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SCHOOL OF ECONOMICS AND MANAGEMENT Department of Business Law
Lund University
Pakistan GST
A Comparison to EU VAT with the Focus on Abusive Practices
Tutor Author
Professor, Ben Terra Muhammad Yasir
Mob, 0765835297
Master in European and International Tax Laws
HARM 53
1 Table of Contents
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2 Abbreviations and Glossary.................................................................................................................4
1. Part......................................................................................................................................................6
1.1. Background..................................................................................................................................6
1.2. Aim of Study................................................................................................................................7
1.3. Questions of the Essay/Study......................................................................................................7
1.4. Method and Materials.................................................................................................................7
1.5. Limitations...................................................................................................................................8
1.6. Outline.........................................................................................................................................8
2 Part......................................................................................................................................................9
Pakistan R- GST a comparison with EU VAT.............................................................................................9
2.1 Introduction;................................................................................................................................9
2.1.1 Economic Activity...................................................................................................................10
2.1.2 Taxable Person.......................................................................................................................11
2.1.3 Taxable Transaction...............................................................................................................12
2.1.4 Right to Deduction.................................................................................................................12
2.1.5 Adjustment of the Input VAT.................................................................................................13
2.2 Distinctive features of the GST Bill 2010..........................................................................................13
2.2.1 Tax Authorities..........................................................................................................................14
2.2.2 Rate of Tax.............................................................................................................................14
2.2.3 Offences and Penalties............................................................................................................14
2.2.4 Registration.............................................................................................................................15
2.3 Risk of abusive practices within the GST Bill 2010...........................................................................15
3. Part....................................................................................................................................................17
3.1 The Tax Abusive Practices and the ECJ Rulings....................................................................................17
3.1.1 Van Binsbergen Case C-33/74...................................................................................................18
3.1.2 Emsland -Starke Case C-110/99................................................................................................19
3.1.3Leusden Case C-487/01 and Holin Groep Case C-7/02 (Joined cases).......................................21
3.1.4 Case C-255/02 Halifax Plc and others.........................................................................22
3.1.5 Case C 439/O4 Axel Kittel and Case C-440/04 Recolta (Joined Cases)......................................24
3.1.6 Case C 425/06 Part Services......................................................................................................26
3.2 The Tax Abusive Practices and Judgments of the Pakistani Court of Law............................................28
3.2.1 Customs, Federal Excise and Sales Appellate Tribunal.....................................................................29
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3.2.2 Lahore High Court ......................................................................................................................31
3.2.3 2007 SCMR 1039........................................................................................................................32
4 Part....................................................................................................................................................34
4.1 Conclusion.................................................................................................................................34
Bibliography...............................................................................................................................................37
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2 Abbreviations and Glossary
A G Advocate General
Commission European Commission
Commissioner Tax Commissioner
Council Council of the European Union
EC European Commission
ECJ European Court of Justice
EU European Union
EUR Euro
GST General Sales Tax
Goods and Services Tax
The GST Bill GST Bill 2010 of Pakistan (Proposed legislation)
Member States European Union Member States
MTIC Missing Trader Intra- community
No. Number
Para Paragraph
PKR Pakistan Rupees
PTD Pakistan Tax Decisions
RDV the Recast VAT Directive
RGST Reformed General Sales Tax
SCMR Supreme Court Monthly Review
The Community The European Community
The VAT Directive means the Council Directive 2006/112/EC
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On the common system of value added tax
Trib. Customs, Federal Excise and Sales Appellate Tribunal
UK United Kingdom
Vs Versus
VAT Value Added Tax
WAPDA Water and Power Development Authority
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1. Part
1.1.Background
VAT is a general tax on consumption of goods and services. It applies to every stage of production, distribution and consumption of various goods and services. Hence the final burden of tax lies on the consumer. For the 1st time it was introduced in France during the mid of 20th century. At initial stages the VAT was applied only on large businesses. However, it has expanded to other businesses of the country. Therefore the value added tax became the major factor in strengthening of the French economy.
The member states of the EU are harmonizing the VAT as a common system of taxation within the Community, since the initial implementation of the 1st VAT Directive. The major sources of the VAT law in the EU are the treaties, Regulations, Directives, Decisions and the general principles of the EU law. These Directive, Regulations and decisions have direct effect on the member states national VAT legislation. The member states are empowered to make their national legislations within the limits provided by the Directives and decisions. All efforts are establish the common VAT system and implementing the concept of single market within the community.
The VAT Directive1 is applicable to the member states of the EU. This directive provides many provisions, rights and freedoms regarding the VAT system of the Community. The ECJ delivered many judgments to decrease the risk of abuse of right and prohibited the abusive practices within the Community.
The GST was introduced in Pakistan under the Sales Tax Act 19902, for the purpose to tax on sale of goods and services. However the Act can’t achieve the goal due to political compromises, large number of exemptions and multiplicity of rates etc3. Now the government of Pakistan is going to implement the Reformed GST Bill 4(RGST) in the form of modern VAT with the consultation of International Monetary Fund and World Bank. The RGST Bill will take the place of the Sales Act, 1990. This RGST Bill has many provisions similar and different to the EU VAT Directive. This essay will be a comparative study of these provisions of both these legislations with the focus on abusive practices. The implementation issues regarding the RGST Bill are outside the scope of the essay.
1 The Recast VAT Directive2 Sales Tax Act, 1990 of Pakistan3 Brief of GST Law 2010 available at http://www.cbr.gov.pk/newst/ACT/Default.asp Dated 03-04-20114 The General Sales Tax Bill 2010 of Pakistan http://www.fbr.gov.pk/newst/stgos/2010/GSTBILL2010.pdf Dated 04-04-2011
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Pakistan is a common law and also an Islamic country. The Higher Courts of Pakistan follows the common law while dealing with the commercial, property and civil law. However, Muslim citizens are subject to the Islamic law in personal life matters as, marriage, divorce, guardian ship and offences defined under the Islamic law. Islamic law is applicable in the Family Courts and the Sharia Courts while dealing with the personal matters of citizens. The tax legislation also defines the administrative and judicial authorities regarding the tax issues. These authorities follow the tax law when dealing with the tax abusive practices or the tax payer’s rights.
Tax avoidance and tax evasion both are different terms. Avoidance is about to minimize the tax liability and evasion is about failure of compliance with tax liabilities. Tax avoidance is legal but the tax evasion is illegal. The ECJ ruled and interpreted that the Community law prohibits the tax evasion, fraud and abusive practices.
1.2.Aim of Study
This paper will describe a comparative study of the basic provisions of the EU VAT Directive and the RGST Bill of Pakistan. The main purpose of this comparative study is to identify the similarities as well as differences between these legislations with the special focus on identifying the vulnerability for the tax abusive practices. The RGST Bill is drafted to introduce a modern form of VAT in Pakistan and to find out that the Bill can achieve its purpose of introduction in the country.
This paper will also discuss the tax abusive practices as dealt within the ECJ judgments and available judgments of Higher Courts of Pakistan. These judgments will be discussed to analyze the approach difference between the ECJ and the Higher Courts of Pakistan, when dealing with the tax abusive practices in their jurisdictions.
1.3.Questions of the Essay/Study
The questions of the essay therefore are:
1. What is difference between the basic provisions of the EU VAT Directive and the RGST Bill of Pakistan?
2. Whether these differences make the RGST Bill of Pakistan vulnerable for tax abusive practices and what can Pakistan learn from the EU VAT Directive?
3. How the ECJ developed the principle of prohibition of abuse of right (abusive tax practices) through the judgments and approach difference of the ECJ and Pakistani Higher Courts, when dealing with the tax abusive practices in the area of indirect taxation?
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1.4.Method and Materials
The thesis will describe the comparative study of the basic provisions of legislations5 as well as the latest EU VAT Directive and the RGST Bill of Pakistan. The EU VAT Directive and the RGST Bill of Pakistan are the primary source for comparative study. The ECJ is the interpreter of the EU community law, so the case laws with the focus on the tax abusive practices are very important to achieve the motivation of the thesis. Relevant literature to the subject of this thesis will also be considered.
The ECJ has delivered judgments in some interesting cases related the tax abusive practices within the Community. The choice of cases for this thesis is due to the main value and better understanding of the concept of the tax abusive practices within the Community and available judgments of the Higher Courts of Pakistan to analyze the circumvention or the tax abusive practices in Pakistan.
The Advocate General’s opinions may not be necessarily equivalent to judgments. However, they provide the best understanding of judgments and help to fully investigate the legal issues.
1.5.Limitations
The thesis will analyze the comparative study of basic provisions of both legislations with the focus on the abusive practices within their territorial jurisdictions. Different basic provisions, such as taxable person, taxable transactions, economic activity, right to deduction and right to adjustment of the VAT and few other distinctive features of legislations with exploring the vulnerability for abuse of right will be briefly described. The development relating to the concept of the tax abusive practices under the ECJ judgments and available Pakistani Courts will be discussed.
1.6.Outline
After the introductory part, the second part will provide the explanation of certain provisions of the VAT Directive developed under the ECJ judgments and their comparison with the same terms used in the RGST Bill 2010 of Pakistan. Furthermore, this part will also consist on some distinctive features of both legislations.
The third part of the thesis deals with the ECJ judgments and the available rulings of the Higher Courts of Pakistan with the focus on the development of concept of the tax abusive practices
5 As part of this thesis it will be assumed that the RGST Bill 2010 successfully has been passed as legislation in Pakistan.
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within the territorial jurisdictions of the Courts. The ability to combating the tax abusive practices through these judgments will also be discussed in this part of the thesis.
In the fourth, part, a final conclusion of the thesis is presented.
2 Part
Pakistan R- GST a comparison with EU VAT
2.1 Introduction;
The implementation of the VAT Directive within the Community is a major step towards achieving the goal of single market within the EU member states. The EU VAT Directive is binding for all 27 member states and an individual taxpayer can derive rights from the Directive. The member states are free to adopt the form and method to achieve the goal mentioned under the VAT Directive.
The VAT Directive’s purpose is to establish a common VAT system within the Community.6 The Directive defines VAT as a general tax on consumption of goods and services and will be chargeable after deduction of the input VAT amount connected the amount on the cost of the components of the goods and services. The final burden regarding VAT is on the consumer. The system is applied up to and including the retail stage.7
The Sales Tax, of 1990 was introduced with the intention to implement a law similar to VAT to the extent of goods. However, this GST was not applied on services and also not extended to the scope of retail stage. Recently the Pakistan has drafted a Reformed GST Bill 2010 with the consultation of IMF, World Bank and other donor’s organizations for the purpose to introduce the modern VAT/ GST in Pakistan. The new R-GST Bill8 will replace the Sales Tax Act, 1990.
The comparative study between the GST Bill 2010 and the EU VAT Directive is to identify the weak points in the GST Bill related to abusive practices. The following section will describe fundamental similarities as well as differences between each law with focus to investigate their vulnerability for the tax abusive practices. The key aspects of both legislations as economic activity, taxable person, taxable transactions, right to deduction, adjustment, chargeable event, power of authorities and some distinctive features between both legislations will be briefly 6 Article 1(1) of the Recast VAT Directive7 Article 1(2) of the Recast VAT Directive8 The theoretical name is GST Bill 2010.This Bill is also known as R-GST in Pakistan. available athttp://www.fbr.gov.pk/newst/stgos/2010/GSTBILL2010.pdf
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overview in the following section. Further guideline can be taken from the decisions of the court of laws.9
2.1.1 Economic Activity
Activity carried out by producer, trader, professional or person supplying services including mining and agricultural activities is regarded as an economic activity.10 Furthermore “the exploitation of tangible or intangible property for the purpose of obtaining income there from on a continuing basis shall in particular be regarded as an economic activity”.11 This activity should be an independent activity.12
The ECJ interpreted this article in W. M. Van Tiem case that if a person (owner) grants the use of property to another person for a short term and received consideration in return, so it is an exploitation of tangible property for the purpose to receive income than the activity shall be regarded as an economic activity.13
The economic activity has a wide concept under the EU RVD, and the ECJ has defined criteria to understand the concept of exploitation of the property in Renate Enkler case. The ECJ defined some grounds to indicate the activity for the purpose to obtaining income on continuing basis from property. These indications are 1) suitability of the property for exploitation 2) commercial and private use of property must be in mind during the examination of exploitation and economic activity’s process 3) nature of economic activity or how economic activity usually carried out 4) amount of income and number of customers also some other factors in particular cases be in mind during the examination of exploitation and economic activity regarding the property.14
The GST Bill 2010 of Pakistan defines the economic activity as “any activity carried on the regular or continuous basis by a person intended to or involved in supply of goods or services. An activity regarding business, profession, trade, manufacturing, calling, any kind of undertaking an activity relating to property such as lease, license or other similar arrangements is considered to be as an economic activity within the meaning of the GST Bill”15.
9 The Court of Justice of the European Union’s decisions to the extent of the EU VAT Directives provisions interpretation and the R-GST Bill provisions can’t be described as it is not implemented yet, so the cases described of Pakistan Higher Courts are relating to the provision of The Sales Tax Act 1990 of Pakistan.10 Article 9(1) of the RVD11 Article 9(1) of the RVD12 Article 10 of the RVD13 Case C-186/89 W. M .Van Tiem Para 2014 Case C- 230/94 Renate Enkler Para no. 25 to 2015 Article 5 of the GST Bill 2010 of Pakistan
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However, activities carried by an employee under the employment contract, recreation or hobby activities by an individual and an activity without expectation of profit carried by an individual are not an economic activity within the meaning of the Bill.16
Economic activity’s definition under the GST Bill is much wider than provided by the EU RVD. The economic activity under GST Bill covers almost all areas of economic activity’s definition provided under the EU RVD. It also goes beyond to the definition of the EU RVD’ when it covers the undertakings of any kind and about the concern of nature of trade. Further the RGST Bill describes that anything done or undertaken during the commencement and termination of an economic activity is also part of the economic activity.
2.1.2 Taxable Person
Article 9(1) of the RVD defines taxable person as “ Taxable person shall means any person who, independently carries out in any place any economic activity, whatever the results of that economic activity”17
The ECJ decided in the Lennartz case that acquisition of goods by a person for the economic activity is enough to qualify as a taxable person, even though the goods have not been immediately used for the economic activity18.
Public bodies, states, regional and local government bodies are not to be seen as taxable person regarding to their transactions or activities performed as public authorities19. However the ECJ decided in Ayuntamiento de Sevilla case that, the public authority’s activities must be within the national legislation applicable to them and these activities should be done as public authority. An activity performed by private individual can’t be outside the scope of VAT merely because of falling within the prerogatives of the public authority.20
The GST Bill describes that person liable for the tax is a person which imports the taxable import and a supplier who supplies the taxable supply.21 Furthermore, a person’s registration is required under the law. The registration for tax purposes is necessary as well as voluntarily in different circumstances. Where a person makes taxable supplies and imports, more than a value of the threshold amount his registration is necessary. The person who carries an economic activity of value not more than the threshold amount maybe voluntarily registered under the purpose of tax.22
16 Article 5 (3) of the GST Bill 2010 of Pakistan17 Article 9(1) of the RVD 18 Case C-97/90 European Courts Reports Page I-03795 Judgment dated 11, July 1991
19 Article 13 (1) of the RVD20 Case C-202/90 Ayuntamiento de Sevilla Para 18 and 19 of the Judgment21 Section 10, of the GST BILL 201022 Chapter vi “ registration” section 43 and 44
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Under the GST Bill, a clear definition of the taxable person as in EU RVD is not available. However, combine study of section related to taxable transaction, economic activity, the person liable to tax and registration provides that any person who carries an economic activity and a registered person under the law is a taxable person.
2.1.3 Taxable Transaction
Taxable transaction includes the supply of goods, intra community acquisition of goods and supply of services. The transfer of ownership of tangible property is a supply of goods.23 The supply of electricity, gas, heat or cooling energy is regarded as tangible property.24 Intra- community acquisition of goods for consideration within the territory of a member state shall be subject to VAT.25 Transaction which is not a supply of goods shall be treated as supply of services.26
Under the GST Bill 2010 Pakistan provides that tax shall be imposed on the supply of goods and services. The rate mentioned in the Bill is fifteen percent (15%) on the taxable supplies and taxable imports. The tax rate will be computed on the base of value of the goods and services.27
2.1.4 Right to Deduction
The right to deduction is an essential element of the VAT and taxable person can deduct the input VAT in respect of goods and services, which are not consumed by him. The VAT Directive provides that “ the taxable person has right to deduct input VAT regarding the supplies of goods and services, intra Community acquisition of goods and importation of goods to Member State where the transaction are carried out, goods shall be used for taxable transactions28. The right of deduction arises at the time when the deductible tax becomes chargeable.29In order to deduct input VAT the taxable person must have to prove that delivery of goods or services have been completed, holding of invoice, specific amount of intra community acquisition of goods and VAT has been paid for certain tax period.30
The ECJ decided in Midland Bank Case, there must be a direct and immediate link between particular input transaction and output transaction for the purpose to deduct input VAT amount.
23 Article 14 to 19, 20 to 23 and 24 to 30 of the RVD24 Article 15(1) of the RVD25 Article 2 (1)(b) of the RVD26 Article 24(1) of the RVD 27 Article 9 (1)(2)(3)(4) of the GST Bill 2010 Pakistan28 Article 168 0f the RVD29 Article 167 of the RVD30 Article 178 0f the RVD
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The existence of the direct and immediate link is necessary to deduct VAT regarding the transactions in question.31
The GST Bill 2010 provides that a registered can deduct input tax regarding goods and services which have been supplied or imported for taxable purposes and in course of an economic activity. The supplies to charitable organization might be regarded as taxable supplies under special circumstances by the Federal Board of Revenue.32
2.1.5 Adjustment of the Input VAT
According to VAT Directive adjustment of the deduction should be adjusted, when the deduction was not in an adequate amount of which the taxable person was entitled or due to some changing factors like cancellation or reduction in the price of goods, which are subject to transactions.33 However, Member States can make rules for adjustment of deductions.34
The ECJ replied in Dieter Armbrecht case to the national court that the adjustment of input deduction shall be limited to the extent of property which is part of the business.35
The GST Bill 2010 describes the adjustment event of input VAT when the supply has been cancelled, altered or returned. Hence the supply of goods losses its capacity as taxable supply due to its changing nature, etc.36Some rules related to adjustment of input VAT and its effect on the adjustment event have been introduced within the GST bill, like rules relating to the effect of cancellation of registration for a taxable person and the rule for changing the rates of the goods on the adjustment event.
2.2 Distinctive features of the GST Bill 2010
The GST Bill 2010 of Pakistan has some distinctive features related to administration, offences and penalties under the Bill. These features have not been discussed in the EU RVD and it’s upon the Member States to make rules for the implementation of the EU RVD in the national legislations.
2.2.1 Tax Authorities
31 Case C-98/98 Midland bank Para 2432 Article 27 of the GST Bill 2010 of Pakistan33 Article 184 and 185 of the RVD34 Article 186 of the RVD35 Case C-291/92 Dieter Armbrecht the judgment of the ECJ Para 3336 Article 31 of the GST Bill 2010 Pakistan
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The GST Bill 2010 of Pakistan provides detailed introduction of the tax authorities, functionaries and procedure to conduct the proceedings before the said tax authorities under the Bill. The GST Bill also described the clear powers and functions to resolve the tax legal issues in the tax courts. Federal Board of Revenue of Pakistan along with the Tax Officers has wide powers under the GST Bill 2010. The Revenue Board has the powers to assign, modify or withdraw the powers from the functionaries under the GST Bill.37The authorities also have power to compound in the case with the defaulter or fraudsters with the permission of the tax court.
The EU RVD delegates all powers related to appointment and functions of the tax authorities to the Member States of the EU. The EU Member States are bound to amend their national legislation and make the turnover taxes laws according to the provisions of the EU RVD.
2.2.2 Rate of Tax
The GST Bill introduced standard 15% tax rate on the supply of goods and services. In the past this was 17% or multiple other rates going up to 25%. Export supplies will be zero rated under the GST Bill, furthermore the sale of transfer of an economic activity as a going concern shall be zero-rated under the said legislation38.
The EU RVD describes that the standard rate for the Member States may not be lowers than 15%. However the Member States may apply reduced rates on certain supplies after consultation with the VAT Committee.39
2.2.3 Offences and Penalties
The GST Bill of Pakistan provides a number of offences and penalties related to nonpayment of tax, tax fraud and wrong deduction or adjustment of the GST under the GST Bill. This Bill also empowers the tax authorities to arrest and detain the fraudsters and defaulters of the GST40. Furthermore, the legislation also provides a clear guideline to recover the GST amount from the tax arrears and search of the premises of the defaulters and fraudsters under the GST legislation of Pakistan.
The EU RVD does not contain these types of provision and according to the RVD it up to the member states to define and implement the offences and penalties regarding the VAT.
2.2.4 Registration
37 Article 61 and 62 of the GST Bill 2010 0f Pakistan 38 Article 23 and 25 of the GST Bill 2010 of Pakistan 39 Article 96 to 105 of the EU Council Directive 2006/112/EC as amended December 201040 Chapter 13 and third schedule of the GST Bill 2010
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Under the GST Bill 2010 the registration of a person for the tax purpose is necessary, if he exceeds the registration threshold within the tax year. However, a person may apply for the voluntarily registration at any time, if he performed the economic activity.41 The federal board has authority to register a person compulsory for the tax purpose. However an earlier notice to the person is required by board of revenue42.
2.3 Risk of abusive practices within the GST Bill 2010
As described above the GST Bill 2010 is a proposed legislation for the value added taxation in Pakistan. A comparative study between EU RVD and the GST Bill 2010 of Pakistan shows few risk of its vulnerability for tax abusive practices within the GST Bill of Pakistan.
According to the GST Bill 2010 the tax officers will receive a significant amount of powers and due to history of corruption within the country. It is anticipated that these reforms will be widely misused.
The administration of existing GST Act 1990 has lot issues in managing it due to lack of knowledge and understating of the Law. In these circumstances if the GST Bill is introduced it will create an additional mismanagement and potential problems for the tax payers.43
There is an additional risk of failure of the GST Bill 2010 due to the fact that the provision for handling the fake invoices has not been prescribed properly. In addition to this the rights of tax payers have not been taken care of properly.
Some recommendation of the GST Bill 2010 also questionable. For example a tax payer is unable to pay his liability; the recoveries will be made from the relatives. This type provision in the GST Bill 2010 will create lot of complications in recoveries.
It is also important another key issue with the GST Bill 2010. A lot of provision, recommendations and their handlings have not been outlined clearly. This creates a potential misuse of the law by tax authorities.
The GST Bill 2010 does not include clear guidelines for the refund mechanism on export. This will trigger potential chances of the mismanagement within the refund claims process.
Too high threshold amount gives exception from tax to small business and low threshold amount put pressure on the tax implementing authorities. The GST introduced to the threshold amount as Rupees Seventy Five hundred thousand (7500000) approximately equal to (62000 Euros) which is too high in the country like Pakistan. Because an Economic Census of 2001/03 provide that only 20000 businesses out of 1567000 businesses exceeds the sale to the threshold amount 5000000(five million) PKR provided
41 Article 43 and 44 of the GST Bill 201042 Article 45 of the RGST Bill 2010 0f Pakistan43 For detail to please refer to the judgments of the Pakistani Courts described in next part of paper, where the fraudulent people avoid from the law due to negligence or violation of the law by the tax authorities
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under the existing Sales Tax Act 1990.44 Introduction of RGST with bigger threshold amount may not bring appropriate results according to the purpose of introduction or implementation of the GST legislation.
In addition the RGST has been criticized due to its complicated language which creates confusion for the tax payers and this confusion can put more pressure on the tax authorities as well as on the Courts of law for its interpretation etc.45 The Judgments of the ECJ and Pakistani Courts of law, related to the tax abusive practices will be discussed in the next part of the paper.
44 Pakistan Tax Policy Report Tapping Tax Basis for Development Page 6945 Akhtar Ali “What Wrong with R-GST bill 2010 of Pakistan” Article dated 24, November 2010 available athttp://akhtaralinaeem.wordpress.com/2010/11/24/what-is-wrong-with-r-gst-reformed-general-sales-tax/
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3. Part
3.1 The Tax Abusive Practices and the ECJ Rulings
The term “abuse” means improper use of something or use (something) to bad effect or for a bad purpose.46 When the term abuse of right comes into operation, this means that abuse of a right discussed under the provisions of a law. These rights provided by law and boundaries that when the exercise of the rights is within the scope of law, also to describe when the exercise of the rights is amounting to wrong or abuse of right is linked to the interpretation of the legislation.47
The concept of abusive practices by the ECJ has been discussed in these circumstances, first when the provisions of EC treaty invoked with the purpose to circumvent national legislation and second, when a person relied on the Community law for financial gain in a way or manner which is against the purpose of the Community law.48 The ECJ discussed the abuse in the judgments and used different words for it as, fraud, circumvent, avoidance, and evasion.49
The ECJ delivered many judgments regarding the abuse of right in the areas of, provisions of services, common agricultural policy, company law and tax since more than 35 years. The ECJ used the term “circumvention” 1st time in Van Binsbergen50 case Judgment relating the freedom to provide services. However the ECJ did not used the word “abuse of right or abusive practices” in the judgment. The ECJ used these words interchangeably in different judgments because of unusual language versions and standard of translation used in the Judgments of the Court.51
I have discussed these cases, Van Binsbergen Case, Emsland- Starke Case,Leusden and Holin Groep(joined cases), Halifax Plc case, Axel Kittel and Recolta (joined Cases) and Part Services case of the ECJ in this part of paper. In addition some case from the Higher Courts of Pakistan. All these cases are related to tax abusive practices.52
The purpose to mention the ECJ cases is to analyze tax abusive practices in the EU Community legislation and the thinking of the Court. Further all cases has been described in chronological order to see the development of the anti abuse principle in the Community law and how the Court combating the tax abusive practices through their judgments orders. In addition the
46 Oxford Dictionary definition available at http://oxforddictionaries.com/view/entry/m_en_gb0002970#m_en_gb000297047 Paul Lasok QC “Abuse of right in EC Law- Origin and History” Page 2 48 Opinion of Advocate general Maduro in the Case C – 255/02 Halifax Para, 6349 Luca Cerioni the “Abuse of Right” in EU Company and EU Tax Law page, 250 Case C- 33/7451 Ibid 4852 All cases with full detail of title and no,s are written in the discussion of the cases judgments.
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purpose to mention Pakistani Courts judgments is to analyze that the Courts are dealing with the tax fraud or evasion in the area of Sales Tax Act and learning for Pakistan to combat the abusive practices.
3.1.1 Van Binsbergen Case C-33/74
A Dutch lawyer was representing the parties in the court of law at Netherland. During the proceeding, he changed his residence and moved to Belgium. According to Dutch law a legal representative must be established in the Netherland in order to defend the parties or appear on behalf of other persons, before the courts of laws of the country. Hence, the lawyer has been changed the residence so, he losses the capacity to appear as legal representative in the Courts of the Netherland. The lawyer relied on the articles 59 and 60 of the EC Treaty relating to free movement and providing of services within the Community.53 The national courts referred the case to the ECJ for interpretation of articles 59 and 60 of the EC Treaty.
Questions for Preliminary ruling
The national court refers these questions to the ECJ for interpretation of the EC Treaty.
1. The provision of the national law like, only person established in the country is entitled to appear before the Court of law as legal representative, is in accordance with the provisions of the EC treaty?
2. Whether an individual can rely on the EU law (Treaty rights) before the national Courts?
Judgment of the ECJ
The ECJ considered the nature of services as provided by professionals as well as non professionals. The services in question were provided by a lawyer and these types of services need the professional abilities. The requirements imposed through the national law on the professionals are within the scope of the EC Treaty. Where the professional established himself in another Member State for the purpose to escape from the national rules applicable in the Member State where he is providing services. The ECJ justified the rules in judgment especially, when these rules are binding for all persons established within the Member State. 54 The ECJ decided that the Member State can take measures to introduce or implement the legislation, in order to prevent the escape or avoidance from the national rules by the professionals.55
53 Case C-33/74 judgment of the European Court Justice Para no. 3,4 and 554 Case C-33/74 the Judgment of the European Court of Justice Para no. 12, 13,14 and 1555 Case C- 33/74 the judgment of the European Court of Justice Para no. 17
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According to ECJ ruling in the Van Binsbergen case an individual can rely on the Community law in the national courts. Especially, when the risk of discrimination on the basis of nationality arises from the national law where the person is providing services.56
The ECJ does not describe the word abusive practices or abuse of right in the judgment. However the ECJ decided about the situation in the case that an individual can’t rely on the Community law for the purpose to escape the national law. Moreover the ECJ decided about the specific type of services provider and his avoidance from the professionals rules of conduct applicable in the Member State.
The ECJ judgment in Van Binsbergen case creates few questions as the Member States can take measures for prevention of fraud or abuse of right in areas other than professional services. Secondly, any act with the intention to escape from the national rules by relying on fundamental freedoms can be discouraged or prohibit by the Member States. The Judgment is not clear about the abusive practices or abuse of right but it was 1st step towards the development of the principle of abuse in the Community law. However the judgment provides the guideline that an artificial use of the fundamental freedoms provided by the EU law can’t be abused. Especially with the purpose to circumvent from the national legislations of the Member states.
3.1.2 Emsland -Starke Case C-110/99
A German company Emsland-Starke exported many consignments of potatoes to Switzerland during April and June 1987. The receptionist companies were Fuga and Lukowa both established in Switzerland at same address and managed by the same group. The consignments of potatoes after reaching to receptionists companies again sent back to the German company and the obtained the export refund. The German company also exported wheat starches to the Swiss companies which were sent to the Italy soon after their arrival in Switzerland and the company again received the export refund by the authorities. German customs authorities enquired the consignments and found that after releasing the consignments for home use in Switzerland all potatoes sent back to Germany through the same means of transportation. German authorities demanded for repayment of the export refunds in respect the consignments by the German company.57 The Emsland-starke company after two consecutive failure rounds in the court of laws appealed to the Federal Finance Court of Germany on the point of law.58 The Federal Finance Court stayed the proceeding and referred the case to the ECJ for preliminary ruling on these questions.
Questions for Preliminary Ruling;
56 Case C-33/74 Van Binsbergen the judgment of the ECJ Para no. 2757 Case C-110/99 Emsland-Starke the judgment of the ECJ Para no.7,8,9,10,11 and 1258 Ibid Para no.13,14 and 15
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1. Does the exporter lose the right of export refund under the light of facts mentioned in the case?
2. What would happen if the purchaser sold the product to a sister company established outside the Community59?
Judgment of the European Court of Justice
The ECJ delivered the judgment following by the opinion of Advocate General Albert60. The Commission also intervened in the proceeding and submitted to the court that the Regulation in question was not applicable at the material time. The general principle of the abuse of right is applicable in the Member States’ national legislations and the ECJ have applied the principle in many case laws. The principle is not recognized by the ECJ as the general principle of the Community law.61
The ECJ established criteria to examine (test) the abuse of right under the Community law. First the combinations of objective circumstances and second the subjective elements regarding to the intention of the taxpayer was introduced in the judgment. The ECJ defined that abuse of right requires objective circumstances in which the formal observance laid down by the Community rules. The purpose of the rules has not been achieved.62
Second a subjective element consisting in the intention to obtain an advantage from the Community rules by creating artificially the conditions laid down for obtaining it.63
The ECJ decided the case under the above mentioned criteria that the exporter took the undue advantage of the Community rules and artificially established the whole scene to obtain the export refund from the authorities. The authorities demand for repayment of the export refund is justifiable and the demand to repay the export refund can’t be considered as a penalty.64 In reply to 2nd question the Court decided that the national court can take into account during the decision of the main proceedings about the requirement of the repayment of refunds.65
In Van Binsbergen case the ECJ used the words like to avoid, to evade and to escape from the law. However, in the present case the ECJ defined the concept undue advantage from the Community rules. Furthermore, the Court also describes the test criteria to examine the right of abuse under objective elements and the objective elements. The judgment shows the
59 Case C-110/99 the judgment of the ECJ Para no. 19(1)(2)60 Opinion of the Advocate General Albert delivered on 16 May 200061 Case C-110/99 the Judgment of the ECJ Para no.36 to 3862 Case C-110/99 the Judgment of the ECJ Para no.5263 Case C-110/99 the Judgment of the ECJ Para no.5364 Case C-110/99 the Judgment of the ECJ Para no. 5665 Ibid Para no.59
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importance of link between the subjective element and the objective result of the artificial developments for the purpose to gain the financial advantage from the EU rules. In addition the Court laid down the criteria to see the artificial development for the purpose to take advantage from the Community law and abuse of right provided under the EU Law.
Furthermore, the ECJ goes toward a step a forward in the case and describes a comprehensive detail about the abuse of right under the artificial developments conduct and intention to take undue advantage or financial advantage from the Community rules. The Judgment describes that an artificial conduct to gain right from the EU Law can be against the financial interest of the Community, and it should be prevented and prohibited under the EU law. In order to see that the ECJ applied this test of subjective element and objective element regarding the tax abusive practices case laws in the later judgments, the Leusden case is important.
3.1.3Leusden Case C-487/01 and Holin Groep Case C-7/02 (Joined cases)
The Gemeente Leusden providing playing fields to sports clubs and the company after converting the field from natural gross into artificial gross let the pitch to a hockey club. Later on additional assessment for input VAT was made under an amending law. The additional assessment’s decision was supported by the tax authorities.66 Later on the case was sent to ECJ for preliminary ruling for interpretation of the VAT legislation.67 The Leusden argued because of that amendment in national legislation he got an advantage of less taxpaying and the decision of tax authorities is breach of legitimate expectation.68
Case C-7/02
A company in Holin group constructed office on plot and the Holin group deducted the VAT. In 1995 the offices were leased out to a bank and they started the VAT exempt activities. The tax authorities made an assessment under the new amending national law and served the VAT assessment to Holin group. The decision of the tax authorities also remained untouched by the court and later on the national superior sent the case to ECJ for preliminary ruling.69
Question for Preliminary ruling;
1. Whether the principle of legal certainty and legitimate expectation preclude the VAT adjustment, in case of no abuse or fraud on behalf of tax payers?
2. The amending law is enforceable only for deduction or until the expiry of adjustment period under the circumstances?
66 Case C-487/01 Judgment of the ECJ Para no.21,22 and 2367 Ibid Para no. 2768 Ibid Para no.3769 Case C-7/02 and Case- C487/01 joined cases judgment of the ECJ Para no. 28 to 32
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Judgment of the ECJ
The ECJ applied the test of Emsland-Starke’s judgment to enquire about the abuse of right in the judgment of this case again.70The court decided the amendment in the national law which gives the advantage to the tax payer without abuse of right cannot breach a legitimate expectation based on the Community law.71 Further a taxpayer cannot be blamed for tax advantage or abuse provided a lacuna in the national legislation which gives right for less.72
The judgment has importance with the tax abusive practices that it defines the difference between the abuse of right and tax advantage. It is noticeable in the judgment that without intention to abuse of right and take a tax advantage provided by the national legislation can’t be treated as the tax abusive practice.73
However, the Halifax case in one of the important cases in European tax abusive practices and it provides more detail study in the field of tax abusive practices. The Halifax case helps to observe the conditions for deducting input VAT where the underlying transactions comprise an abusive practice.
3.1.4 Case C-255/02 Halifax Plc and others
Halifax is a British banking company, and its most performing activities are VAT exempt. The company needs to build call centers at many sites and for this purpose the Halifax entered into many agreements with other companies, which are also related to the same group of Halifax Plc. It is important to note that the company can deduct only less than 5% of its input VAT. As a consequence of these several agreements and transactions between the same group of companies, the Halifax deducted whole input VAT paid on invoices received from the suppliers of construction work.74 Later on the commissioner refused the claim of deduction for input VAT by a contractor company.75 The company appealed against the decision of the commissioner into the national court but failed to get relief. However at the later stage case was referred to the ECJ for preliminary ruling for the interpretation of the Sixth VAT Directives provisions.
Questions for preliminary Ruling;
70 Joined cases 487/01 , 7/02 judgment of the ECJ Para no.7871 Ibid Para no.7872 Ibid Para no.7973 Ibid Para no.8274 Case C-255/02 Halifax plc and other vs commissioners of Customs and Excise, the Judgment of the ECJ Para no, 12 to 2975 Ibid para no.32
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1. The transactions in issue can be regarded as economic activity within the meaning of Sixth VAT Directive, when they carried just to gain tax advantage or for tax fraud?
2. The right to deduction of input VAT can be denied because the transactions giving rise to that right constituted and abusive practices?
Judgment of the ECJ
The ECJ decided the case after the opinion of Advocate General Maduro.76The Advocate General as well as the Court modified the two elements test criteria discussed in the Emsland Stark case earlier. In addition the AG discussed about the purpose of transactions is contrary to the objectives of the Community law.77 However, the court put responsibility on the national courts examines purely artificial arrangement and links between the parties of the case.78
Under the light of previous case laws of the ECJ regarding taxable person, taxable transaction and economic activity the Court gave the positive reply regarding the 1st question of the national court.79 The Court stated that the objective criteria’s requirement has been fulfilled by the transactions as they constituted the supply of goods and an economic activity within the meaning of the Sixth VAT Directive.80 The purpose of the transactions is immaterial in reply of the 1st question.
Furthermore, the ECJ decided in reply of 2nd question that the transactions in issue carried out not in normal commercial purposes. The purpose of the transactions is to avoid from tax liability or undue tax advantage. So the Community law prohibits the wrongful obtaining advantages provided under the law.81 The principle of prohibiting abusive practices also applied the VAT cases. 82
The ECJ extended the scope of abusive practices from others areas and bring this concept into the VAT. The Court is taking the next step by introducing the tax advantage as not only one purpose but an important purpose of the transaction. Regarding this the ECJ defined that in order to analyze concept of abuse in the VAT. These factors should be taking into account 1) the transaction in question is according to the provisions of the VAT Directive and the national legislation (implementing of the VAT Directive) result of the deduction is contrary to these provisions83 2) objective element of the transaction is to take tax advantage.84 The Halifax case
76 Advocate General Maduro delivred the opinion on 07 April 2005 in Halifax case C-255/02 77 Opinon of the AG Maduro para no.7078 Case C-255/02 judgment of the ECJ Para no.8079 Ibid Para no.6080 Ibid 81 Case C-255/02 judgment of the ECJ Para no.69 82 Ibid para no.7083 Ibid para no.7484 Case C-255/02 Halifax Plc vs CCE the judgment of the ECJ Para no.75
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makes clarity about the tax abusive practices in the VAT area. However the case also put lot of pressure on the national courts of the Member States regarding determination of the tax abusing practices and implementation of the VAT Directive in its true spirit.
Soon after deciding the Halifax case the ECJ decided the Axel Kittel cases regarding the right to
deduction of input VAT. When a person knowingly participates in the fraud transaction and what
can be the effect of these transactions regarding the right to deduction of the input VAT in
fraudulent transactions.
3.1.5 Case C 439/O4 Axel Kittel and Case C-440/04 Recolta (Joined Cases)
The cases (439/04 case Kittel, 440/04 case Recolta) was joined for the purpose of written procedure, oral and the judgment.
Computime;
The company engaged in the business of computer components, later on the Belgian tax authorities found that the company is involved in the carousel fraud. According to the tax authorities the company is also aware about facts the carousel fraud. The company has been received the input VAT from the authorities, so the tax officers refused for the deduction of the input VAT for the supplies of company.85The tax collector fined the company and also demands for the payment of 18 EUR million. The company applied to tribunal for the cancelation of order passed by the tax authorities. The tribunal upheld the decision of the tax authorities against the company. Finally the Mr. Axel Kittel appealed against the decision of the tribunal in the Court of the Cassation.86
Recolta;
The tax authorities investigated against Mr. Ailli-lud and Auto Mail for the tax suspicious activities. The tax authorities found that companies had set a fraud scheme for the purpose to deceive the authorities. The Recolta filed an appeal in the tribunal against 360000 EUR demand by the tax authorities. The tribunal passed order in favor of the Recolta and accepted that it can’t be suggested, Recolta are its Directors knowingly involved in the tax fraud scheme.87The tax filed an appeal against the decision of the tribunal but failed to get relief in the favor by the higher court. Finally the Belgian state filed an appeal in court of the Cassation to get decision against the Recolta. The court of Cassation stay the proceedings and the case referred to the ECJ for preliminary ruling88,
85 Case C-439/04 and Case C-440/04 Judgment of the ECJ Para no. 10, 1186 Ibid Para 1287 Case C-439/40 and 440/04 judgment of the ECJ Para no. 16 and 1788 Case C-439/04 and 440/04(joined cases) the judgment of the ECJ Para no.18,19
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Question for Preliminary Ruling
1. The contract against the public policy is a void contract under the national legislation and a person became a party in good faith to the contract. This situation cause that party in contract lose the right to deduction?
2. If the answer is negative than where the contract is incurably void for fraudulent evasion of VAT itself?
3. If the contract is void on unlawful basis incurred under domestic law, is a fraudulent evasion of VAT for both parties to contract89?
Judgment of the ECJ
The ECJ relied on the Optigen case90 and decided that the right to deduction is an integral part of the VAT. The right to deduction can’t be limited in the scope and person who is in good faith or no reason to understand the fraud scheme, his right to deduction can’t be denied.91 In addition, when the person intentionally participate in the transactions which are part of the fraudulent scheme, the national court can treat him as an accomplice and deny the right to deduction of the person.92
The most important part of the case regarding the tax abusive practices is answer of the question no.3 of the ECJ’s judgment. The Court followed the objective criteria and decided that if a transaction is a supply of goods, by a taxable person and fulfilled the condition of economic activity. However the purpose of whole scheme is to deceive the tax authorities, tax evading or fraud than the objective criteria has not been fulfilled and the trader lose the right to deduction of the input VAT.93In addition, the tax authorities found that right to deduction has been exercised fraudulently than the authorities has right to claim a refund of the input VAT previously received by the fraudulent persons.94
The Judgment is an important step towards the combating measures against the tax abusive practices. The ECJ described that the Community prohibits all the types’ tax fraud and the tax abusive practices. The Member States can take effective measures to discourage the tax abusive practices and the tax fraud, evasion, avoidance or abuse.95 Furthermore a trader can’t rely on the Community law in order to deceive the national legislation and when he has made transactions for the purpose of tax fraud or abuse.96
89 Ibid Para no.2590 Joined case 354/03, C-355/04 AND C 484/03 Optigen case91 Case C-439/04 Axel Kittel case, the judgment of the ECJ Para no.5392 Case C-439/04 Axel kittle case, the judgment of the ECJ Para no, 55 93 Article 2(1)(a) of the RVD and case C- 255/02 Halifax judgment Para no. 59 94 Case C-439/04, 440/04 Axel Kittel judgment of the ECJ Para no.55 95 Ibid Para no. 5496 ibid
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The Part Services is an important case in VAT tax abusive practices. It provides that Member States can take measures to prevent tax avoidance by their taxpayers. This case also provides the guideline that how the ECJ implementing the principle of prohibition of tax abusive practices under Community law.
3.1.6 Case C 425/06 Part Services
Two Italian companies belonging to one financial group structured the transaction under two contracts instead of the one contract regarding the leasing of motor vehicles.97 The companies provide taxable and exempt supplies under different contracts with their customers with the purpose to save the group VAT. Italian tax authorities found that the consideration paid by the customers for leasing contract has been artificially divided in many contracts and purpose is to minimize the tax liability of two group companies.98 However the companies argued before national court that it was not single contract and the structure is adopted valid reasons and for better marketing, organization and the guarantee. Further, the purpose behind the structure is not the tax fraud or avoiding from the tax liability.99 The Supreme Court of Cassation referred the case to ECJ for preliminary ruling with these questions,
Questions for Preliminary Ruling
1. The transaction made with sole purpose of tax advantage, corresponds to the definition of transaction carried out with no commercial reason or is it broader or restrictive to its definition100?
2. Whether there is any abuse of right under the facts of the case101?
Judgment of the ECJ
The ECJ decided that it is important to note about the nature of transactions as the national court describe the characteristics of the transactions as….
o Companies belong to same groupo Service divided by the leasing company and financing by another companyo Payment by customer for leasing services and its difference from the actual price of
motor vehicleso Receiving of consideration by the leasing company and transfer of amounto The service of leasing company change into the renting of vehicles102
97 Case C-425/06 Part Service, judgment of the ECJ Para no.1198 Ibid Para no. 17 99 Ibid Para no.19100 Ibid Para no. 40101 Ibid Para no.46102 Case C-425/06 Part Services, the Judgment of the ECJ Para no.57
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The ECJ provides guideline to the national courts about the determination of tax abusive practices. In present case the ECJ provides more detailed for national courts for adjudication about the transaction which has been divided artificially for gaining of tax advantages. Previously the Court in Halifax case decided that when the transactions carried for the purpose to tax advantage and grant of relief will be contrary to the EU VAT Directive.103 Further the sole objective from many factors of the transaction concerned is to obtain tax advantage.104 The characteristics to examine a single transaction or number of transactions for the objective element test have been described in the present judgment. The ECJ judgment in Halifax case is bit short on the guideline for national courts, when they are dealing with tax abusive practices. However in the present case the detail for national courts has been described in the judgment.
More ever the ECJ applied two tests criteria in the Part services' case. The court describes that the national court must see the result of transactions as tax advantage or not, granting of relief will be contrary to the provisions or purposes of the Community law. Further the principal approach of contractual has been adopted or not.105 In addition the national court may take into account these elements like totally artificial nature of the transaction in issue, links between the suppliers and receptionists of the transactions on the legal and economic basis, economic objectives as marketing, organization and guarantee consideration, etc.106
The ECJ Judgment in Cadbury Schweppes case is more in line with the present judgment. The Court decided that the CFC must accord to an actual establishment intended to carry on genuine economic activities in other state.107 These result of objective element based on the facts that CFC physically exit in respect of premises, staff and establishment.108 Moreover if characteristics of the CFC prove that the company was a fictitious establishment than the creation of CFC must be assume as characteristics of wholly artificial arrangement.109 So the Part Services case is an important step towards the findings based on the characteristics of transactions in issue in every case regarding tax abusive practices.
3.2 The Tax Abusive Practices and Judgments of the Pakistani Court of Law
103 Case C- 255/02 Halifax Plc vs CCE , The Judgment of the ECJ Para no,74 104 Ibid para, 75105 Ibid Para no.58106 Ibid Para no. 62107 Case C 196/04 Cadbury Schweppes, the judgment of the ECJ Para no,66108 Ibid Para,67 109 Ibid Para 68
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The GST 1990 was implemented in Pakistan with the purpose to enhance taxation system in the line of international value added taxation. However, due to political compromises, large number of exemptions, multiplicity of rates and several other reasons it became a narrow based tax. Under these reasons recently the government of Pakistan introduced GST Bill 2010. After approval from parliament the new will replace the Sales tax Act 1990.110
For the purpose of handling of abusive tax practices and the judgments of Pakistani courts, I choose cases decided under the GST Act 1990. The Sales Tax Act 1990, defines the tax fraud as “tax fraud means that if someone knowingly, dishonestly or fraudulently and without any lawful excuse is doing or causing to do any act like a) making of false tax invoices b) carrying taxable supplies with registration c) paying less tax amount from his actual tax liability for two consecutive months” will liable for tax fraud under the Act.111 The Sales tax Act also provides the definition of some other key provisions relating to sales tax as, economic activity, taxable person, taxable supplies and tax invoice etc.112
The purpose to describe the judgments of Pakistani Courts is to find out the approach of the country courts regarding the tax abusive practices. The Sales Tax Act 1990 describes the judicial function and powers of the courts and also categorized them as, collectors of the sales tax, appellant tribunal, Provincial High Courts and the Supreme Court of Pakistan. It is important to mention that in High Court and Supreme Court the parties (taxpayer and tax authorities) can appeal only on the law point.113
In addition, to see whether there is any approach difference between the ECJ above mentioned judgments and Pakistani Courts judgments regarding the abusive practices in the area indirect taxation. I have chosen the interesting cases from the Supreme Court of Pakistan to the tax tribunal all these cases are from the indirect taxation area.
It is pertinent to mention here that Pakistan is a common law and Islamic law country. Being a common law country the courts system is in accordance with common law system and the common law system applies on the commercial system. The Islamic law applies on the personal status of the Muslim citizens as family matters like marriage, divorce, child guardianship etc.114The concept of Islamic law (Sharia Law) is out of the scope for this paper.
110 Information of reformed GST of Pakistan, the Brief of GST Bill 2010 available at http://www.fbr.gov.pk/newst/SalesTaxRules.asp
111 The Sales Tax Act 1990 as amended 2009 chapter 1 Definitions (37)112 The Sales Tax ACT 1990 of Pakistan Chapter 1 Definitions113 The Sales Tax ACT 1990 Articles no, 45 to 47114 http://www.law.emory.edu/ifl/legal/pakistan.htm Legal System History dated 5-5-2011
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3.2.1 Customs, Federal Excise and Sales Appellate Tribunal115 (Sales Tax Appeal no.663/LB of 2009)
The Auditing Department of Sales tax has found theses errors in record of appellant.
1) The appellant has received an illegal refund of the tax through tampered shipping bills.
2) Excess consumption of fabric and removing of the fabric without charging Sales Tax on removing Stock 3) for purchasing purposes and refund of the Tax, the appellant has used fake invoices (flying invoices).
4) Proper description of the fabric was not mentioned on the shipping bills which amount to tax fraud.
5) It was observed during the audit that export, stock and purchase qualities of fabrics are not related to each other.
The Tax authorities issued a show cause notice to the appellant and later imposed the fine on the appellant. The aggrieved taxpayer files an appeal against before the Collector appeals but failed to get relief. The appellant filed an appeal against the decision of the Collector’s order in the appellant tribunal. The appellant argued before the appellate tribunal that before deciding the case on facts it’s necessary to decide these law points.
Law Points on behalf of the appellant
1) The auditing officer was not authorized by the law to audit the appellant (lack of jurisdiction) and order passed on jurisdictional error basis has the validity.
2) The impugned show cause notice has not issued in accordance of the law( Sales Tax Act 1990)
3) The details of the tax fraud have not been mentioned in the impugned show cause notice issued by the tax authorities.
Judgment of the Tribunal
The tribunal heard the written and oral arguments of both the parties and decided to resolve above mentioned legal issues in advance than the issues of the facts. The tribunal found that the auditing officer was not empowered to audit the appellant company under the law, and the audit was an ultra vires act performed by the auditing officer. The appellant argued that the show cause notice has not been issued according to the law because the nature of the allegation not mentioned in the impugned show cause notice.115 Name of the Tribunal Judgment and the judgment of the Tribunal Published in Pakistan Tax Decisions 2010 Page no. 957Sales Tax Appeal Tax no.663/LB of 2009, decided on 10th September 2009
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In addition the tribunal decided that it is well settled principle of law, none is allowed to act beyond his jurisdiction and all the scope of acts and deeds beyond the scope of jurisdiction are null and void in the eyes of law.116 Further the Tribunal described that “It is also well settled law that when basic order is without lawful authority, then the superstructure built on it would have to fall on ground automatically”.117
The Tribunal described in the Judgment that onus to prove the allegation of the tax fraud is on the tax department. When the department is issuing a show cause to be appellant without mentioning the specific charge the tax fraud under Sales Tax Act 1990 than the purpose of show cause notice has not been achieved under the law and the notice is null and void in the eyes of the law.118
On the issues of facts the tribunal decided that the onus to prove was on the tax department regarding fake invoices and tempered export bills. However the tax department and the Custom authorities not raised objection about tempering of bills etc. The decision of the issue also goes in favor of the appellant and the tax authorities can’t prove that the appellant had deliberately, knowingly, intentionally or willful evasion of tax under the Sales Tax Act.119
The tribunal interpreted the Sales tax according to the spirit of law, where the taxpayer can’t present the bank invoices for the refund of input tax. The Sales Tax Act describes that tax payer’s can’t deduct input tax without presenting bank invoices in respect of transactions having the value more than 50000 PKR.120 However, the tribunal decided that the basic spirit of the law is to eliminate the fake invoices and in present case the tax department can’t prove that the invoices in issue are fake invoices. So the taxpayer is entitled to refund input tax, and his right can’t deny on the technical basis. The denial of input tax is against the basic spirit of the law.121
3.2.2 Lahore High Court 122
Writ Petition No.14360 0f 2008
The petitioner was running a Steel Re-rolling factory 9/10 months ago before filing the writ petition in the High Court. The petitioner’s factory discontinued the production and he makes a
116 The decision of the tribunal is based on the judgment of the Supreme Court of Pakistan Published in2002 Supreme Court Monthly Review page no. 122117 The Tribunal’s Decision based on the Judgments of the Supreme Court of Pakistan reported in 2007 Supreme Court Monthly Review page no. 8182007 Supreme Court Monthly Review Page no. 1835 118 The tribunal decided the issue under the Judgment passed by the High Court of Lahore reported in2007 Pakistan Tax Decisions page no. 2265119 Para 16,17 and 18 of the Judgment by the Customs, Federal Excise and Sales Tax Tribunal reported in2010 PTD (Trib.) 957120 Section, 73 of the Sales Tax Act 1990121 Customs, Federal Excise and Sales Tax Appellate tribunal Judgment reported in2010 PTD(Trib.) Page 975 122 Provincial High Courts are second superior courts of the country
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request to WAPDA for disconnection of electric supply. The petitioner keeps the right to reuse the electricity and in consideration, he will pay fix charges for the electricity. The tax department imposed withholding and Sales tax in the bills of electricity’s fixed charges. The petitioner argued before authorities that factory had discontinued production and also the electricity has not been consumed. So it is not a supply under the Sales Tax Act and the tax imposed by the authorities is illegal. However, the tax authorities refused for correction of bills and wrongfully imposed taxes.123
Judgment of the High Court
The Court decided that the purpose for payment of fixed charges is a kind of security for retention of the electricity connection and whenever the petitioner wants to start production he had to inform the WAPDA authorities. However it is clear from the record that the petitioner has not consumed a single unit of electricity during the period of disconnected production. So he is not liable for the income tax.124
For the purpose of the Sales Tax imposition, it is clear that the petitioner has not consumed the single unit of the electricity. There is no evidence of actual supply to the consumer and the imposition of the sales tax on the petitioner is also not according to the provision of the Sales Tax Act.125
The Court decided that basic principle of interpretation is the golden principle which means to remain within the scope of the law and not to go beyond its language. So the court described that when the language of the law is clear and interpretation is also according to the fundamental rights of the citizens than it is unnecessary to go in further detail for interpretation.126
Finally, the Court decided that in the light of above mentioned circumstances the tax imposed by the authorities was not according to the law. So the imposed tax was deleted from the electricity bills.127 The judgment showed that there was not abuse of right on the behalf of the taxpayer. However, it makes clear the concept of courts thinking in interpretation of the law and the protection of fundamental rights of taxpayers under the court judgment whenever the rights are at stake by tax authorities. In next headings I will describe the judgment of Supreme Court of Pakistan.
123 Judgment of the Lahore High Court Lahore reported in2009 PTD 774124 The Judgment of the Lahore High Court Lahore Para no. 13 2009 PTD 774125 Ibid Para, 9 126 Ibid Para no.12127 Ibid (a)definition of the law
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3.2.3 2007 SCMR 1039128 C.P.L.A Nos.535 and 536 of 2006, decided on12th, February, 2007
The writ petitioners are running a business of manufacture and supply of ginned cotton. The tax authorities raided the factories of the petitioners with the suspicion of maintaining the double records of the book keeping with the purpose of tax evasion in the payment of Sales tax. The tax authorities seized the record and took into possession the record and documents of the factories. The petitioners filed writ petition in the High Court and argued that the act of authorities was illegal and against the provisions of the Sales Act 1990. The High Court accepted the arguments of the petitioners and also the writ petition filed by them against the tax authorities. Later on, the tax authorities filed an appeal against the decision of the High Court.
Judgment of the Supreme Court
The tax authorities argued in the Supreme Court that the tax officer got information about the tax evasion by the respondents.129After receiving information the authorities raided at the factories and the tax evasion also proved by the documents seized by the authorities. However, the authorities can’t satisfactorily reply to the Court on violation of law regarding the search warrants which is necessary to get for the raid purposes. The Supreme Court also found the clear violation of the Sales Tax Act 1990’s provision regarding the conducting of search in the taxpayer’s premises.130
The Supreme Court decided that the authorities of the law has amended time to time for the purpose to curtail and monitor the unlimited and unbridled powers of the tax authorities resulting in undue harassment and humiliation to the tax payers.131 However the authorities can bypass the normal procedure when they have strong evidence and cogent reason to act in the manner like the authorities act in the case in hand.132
Furthermore, the Court described that the authorities can’t prove the tax evasion on behalf of the taxpayers with cogent reasons and evidence for the purpose to conduct raid in taxpayer’s premises without following the law. The Supreme Court ruled that the authorities were fully aware of the law interpreted by the Court in another judgment.133 In addition, the authorities have been failed to comply with the law and can’t describe any cogent reason to bypass the normal
128 The Judgment of the Supreme Court of Pakistan reported in2007 Supreme Court Monthly Review Page no. 1039129 It is Pertinent to mention here that the registered persons (tax payers) in the writ petition before High Court called as petitioner and when the authorities filed appeal before the Supreme Court, the taxpayers will be called as respondents in Supreme Court. 130 The Judgment of Supreme Court of Pakistan reported in2007 SCMR page 1039 Para 5131 Ibid Para 6132 Ibid Para 7 133 The Supreme Court relied on the previous Judgment of the Court reported in 2005 SCMR 1166
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rules to conducting raid on the taxable person’s premises. The tax authorities should make every possible effort to comply with the provisions of the law. The Court concluded that there is no reason to interfere in the judgment passed by the High Court in this case.134
134 The Supreme Court Monthly Review 2007 page no.1039 Para 7
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4 Part
4.1 Conclusion
The first question of the essay was what the difference is between the basic provisions of the EU VAT Directive and the RGST Bill of Pakistan. As seen above in part 2 of the paper under the comparative study of both legislations that there is not major difference between the basic provisions of the EU VAT Directive and the RGST Bill of Pakistan. However, in the definition of the provision, for example, taxable person, economic activity and taxable transactions, the EU VAT Directive has been described them in quite short terminology. Even so, with the help of the ECJ’s interpretation of these provisions make it quite clear and according to the purposes of the law. The language used in the GST Bill is complicated, to some extent, as can be seen by, the definition of the taxable people is quite clear in the EU VAT Directive but the definition of the taxable person in the GST Bill is not clear, and it has been used as a person liable to tax or registered person.
The RGST bill has some distinctive features from the EU VAT Directive. These provisions are tax authorities, rate of tax, offences and penalties and requirement of the person for the tax purposes. The EU VAT Directive does not contain these provisions and the Directive empowers to the Member States to harmonize the national legislation for the purposes mentioned in the EU VAT Directive.
The second question was regarding the risk of vulnerability for the tax abusive practices and provides lessons learned to Pakistan from the EU VAT. It is pertinent to mention here that RGST of Pakistan is still a Bill and not in practice law. As we seen in part 2, that the RGST of Pakistan has some distinctive features and also difference between the basic provisions of the legislations. The basic provisions do not make it vulnerable for the tax abusive practices. However the distinctive features of the RGST as excessive powerful tax authorities may be used for the tax abusive practices. As we seen, under the judgments of Pakistani Higher Courts the tax abusive practices has been cover by the ultra vires acts of the authorities. Especially under the circumstances when the court of law implementing the previous judgments like “when the basic order is unlawful, than the whole superstructure built on it would have to fall on ground.” It shows the inability of the tax authorities to combat the tax abusive practices. However some features as too high threshold amount, complicated system of refund and strict mechanism for recovery of tax from arrears (or from their relatives) bring the RGST under criticism. In future these provisions might be misuse for the purpose of the tax abusive practices.
The third question was regarding the concept of abuse of rights (abusive tax practices) under the ECJ judgments and the approach difference in the ECJ judgments and Pakistani Higher Courts judgments, when dealing with the abusive tax practices in the area of indirect taxation. The
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concept of abuse of right came in the judgments of the ECJ when the Court decided the case Van Binsbergen case related to providing of services and then in Emsland - Starke case the Court introduced two limb test criteria in order to find the abuse of right within the Community law. The test also applied in the Leusden case. However, in Halifax case the ECJ describes that the nature of transaction is immaterial and if the object of the transactions is contrary to the purpose of the Community law than it will be considered as the tax abusive practice. The ECJ extended and modified the objective and subjective elements' criteria in the Halifax case. Further the ECJ defined the tax abusive practices and combat to the abuse of right in VAT cases on the national level of the Member States. In Axel Kittel case the ECJ described to combat fraudulent taxpayers and denial the right to deduction when the taxable person knows and having the mean to know participates in the scheme of fraud. The Part Service case is important to combat the tax abusive practices and provides the guideline for the national courts of the Member States when dealing with the cases relating to the abuse of right. As the relation between the parties of transaction, legal contracts, purpose of the transactions is accordance with the law or against it. In addition the judgment in Part Service case goes to step forward to the judgment of the Halifax case. The judgments of Halifax case describe that national court of the Member states can take into account the factors described in the judgment. However, the judgment of the Part services' cases provides the detail that how the national courts of the Member States can deal and what characteristics should take into account to combat the tax abusive practices under the Community law. So the Judgment of Van Binsbergen case to the Part Services case clarified that how the principle of prohibition of abuse of right developed through the judgments of the ECJ and provides guidelines for the Member States to combat the tax abusive practices.
The Judgments of the Pakistan Higher Courts provides the guidelines that how the Courts are dealing with the Tax abusive practices in Pakistan. So under the light of the judgments of the ECJ and Higher Courts of Pakistan it can be analyzed that the difference of the ECJ and Higher Courts of Pakistan approach can’t be found in the area of indirect taxation, while they are dealing with the tax abusive practices. I found a difference in the judgments of the ECJ and the Pakistani Courts of laws that Pakistan’s Courts of law tried to combat the tax abusive practices, but the tax authorities used the powers in illegal ways and finally in spite to combat the tax abusive practices it seems that they are facilitating the fraud practices. However the Courts approach is totally in accordance with the law and also the Courts interpreting law and delivered the judgments to protect the taxpayer’s rights under the law. The situation might be different in other areas; however I choose the judgments of the higher courts of Pakistan related to the Sales Tax Act 1990 and tax abusive practices. The Courts are functioning within the law and interpreting the law in its true spirit and according the principles of the national laws.
Final Remarks
The implementation of the GST in Pakistan in the circumstances, when the tax authorities have excessive powers by law but lack of sources, experience and essential training can make the GST
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more vulnerable for the tax abusive practices. More study need to be undertaken to find out the problems within the tax system of Pakistan and future of the GST in the country.
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Bibliography
LawsIntegrated text of the Council Directive 2006/112/EC on the common system of value added tax (the Recast VAT Directive)
Integrated Text of The Sixth VAT Directive (as applicable until January 2007)
The Sales Tax Act 1990, of Pakistan (as amended until 1st July 2009)
Legislation Bill
The Reformed General Sales Tax Bill of Pakistan
Literature
Ben Terra/ Kajus Julie “A Guide to European VAT Directives- Introduction to European VAT”, IBFD, 2010
Jorge Martinez and Kasper Richter “Tax Policy Report; Tapping Tax Bases for Development” Pakistan Tax Policy Report 2009
Luca Cerioni the “Abuse of Right” in EU Company and EU Tax Law; A Re- Reading of the ECJ Case Law and the Quest for a Unitary Notion, 2010
Paul Lasock Q C “Abuse of right in EC Law- Origins and History” Bar European General Annual Meeting at Slovenia 2006
Case Laws of the European Court of Justice
Case C- 33/74 Van Binsbergen {1974} ECR 1299
Case C-186/89 W M Van Tiem European Court Reports, {1990} Page I-04363
Case C-202/90 Ayeuntamento de sevilla available at European Court reports {1991} Page I-04227.Case C-230/94 Renate Enkler vs Finanzamt Homburg, judgment dated 26, September, {1996}European Courts Reports 1996 page I-04517Case C-98/98 Commissioner of Custom and Excise v Midland Bank plc, European Court Reports {2000} page I-41077Case C- 110/99 Emsland- Starke European Court Reports {2000} Page I-11569Case C- 255/02 Halifax Case judgment European Court Reports {2006} Page I-01609
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Case C-152/02 Terra Baubedarf- Handel GmbH vs Finanzmat Osterholz Scharmbeck, European Court Reports {2004} I-5583 Case C- 354/03, Case C- 355/03, Case C- 484/03, Opinion of the Advocate General Poiares Maduro European Court Reports {2006} Page I-483Case C- 354/03, Case C- 355/03, Case C- 484/03, judgment of the European Court of Justice European Court Reports {2006} Page. I-483 Case C- 194/04 Cadbury Schweppes Judgment dated 12 September, {2006} ECR Page I-07995Case C-439/04 and 440/04 Axel Kittel, Recolta joined cases judgment European Court Reports, {2006} Page. I-6161Case C-425/06 Part Service Case European Court Reports {2008} Page. I-00897
Opinions Advocate Generals
Case C- 255/02 Advocate General Maduro delivered the opinion on 07 April 2005 in Halifax
Case C-110/99 Opinion of the Advocate General Albert delivered on 16 May 2000
Judgments of the Pakistani Courts
2010 Pakistan Tax Decisions (Trib.) 957
2010 Pakistan Tax Decisions (Trib.) 975
2009 Pakistan Tax Decisions (Lahore High Court Lahore) 774
2007 Supreme Court Monthly Review (Supreme Court of Pakistan) 1039
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