590+ Taxes & Levies Quick Commentary – TLQC 3019

A.   Background (BG)

This refers to the related Important TLQCs in trail, blue, italic and double line (a) 2065 of 15.11.22 about GIDC prior to 2015 is not recoverable - LHC ICA order (b) 232 of 8.3.17 about GIDC Act 2015 - SHC DB suspension order for one party and not all - SHC SB order Federation may now shortly appeal and get several SHC DB order (c) 185 of 28.11.16 about SHC SB order against GIDC Act 2015 suspended by SHC DB order

2.   We also refer to several Other TLQC 851 of 5.7.19 about Provision for Gratuity" is not allowable, unless "Contributed to Approved Gratuity Fund - LHC

II.   UPDATED COMMENTARY – EXECUTIVE SUMMARY

Further to KQU 3203, being an important matter, we would inform you about ATIR order ----------- (Attachment 3019.1) in the ensuing paragraph, with emphasis in bold & Underline for quick reading.

The following issues are addressed in the judgement:

1.   Incidence of GIDC was passed on to the consumers, hence, amount payable to Govt by the Company cannot withheld or use GIDC money for own purposes.

2.   GIDC is allowable expenses for Income Tax purpose, as Tax Department Interpretation of section 5 of the GIDC Act, 2015 is incorrect and Department ignored IAS 37 and Accrual basis

3.   Due to Major issues and chequered history, we intend to arrange a GIDC Workshop. If you are interested, please click on the link to fill the Online Form

III.   DETAILS

The Important Paras 19 to 21 are reproduced below Italic verbatim, with emphasis on in bold and red.

19. Based on the provided facts and analysis, it is clear that the Gas Infrastructure Development Cess (GIDC) was passed on to the end consumer. Below is a detailed rationale for this conclusion:

Key Observations

1. GIDC Included in Creditors' Closing Balances (Tax Years 2015 - 2019):

o           The taxpayer consistently reported GIDC amounts in the audited accounts as part of creditors, demonstrating non-payment to the respective gas distribution companies.

o           The accumulation of unpaid GIDC balances across multiple years highlights the company's reliance on these funds without fulfilling its statutory payment obligations.

2.  Claiming GIDC as an Expense:

o           The taxpayer claimed GIDC as an expense under the cost of sales on an accrual basis without making actual payments.

o           This treatment reduced the taxable profit while benefiting from the associated tax deduction, effectively lowering the company's income tax liability.

3.  Increase in GIDC Amounts:

o           The progressive accumulation of GIDC amounts across the years shows that the taxpayer included the cess in their pricing mechanism and used these funds as working capital or for other business purposes.

4.  Judicial Proceedings:

o           The company's justification for non-payment, citing ongoing legal proceedings before the Supreme Court, does not negate the fact that the GIDC cost was accounted for as part of the cost of sales, influencing the pricing of the end products.

5.  Passing the Burden to End Consumers:

o           The inclusion of GIDC in the cost of sales inherently signifies that the cess was incorporated into the pricing of the final product, thereby indicating that the burden of the cess was ultimately borne by the consumer.

o           This is further corroborated by the company’s audited accounts, which show GIDC as a payable liability, confirming that the company retained these amounts rather than absorbing the cost or paying it to the government. The appellant brought nothing on record to rebut that the incidence of cess has not passed on to the consumer. The appellant cannot be absolved of its responsibility to prove the factum passing or otherwise of the incidence of cess to the consumer. Reliance is placed on the judgment titled M/s Asia Ghee Mills (Pvt) Ltd vs Assistant Collector (Audit) and two others, [PTCL 2009 CL 28 (H.C, Lah)]

6.  From a legal and ethical perspective, when the appellant company had collected the cess from its customers on behalf of the Government, it assumes a fiduciary and legal obligation to remit the collected amount to the Federal Government forthwith. The company is not entitled to withhold payment and uses it for its own purpose

20.         CONCLUSION

i.   The revenue department's decision to disallow the expense under section 5 of the GIDC Act, 2015 is based on an incorrect interpretation. At the same time, the appellant has also incorrectly justified their claim under section 5 ibid. However, the appellant (gas consumer) has otherwise the right to claim this expense under section 20 of the Income Tax Ordinance, 2001 as it is incurred exclusively for business purposes.

ii. The provision for the cess in the appellant’s books is appropriate as it meets the criteria for accrual accounting by recognizing the liability when it is payable (upon billing) and determining the amount with reasonable accuracy. Thus, the appellant has correctly created a provision for the cess in their books of account, as it meets the criteria set out by IAS 37.

iii.         It is evident from the record that the appellant collected the cess from its clients/customers and passed the incidence of the cess onto them. Therefore, in light of the judgment of the Hon’ble Supreme Court, the appellant is directed to promptly deposit the amount of cess into the government treasury, along with the applicable default surcharge. The relevant excerpt from the judgment of the Supreme Court is reproduced below for ease of reference:-

“Para-42

...............................

(iii) As all industrial and commercial entities which consume gas for their business activities pass on the burden to their customers/clients therefore all arrears of 'Cess' that have become due up to 31.07.2020 and have not been recovered so far shall be recovered by the Companies responsible under the GIDC Act, 2015 to recover from their consumers. However, as a concession, the same be recovered in twenty-four equal monthly installments starting from 01.08.2020 without the component of late payment surcharge. The late payment surcharge shall only become payable for the delays that may occur in the payment of any of the twenty-four installments.”

iv.      Regarding the other additions confirmed or remanded by the learned Commissioner of Inland Revenue (Appeals), it was mutually agreed by the parties that these matters would be referred back to the assessing officer for reconsideration. Order accordingly. However, being an old matter, the assessing officer is directed to pass the order preferably within two months from the date of receipt of this order after giving proper opportunity to the appellant.

21.      Let this order be sent to the following authorities for information and necessary action:-

·           Learned Secretary, Ministry of Petroleum and Natural Resources, Block-A, Pak Secretariat, Islamabad.

·           Learned Director General, Oil and Gas Regulatory Authority. Office at Plot No.54, Fazal-e-Haq Road, Near PIA building, Blue Area, Islamabad.

IV.   Further Details & Services 

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