Legality of sales tax on advances

Sales Tax on advances was introduced with the enforcement of Sales Tax Act, 1990. However, its implementation was a matter of dispute until November 2003 when the Supreme Court of Pakistan finally decided to set aside the judgement of the High Court in the case of D.G. Khan Cement Company Ltd and others, at Para 29, reported in 2004 PTD 1179 in the following manner (hereinafter referred to as "the judgement"):
"It is hereby declared that the payment of sales tax was due within the tax period under the Act from the date of receipt of the amount of consideration in advance and not from the date of delivery of goods and declaration made by the High Court to the contrary is hereby set aside."
Relevant section, which says that sales tax shall be levied on advance payment, is appended below for convenience of the reader:
"Section 2(44) of the Sales Tax Act, 1990 "Time of Supply"
A supply shall be deemed to have taken place at the earlier of the time of delivery of goods or the time when any payment is received by the supplier in respect of that supply:
PROVIDED THAT WHERE ANY PART PAYMENT IS RECEIVED:
(a) for a supply in a tax period, it shall be accounted for in the return for that tax period; and
(b) ..................."
It would be pertinent to discuss hereunder the constitutional power in the legislation of the Sales Tax Act, 1990:
The Parliament has the power to legislate law with respect to any matter enumerated in the Federal Legislative List or in the Concurrent Legislative List. Taxes on sale are mentioned at the Entry No. 49 of Part I of the Federal Legislative List in the Fourth Schedule of the Constitution of the Islamic Republic of Pakistan, 1973 as:
"49. Taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed."
Now, the following questions which were not brought to the Supreme Court of Pakistan in the judgement and thus, could not be addressed:
What is the definition of "sales" enumerated in the Entry No. 49 of the Federal Legislative List?
At the time of introduction of Constitution of the Islamic Republic of Pakistan, 1973 there was no Sales Tax Act, 1990. However, Sale of Goods Act, 1930 was already enforced and the same is still in existence where "sale" has been vividly explained. So, while interpreting the Constitution shall we take the meaning of "sale" enumerated in the Entry No. 49 of the Federal Legislative List in accordance with the meaning of "sale" mentioned in the Sale of Goods Act, 1930 or in accordance with the meaning of "sale" mentioned in Sales Tax Act, 1990?
In the case any difference between Sale of Goods Act, 1930 and Sales Tax Act, 1990 with respect to the meaning of "sale" whose meaning shall prevail and determine the meaning of "sale" enumerated in the Entry No. 49 of the Federal Legislative List?
Is it possible that the Parliament through the law or through deeming provisions can expand the meaning of any word enumerated in the legislative lists for taxing purpose?
Whether or not words "Sale" and "Agreement to Sell" have the same meaning?
In order to analyse the above questions, it would be better to peruse Section 4 of the Sale of Goods Act, 1930:
"SECTION 4 "SALE AND AGREEMENT TO SELL"
(1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another.
(2) A contract of sale may be absolute or conditional.
(3) Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.
(4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred." Secondly, distinction between "sale" and "agreement to sell" is also illustrated by Halsbury's Law of England, volume 29, page 15, para 13:
"An agreement to sell, or, as it is often stated, an executory contract of sale, is a contract pure and simple, whereas a sale, or, as it is called for distinction, an executed contract of sale, is a contract plus a conveyance. Thus, by an agreement to sell a mere 'jus in personam' is created, by a sale a 'jus in rem' is transferred. Where goods have been sold, and the buyer makes default in payment, the seller may sue for the contract price, but where an agreement to buy is broken, usually the seller's only remedy is an action for unliquidated damages. Similarly, if an agreement to sell be broken by the seller, the buyer has only a personal remedy against the seller.
The goods are the property of the seller and he can dispose of them. They may be taken in execution for his debts, and if he becomes bankrupt they pass to his trustee in bankruptcy. But if there has been a sale, and the seller breaks his engagement to deliver the goods, the buyer has not only a personal remedy against the seller, but also the usual proprietary remedies in respect of the goods themselves, such as the actions for conversion and detinue. Again, if there be an agreement for sale and the goods perish, the loss as a rule falls on the seller, while if there has been a sale the loss as a rule falls upon the buyer." Thirdly, International Accounting Standard 18 (Revenue), recognised by Companies Ordinance, 1984 under section 234, states in Para 14 the condition for recognising revenue:
"Revenue from the sale of goods shall be recognised when all the following conditions have been satisfied:
a) the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;
b) the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; c) the amount of revenue can be measured reliably;
d) it is probable that the economic benefits associated with the transactions will flow to the entity; and
e) the costs incurred or to be incurred in respect of the transaction can be measured reliably."
Lastly, reference is made to the AIR 1968 Supreme Court 838 (V 55 C 170) from Madras by J.C. Shah, v. Ramaswami and v. Bhargava, JJ., where answers to the above questions are probably given:
"The expression 'sale of goods' used in the legislative entries in the Constitution and the Government of India Act, 1935, bears the same meaning which it has in the Sale of Goods Act, 1930 and therefore the State Legislature may under Entry 54 List II, legislate in respect of the series of acts beginning with an agreement of sale between parties competent to contract and resulting in transfer of property from one of the parties to the agreement to the other for a price, and matters incidental thereto, but cannot make a transaction, which is not a sale within the Sale of Goods Act, a sale by a statutory fiction and impose tax thereon.
Consequently, if the element of transfer of property from one person to another is lacking in any transaction, there is no sale and the Legislature cannot by treating it as a sale by a deeming clause bring it within the ambit of the taxing statute. AIR 1958 SC 560 and AIR 1963 SC 1207 and AIR 1964 SC 1037.
Another reference in this regard is made to the AIR 1954 S.C. 459 (vol. 41, C.N. 110) (from Allahabad: AIR 1952 All 764) by Mahajan C.J., B.K. Mukherjea, Bose, Bhagwati and Venkatarama Ayyar JJ.
Under the statute law of India, that is the Sale of Goods Act, 1930, which is based on English law on the subject, a sale of goods and an agreement for the sale of goods are treated as two distinct and separate matters, the vital point of distinction between them being that whereas in a sale there is a transfer of property in the goods from the seller to the buyer, there is none in an agreement to sell.
Therefore, there having existed at the time of the enactment of the Government of India Act, 1935, a well defined and well-established distinction between a sale and an agreement to sell it would be proper to interpret the expression "sale of goods" in entry 48 in the sense in which it was used in legislation both in England and India and to hold that it authorises the imposition of a Tax only when there is a completed sale involving transfer of title, and not when there is a mere agreement to sell. The State Legislature cannot by, enlarging the definition of "sale" as including forward contracts, arrogate to itself a power which is not conferred upon it by the Constitution Act, and the definition of "sale" in section 2(h) of the U.P. Sales Tax Act must, to that extent, be declared ultra vires.
On the other hand, the writer feels necessary to highlight the concept of "Sale" by way of Salam (advance payment) under Islamic Law as:
The meaning and condition of Salam as defined by Muhammad Taqi Usmani in his book "An Introduction to Islamic Finance" which inter alia includes:
"Salam is a sale whereby the seller undertakes to supply some specific goods to the buyer at a future date in exchange for an advanced price fully paid at spot. Salam can be effected in those commodities only the quality and quantity of which can be specified exactly.
The things whose quality or quantity is not determined by specification cannot be sold through the contract of Salam. Muhammad Taqi Usmani refers in this context Hadith of Holy Prophet (Peace Be Upon Him) which is as under:
"Whoever wishes to enter into a contract of Salam, he must effect the Salam according to the specified measure and the specified weight and the specified date of delivery". (This Hadith is reported by all the six famous books of Hadith, See Ibn-ul-humam, Fath-ul-Qadir v.6, p.205)
The meaning and condition of Salam as defined by Muhammad Ayub in his book "Islamic Banking and Finance (Theory and Practice) published by State Bank of Pakistan, which inter alia includes:
"Salam is a sale whereby the seller undertakes to supply some specific goods to the buyer at a future date in exchange for an advance price fully paid on spot. Salam can be applied in those commodities only that are normally available in the market and whose quality and quantity can be specified exactly.
The quality of the commodity that is intended to be purchased should be fully specified leaving no ambiguity leading to dispute."
The meaning and condition of Salam as defined by State Bank of Pakistan in its Press Release dated April 16, 2004 duly approved by State Bank's Shariah Board, which inter alia includes:
"Salam (advance payment against deferred delivery of goods) means a kind of sale whereby the seller undertakes to supply specific goods to a buyer at a future date in consideration of a price fully paid in advance at the time the contract of sale is made.
The specifications, quality and quantity of the commodity must be determined to avoid any ambiguity which could become a cause of dispute".
It is pertinent to mention that the Preamble of the Constitution of the Islamic Republic of Pakistan 1973 declares that in Pakistan Muslims shall be enabled to order their lives in the individual and collective spheres in accordance with the teachings and requirements of Islam as set out in the Holy Quran and Sunnah. Presently, cement industry, sugar industry, automobile industry and specially companies dealing consumer products take or record advance against taxable supply, etc in the following situations:
The company takes advance against taxable supply; however, price of the product, quantity, description, etc are generally not determined at the time of advance payment.
The company also records advance on account of target discounts/after-sale discounts, etc against taxable supply, which is also not known.
After review of the Salam transaction and present modus operandi of accepting advances in our business society, another question arises that whether or not sales tax on advances is in conformity with the Injunctions of Islam?
In this respect, the Federal Shariat Court has been established and its powers, jurisdiction and functions have been defined in Article 203D of the Constitution of the Islamic Republic of Pakistan 1973 as under:
"(1) The Court may, either of its own motion or on the petition of a citizen of Pakistan or the Federal Government or a Provincial Government, examine and decide the question whether or not any law or provision of law is repugnant to the Injunctions of Islam, as laid down in Holy Quran and Sunnah of the Holy Prophet, hereinafter referred to as the Injunctions of Islam.
(1A) Where the Court takes up the examination of any law or provision of law under clause (1) and such law or provision of law appears to it to be repugnant to the Injunctions of Islam, the Court shall cause to be given to the Federal Government in the case of a law with respect to a matter in the Federal Legislative List or the Concurrent Legislative List, or to the Provincial Government in the case of a law with respect to a matter not enumerated in the either of those lists, a notice specifying the particular provisions that appear to it to be so repugnant, and afford to such Government adequate opportunity to have its point of view placed before the Court.
(2) ..................
(3) If any law or provision of law is held by the court to be repugnant to the Injunctions of Islam,-
a) the President in the case of a law with respect to a matter in the Federal Legislative List or the Concurrent Legislative List, or the Governor in the case of a law with respect to a matter not enumerated in either of those Lists, shall take steps to amend the law so as to bring such law or provision into conformity with the Injunctions of Islam; and
b) such law or provision shall, to the extent to which it is held to be so repugnant, cease to have effect on the day on which the decision of the Court takes effect."
It would be unjustified if the following problem explained in Para 4 of the judgement is not discussed:
"It was pointed out that usually the supply of goods used to be made 2-4 months after the receipt of advance payment, therefore, the manufacturers had been wrongly retaining with them the amount of sales tax which had become due on the 20th of the succeeding month of the receipt of the advance payment i.e. the time fixed by the statute".
Sales Tax Act, 1990 is based on the Value Added Tax scheme where tax is finally collected from the consumer and the businesses are merely withholding agents.
Under the scheme, the company is entitled to get credit of the sales tax paid on taxable purchases against sales tax payable on its taxable supply.
In case sales tax is charged on the advances on that tax period by issuing invoice under section 23 of the Sales Tax Act, 1990, the sales tax paid on the advances shall become the input tax on that particular tax period and thus, tax credit is allowed to the person giving advance payment. Therefore, the government, technically speaking, does not get any benefit from the arrangement of sales tax on advances.
In view of the above discussion and citations, the writer is of the opinion that if the questions highlighted hereinabove were brought before the Supreme Court of Pakistan, the judgement would probably be different. However, it is now open for the general public and legal practitioners to comment on the subject.