KARACHI: An appellate bench of High Court of Sindh (SHC) allowed eleven identical petitions filed by Total Parco Pakistan Limited, Kirthar Pakistan B. V, Proctor and Gamble Pakistan and ENI Pakistan Limited impunging Show cause notices in respect of input tax claims.
Hyder Ali Khan advocate appearing for the Petitioners sought a declaration that Section 8(1)(ca) of the Sales Tax Act, 1990 (“Act”) is ultra vires to the Constitution; or in the alternative, it may be read down, as the Court may deem fit.
The bench after a detailed hearing through a detailed judgment spreading over 11 pages held that relevant section of law under challenge cannot be invoked or applied independently in isolation and has to be read with Section 8A; and can only be invoked against the petitioners, once an exercise has been carried out and a conclusive finding has been arrived at against them pursuant to section 8A of the Act.
The Counsel for the Petitioners1 has argued that through Section 8(1)(ca)2 the input tax claim has been denied on goods or 1 Mr. Hyder Ali Khan Advocate C. P. No. 3852 / 2018 & Others Page 2 of 11 service in respect of which sales tax has not been deposited in the Government Treasury by the respective suppliers; that this amounts to a confiscatory action; that the Petitioners while purchasing their goods pay value of the goods so purchased along with sales tax and once it is paid to the supplier, it is the property of the Petitioners which cannot be taken away in this manner; that though Section 8 starts with a non-obstante clause, but in this case insofar as the Petitioners are concerned, they have paid the due sales tax and cannot be subjected to or dependent upon the conduct of the supplier who never remains in their control; that it is for the Respondents to regulate the supplier who is a registered person; that until and unless it has been brought on record that it was within the knowledge of the Petitioners that such tax would go unpaid, and for that an appropriate action has been first initiated under Section 8A of the Act, the petitioners cannot be made liable to the act and conduct of the supplier; that the Lahore High Court has already declared this provision as ultra vires and if this Court so wishes it can even read down this provision to the extent that first a joint liability is to be established under Section 8A and only then such input tax can be disallowed; and by relying upon reported cases3 he has prayed for allowing these petitions to the above extent.
The counsel for respondents have argued that a mere Show Cause Notice has been issued; hence, Petitions are not maintainable; that it is settled that all efforts are to be made to save the law rather than to declare it ultra vires; that input tax is not a fundamental right, but only a statutory right, hence, it is not a case of seeking protection under Article 199 of the Constitution; that even otherwise, such rights are not absolute but qualified; that if the tax Tax credit not allowed. – (1) Notwithstanding anything contained in this Act, a registered person shall not be entitled to reclaim or deduct input tax paid on – [(ca) the goods 10[or services] in respect of which sales tax has not been deposited in the Government treasury by the respective supplier is not deposited in the Government Treasury, it cannot be adjusted through input tax claim; that Section 8 overrides all such claims of input tax adjustment through a non-obstante clause, whereas, a reasonable restriction can always be placed on any such claim; that if permitted, it would amount to a double impact on the revenue as on the one hand the tax has not been deposited and on the other, further input is being claimed; that it may be a case of unreasonableness or hardship, but is permitted in law.
The bench after hearing the sides held that input tax in question upon fulfilling the requirements as contemplated in the Act, including section 73 thereof, would become property of the Petitioners, and though the taxing power is unlimited as long as it does not amount to confiscation and that the Legislature does not have the power to tax to the point of confiscation6. Taxation is a process which interferes with the personal and property rights of the people, although it is a necessary interference. But because it does take from the people a portion of their property, seems to be a valid reason for construing tax laws in favor of the tax-payer. Accordingly, this objection is hereby overruled.
The Petitioners case is premised on the fact that when they purchase goods from suppliers / active taxpayers, they are required to make payment of the goods as well as the amount of the sales tax involved and once that is paid in terms of relevant provisions of the Act including Section 73 ibid, they are then issued a sales tax invoice on the basis of which they claim input tax adjustment in their monthly sales tax returns. Once it is done, according to them, the suppliers no more remain in their control, and if ultimately a default occurs in depositing the sales tax, input tax claimed by them is then being denied on the basis Section 8(1)(ca) of the Act which according to them is ultra vires, confiscatory, unreasonable and beyond the mandate of the Act read with the Constitution of Islamic Republic of Pakistan. It is their case that section 78 allows this input tax adjustment and once it is paid, it becomes their property. On the other hand section 8 generally restricts such claim of input tax and for the present purposes it is disallowed in terms of section 8(1)(ca), whereas, 8A9 provides for initiating a joint action against the persons so involved in it. At the same time Section 7310 of the Act requires a purchaser to follow certain guidelines while claiming any such input tax. 7. Perusal of Section 7 reflects that subject to the provisions of Section 8 and 8B, for the purpose of determining his tax liability in respect of taxable supplies made during a tax period, a registered person shall, subject to the provisions of section 73, be entitled to deduct input tax paid or payable during the tax period for the purpose of taxable supplies made, or to be made, by him from the output tax. Though, in terms of Section 7 such admissibility of input tax adjustment or refund is qualified by and through s.8 and here, more precisely in terms of s.8(1)(ca), the Petitioners’ precise case is that they have paid this tax and are in possession of a sales tax invoice, and when s.7 along with s.8 is read harmoniously; there is no occasion to deny input tax adjustment in terms of s.8(1)(ca). On the other hand Respondents case is based on the fact that it is the intent of the legislature which has to be seen, and for the reason that the claim of input tax is subject to section 8, which has an overriding effect, whereas, this issue is already settled by a learned Division Bench Judgment of this Court in the case of AMZ Spinning11 and followed by this Bench in the case of Liberty Mills Ltd. 12, therefore the Petitioners have no case. With respect, in our considered view, for discussion to follow, this case is not covered by the ratio settled in the aforesaid judgments as it requires a much deeper appreciation of the impugned provision. 8. Here Section 8 and its non-obstante clause have to be read along with s.8A. It is in respect of joint and several liability of registered persons in a supply chain where tax is unpaid and provides that where a registered person receiving a taxable supply (petitioners herein) from another registered person (Supplier) is in the knowledge or has reasonable grounds to suspect that some, or all of the tax payable in respect of that supply or any previous or subsequent supply of the goods supplied would go unpaid, of which the burden to prove shall lie on the department such person as well as the person making the taxable supply shall be jointly and severally liable for payment of such unpaid amount of tax. It is of utmost importance to appreciate that Section 8(1) (ca) and Section 8A, both were introduced in the Act at the same time through Finance Act 2006 and when both these provisions are read in juxtaposition, it appears that they have nexus with each other and neither can be read in isolation; nor it would be appropriate to apply them in isolation to each other. The intent and purpose appears to be the same. Both relate to the same transaction of disallowing an input tax adjustment on goods or services on which tax remains due or unpaid. It is not in dispute that the petitioners have paid such tax to the supplier. In that case first it has to be determined and for which the onus is on the department that the petitioners are at fault or have remain negligent with conscious knowledge. The Petitioners stance appears to be weighty that before disallowing any input tax under Section 8(1)(ca) first an exercise has to be carried out under Section 8A ibid and for that the burden lies on the Department to first establish that where a registered person receiving a taxable supply from another registered person is in knowledge or has reasonable grounds to suspect that such amount of tax which he is paying to the supplier and of which he is claiming input tax adjustment would go unpaid. One needs to see the legislative intent as it is the knowledge or reasonable grounds to suspect that this tax would not be deposited; with a further qualification that for this the burden lies on the Department. Until this has been discharged, invoking s.8(1)(ca) would be premature. So in all fairness first an exercise under Section 8A has to be carried out and after it is concluded by discharging the burden to this effect, only then Section 8(1)(ca) could be invoked and the input tax adjustment can be disallowed. If this is not done in this manner, then the provision of Section 8A would be redundant and redundancy cannot be attributed to the legislature.
It also needs to be appreciated that when the petitioner and or a buyer purchases goods, an invoice is issued for the amount of goods so purchased along with the amount of sales tax, and when the petitioner and or the purchaser makes payment of the same, it is being done to a person who has been duly authorized to receive it by FBR as a registered person. He is not a stranger or an unauthorized person for that purpose. If he had not been an authorized tax registered person, in that case he could not issue any sales tax invoice, resultantly, no one would pay him the amount of sales tax of which no sales tax invoice is being issued. It is a receipt of tax issued by the supplier on behalf of the State, as he has been permitted to do so. It becomes the input tax claim or the property of the purchaser, once he has complied with the relevant conditions and restrictions prescribed under the Act or any Rules thereunder while making payment of the same. In the instant matter there are two requirements which the petitioner has to fulfill i.e. the supplier should be available as an active tax payer on the list so issued by FBR; and secondly, while making payment the condition / restriction, if any, of section 73 of the Act has to be complied with. It is not the case of the Respondents that petitioners before us have not fulfilled these two basic conditions. Therefore, by asking the petitioners to do what they are not required to do, in the present facts and circumstances amounts to doing an impossible task. They have complied with the requirement stipulated for them at the time of purchase of the goods; and subsequently, if the supplier does not deposit the tax collected from them, without recourse to the provision of section 8A ibid, they cannot be denied the benefit of input tax in question. In our considered view both these provisions are to be read together and in juxtaposition. Section 8(1)(ca) has to be read down in a manner so as to save the provision and at the same time it remains enforceable; however, in a harmonious manner along with Section 8A ibid.
The bench with above reasons allowed all the petitions.