FBR to seek Law Division’s opinion
SOHAIL SARFRAZ
ISLAMABAD: The Federal Board of Revenue (FBR) will legally file reference with the Law and Justice Division seeking clarification whether SRO 706 (I)/2010 was legally issued under which input tax on agricultural tractors was exempted to the tractor manufacturers through refund.
Federal Board of Revenue (FBR) Member Inland Revenue (Operations) Dr Hamid Ateeq Sarwar, Friday, informed the Public Accounts Committee that the FBR has accurately issued SRO706 (I)/2010 to ensure that the prices of tractors should not increase at that time.
To clear ambiguity, the Auditor General of Pakistan (AGP) and the FBR can seek clarification from Law and Justice Division about the legality of this SRO.
During the PAC meeting, officials of the AGP directed the FBR to submit the update on the demand of Rs18 billion raised against a tractor company during an internal audit conducted on the directions of the Federal Tax Ombudsman (FTO).
The officials of the AGP further pointed out whether the farmers were able to get the benefit of SRO706 (I)/2010.
As the matter involves interpretation of law, the same should be referred to the Law and Justice Division, FBR Member Inland Revenue operations added.
According to the audit brief submitted by the AGP before the PAC on Friday, as provided in Section 13(1) read with Sixth Schedule of the Sales Tax Act, 1990, the supply of tractors has been exempted from the chargeability of sales tax. Conflicting with the above provision of the law, FBR issued SRO706 (I)/2010 dated 2nd August 2010 by exercising its powers under Section 13(2) of the law, wherein, the input tax on agricultural tractors was exempted to the tractor manufacturers by way of refund subject to the condition that “manufacturer shall sell exempt agricultural tractors against proper tax invoice with zero sales tax at the price agreed with federal government”.
The condition “at the price agreed with the Federal Government” was also deleted on 28.04.2007. Audit is of the view that through said SRO, supply of tractors has been turned zero rated whereas it was an exempt commodity as contained in the 6th Schedule to the Act. The refund of input tax against supply of tractors by treating them as zero rated through an SRO was in conflict with the basic provisions of the Act.
Hence, refund sanctioned in this way was unlawful causing a loss of government revenue to the tune of Rs7,069.311 million during tax periods in case of one manufacturer only, as per information available to Audit.
The LTU, Lahore informed that refund of sales tax was allowed as per existing law/rules/instructions of FBR.
As per Sections 72 and 42 of the Sales Tax Act, 1990 and Federal Excise Act, 2005, the field officers were bound by such law/rules/instructions of FBR.
As such no loss occurred on the part of officers of LTU. Audit is of the view that administrative officers were bound to comply with the provisions of the Act of the parliament in public interest rather than to blindly follow the instructions of FBR while sanctioning such refunds. Hence, the reply given by the department is irrelevant and not tenable.
The AGP objected that special excise duty was levied under Section 3A of the Federal Excise Act, 2005 on goods specified in SRO 655(1)/2007 dated 29-06-2007.
Later on, special excise duty was exempted vide SRO 675 (1)/2011 dated 01.07.2011 issued under Section 16(2) of the Act, effective from 01.07.2007 by way of refund to the purchaser i.e. manufacturer of tractors. After issuance of SRO of 2007, vendors of agricultural tractors kept on charging this duty and the same was also being paid by the tractor manufacturers while making taxable supplies.
Tax authorities of FBR allowed a refund of special excise duty (SED) to M/s Millat Tractors (Pvt) Ltd by giving the benefit of SRO dated 01.07.2011 from back date i.e. July 1, 2011 to the taxpayer. Audit is of the view that Section 16(2) of the Federal Excise Act, 2005 does not empower the federal government to exempt duty from retrospective effect as specifically allowed in case of sales tax under Section 13(4) of the Sales Tax Act, 1990. Hence, refund of SED of Rs242.826 million to Millat Tractors (Pvt) Ltd, allowed during July 2007 to May 2011, was unlawful. Moreover, the amount of special excise duty became part of the price of tractor and was passed on to consumers/farmers. In this way, tractor manufacturers enjoyed double benefit i.e. higher prices of product and refund.
The officers of LTU allowed refund of special excise duty as per Sections 72 and 42 of Sales Tax Act, 1990 and Federal Excise Act. The reply was irrelevant and did not address the issue. The lapse was pointed out to the department during June to October 2013.
In this regard, it is stated that recovery notice dated 03.07.2025 has been issued to M/s Millat Tractors Limited for payment of sales tax amounting to Rs1,847,840 by 15.07.2025.
Further, DGAIR (North)’s letter dated 03.01.2017 has been forwarded to the board for necessary guidance and its reply is awaited.
The DAC directed the LTO, Lahore to get its stance verified from audit in the light of board’s clarification issued on 07.04.2017 and submit progress to audit and FBR by 30.07.2025.
The PAC may like to direct the department to: i)expedite recovery of government dues; ii) justify issuance of SROs conflicting with Acts of the Parliament and fix responsibility on person(s) at fault; iii) submit SROs pertaining to exemptions, concessions and zero rating of supplies, issued during a financial year, for Parliamentary approval; and iv) conduct a fact finding enquiry on the issue as FBR has already conducted internal audit of a tractor company for the subsequent period(s) on the directions of honourable FTO and raised demand of Rs.18.7 billion on the same issue, the AGP report added.
