LHC)

  33. Kinds / classification • Assessment concepts- Assessment & Re-assessment, Original & Revised assessment, Deemed assessment, Agreed assessment, etc. • Original assessment kinds. • Self assessment • Provisional assessment • Assessment on the basis of return • Normal assessment • Best judgement assessment/ Ex-parte assessment. • Revised assessment kinds. • Review vs.. revision • Review • Amended, Escape, Additional or Re-assessment • Rectified assessment

  34. Kinds / classification • Revision • Revision of assessment by: • Board • Collector • Commissioner • IAC • Appellant Authority • Courts

  35. Assessment Scope • Sales Tax Act 1990. • Assessment of Tax. S.11 • Recovery of tax not levied or short levied or erroneously refunded. S. 36 • Revision By: • Board or Collector S. 45A • Collector of Sales tax Appeals, • S.45B • Appellate Tribunal S.46 • High Court – Reference – S.47 • Board under ADR. S47A • Correction of errors. S. 57

  36. Assessment Scope • Sales Tax Act 1951 • Assessment. S.10 • Assessment on the basis of return • S. 10 (2)- Sales Tax Officer is satisfied about the correctness and completeness of the return. • Normal assessment. S. 10(3)- Sales Tax Office is not satisfied about the correctness or completeness of the return and call for any information, particulars, books, record, documents, etc. and determine the tax payable • Best judgement assessment. S. 10(4) – Returned not filed or record, documents, books not produces- Exparte judgement shall be made after giving an opportunity of being heard.

  37. Assessment Scope • Revision by Commissioner of Sales Tax. S. 16 • Tax not assessed – escape assessment- Reassessment S.28 • Revision by Inspecting Assistant Commissioner to the assessment order of Sales tax officer. S.28A • Rectification of mistake. S30 • Appeal to Appellate Assistant Commissioner. S14 • Appeal to appellate Tribunal. S 15 • Reference to High Court. 17

  38. Assessment of tax • Section 11(1) • Non filer of Return • Filer of return making short payment due to miscalculation. • Show Cause Notice by Sales tax Officer • Order of assessment of tax, including imposition of penalty and default surcharge. • Show Cause Notice and order of assessment abated if non filer file the return and pays the tax along with penalty and default surcharge.

  39. Assessment of tax • Section 11(2) – Invoking of: • Non payment due tax on supply made. • Short payment of due tax on supply made. • Claim of inadmissible of input tax credit. • Claim of inadmissible of Refund. • Reasons and grounds • of non payment • of short payment • claim of in admissible input tax or refund shall be other than non filing of return or short payment due to miscalculation.

  40. Assessment of tax • Section 11(4) • Assessment order shall determine • Sales tax actually payable • Determination of amount of tax credit • Determination of amount of refund • Imposition of penalty • Charge of default surcharge • Prerequisites • Issuance of show cause Notice by the sales tax authority having jurisdiction over the case and competent u/s 45

  41. Assessment of tax • SCN specifying the reasons and ground on the basis of which it is issued and intended to proceed. • Taking into consideration the representation of the taxpayer • Providing opportunity of being heard • Limitation of passing the order- 90 days from the issuance of scn or extended period of 90 days by the collector for the reasons to be recorded in writing. • Determination of tax liability • Non obstante • Minimum tax liability by the non filer of return to be adjudicated by the sales tax department not below the rank of assistant collector as prescribed by Board. S 11(5)

  42. Recovery of tax u/s 36 • Section 36 (1) – Invoking of • Non levy of tax by the reason of collusion • Non levy of tax by the reason of deliberate act. • Short levy of tax by the reason of collusion. • Short levy of tax by the reason of deliberate act. • Tax erroneously refunded by the reason of collusion. • Tax erroneously refunded by the reason of deliberate act.

  43. Recovery of tax u/s 36 • Service of show cause notice on the person liable to pay such amount of tax • Service of notice within 5 years from the due date of payment u/s 6 and date of refund in case of refund. • Amount of tax required to be paid should be specified in the show cause notice.

  44. Recovery of tax u/s 36 • Section 36(2) – Invoking of: • Non levy of tax by the reason of inadvertence. • Non levy of tax by the reason of error. • Non levy of tax by the reason of misconstruction. • Short levy of tax by the reason of inadvertence. • Short levy of tax by the reason of error. • Short levy of tax by the reason of misconstruction. • Erroneous refund of tax by the reason of inadvertence. • Erroneous refund of tax by the reason of error. • Erroneous refund of tax by the reason of misconstruction.

  45. Recovery of tax u/s 36 • Section 36(2) – Mandatory conditions • Issuance of show cause notice to the person liable to pay non levied, short levied tax or erroneous refund. • Service of notice within 3 years from the due date of payment of tax u/s 6 and date of refund in case of erroneous refund. • Amount of non levied, short levied or erroneous refund required to be paid must be SPECIFIED in the Notice.

  46. Recovery of tax u/s 36 • Section 36(3) – Mandatory conditions • Consideration of objections of the person served with show cause notice by the empowered sales tax officer. • Determination of the amount of tax or charge in the order payable by the person on whom the show cause notice is served. • Order shall be passed within 90 days from the date of issuance of show cause notice or within extended period as the Collector may for the reasons to be recorded in writing fix. • The Collector is empowered to extend the period for passing the order by maximum 90 days.

  47. Recovery of tax u/s 36 • Section 36(4) – Calculation of Limitation period, 5 year u/s 36(1), 3 years u/s 36(2). • In case of non levied or short levied the due date of payment u/s 6. • In case of import the time of payment of custom duty under the Custom Act 1969. • In case of Taxable supply made, date of filing of return of the period. • In case of taxable goods, supplies or classes of supplies other than zero rated supplies as specified in the notification by the Board, the time or date as specified by Board for the payment of tax in respect of such supplies in the Notification in the Official Gazettee. • In case of erroneous tax refund, the date of refund.

  48. Revision by Board u/s 45 • Section 45A (1) (2) (3) – Revision by Board • Suo moto exercise of revisional jurisdiction by the Board. • Calling for and examining the Record of any departmental proceeding under the Act or Rules made there under. • Object of revision to check and satisfy itself about the legality or propriety of any decision or order passed under such proceeding. • Revision of the decision or order of the any sales tax authority. • Discretion of passing any order as Board think fit –quash, annul, cancel, modify, vary, maintain, set-aside etc.

  49. Revision by Board u/s 45 • No order of enhancement or imposition of penalty or fine or sales tax greater than original levied unless person effected by the order is given an opportunity of showing cause and of being heard. • No exercise of revisional jurisdiction where appeal before the Collector of Sales Tax (appeals) u/s 45B or before the Appellate Tribunal is pending. 45A(2) • No revision order after the expiry of 5 year from the date of original decision or order of sub-ordinate officer. 45A(3)

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