Sales Tax Act (VII of 1990)‑‑‑

‑‑‑‑Ss. 21 & 37‑‑‑S.R.O. 230(I)/1997, dated 29‑3‑1997‑‑‑Standing Order 1 of 2000‑‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.2(3)‑‑‑De‑registration‑‑‑Application for de‑registration‑‑‑Audit‑‑‑No intimation about the outcome of the audit to complainants‑‑‑Unreasonable delay in disposal of application for de registration‑‑‑Validity‑‑‑Audit had dragged on for a long time and the complainants had been kept in dark about the outcome of audit or the result of explanation given by them‑‑‑Demand seemed to have been calculated by the auditor and complainants had given explanations in this regard but had not been informed of the outcome of this exercise‑‑‑Such was a clear case of harassment on the part of the Sales Tax Authorities‑‑ Senior officers had left the entire initiative with the auditors who conduct the process of audit at their own convenience ‑‑‑Maladministration thus was established‑‑‑Central Board of Revenue should take serious view of such kind of ‑ maladministration which renders the taxpayers hostage to the whims of the Sales Tax Officials and leave them at their mercy‑‑ Federal Tax Ombudsman recommended that Central Board of Revenue to devise clear parameters for the auditors to comply with and senior officers should be made responsible to ensure that the prescribed time frame is strictly followed when the taxpayers offer explanation or reply to the audit observation, the Sales Tax Authorities should give their clear response within specified period; where a contravention case is instituted against a taxpayer, the Sales Tax Authorities should intimate him of the nature of contravention and the action proposed to be taken; Central Board of Revenue to consider to specify a time frame for issue of a show‑cause notice and completion of adjudication proceedings; initiate an inquiry to identify the, reasons for the inordinate delay at various stages of the audit, consequent on the de‑registration application, spanning a period of about three and half years and take suitable action against the officials responsible for the delay and for repeatedly demanding copies of the documents from the complainants; direct the Collector (Adjudication) to ensure that show‑cause notice be issued to the complainants within thirty days; adjudication proceedings be finalized within a reasonable period of time and decision regarding the application for de‑registration be given within fifteen days of the issue of the adjudication order.

Khushnood Ali Khan, Consultant.

Samina Taslim, Deputy Collector of Sales Tax (East).

Jamshed Talpur, Assistant Collector of Sales Tax.

Zahidul Bari, Senior Auditor.

FINDINGS/DECISION

The complaint has been filed against the Sales Tax Department for not de‑registering the firm for which the application was submitted about four years ago. The complainants have stated that they applied for de‑registration to the Collector of Sales Tax and Central Excise (East), Karachi, on 4‑8‑1999 and, thereafter, sent several reminders and paid regular visits to the Sales Tax Office. After almost two years of filing the application; the process of de‑registration was started on 24‑7‑2001 and an auditor was assigned' to audit their sales tax records. The documents and explanations required by, the auditor were provided through the Assistant Collector, Registration.

2. The complainants stated that they received a letter, dated 9‑10‑2001 from the auditor asking them to submit the documents within three days which had already been provided to the previous auditor. However, the copies of the required documents were provided to him vide letters, dated 16‑10‑2001 and 25‑10‑2001. They received audit observation, dated 2‑11‑2001 for the period when they were not required to be registered and were dealing in exempted goods only. Proper reply to the audit observation was submitted on 27‑11‑2001. Almost one year after submitting the replies to different queries /observations, and complying with the requirements of Standing Order No.1 of 2001, they were not aware about the fate of the de‑registration application.

3. The complainants stated that they received a notice under section 37 of the Sales Tax Act, without mentioning any reason or nature of inquiry pending against them, from the same senior auditor and the information/documents were provided through their Tax Consultant. On 3011‑2002, they again received a letter from the senior auditor directing them to submit explanations of irrelevant queries based on assumptions within five days. These observations had already been replied but a detailed reply, alongwith photocopies of various sections of Income‑Tax (Law), were submitted on 14‑12‑2002. They again approached the concerned, Assistant Collector (to inquire) about the fate of de registration of the application but received no reply.

4. When their representative visited the Sales Tax Office to remind them, the senior auditor of Registration Section asked him to provide copies of all the documents as the file was not traceable with his section. However, on 20‑12‑2002 he received a letter from senior auditor Mr. Muhammad Israr intimating that the file was available with I&P Branch and till the Branch completed its investigation, they could not be de registered. The department h9d thus failed to meet any of the directions contained in the Standing Order issued by the (then) Collector of Sales Tax; now Member (Sales Tax). The application was filed in 1999 and three audits had been carried out within a period of two years without any final result. They requested that instructions be issued for de registration and harassment through repeated audit/inquiry on irrelevant grounds be stopped.

5. The Assistant Collector (Registration) replied to the complaint that consequent on the application for de‑registration, the letter for intimation about audit was sent on 11‑7‑2001 followed by reminders, dated 8‑9‑2001 and 18‑8‑2001. The complainants submitted incomplete records. The scrutiny of the record revealed that there was a huge difference in sales tax returns, profit and loss account and income‑tax returns. The audit observations, dated 8‑10‑2001 and 2‑11‑2001 were issued to the complainants intimating recoverable principal amount of Rs.36.09 million. They submitted copies of bills of entry of sewing, press and embroidery machines valued at Rs.73,96,257 but did not produce documentary evidence of exempt purchases for the remaining amount of Rs.8,80,17,659, which were not declared in the sales tax returns.

6. He stated that the exemption was admissible on the machinery used for manufacture of taxable goods. But the complainants were a commercial importer and had no manufacturing facility. The Department had obtained the evidence of supplies from their bank statements showing receipt of Rs.28,63,02,035 for the period up to 2000‑2001. The complainants had failed to clarify the objections raised in the audit observation and to produce evidence in support of their contentions.

7. The Assistant Collector alleged that the complainants had issued fake sales tax invoices, which were not recoded in the sales tax returns. Under section 21(1) of Sales Tax Act, the competent authority was empowered to cancel the registration from such date that he may specify but not later than four months from the date of application of the date of the outstanding dues were deposited. Since the complainants had not paid outstanding dues, the mandatory period of four months was not applicable which would start from the date they deposit the amount.

8. The Assistant Collector stated that the matter was forwarded to I&P Branch of the Collectorate for proper investigation, which issued a notice under section 37 of the Sales Tax Act on 11‑10‑2002. The complainants once again failed to produce any documentary evidence in support of their reply, dated 14‑12‑2002. The case was then referred to the appropriate Adjudication Officer for issue of show‑cause notice.

9. During the hearing of the complaint, the Consultant representing the complainants stated that the first auditor conducted audit for about four months and all the relevant records were provided to him but the complainants did not receive any intimation about the outcome of the audit. He referred to the Standing Order 1 of 2000 prescribing the procedure for audit and de‑registration of the registered persons. Section 21 of the Sales Tax Act also provided that the de‑registration should be completed within two months and the period could be extended by the Collector by four months. In case of extension, intimation should be given to the registered persons but no such intimation was received. He stated that on 28‑11‑2002 a detailed reminder was sent to the Assistant Collector (Registration and Information) to which a reply, dated 28‑12‑2002 was given that the case had been sent to the I&P Branch for investigation without mentioning about the extension of the period.

10. The learned Consultant stated that the senior auditor sent the audit observation, dated 2‑11‑2001 pointing out sales of Rs.110 million and purchases of Rs.95 million not declared in the sales tax returns pertaining to the year 1997‑98. The amount of sales tax and additional tax was worked out at Rs.132 million. The complainants replied vide letter, dated 27‑11‑2001 explaining that during 1997‑98 machinery was imported under S.R.O. 230(I)/1997 and there was no sales tax liability. Thereafter no action was taken for about one year although a huge amount was involved and complainants were entitled to a suitable re y to their letter. When the complainants contacted the Registration Section, they were informed that their file was not traceable. In October 2002 the senior auditor of I&P wrote them a letter again calling for the same record already submitted to the department, which too was replied on 14‑12‑2002, and the details and documents were submitted to the Department again.

11. The learned Consultant stated that even after filling of the complaint, they have received no intimation from the Department. From the reply of the Department to this complaint they have learnt that the case has been referred to the Adjudication Collectorate or issue of show‑cause notice but the notice has not yet been received and the decision on the de‑registration application filed about four years ago was till pending. He submitted photocopy of a news item in the Business Recorder of 27‑11‑2002 that C.B.R. had warned the Collectors to check unreasonable delays in the disposal of applications for de‑registration of taxpayers. He was of the view that C.B.R's warning had gone unheeded.

12. The Deputy Collector stated that Assistant Collector concerned could not attend the hearing as he was on leave; she would ask him to explain several issues with which she was not conversant. She requested for adjournment to another date. The Deputy Collector was asked to clarify whether it was necessary under the Sales Tax Law that when a contravention case was instituted against a taxpayer/registered person, a copy of the report or intimation should be sent to him. She promised to examine this question and report.

13. The Assistant Collector of Sales Tax (Registration and De Registration) attended the hearing on, 30‑6‑2003. On the basis of his statement and replies to the queries, the position emerged as follows:‑‑

(1)The de-registration application initially remained pending for about two years without action because of acute shortage of auditors.

(2)The senior officers placed greater emphasis and high priority on the audit of the registered persons and to check the increasing number of fake/flying invoices.

(3)A.C. could not explain whether the complainants contention that they were not required to be registered when dealing with the exempted goods was correct or not.

(4)There was, nothing on record to show whether the reply to the audit observation had been examined.

(5)The instructions regarding audit and de‑registration contained in Standing Order, 1/2002 were not complied with.

(6)In response to the notice under section 37 of the Sales Tax the complainants had replied to the queries but the mattes did not progress.

(7)Mr. Farrukh Sajjad, Assistant Collector, had asked the counsel for the complainants to furnish copies of the documents as the file was not traceable which was found with Mr. Zahidul Bari, senior auditor of I&P Branch:

(8)Only one audit observation dated 2‑11‑2001 was issued and the demand of sales tax Rs.36 million and additional tax Rs.94.9 million, total Rs.132 million, had been worked out. No action was taken on the reply of the complainants dated 27‑11‑2001 till 18‑12‑2002 when a contravention report was sent to the Collector (Adjudication).

(9)The show‑cause notice has not yet been issued by the officer of competent jurisdiction.

14. Mr. Jamshed Talpur, Assistant Collector, requested that opportunity‑for hearing be given to Mr. Zahid‑ud‑Bari, senior auditor, to submit explanation regarding the audit proceedings and the de registration process of the complainant. They attended this office on 10‑7‑2003. Mr. Zahid-ur‑Bari stated that the complainants did not reply to the audit observation issued on 24‑7‑2001. When a notice under section 37 was issued on 11‑10‑2002, they submitted a reply in December 2002. Since the reply was not satisfactory, a contravention report was formulated in February, 2003 and‑sent for adjudication.

15. The submissions made in the complaint and the arguments put forward by the learned Consultant as well as the reply of the Department and the arguments advanced by the Assistant Collector of Sales Tax have been examined. It has been established that (i) no action was taken on the application for de‑registration for about two years; (ii) the Complainants reply to the audit observation dated 2‑11‑2001 was not examined for more than a year; (iii) the contention of the complainants that they were not required to be registered when dealing with the exempted goods was not examined; (iv) the complainants were asked to furnish copies of the documents again and again while their reportedly missing file was available with the I&P Branch; (v) more than three years after filing of the de‑registration application, a contravention report was formulated but intimation about it was not given to the complainants; and (vi) show cause notice has not yet .been issued to them.

16. The audit has dragged on for a long time and the complainants have been kept in dark about the outcome of audit or the result of explanation etc given by them. The demand of Rs. 132 million seems to have been calculated by the auditor and the complainants have given explanations in this regard but have not been informed of the outcome of this procedure. It is a clear case of harassment on the part of the sales tax authorities. It seems that the senior officers have left the entire initiative with the auditors who conduct the process of audit by fits and starts at their convenience. Maladministration is established.

17. The C.B.R. should take serious view of this kind of maladministration which renders the taxpayers hostage to the whims of the sales tax officials and leaves them at their mercy.

18. It is recommended that

(i)C.B.R. to devise clear parameters for the auditors to comply with and senior officers should be made responsible to ensure that the prescribed time frame is strictly followed.

(ii)When the taxpayers offer explanation or reply to the audit observation, the sales tax authorities should give their clear response within specified period.

(iii)Where a contravention case is instituted against a taxpayer, the sales tax authorities should intimate him of the nature of contravention and the action proposed to be taken.

(iv)C.B.R. consider to specify a time frame for issue of a show cause notice and completion of adjudication proceedings.

(v)Institute an inquiry to identify the reasons for the inordinate, delay at various stages of the audit, consequent on the de registration application, spanning a period of about three and half years from August, 1999 to December, 2002 and take suitable action against the officials responsible for the delay and for repeatedly demanding copies of the documents from the complainants;

(vi)Direct the Collector (Adjudication) to ensure that show‑cause notice be issued to the complainants within thirty days; and

(vii)Adjudication proceedings be finalized within a reasonable period of time.

(viii)Decision regarding the application for de‑registration be given within fifteen days of the issue of the adjudication order.

(ix)Compliance be reported within two months.

C.M.A./896/FTO Order accordingly.