FRIDAY APRIL 22: Stop deducting WHT from EPZ units, FTO tells KESC

ISLAMABAD: In a landmark judgement, Federal Tax Ombudsman (FTO) Dr Muhammad Shoaib Suddle has barred the Karachi Electricity Supply Corporation (KESC) from illegal deduction of 5 percent withholding tax on power consumed by around 200 industrial units and manufacturers-cum-exporters within the jurisdiction of Export Processing Zone Authority (EPZA) Karachi.
The FTO Regional Office Karachi has issued a detailed judgement in the case of Messrs Alupak Ltd vs Secretary Revenue Division in complaint number 7 of 2011. In his latest judgement, the FTO has directed the FBR to ensure that no deduction is made under Section 235 of the Income Tax Ordinances, 2001, from the electricity bills of manufacturers-cum-exporters located in Karachi EPZA as envisaged in SRO.1099(1)/2010 dated December 7, 2010. The FTO's decision has ensured relief not only to the complainant but to more than 200 other such manufacturers-cum-exporters located in the Export Process Zone Authority, Karachi.
The interesting aspect of the case is that the KESC without realising the fact that 97% of the electricity was being consumed by the industrial units, who were exempt from 5 percent withholding tax and only 3% was being consumed by EPZA, deducted advance tax u/s 235 from entire consumption bills issued in EPZA's name.
According to the FTO findings, the departmental inaction to enforce implementation of SRO 1099 (1)/2010 dated December 7, 2010 tantamount to maladministration in terms of clause (ii) of sub-section (3) of Section 2 of the Federal Tax Ombudsman Ordinance, 2000. The FTO has recommended the FBR to direct the Chief Commissioner to ensure that no deductions are made u/s 235 of Income Tax Ordinance from the electricity bills of manufacturer-cum-exporters in Karachi EPZA as envisaged in SRO 1099 (I)/2010 dated December 7, 2010; and comply within 30 days.
Details of the case revealed that in a petition before the FTO, it was contended by a manufacturer-cum-exporter located in the EPZA, that the EPZA in violation of FBR's SRO No 1099(1)/2010 dated December 7, 2010 has been deducting 5% withholding tax on his electricity bills.
The complainant, an exporter of Aluminium Collapsible Tube, having his factory lactated at the EPZA, Karachi, has alleged maladministration in the Department for not enforcing SRO No 1099(1)/2010 dated December 7, 2010. The complainant has contended that according to SRO 1099(1)/2010 dated December 7, 2010 added in Part-IV of Second Schedule to Income Tax Ordinance, 2001 clause (76), it was stipulated that the provisions of Section 235 shall not be applicable to an industrial undertaking which is manufacturer-cum-exporter, and situated in Karachi EPZA, which has been declared by the Federal Government as a 'Zone' within the meaning of the Export Processing Zone Authority Ordinance 1980 (IV of 1980).
According to the complainant, whereas advance tax was not liable to be deducted on his electricity consumption bills under Section 235 of the Ordinance, the EPZA issued a Circular dated 20.12.2010, in violation of the said SRO, and started illegally deducting 5% withholding tax on the consumption bills on the plea the KESC had refused exemption to EPZA being a facilitator/ service provider. According to the complainant, the EPZA had decided to continue to deduct advance tax from their bills till the matter taken up by them with the KESC, the Ministry of Industries and Production and the FBR was resolved favourably.
The department in its comments filed on February 11, 2011 contended that no maladministration was involved on their part as the complainant never approached them against the KESC's levying of advance tax on electricity bills under Section 235. However it was admitted that provisions of Section 235 were not applicable to an industrial undertaking being a manufacture-cum-exporter, having their units situated in Karachi EPZA which had been declared as "Zone" within the meaning of EPZA Ordinance 1980. The department further contended that in order to resolve the grievance of the complainant, the Chairman EPZA had already been approached.
During the hearing, the departmental representative produced a copy of General Manager (Finance) EPZA's reply addressed to the Chief Commissioner, RTO-III Karachi, explaining that for smooth operation and uninterrupted supply an arrangement was made by EPZA to purchase electricity form the KESC in bulk and provide to the manufacturing-cum-export units through separate metering system. The KESC, however, without considering the fact that 97% of the electricity was being consumed by the industrial units, who were exempt form applicability of Section u/s 235, and only 3% was being consumed by EPZA, deducted advance tax u/s 235 from entire consumption bills issued in EPZA's name. EPZA accordingly requested the FBR to issue instructions to KESC authorities for implementation of the SRO in letter and spirit. The DR contended that the Chief Commissioner had already approached the FBR vide letter dated 10.2.2011 to issue instructions to KESC or to allow him to issue the same so that the hardship faced by the complainant and over 200 similar units, could be alleviated.
The arguments of both the parties have been given due consideration. The contention of the Department that no maladministration is caused to the complainant as he did not approach the FBR for enforcing relevant SRO is not valid. It is clear from the letter dated 2.2.2011 that the issue was already taken up by EPZA with various authorities, including the FBR, manifesting delay in the implementation of SRO. Thus inaction is clear on the part of FBR to enforce the SRO, which involved not only the case of the Complainant but more than 200 other manufacturing-cum-export units working in the Karachi Export Processing Zone from whose electricity consumption bills deductions were being made in violation of SRO 1099 (1)/2010 dated 7th December, 2010.