SC directs ministries to look into ST issue
TERENCE J SIGAMONY
ISLAMABAD: The Supreme Court directed the Ministry of Finance and the Ministry of Power to look into charging of sales tax on electricity being supplied to Azad Jammu and Kashmir (AJK) by the Islamabad Electric Supply Company (IESCO).
The secretaries of both the ministries were ordered to talk to the concerned authorities as to why the agreement between Pakistan and the AJK is not implemented and submit a report regarding the matter within 30 days.
A three-judge bench, headed by Justice Umar Ata Bandial, heard Islamabad Electric Supply Company (IESCO)’s appeal against the Islamabad High Court (IHC)’s verdict.
IESCO chief financial officer had filed the petition through senior advocate Sabtain Ali Fazli.
A Division Bench of the IHC on 09-06-2016 held that the agreement does not exempt the petitioner from the levy, charge and collection of the sales tax unless the same is specifically exempted under Sales Tax Act, 1990.
During the proceeding, an officer of the FBR said that there was no agreement, but an MoU, as President (Pakistan) had not signed on it.
Sabtain said that was an agreement executed between the State of Pakistan and the State of Azad Kashmir on 27-06-2003 for raising the level of Mangla Dam.
He said if the official denying the agreement between the AJK and GoP then he state so, adding till November 2010 no tax was charged but on 14-12-2010 his client received a show cause notice, wherein it had been alleged by the auditor of the Audit Division, Taxpayer Unit, Islamabad, that the petitioner had supplied electricity to AJK without charging sales tax on such supplies.
It has further been stated that all the taxable supplies made by the petitioner are chargeable to sales tax unless otherwise specifically exempted under Sales Tax Act, 1990.
The department through show cause notice raised a demand of sales tax of Rs1,269,950,880 for the tax period from July 2008 to June 2012.
The petitioner filed the reply of the show cause notice on 14-12-2010.
However, the department on 28-12-2010 rejected the reply and show cause was enforced vide order 31-12-2010, and directed the petitioner to deposit Rs1,269,950,880 along with default surcharge under Section 32 of the Sales Tax Act, 1990.
The petitioner challenged the order before Commissioner Inland Revenue, Islamabad. However, the appeal was dismissed by the Commissioner vide order 29-03-2011.
The petitioner then filed an appeal before the Appellate Tribunal.
The tribunal on 07-09-2011, after the perusing the bilateral agreement dated 27-06-2003 held that the supply of electricity to the AJK is exempted from payment of sales tax by virtue of the agreement between the government of Pakistan and the government of Azad Jammu and Kashmir.
The agreement contained an abiding commitment that the parties shall not levy sales tax on the supply of electricity to each other.
However, the tribunal regarding the export of electricity to AJK held that the supply of electricity to the AJK does not come into the ambit of export; therefore, the same cannot be taxed at zero rate under Section 4 of the Sales Tax Act, 1990.
Both the parties challenged the tribunal order before the IHC.
The Division Bench of IHC set aside the tribunal’s order dated 07-09-2011 vide order 09-06-2016.
It said that the supply of electricity to the State of AJK does not come under the ambit of export.
The IHC also disagreed with the Appellate Tribunal decision that the treaty between the States (Pakistan and AJK) is binding.
It held that the agreement dated 27-06-2003 executed between the State of Pakistan and the State of Azad Kashmir does not exempt the petitioner from the levy, charge and collection of the sales tax unless the same is specifically exempted under Sales Tax Act, 1990.
Sabtain said that according to the agreement, the government of Pakistan would not charge GST from the AJK as the Azad Kashmir charged it otherwise it would be double taxation on the people of the AJK.
The counsel argued if the transmission lines were going to the AJK then this was export. Everything going out of Pakistan is export.
If there is export then you would have to go into its definition, and this is zero rated.
The counsel stated in the petition that the IHC failed to take into account the Supreme Court’s judgments treating the State of Azad Kashmir as being not part of Pakistan. Therefore, the IHC judgment is violative of Article 189 of the Constitution.
He argued that the Supreme Court of Pakistan has consistently treated Azad Jammu and Kashmir (PLD 2005 SC 373) as not part of Pakistan, adding that any territory not constituting part of Pakistan is a foreign territory (PLD 1966 SC 88) and (PLD 2000 SC (AJK).
He prayed that on this ground alone the IHC judgment be set aside.
He further argued that the IHC Division Bench also failed to take into account that Article 1 of the Constitution clearly and unambiguously defines the territories of Pakistan. According to it, the AJK does not come within the territorial limits of Pakistan.
The Azad Jammu and Kashmir has its own president, legislature, judiciary, which are independent from the president, legislature and judiciary of Pakistan.
He stated that both the Supreme Courts of Pakistan and the AJK held that Azad Kashmir was not part of Pakistan.
He argued that the import and export was defined under the Import and Export (Control) Act, 1950, adding that Section 2(c) of the Act states “import and export means respectively bringing into and taking out of Pakistan by sea, land or air.”
Sabtain contended if Azad Jammu and Kashmir was not part of Pakistan then any goods that were sent would amount to goods being “taken out of Pakistan” and that would be an export, thus under Section 4 of the Sales Tax Act, 1990 his client entitled to a zero rate of supply.
He said that the Division Bench IHC, Appellate Tribunal and foras below had erred in law to hold that since procedure under Section 131 of the Customs Act or the restriction and conditions imposed under the Imports and Exports Control Act, 1950, had not been complied with.
