LHC Orders FBR to Amend Sales Tax Act to Safeguard Rights of Taxpayers

Lahore High Court (LHC) has directed the federal government to introduce legislation in the Sales Tax Act of 1990 to safeguard the rights of taxpayers for timely refund payments in cases of pre-refund audit proceedings.

LHC order added that the non-adherence by the respondent-FBR to the time limit envisaged under Section 10(3) of the Sales Tax Act in concluding the refund claims amounts to a simultaneous violation of the fundamental rights of the taxpayers guaranteed under Articles 23 and 24 of the Constitution.

No consequences of such non-adherence have been envisaged under the Act. This aspect of the matter is a policy issue and requires legislation for the Federal Government to examine on a priority basis.

Therefore, the Federal Government is directed to consider the possibility of initiating necessary legislation on the subject by providing the consequences of non-adherence to the provision of Section 10(3) so that the rights of the taxpayers can be safeguarded, LHC directed the federal government.

This brings the Court to examine the point as to whether the departmental functionaries can sit over the rights of taxpayers falling under the first proviso to Section 10(1)] for an indefinite period firstly by their inactions and subsequently, by initiating pre-refund audit proceedings to determine the admissibility of the claim and not concluding the same within a reasonable time and what are consequences of delay in deciding the tax refund claim.

According to a judgment of the LHC, “The FBR and its officials cannot sit over the rights of the taxpayers in relation to the tax refund claims for an indefinite period and must conclude the pre-refund audit proceedings by strictly following the mandate of Section 10(3) of the Sales Tax Act (Act)”, LHC order added.

Through the petition, under Article 199 of the Constitution, a Public Limited Company engaged in manufacturing of fertilizers challenged pre-refund audit proceedings and the consequent show-cause notice issued by the respondent-FBR, with the averments that the same be declared illegal, unlawful, and violative of the provisions of section 10 of the Sales Tax Act, 1990.

Prayer has also been made that the department should refund the excess amount of input tax paid by the petitioner while dealing with delays in audit proceedings.

The company paid input tax applicable at 17%, whereas the output tax was charged on the goods (fertilizers) at the reduced rate of 2% by the Eighth Schedule to the Act. Hence, the petitioner was entitled to the referred amount of tax refund. However, refund claims remained pending payment with the respondent FBR despite the timely filing along with the requisite documents.

LHC believed that section 10 of the Sales Tax Act is not a self-containing and self-executory provision; rather, the admissibility of the tax refund claim is required to be determined in a case where there is reason to believe that the refund claim is not admissible.

LHC further directed that given the facts and circumstances of the present case and the scope of the first proviso to Section 10(1) of the Act, the present petition is misconceived and pre-mature since the impugned show-cause notice issued by the department has been premised on the pre-refund audit proceedings. No adverse order has been passed against the petitioner.

The FBR is directed to proceed with the present matter, strictly per law, keeping in view the mandate of Section 10(3) of the Act, and if, in the instant case, there has been no approval obtained from the Board for the conclusion of pre-audit proceedings within nine months, ex-post facto approval must be obtained, before proceeding further.

LHC further ordered that section 67 of the Act is only applicable. The additional amount is payable to the taxpayer when the refund is held due and is not made within the time specified in Section 10 of the Act. Still, the said provision is to be applicable after the investigation of the claim, or so much of the claim as is accepted, and for the said purpose mandate of Section 10(3) is to be strictly adhered to.

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