Sindh High Court warns FBR of penalty on illegal tax demand

KARACHI: A high court may order the Federal Board of Revenue (FBR) to pay 10 percent of a tax demand as compensation to a taxpayer if its recovery notice is found in contravention of laws, sources said on Saturday.

Sindh High Court (SHC), in a recent order related to a case of an airline’s tax recovery, said the tax official involved in any such a recovery might also be liable to pay one percent of the total tax demand, according to people familiar with the hearing.

Shaheen Air International Limited has recently filed a suit against “alleged highhandedness” of a tax department.

Last month, Shaheen Air International Limited paid Rs910 million in outstanding tax amount after the authorities sealed the airline’s headquarters in Karachi for a brief period.

The FBR had locked the head office of the privately-held airline for an hour to recover the outstanding taxes.

Tax officials said the private airline failed to make tax payment for April and May. Airlines are bound to collect Rs5,000 in federal excise duty on an air ticket bought by international passengers and Rs2,500 from domestic passengers. They are required to deposit the taxes into the national kitty within a stipulated time frame.

The court observed that if an order sent to the taxpayers was found to be void then the court might consider exemplary compensation by directing the department to pay up to 10 percent of the impugned demand to the taxpayer and also directing the official concerned to pay at least one percent of the demand.

In the last hearing, the counsel for the airline argued that the recovery of the FBR was not in compliance with the law. The counsel said the Large Taxpayers Unit couldn’t comply with the mandatory requirement of issuance of prior show cause notice under Section 14 of the Federal Excise Act 2005.

It was also observed that FBR had issued recovery notices in many cases under repealed or omitted provisions of law in violation of some mandatory provision of law or “the well-settled principles of natural justice”.

The court directed Shaheen Air to pay 50 percent of the total demand raised by the FBR as per directives of Supreme Court of Pakistan.

In the recent judgment, the apex court ordered the higher courts that the suits, which are already pending or shall be filed in future, must only be continued / entertained on the condition that a minimum of 50 percent of the tax calculated by the tax authorities is deposited with the authorities.

The court, in the interim order, directed the taxpayer to deposit 50 percent of the demand on or before the next date of hearing. The next hearing has been fixed for August 15.

Tax officials said the FBR is expecting around Rs1 billion as a result of the interim order. Shaheen Air’s spokesman said the airline is a compliant taxpayer and ready to pay outstanding amounts.