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ISLAMABAD: The Khyber-Pakhtunkhwa Revenue Authority, Collector Appeals has withdrawn the tax imposed on the Peshawar Electric Supply Company (Pesco) due to non-withholding/deduction of the sales tax on service on payment made to an advertisement company in a past tax period.

According to a recent order of the said Collector Appeals of the KPRA, the Collector has deleted the tax levied under Section 40(1A) of Sales Tax On Service Act by Khyber-Pakhtunkhwa authority (KPRA) (Respondent) due to non-withholding the sales tax on service on payment made to an advertisement company in tax periods July-17 till June-18. This order of KPRA Collector (Appeals) would nullify many cases built by the KPRA on the same grounds.

The background of the case revealed that during audit of the (Pesco) appellant a discrepancy has been highlighted that appellant has received advertisement services amounting to Rs18,501,845, but did not withhold the sales tax amounting to Rs3,145,314, resulting into non-withholding/non-payment of the said amount of sales tax.

A notice was therefore issued to the appellant by the respondent to show cause as to why the said amount shall not be recovered from appellant along with default surcharge and penalty.

After many hearings, the respondent has confirmed the tax on the same pleas raised in the notice, and demand has been raised. Yawar Muhammad, Chartered Accountant and Director Tax Advisory from Rafaqat Babar & Co, Chartered Accountants, while arguing the case on behalf of the appellant, contended that the respondent had illegally based the assessment on the information received from Directorate General, Audit, Inland Revenue, Lahore.

According to him, the responsibility of conducting audit lay on the KPRA itself.

He further contended that the present case did not fall within the ambit of Section 30 of the KPRA Sales Tax on Service Act, hereby referred as "Act", because the provision did not provide anything about recovery from withholding agent and did not lay any responsibility on him of withholding.

Moreover, the Section 40(1A) of the Act could not be given retrospective effect as it was inserted via Finance Act, 2019, applicable for tax year 2020 and onwards.

The Assistant Collector Withholding appearing on behalf of respondent, submitted that Section 110 of the Act empowered the Authority to get assistance of any government agency and further submitted that the present case pertains to fixing liability and not recovery.

While giving the judgment, the Collector (Appeals) stated that Section 30 of the Act empowers the Authority to require any person to withhold tax charged from any person but there was not enabling provision in the Act, whereby, an officer of the Authority could determine/assess the payable withheld tax.

Sensing this defect in law, legislature introduced amendment in Section 40 and added sub-section (1A) thereto.

To make it more clear, the insertion of sub-section (1A) in Section 40 of the Act implies that the original section did not provide for determination of default on the part of the withholding agent and imposition of penalty and default surcharge on such agent.

This amendment was introduced in the year 2019, while the present case pertains to the tax period of 2018.

In the case of Fatima Fertilizer Company, it has been held that generally, amendment in fiscal statutes shall be given prospective effect unless retrospective effect has been accorded thereto by the Legislature itself. Therefore, it has to be held that the assessment of withholding tax has been illegally made against the appellant in the present case and deleted accordingly, the Collector Appeals order added.

Copyright Business Recorder, 2021

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