INTERPRETATION SCOPE AND APPLICATION OF SECTION 73 OF SALES TAX ACT, 1990---AN OPINION

INTERPRETATION SCOPE AND APPLICATION OF SECTION 73 OF SALES TAX ACT, 1990---AN OPINION <!--[if gte mso 10]> INTERPRETATION SCOPE AND APPLICATION OF SECTION 73 OF SALES TAX ACT, 1990---AN OPINION By Khalid Anwar, Advocate, Karachi [1. While conducting audit of sales tax record of various textile units engaged in the manufacture of yarn, it had come into the notice of sales tax authorities that the provisions contained in section 73 of the Sales Tax Act, 1990 were not being complied with. C.B.R. authorities are of the view that remittances against any supply should be made through banking channels showing transfer of payment in favour of seller from the business account of the buyer and the "business account" means the "business bank account". In order to ensure, the compliance of the said provisions of law, C.B.R has asked the members of APTMA to 'furnish information regarding the bank -account number and branch of the bank from where the remittances from the buyers had been remitted against the supplies made by the manufacturers of yarn. 2. Chairman APTMA has sought a legal opinion from Mr. Khalid Anwar, Advocate Supreme Court of Pakistan requested him to explain the scope and application of section 73 and also give a proper interpretation of the provisions contained in the aforesaid section. Mr. Khalid Anwar has analyzed various parts of section 73 of the Act and rendered his legal opinion after discussing the provisions at length. The legal opinion is being attached for your consumption]. 3. Section 73 was introduced into the Act in 1999 and thereafter, has undergone a number of amendments, almost all by way of further insertions and additions. The section, as amended, is as follows: "Certain transactions not admissible.---Notwithstanding anything contained in this Act or any other law, for the time being in force, any transaction in respect of which payment is made on or after the first day of July, 2000, for a sum exceeding fifty thousand rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft or pay order or any other banking instrument showing transfer of the payment in favour of the seller from the business account of the buyer shall not be admissible for the purposes of input tax credit, adjustment or deduction, or refund, repayment or drawback or zero-rating etc. of tax under this Act .provided that payment, in case of such transaction on credit, is so transferred within one hundred and twenty days of issuance of tax invoices: Provided that when a registered person supplies taxable goods for a sum exceeding fifty thousand rupees in respect of which payment is received otherwise than in the manner prescribed in this section read, with section 7, he shall 'not be entitled to claim adjustment or refund of input tax in respect of such goods." 4. Broadly speaking, the section applies to two situations. Firstly, it provides that any transaction in respect of which payments in excess of Rs.50,000 are made in a manner other then one of the prescribed modes shall not be admissible for purpose of input tax, or refund, repayment or drawback. Secondly, if a registered person supplies taxable good for a sum exceeding Rs.50,000 and receives payment in a manner other than one of the prescribed modes, he is barred from claiming any adjustment or refund of input tax in respect of such goods. 5. The basic principles for the interpretation of fiscal statutes is that such laws are to be construed and applied strictly. The principle was stated as long ago as 1921 in Cape Brandy Syndicate v. Inland Revenue Commissioners (1921) 1 KB 65 in the following terms: It simply means that in taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is' to be read in, nothing is to be implied,' one can only look fairly at the language used. The above principle has been applied innumerable times by the Courts in Pakistan. For instance, citing the above passage with approval in Government of Pakistan v. Hashwani Hotels Ltd. PLD 1990 SC 68, the Supreme Court described it as an excellent guideline (which) can be safely utilized for interpreting a taxing statute. 6. Notwithstanding the fundamental principle described above, the provisions of fiscal statute are generally classified into two categories: the substantive or charging provisions, and the procedural or machinery provisions. The substantive provisions, in terms of which the tax is actually levied and determined, are construed strictly. However, the machinery provisions which relate to the collection and recovery of the tax are construed more liberally. The first question that arises in construing any section of a fiscal statute is, therefore, whether it is to be regarded as a substantive or machinery provision, and in order to discover the true meaning and scope of section 73, this is first matter that must be considered. 7. As provided in section 3(3), the legal liability to pay the sales tax is on the person making the supply, i.e., the seller. The tax so paid is defined by the Act as the output tax. However, the scheme of the Act is that the sales tax is a value added tax. Any person involved in a sales transaction (unless he is the first or the last in the supply chain) is entitled to deduct from the output tax, the input tax, i.e., the tax that he paid on his purchases of the relevant raw material etc. Thus, a person liable to make payment under the Act makes only a net payment of output minus input tax: see section 7. 8. It follows from the foregoing that in order to determine the tax liability of any person under the Act, one must examine and determine both his output tax and input tax for the relevant period. Any provision that impacts on this exercise is clearly a substantive provision because it affects the tax liability of the person concerned. Since section 73 has precisely such an affect, inasmuch as non-compliance with the terms thereof leads to the exclusion of certain transactions from the determination of input tax, it follows that it is a substantive provision. In our view, therefore, the provisions of section 73 must be construed strictly and in terms of the principles approved by the Supreme Court as noted above. 9. Before proceeding further, it is important to draw attention to the fact that the payment of tax on almost every transaction within the purview of the Act has a dual character. From the point of view of the seller, it is not merely his legal liability, but is also his output tax. From the point of view of the buyer, on the other hand, the same tax is his input tax. Thus, in examining the impact of section 73 on any sales transaction (and on the persons involved in the transaction), it is important to keep in mind whether one is looking at the transaction from the point of view of the seller or the buyer. 10. The first point to note about section 73 is that payments in excess of Rs.50,000 can only be made in one of the prescribed modes in order for the transaction to account towards inclusion in, or for determination of, input tax. This is, in fact, one of the crucial questions on which our views have been sought: what is the nature and scope of the prescribed modes of payment? For convenience, the relevant portion of section 73 is reproduced again. This provides that payment must be made: "by a crossed cheque drawn on a bank or by a crossed bank draft or pay order or any other banking instrument showing transfer of the payment in favour of the seller from the business account of the buyer." In our view, the prescribed modes of payment can be restated as payment by: (a) a crossed cheque drawn on a bank; or (b) a crossed bank draft; or (c) a crossed pay order; or (d) any other banking instrument showing transfer of the payment in favour of the seller from the business account of the buyer. 11. We are informed that the sales tax Department is in fact applying and interpreting the prescribed modes as being payment by: (a) a crossed cheque drawn on a bank; or (b) a crossed bank draft; or (c) a crossed pay order; or (d) any other banking instrument; and . in all cases, the instrument must show that the transfer of the payment in favour of the seller is from the business account of the buyer. Thus, even in the case of (say) a bank draft, a payment to be valid for the purposes of section 73 must show that it is from the business account of the buyer. 12. In our view, the interpretation adopted by the Department is clearly incorrect for a number of reasons. Firstly, this approach places the specified modes (crossed cheques, bank drafts and pay orders) at par with all other modes of payment ("any other banking instrument"). Thus, for example, a bearer cheque (which is certainly a banking instrument) is no different from the specified modes (inasmuch as all must be transfers of payment from the business account of the buyer). This is clearly incorrect. It renders otiose and redundant the need to specify selected modes at all, since the three specified modes are obviously banking instruments. In other words if the Department's interpretation were correct, section 73 need merely have referred to' mode (d) since that would have been sufficient for all purpose. Secondly, this interpretation also fails to appreciate the nature of a bank draft and a pay order. These instruments are in fact instructions by' a bank to its head office or concerned branch to make payment to the payee noted on the instrument. While these instruments are obviously made by the bank on the request of some 'person, the account of such person is of no concern as regards the bank draft or pay order (and does not, e.g., appear on the face of the instrument). This may be contrasted with a cheque, which not merely is drawn on a bank, but is on a specified account at the branch concerned, and all of this information is readily identifiable from the face of the cheque itself. To require, therefore, that a pay order or a bank draft must show that the transfer of the payment is from the business account of the buyer is contrary to the very nature of the instrument concerned. 13. Thirdly, as noted above, section 73 must be given a strict and literal interpretation. Failure to comply with its terms excludes that which would otherwise be included in the computation of input tax. It follows (and this is another basic principles of interpreting fiscal statutes) that if two interpretations of a fiscal provision are possible, the one more favourable to an assessee is to be adopted. Clearly, of the two possible interpretations of the prescribed modes (the one identified by us in para. 9 and the one adopted by the Department noted in para. 10), the former is more favourable to the taxpayer. It follows that section 73 being a substantive provision, the former interpretation should be adopted as being the true meaning of the relevant provisions. 14. One consequence that flows from the foregoing is that if, and as long as, it is shown that payment has been made through one of the three specified modes (crossed cheque, bank draft or pay order) that is a complete discharge of the requirements of section 73. The concerned person cannot thereafter be denied the benefit of including the tax paid in respect of the concerned transaction in the fourth (general) mode (any other banking instrument) that it must also be shown that the transfer of the payment in favour of the seller is from the business account of the buyer. What sort of instruments come within the purview of the general mode? It is not possible to give an exhaustive list of the instruments concerned, except to note that two requirements must be fulfilled: (a) the instrument must be a banking instrument, and. (b) it must be shown that the transfer of payment is from the business account of the buyer. In this context, our attention-has been drawn to sales tax ruling 9/2002 (reported in 2002 PTD Statute 481 which purports to exclude bearer cheques from the scope of section 73. In our view, such a blanket exclusion is incorrect. A bearer cheque is clearly a banking instrument. As noted, a cheque invariably has both the account number and identity of the relevant branch of the concerned bank stated on its face. If this account is in fact, the business account of the buyer, in our view, the bearer cheque is compliant with the requirements of section 73 and must be accepted as such. 15. The analysis in the last para. brings us to the next question, namely as to the true meaning of the requirement of "showing transfer... from the business account of the buyer". What does this man? More particularly, does this require that the instrument itself must, on its face, show that the payment is from the business account of the buyer? Our attention has been drawn to sales tax ruling 53/2002 (report in 2002 PTD Statute 463. This is in connection with travellers cheques. These are certainly banking instruments if issued by a bank. Yet, as anyone who has seen or used a travellers cheque is aware, they do not bear any reference to the account of the person to whom, or on whose request, the cheques are issued. Yet, in the above noted Ruling the Department has accepted that such cheques are complaint with the terms of section 73 as long as they are issued from the business account of the buyer. This can only mean that it must be shown that the funds used to obtain the travellers cheques came from the business account of the buyer, and not that the said account should appear on the face of the instrument. 16. In our view, the view taken by the Department in the aforesaid Ruling is in consonance with the proper interpretation of section 73. In so far as the general mode is concerned, the payment must be made through a banking instrument, but it is not necessary that the instrument itself show that the transfer is from the business account of the buyer. That can be separately or independently verified and confirmed. 17. The next question that arises is in relation to the first proviso in section 73, which, again for purposes of convenience, is reproduced below: "Provided that payment, in case of such transaction on credit, is so transferred within one hundred and twenty days of issuance of tax invoices." What does this mean? More particularly, does this cover every transaction on credit (i.e., even those involving payment through the three specified modes) or only a transaction where payment is made through the last (general) mode? While the matter is not free from doubt, in our view, the better view would be that the proviso applies to payments made under all the modes prescribed in terms of section 73. In this context, reference may be made to a C.B.R. directive dated 28-12-2001 which states that compliance with the terms of the proviso requires only the issuance of the banking instrument within 120 days, and not its deposit or encashment. 18. As will be noted from the foregoing, the provisions of section 73 have so far been examined in respect of the first of the two situations mentioned in para. 3 (supra), i.e., from the point of view of the buyer. As. has been seen, there are two distinct aspects of the section's application to buyers. Firstly, unless a payment in excess of Rs.50,000 is made through one of the prescribed modes (either the three specified modes or the fourth general mode), it shall not be admissible for purposes of input tax, etc. Secondly (and this is a separate and distinct point altogether), the first proviso provides that if the transaction is on credit, payment must be made within 120 days of the sales tax invoice. The C.B.R's. view of what constitutes payment in this context has also been referred to. 19. We turn now to examine the second of the two situations mentioned in para. 3 (supra), which is contained in the second proviso to section 73. This makes the section applicable to sellers and provides that if a payment in excess of Rs.50,000 is not received by a seller through any of the modes prescribed by section 73, then he shall not be entitled to claim adjustment in respect of the input tax paid in respect of such goods. This clearly means that the payment must be received by the seller in the manner as explained in para. 9 (supra), i.e., the payment must be by: (a) A crossed cheque drawn on a bank; or (b) A crossed bank draft; or (c) A crossed pay order; or (d) Any other banking instrument showing transfer of the payment in favour of the seller from the business account of the buyer. 20. One question that arises in the context of the second proviso is whether the first proviso also applies in terms to sellers? As will be recalled, the earlier proviso (in relation to buyers) limits credit transactions to 120 days (as interpreted and applied by C.B.R.). Does this extend to sellers as well? In our view, the answer to this must be in the negative. The sellers who come within the purview of the second proviso remain unaffected by the first proviso. The reason is that the second proviso makes ' only the manner prescribed for payments under section 73 applicable to the sellers; it does not apply any other restriction contained in the section as well. As noted above, the manner prescribed for payments is a matter distinct and separate from the period within which payment must be made in a credit transaction, which is the subject-matter of the first proviso. Applying the rule of strict interpretation, and placing that meaning on the second proviso which is favourable to the taxpayer (the seller), the only conclusion that can be drawn is that the first proviso is not applicable to the case of the latter. It follows, therefore, that sellers remain unaffected by this condition. 21. After the foregoing detailed examination of section 73, we turn now to apply it in terms of the specific fact-situations faced by members of APTMA as referred to us. The problems in terms of the section relate to those members which sell their yarn to weavers throughout the country, either directly or through brokers. The buyers may or may not be registered under the Act; we assume that the members of APTMA are all so registered. The problems faced by the APTMA members arise in relation to their position as sellers (i.e., in terms of the application of section 73 through the second proviso). 22. The first matter that arises relates to the question whether, in credit transactions, payment is to be transferred within 120 days (in terms of the first proviso). The manner in which the Department is insisting on applying the section to APTMA members is to require all credit transactions to have a terminus within 120 days of the sale tax invoice. As noted above, in our view, this is incorrect. The first proviso is not relevant for purposes of applying section 73 to sellers to the second proviso. The requirement and stipulation of 120 days as contained in the first proviso does not operate to sellers. A seller who receives payment beyond the period of 120 days is still compliant of the requirement of section 73 .as long as the payment is made by the buyer through any of the prescribed modes. 23. The second matter that arises relates to the question of payments from the business account of the buyer. Again, as explained herein above, this relates only to the general mode, and not (as erroneously interpreted by the Department) to the three 'specified modes. In this context, our attention has been drawn to notices issued to some of the APTMA members recently by some of the sales tax Collectorates seeking information regarding the supplies made by the former. The format sent to the members requires them to identify, inter alias the mode of payment and the buyer's account number and the bank branch where such account is maintained. In our view, the latter column need be filled only if the payment is made by the buyer through the general mode. If the payment is made through any of the specified modes, the requirements of section 73 have been met and such payment constitutes a complete discharge of the obligations under the said section. As regards this column, therefore, the Department should be requested to obtain the information direction from the buyer concerned. 24. Before concluding, one general comment may be made with regard to section 73. It is clear that the objective behind the section is, as has been noted in many of the C.B.R. directives in connection therewith, to document the economy. This is sought to be achieved by, ensuring that payments are made and/or received through the medium of well-recognized and specified banking instruments which need to be documented, i.e., crossed cheques, bank drafts and pay orders. Recognizing that in certain situations, recourse to any of the three specified modes may not be adequate, section 73 also permits use of a general mode (any other banking instrument) subject to the condition in connection therewith noted above as regards the matter of the business accounts. We have examined some of the practical difficulties that have arisen in this regard. In our view, the proper approach for the Department to take with respect to business accounts should be to enquire from the buyer as regards his business account, and from the seller only as to his business account. It is entirely impractical to expect or require the buyer to have knowledge of, or provide information regarding, the seller's business account or vice versa.