This blog is written by Mr. Sharif Uddin Khilji, FCA Chief Executive, Khilji and Co Chartered Accountants. Please read this blog and provide your valued comments.

Principles of interpretation of Schedule of Provincial Sales Tax Laws

The interpretation of schedules of Provincial Sales Tax Law and various entries in those schedules has remained a problem area. Below is a compilation of some Court decisions to enable better understanding of these schedules:

2018 PTD 1487

The Sindh High Court explained principles of reading the First & Second Schedule as follows:

Quote “The First Schedule should be regarded as descriptive, i.e., as setting out in general terms the nature and scope of the services brought within the terms of the Act. The Second Schedule on the other hand is part of the charging provisions, specifying the services actually brought to tax. The Second Schedule should be regarded us a subset of the first Schedule. By this we mean that the scope of a tariff heading as given in the Second Schedule cannot go beyond the description as given in the corresponding entry in the First Schedule. However, the manner of interpreting the two Schedules is different. Being only descriptive in nature the entries in the First Schedule are to be construed in terms of the principles of interpretation that apply generally to statutes. The Second Schedule on the other hand is to be interpreted in terms of the special rules that apply to the charging provisions of a fiscal statute. Another point that needs consideration is how to deal with an overlap between different tariff headings. In our view, this question (and if there be any. the degree of the overlap) is to be dealt with by first examining the first Schedule, and interpreting the entries in terms as just noted. If it is concluded that there is an overlap, then the degree thereof has to be established. Once this has been done then the corresponding entries in the Second Schedule are to be applied in light of such conclusions, though of course now interpreting the entries in the different terms as stated above. In other words, whether there is, or is not, any overlap is to be assessed in terms of the First Schedule; the consequences of a conclusion that there is, are to be addressed in terms of the Second Schedule”. Unquote

111 TAX 82

In this decision the Sindh High Court explained how to read the entries provided in the schedules of Federal Excise Duty. Since the scheme of Schedules in Provincial Sales Tax laws uses the same methodology therefore this decision is relevant for Provincial Sales Tax Laws as well. The relevant extracts from Court decision are hereunder:

Quote “It is a fundamental principle of interpreting fiscal statutes that there is no intendment or equity with regard to the charging provision, which must be applied as it stands, it is also an established principle that if two reasonable interpretations are possible, the one favoring the taxpayer will be adopted”. Unquote

Quote “The attempt by learned counsel to conclude from the enumeration of the persons that all the services provided by them were included in Heading No. 98.13 cannot be accepted. This would render otiose the listing of specific services in the various sub-headings. Furthermore, this submission runs counter to the structure of the Pakistan Customs Tariff. As is well known, this is based on (and is almost entirely identical with) the Harmonized Commodity Description and Coding System (“HS System”), which has been agreed upon under an international convention and which is regulated by the World Customs Organization. The HS System is of course concerned with goods, and it comprises of 97 chapters (with one chapter, 77, being left “blank” for possible future use) wherein all manner of goods are listed and categorized. The Pakistan Customs Tariff faithfully reproduces and gives effect to this system. In addition, the HS System allows two final chapters (i.e., 98 and 99) to be used for national purposes and Pakistan has utilized Chapter 98 for “services”. Even a quick glance shows that Chapter 98 replicates the system of classification adopted for goods under the HS System. Now, the chapters of the HS System are preceded by certain “General Rules for the interpretation of the Harmonized System” (“General Rules”). These rules are incorporated in the Pakistan Customs Tariff and therefore have the force of law. Although the rules are concerned with goods, in our view they may, subject to suitable adaptation, also be used for the purposes of Chapter 98. This is so because of the close correspondence between the classification system under the HS System and that used in Chapter 98. Rule 6 of the General Rules has been understood to mean, inter alia, that in those headings under which sub-headings are to be found, the classification is to be on the basis and in terms of the sub-headings. Applying this rule to Heading No. 98.13 leads to the result that it is the sub-headings thereof that are to be applied. This would be in conformity with the HS System, and is therefore, in our view, the correct approach to applying Chapter 98. It follows that the submission by learned counsel for the Department, which would lead to the contrary result, is not tenable and cannot, with respect, be accepted”. Unquote

 The Honorable Sindh High Court further noted under para 20 Quote “It may also be noted that some of the sub-headings in Heading No. 98.13 were described as “other”. This is in fact a common device, to be found abundantly in the HS System in its various chapters. Some of these are independent sub-headings, which operate in their own right, but others are merely subordinate to other sub-headings. As learned counsel for the applicant pointed out (correctly in our view) all the “other” sub-headings in Heading No. 98.13 were in fact subordinate (i.e., sub-sub-) headings, which were linked to various sub-headings, none of which was relevant for present purposes”. Unquote

 The Appellate Tribunal Sindh Revenue Board in its decision AT-51/2014 dated January 16, 2016 declared reimbursement of expenses not to be covered by definition of services hence not chargeable to sales tax. Quote “The other service postal charges received from loanees is apparently not a service but appears to be reimbursement of expenses incurred by the appellant which is not covered by the definition of service provided in section 2(79) of the Act and sales tax cannot be recovered from the appellant”. Unquote

I hope the readers would be benefited from above compilation however feel free to contact me in case any clarification is required.

Sharif ud din Khilji, FCA