Restaurants on Motorways evading sales tax in millions

The detection of non-payment of huge amount of sales tax by a restaurant in a far-flung area on Islamabad-Lahore Motorway is an eye opener for other RTOs to document actual sales/turnover of dozens of restaurants/hotels and food outlets on Lahore-Peshawar Motorway and other major highways.
In this connection, Commissioner Inland Revenue (Appeals-III), Islamabad has issued Sales Tax Order-in-Appeal (2011) against a restaurant for recovery of the due amount of sales tax. Presently, the case is pending before the Appellate Tribunal Inland Revenue Islamabad.
It is learnt here on Monday that the regional tax authorities are strongly pursuing a case of non-payment of sales tax of around Rs 38 million by a restaurant in a far-flung area on Islamabad-Lahore Motorway, exposing a new avenue to the regional tax authorities for recovery of sales tax from non-filers restaurants/food outlets on Motorways. The detection of tax evasion by a restaurant, Motorway Service Area, (South), Kallar Kahar, Chakwal shows that the tax department has the capacity to recover huge amount of sales tax by determining actual sales of restaurants on motorways, highways and others locations such as Blue Area/Jinnah Super/Super Market and even hilly place of Pir Sohawa where hundreds of people from elite class daily visit for dining in the capital.
According to sources, the unique case of the restaurant on Kallar Kahar Islamabad-Lahore motorway is an example for other RTOs to determine actual sales and turnover, applying different sampling techniques. It has been found that the hotels and restaurants have massively misused the self assessment facility without any audit or verification of their sales and supplies records.
Due to hectic efforts of the RTO Rawalpindi, the department not also raised huge sales tax demand, but also managed to win the case at the level of the Commissioner Appeal. It is astonishing to note that a number of restaurants on motorways of Lahore-Islamabad and Islamabad-Peshawar have not even obtained the sales tax registration numbers. In few cases, the owners of returns have not obtained the National Tax Numbers (NTNs). Other potential restaurants on GT road (Islamabad-Lahore) and highways falls within the jurisdiction of RTOs of Lahore, Sargodha, Peshawar and Islamabad where deputation of tax officers at restaurants under section 40B of the Sales Tax Act can help in achieving desired results. Based the data of huge variation in the electricity and natural gas consumption as compared to actual turnover, the analysis of sales tax return of these hotels/restaurants can easily identify different kinds of discrepancies. The non-filers must be forced to file their returns.
If the actual amount of sales tax could be recovered from a restaurant located in the far flung area, it would be comparatively easy for the tax department to check the actual turnover of such restaurants located in posh areas of Kohsar Market, Jinnah Super, Super Market, Pir Sohawa and dozens of returns located in residential areas in Islamabad.
According to the order of Abdur Rashid Bajwa Commissioner Inland Revenue (Appeals-III) issued on May 13, 2011, it was observed that the unit has not filed sales tax returns for the period July 2005 to April 2010, which is tantamount to violation of the provisions of section 6 and 26(1) of the Sales Tax Act, 1990. Proceedings under section 11(1) & 11(5) of the Sales Tax Act, 1990 were initiated against them vide show cause notice. The unit neither responded to these notices nor attended the hearings fixed on the aforesaid dates. Under the circumstances, it was presumed that they had nothing to offer in their defence and, an ex-parte order under section 11(1) & 11(5) of the Sales Tax Act, 1990 was passed, creating a sales tax liability of Rs 63,613,806/-, on the basis of sales declared by them in their income tax returns filed for the period July 2005 to April 2010. In addition, a penalty of Rs 290,000/- was also imposed for non-filing for the said period.
The Sales Tax Order in Appeal stated that the owner of the restaurant has been provided sufficient opportunity by this forum to explain their position and defend the case. However, it has been noted that they have not come up with any documentary evidence to refute the charges levelled against them. Ample opportunity of hearing was provided to them to do so but they do not appear to be interested in defending their case. On their request, the department was directed to conduct an exercise to ascertain the correct sales, the sales not liable to sales tax or exempt under the 3rd and 6th Schedule, in association with them but it has been observed that they have not only refused to cooperate with the department and have not provided the record for the said exercise. On the contrary the nominated counsel of appellant (restaurant) categorically stated that there is no need of any reconciliation and they want decision on the basis of grounds/additional grounds of appeal. This is sufficient to prove that the appellants have no valid documentary evidence such as sales/purchase invoices, ledgers and bank statement to defend the allegations levelled in the show cause notice. The principles of natural justice thus stand fulfilled. Now when they have been given sufficient opportunity of defence, they cannot escape from their tax liability merely on the ground that they had not been heard or the impugned order has been passed against the unit.
The order further said that the objection of the restaurant that assessment made on the basis of sales shown on the basis of income tax returns id not valid. The reasons for non-acceptance of sales declared in income tax returns for sales tax purposes, often quoted in various decisions of appellate fora are that the principles of accounting to be followed in income tax and sales tax are different and that some times the sales shown in the income tax returns are exempt or not taxable under the sales tax law.
The impression of the appellant (restaurant) that sales tax in the instant case has been levied on service appears to be baseless and unfounded as the case of department is based on sales/supply of goods. In the past, the Board had clarified that restaurants, being manufacturers and supplier of food items, are liable to sales tax. The question of levy of sales tax on service therefore does not arise and the same is over ruled. The unit was provided an opportunity for an inquiry to be conducted in terms of section 45B (3) of the Sales Tax Act, 1990, but they have refused to avail the same that there is no need of any such inquiry, Sales Tax Order in Appeal said.
The objection of the appellants for issuing show cause notice and subsequent adjudication proceedings without jurisdiction is not valid because the show cause notice was issued for non filing and levying of minimum sales tax liability u/s 11(1) & 11(5) of the Sales Tax Act which falls within the jurisdiction of Commissioner Enforcement, the order said.
It has been observed that the impugned order which was passed on July 23, 2010, was despatched to the appellants through courier service on the same date, whereas the appeal in hand has been filed on December 2 2010, after four months of passing of the order. No valid reasons for such an inordinate delay in filing the appeal have been given. For the foregoing reasons, the appeal succeeds only to the extent of reduction in the adjudged amount, as a result of reconciliation of income tax returns by the department, the balance amount shall remain payable along with default surcharge and penalties, Sales Tax Order in Appeal added.