The concept of prescribed records under the sales tax law

Domestic taxes like sales tax are record-based taxes, and the record maintenance pertaining to their production, sales and storage has been prescribed under the law. The Sales Tax Act, 1990 has in this regard prescribed the procedure through regulations contained in sections 22, 23, 24 and 25 of the Act and rules contained in chapter (ii) through chapter (viii) of the Sales Tax Rules, 2008. The provisions relating to record keeping are quite elaborate and bind the taxpayer and the revenue authorities to work within the framework of sales tax law.
The law has prescribed that a business engaged in the supply of goods is required to maintain records either in English or Urdu languages pertaining to supplies, purchases, imports, zero rated or exempt supplies (in double entry tax accounts), invoices, credit notes, bank statements, inventory records, utility bills, salary and labour bills, rental agreements, sale-purchase agreements and lease agreements. In addition, records relating to gate passes, inward, outward and transport records.
The requirements of records are detailed and commercial practices relating to record keeping have been followed while laying down the conditions; for example, a registered person making the taxable supplies is required to issue a serially numbered tax invoice providing the required particulars; these include, name and address including the registration number of the supplier; name, address and registration number of the recipient, date of issue of the invoice, description and quantity of goods, value exclusive of tax, amount of sales tax and value inclusive of tax. A document prescribed under the law is to be maintained and kept in the manner as directed by the provisions of the Sales Tax Act, the bindings created under the law are to be accepted and followed both by the taxpayer and the revenue.
One may ask the authority of the bindings created under the law; attention in this regard is invited towards the preamble of the Act wherein it has been provided that the law is meant to consolidate the law relating to levy of sales tax on the various forms of trade relating to goods. It means that for the purposes of operating the law both the revenue and taxpayer are required to act within the parameters provided by the law. The fact is that the Act is a substantive law and it requires a detailed consideration and scrutiny.
An understanding of the background of sales tax law is necessary for all those who are engaged in its application and implementation because the legal provisions are to be applied per se and not otherwise. The requirements laid down under the law are binding both on the taxpayer and the revenue, being the state department engaged in its application.
An interesting case arises where there are disputes between the taxpayer and the revenue. It has generally been observed that tax machinery usually tries to extend its jurisdiction and influence beyond the scope of law. Allegations generally made against the taxpayers relate to false statements, fraud, non-payment of tax, and clandestine sales. It may, however, be kept in mind that the general principles of interpretation in this regard state that where there is an allegation of tax fraud, the onus of proof lies with the revenue; there is no room for any intendment and there is no presumption as to tax. An assessee can only be subject to tax under a provisions of law being unambiguous and clear and not otherwise, imposition of tax on the basis of assumption or presumption is not warranted in law, revenue is required to establish that a disputed transaction falls within the parameters of taxable supplies or in furtherance of taxable activity and no tax can be imposed on the basis of conceived notions.
The important element under the sales tax law which is on the pattern of VAT is that the tax is chargeable on the each supply chain activity except where exempted or zero rated, and these activities are covered by the prescribed records under the law. A question arises: what is the significance and importance of act of prescribing the records under the law, because a taxpayer generally maintains books of accounts and other necessary records involved in the supply chain events? The word "prescribed" has been treated in law as an authority, guide, direction, or rule. It also means to assert a right or title to the enjoyment of a thing or to direct or define. That means once the record has been prescribed under the law then records other than the one prescribed or defined will not be legally acceptable in evidence. An issue relating to acceptance of a statement given to a bank came for legal determination before the Madras High Court in the case of Coimbatore Textile Mills; the statement was being relied upon by the revenue. The court came to the conclusion that records which are not prescribed cannot be relied upon.
The question arises that whether or not the revenue can rely on the internal correspondence or reports for the demand of tax. It is submitted that revenue is bound by the principles laid down by the sales tax law and unless a co-relationship of an internal memo can be linked with the prescribed records its acceptance and relevance under the law will be doubtful and a nullity in the eyes of law. The superior courts of Pakistan generally in this regard have held that for to tax an individual the external factors not prescribed under the law are relevant factors for consideration to impose or levy tax since an external factor is not a relevant piece of evidence for consideration to correlate it with some activity of the taxpayer. In one hotly contested tax demand case, a report submitted to a Foreign Principal Party in Interest (FPPI) was being considered for imposing the tax demand. The taxpayer contended that the report revealed the names of certain purchasers, but the revenue accepted this report per se for creating the tax demand whereas no verification or physical check was carried out by the revenue to link it with any activity of the taxpayer; thus in absence of any direct evidence relevance of such reports is not a relevant fact.
Interestingly in one case, the issue related to the payment of tax on the so-called unreported sales, the burden to prove the alleged sales was on the revenue to establish a link between the sales and prescribed records. Had these sales been made in Pakistan, the fact was verifiable from the prescribed records or clandestine records if any should have been seized and where no such verification was ever made by the revenue the reliance being placed by the revenue, on assumed sales would be an illegal act not recognised by the sales tax law and the reliance being made on an extraneous factor having no nexus with revenue records will not be admissible in the eyes of law.
We had started our debate by learning that the sales tax law is a complete code in itself relating to levy and recovery of sales tax on taxable supplies made in Pakistan and since in this regard the law has provided a mechanism to collect tax by prescribing records for taxpayers to be maintained, therefore the revenue should be careful to rely on any document which is extraneous to the regulations on the subject because to prove a tax fraud the ingredients for the same include: Material false statement made with intent to deceive the tax authorities. In a leading case, a high court came to the conclusion that the evidence being relied upon by the revenue should be positive, cogent and one which leaves no iota of doubt that accused taxpayer is guilty.
And where revenue officers cannot fetch any direct material to show that the said quantities of goods were in anyway linked with the taxable supplies or represented the actual business, the charge of fraud on the taxpayer will be a nullity.
The upshot of the above discussion is that the prescribed records under the sales tax law are the relevant record for considering and determining the tax liability; and making of any roving inquiry will not be helpful, a functionary under the law has to act within the four corners of law and not otherwise.
(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates Karachi)