A landmark judgement by SC
By: HUZAIMA BUKHARI AND DR IKRAMUL HAQ Published on December 20, 2013
In a landmark judgement delivered on December 10, 2013, the Supreme Court of Pakistan held imposition of nine percent additional sales tax on supply of CNG (Compressed natural gas) as unlawful. The apex court, while directing the government to return the additional money received from the consumers, asked the Oil and Gas Regulatory Authority (OGRA) to issue a revised notification for standard rate of 16 or 17 percent of sales tax as early as possible but not beyond a period of seven days. In compliance with the order, OGRA on December 17, 2013 announced a cut in prices of CNG by Rs 1.23 per kilogramme. The same day, the government filed review petition against the order.
Highlighting crux of the matter, the Supreme Court held that "the Federation of Pakistan under Article 38 of the Constitution as a policy is bound to secure the well-being of the people by raising their standard of living." It ruled that the subsidy already being given to the consumers should not have been withdrawn, adding "though the subsidy is not their right, the government being responsible for their welfare may consider in near future to increase the rate of subsidy by extending its benefits to the consumers".
It may be recalled that additional sales tax of 9% on supply of CNG was levied by inserting subsection (8) in the Sales Tax Act, 1990 through the Finance Act, 2013, which reads as under:
"Notwithstanding the rate of sales tax as contained in sub-section (1) and notwithstanding anything contained in any law or notification made there under, in case of supply of natural gas to CNG stations, the Gas Transmission and Distribution Company shall charge sales tax from the CNG stations at the rate of nine percent in addition to the sales tax chargeable under sub-section (1) on the value of supply, where the value for the purpose of levy of sales tax shall include price of natural gas, charges, rents, commissions and all local, provincial and Federal duties and taxes, but excluding the amount of sales tax, as provided in clause (46) of section 2. This rate shall include the rate of tax chargeable under sub-section (1) and nine percent in lieu of value addition made by the CNG stations. The rate of sales tax under this sub-section shall have effect and shall be deemed to have taken effect on and from the 1st day of July, 2007.
Explanation: The rate of nine percent in lieu of value addition is less than the standard rate of tax chargeable under sub-section (1), as all input tax adjustments have been catered for while determining the figure of nine percent".
The Supreme Court held that subsection (8) of section 3 of the Sales Tax Act, 1990, inserted by the Finance Act, 2013, was contrary to law and the Constitution. Declaring extra sales tax of 9 percent as untenable in law, it was categorically concluded by the apex court that imposition beyond rate fixed under section 3(1) of the Sales Tax Act, 1990 was not justified. The Supreme Court held that directions and the ratio of the judgement of June 21, 2013 in the case of Iqbal Zafar Jhagra v Federation of Pakistan [(2013)108 TAX 1 S.C. Pak = 2013 SCMR 1337], wherein Rule 7 of the Provisional Collection of Taxes Act, 1931 was declared ultra vires, shall be applicable in this case as well. The Supreme Court also observed that gas development charges (GDIC) "falls within the definition of Section 2(46) of the Sales Tax Act, 1990 and no order is required to be passed in this behalf".
The three-member bench of Supreme Court, headed by former Chief Justice Iftikhar Muhammad Chaudhry, has opined that "load-shedding of electricity in the country is manageable subject to dedicated and committed efforts to ensure the maximum possible generation of electricity which is sufficient to cater to the requirements of all consumers". The judgement says that "the competent authority must concentrate its efforts to minimise the sufferings of the consumers by endeavouring to provide uninterrupted supply of electricity... if, however, load-shedding is the only way out, it must be administered without having distinction between rural and urban areas as well as the domestic, commercial and industrial sectors. Moreover, a formula must be put in place to ensure the distribution of electricity on an equitable basis." The apex court further instructs that the competent authority shall take steps to control all kinds of losses by using modern devices like smart meters. It stresses that electricity should be supplied only to the consumers, who are ready to make payment, if need be, in advance or without any default after submission of the bills.
The judgement says that "as far as all kinds of unauthorised consumers are concerned, efforts should be made to persuade them to make payments of the bills, failing which action as envisaged under the Electricity Act, 1910, the Electricity Rules, 1937 and National Electric Power Regulatory Authority Act, 1997 as well as other enabling laws/rules, should be taken". The apex court has directed that "a policy has to be announced by the National Transmission & Despatch Company (NTDC)/Power Distribution Companies (Discos) under which the supply of electricity to the consumer who believes in law and make the payment in time is encouraged and supply to unauthorised consumers is discouraged." The judgement observes: The Court has held that it is responsibility of the National Electric Power Regulatory Authority (NEPRA) and Pakistan Electric Power Company (PEPCO) to reduce the prices while ensuring that "electricity is generated through less-costing value of production from hydel power...and as far as thermal power is concerned, preference must be given to generate electricity by using coal and gas, and unless there is no compulsion, the electricity should not be generated from RFO as it is casting higher prices, which ultimately has to be borne by the consumers".
The apex court has aptly observed that the renewable sources for generating electricity including wind and solar power must be utilised, adding that prices of petrol, diesel, petroleum products, etc have been invariably fixed by OGRA arbitrarily without taking into consideration the rate in the international market. Therefore, in future, the apex court ruled, "all necessary steps shall be taken in this behalf to fix the prices strictly in accordance with the prevailing rates in the international market." Needless to say this command is binding under Article 189 of the Constitution and if not implemented will attract contempt of the court.
Regarding supply of gas at subsidised rates to the fertilisers, the court ruled, "As far as supply of gas at subsidised rates to the fertiliser companies are concerned, it may continue but at the same time there must be a policy to ensure that fertilisers like urea etc is sold in the market to the farmers at a subsidised rate...However, as far as captive power plants are concerned, the policy must be revised and without any justification they cannot be allowed supply of gas to produce electricity because they supply electricity at much higher than the NEPRA rate instead of subsidised rate to NTDC."
It is held by the apex court that NEPRA has failed to perform its duties in accordance with the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997. The judgement says without any unnecessary interference, NEPRA must watch interest of stakeholders/consumers while determining the tariff of electricity and opportunity of hearing must be ensured to all concerned. The court while referring to issuance of licences to CNG stations observed that an exercise has also been undertaken to inquire into the grant of licenses to the various CNG stations. The apex court held that such licences were prima facie unauthorisedly issued from time to time and this aspect of the case was to be heard along with the case of implementation in the case of appointment of Chairman OGRA "and the Court shall decide it on the basis of evidence recorded by the Federal Investigation Agency (FIA) independently".
The judgement of Supreme Court exposes the real malady faced by Pakistan. Rampant corruption in all spheres of governance coupled with lack of will to tax the rich. On the one hand, our incompetent and corrupt rulers are not interested in collecting income tax from the rich and mighty, and on the other have imposed exorbitant sales tax on CNG. Rich absentee landlords conveniently remain outside the tax net, while the poor are paying 16 percent to 17 percent GST on items of daily use. Our rulers are playing havoc with the economy by giving extraordinary tax concessions to the rich and levying exorbitant indirect taxes on the poor as well enhancing the prices of utilities and POL beyond the capacity of the income of vast majority of the population.
Incompetent, corrupt and inefficient tax machinery suits the rulers, who are the real culprits behind our debt enslavement. For example, there was no justification to raise the GST rate to 17 percent in the Budget 2013-14 - at that time IMF was not even in picture. Time and again we have highlighted the need for bringing GST rate to a single digit of 8 percent across the board with effective enforcement, and concentrating more on reduced spending on defence and developments, each by a third, cutting tax rates, eliminating all exemptions and concessions, and enforcing income tax compliance on the part of the rich. Once it is done, then Federal Board of Revenue must resort to tax audits on a war footing, targeting all those who pay taxes but under-file massively (including government servants), and tax them all on the true and fair market value of their undeclared, hidden assets, at home and abroad. Then, revisit the documentation exercise with a view to catching those outside the tax net all together (this would also help quantify the extent of under-filing).
The real tax potential of Pakistan - a cursory look at undeclared income/wealth would prove it - is not less than Rs 8 trillion ['FBR's Year Book 2012-13', Business Recorder, September 27, 2013]. If we manage to collect tax revenue of even Rs 5 to 6 trillion in the coming three years, our reliance on domestic and foreign loans can decrease significantly. This is, however, not possible under the present regime that is brazenly protecting tax evaders - Nawaz Sharif & cronyism, Business Recorder, December 6, 2013.
(The writers are Adjunct Faculty at Lahore University of Management Sciences (LUMS) and partners in law firm, Huzaima & Ikram (Taxand Pakistan)