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
muhammad.yasir.006@student.lu.se
Mob, 0765835297
Master in European and International Tax Laws
HARM 53
1
1 Table of Contents
2
Abbreviations and Glossary .................................................................................................................. 4
1.
Part ........................................................................................................................................................ 6
2
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
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
2
3.2.1 Customs, Federal Excise and Sales Appellate Tribunal ...................................................................... 29
3.2.2
Lahore High Court ....................................................................................................................... 31
3.2.3 2007 SCMR 1039 ......................................................................................................................... 32
4
Part ...................................................................................................................................................... 34
4.1
Conclusion ................................................................................................................................... 34
Bibliography ................................................................................................................................................ 37
3
2
Abbreviations and Glossary
AG
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
legislation)
GST Bill 2010 of Pakistan (Proposed
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
On the common system of value added tax
4
Trib.
Tribunal
Customs, Federal Excise and Sales Appellate
UK
United Kingdom
Vs
Versus
VAT
Value Added Tax
WAPDA
Water and Power Development Authority
5
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.
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
1
The Recast VAT Directive
Sales Tax Act, 1990 of Pakistan
3
Brief of GST Law 2010 available at http://www.cbr.gov.pk/newst/ACT/Default.asp Dated 03-04-2011
4
The General Sales Tax Bill 2010 of Pakistan
http://www.fbr.gov.pk/newst/stgos/2010/GSTBILL2010.pdf Dated 04-04-2011
2
6
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?
1.4.Method and Materials
7
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
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.
5
As part of this thesis it will be assumed that the RGST Bill 2010 successfully has been passed as legislation in
Pakistan.
8
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 Directive
Article 1(2) of the Recast VAT Directive
8
The theoretical name is GST Bill 2010.This Bill is also known as R-GST in Pakistan. available at
http://www.fbr.gov.pk/newst/stgos/2010/GSTBILL2010.pdf
7
9
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 RVD
11
Article 9(1) of the RVD
12
Article 10 of the RVD
13
Case C-186/89 W. M .Van Tiem Para 20
14
Case C- 230/94 Renate Enkler Para no. 25 to 20
15
Article 5 of the GST Bill 2010 of Pakistan
10
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
16
Article 5 (3) of the GST Bill 2010 of Pakistan
Article 9(1) of the RVD
18
Case C-97/90 European Courts Reports Page I-03795 Judgment dated 11, July 1991
17
19
Article 13 (1) of the RVD
Case C-202/90 Ayuntamiento de Sevilla Para 18 and 19 of the Judgment
21
Section 10, of the GST BILL 2010
20
11
value not more than the threshold amount maybe voluntarily registered under the purpose of
tax.22
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 Intracommunity 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
22
Chapter vi “ registration” section 43 and 44
Article 14 to 19, 20 to 23 and 24 to 30 of the RVD
24
Article 15(1) of the RVD
25
Article 2 (1)(b) of the RVD
26
Article 24(1) of the RVD
27
Article 9 (1)(2)(3)(4) of the GST Bill 2010 Pakistan
28
Article 168 0f the RVD
29
Article 167 of the RVD
30
Article 178 0f the RVD
23
12
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.
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.
31
Case C-98/98 Midland bank Para 24
Article 27 of the GST Bill 2010 of Pakistan
33
Article 184 and 185 of the RVD
34
Article 186 of the RVD
35
Case C-291/92 Dieter Armbrecht the judgment of the ECJ Para 33
36
Article 31 of the GST Bill 2010 Pakistan
32
13
2.2.1 Tax Authorities
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.
37
Article 61 and 62 of the GST Bill 2010 0f Pakistan
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 2010
40
Chapter 13 and third schedule of the GST Bill 2010
38
14
2.2.4 Registration
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
41
Article 43 and 44 of the GST Bill 2010
Article 45 of the RGST Bill 2010 0f Pakistan
43
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
42
15
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
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 69
Akhtar Ali “What Wrong with R-GST bill 2010 of Pakistan” Article dated 24, November 2010 available at
http://akhtaralinaeem.wordpress.com/2010/11/24/what-is-wrong-with-r-gst-reformed-general-sales-tax/
45
16
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
purpose to mention Pakistani Courts judgments is to analyze that the Courts are dealing with the
46
Oxford Dictionary definition available at
http://oxforddictionaries.com/view/entry/m_en_gb0002970#m_en_gb0002970
47
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, 63
49
Luca Cerioni the “Abuse of Right” in EU Company and EU Tax Law page, 2
50
Case C- 33/74
51
Ibid 48
52
All cases with full detail of title and no,s are written in the discussion of the cases judgments.
17
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 5
Case C-33/74 the Judgment of the European Court of Justice Para no. 12, 13,14 and 15
55
Case C- 33/74 the judgment of the European Court of Justice Para no. 17
54
18
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. 27
Case C-110/99 Emsland-Starke the judgment of the ECJ Para no.7,8,9,10,11 and 12
58
Ibid Para no.13,14 and 15
57
19
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)
Opinion of the Advocate General Albert delivered on 16 May 2000
61
Case C-110/99 the Judgment of the ECJ Para no.36 to 38
62
Case C-110/99 the Judgment of the ECJ Para no.52
63
Case C-110/99 the Judgment of the ECJ Para no.53
64
Case C-110/99 the Judgment of the ECJ Para no. 56
65
Ibid Para no.59
60
20
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 23
Ibid Para no. 27
68
Ibid Para no.37
69
Case C-7/02 and Case- C487/01 joined cases judgment of the ECJ Para no. 28 to 32
67
21
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.78
Ibid Para no.78
72
Ibid Para no.79
73
Ibid Para no.82
74
Case C-255/02 Halifax plc and other vs commissioners of Customs and Excise, the Judgment of the ECJ Para no,
12 to 29
75
Ibid para no.32
71
22
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
Opinon of the AG Maduro para no.70
78
Case C-255/02 judgment of the ECJ Para no.80
79
Ibid Para no.60
80
Ibid
81
Case C-255/02 judgment of the ECJ Para no.69
82
Ibid para no.70
83
Ibid para no.74
84
Case C-255/02 Halifax Plc vs CCE the judgment of the ECJ Para no.75
77
23
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
85
Case C-439/04 and Case C-440/04 Judgment of the ECJ Para no. 10, 11
Ibid Para 12
87
Case C-439/40 and 440/04 judgment of the ECJ Para no. 16 and 17
86
24
against the Recolta. The court of Cassation stay the proceedings and the case referred to the ECJ
for preliminary ruling88,
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
88
Case C-439/04 and 440/04(joined cases) the judgment of the ECJ Para no.18,19
Ibid Para no.25
90
Joined case 354/03, C-355/04 AND C 484/03 Optigen case
91
Case C-439/04 Axel Kittel case, the judgment of the ECJ Para no.53
92
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
89
25
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
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 group
o Service divided by the leasing company and financing by another company
95
Ibid Para no. 54
ibid
97
Case C-425/06 Part Service, judgment of the ECJ Para no.11
98
Ibid Para no. 17
99
Ibid Para no.19
100
Ibid Para no. 40
101
Ibid Para no.46
96
26
o Payment by customer for leasing services and its difference from the actual price of
motor vehicles
o Receiving of consideration by the leasing company and transfer of amount
o The service of leasing company change into the renting of vehicles102
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.
102
Case C-425/06 Part Services, the Judgment of the ECJ Para no.57
Case C- 255/02 Halifax Plc vs CCE , The Judgment of the ECJ Para no,74
104
Ibid para, 75
105
Ibid Para no.58
106
Ibid Para no. 62
107
Case C 196/04 Cadbury Schweppes, the judgment of the ECJ Para no,66
108
Ibid Para,67
109
Ibid Para 68
103
27
3.2 The Tax Abusive Practices and Judgments of the Pakistani Court of
Law
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
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)
The Sales Tax ACT 1990 of Pakistan Chapter 1 Definitions
113
The Sales Tax ACT 1990 Articles no, 45 to 47
112
28
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.
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
114
http://www.law.emory.edu/ifl/legal/pakistan.htm Legal System History dated 5-5-2011
Name of the Tribunal Judgment and the judgment of the Tribunal Published in Pakistan Tax Decisions 2010 Page
no. 957
Sales Tax Appeal Tax no.663/LB of 2009, decided on 10th September 2009
115
29
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.
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
116
The decision of the tribunal is based on the judgment of the Supreme Court of Pakistan Published in
2002 Supreme Court Monthly Review page no. 122
117
The Tribunal’s Decision based on the Judgments of the Supreme Court of Pakistan reported in
2007 Supreme Court Monthly Review page no. 818
2007 Supreme Court Monthly Review Page no. 1835
118
The tribunal decided the issue under the Judgment passed by the High Court of Lahore reported in
2007 Pakistan Tax Decisions page no. 2265
119
Para 16,17 and 18 of the Judgment by the Customs, Federal Excise and Sales Tax Tribunal reported in
2010 PTD (Trib.) 957
120
Section, 73 of the Sales Tax Act 1990
121
Customs, Federal Excise and Sales Tax Appellate tribunal Judgment reported in
30
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
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.
2010 PTD(Trib.) Page 975
122
Provincial High Courts are second superior courts of the country
123
Judgment of the Lahore High Court Lahore reported in
2009 PTD 774
124
The Judgment of the Lahore High Court Lahore Para no. 13 2009 PTD 774
125
Ibid Para, 9
126
Ibid Para no.12
127
Ibid (a)definition of the law
31
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.
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
128
The Judgment of the Supreme Court of Pakistan reported in
2007 Supreme Court Monthly Review Page no. 1039
129
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 in
2007 SCMR page 1039 Para 5
131
Ibid Para 6
132
Ibid Para 7
32
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
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
133
The Supreme Court relied on the previous Judgment of the Court reported in
2005 SCMR 1166
134
The Supreme Court Monthly Review 2007 page no.1039 Para 7
33
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
34
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
35
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.
36
Bibliography
Laws
Integrated 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 I04227.
Case C-230/94 Renate Enkler vs Finanzamt Homburg, judgment dated 26, September, {1996}
European Courts Reports 1996 page I-04517
Case C-98/98 Commissioner of Custom and Excise v Midland Bank plc, European Court
Reports {2000} page I-41077
Case C- 110/99 Emsland- Starke European Court Reports {2000} Page I-11569
Case C- 255/02 Halifax Case judgment European Court Reports {2006} Page I-01609
Case C-152/02 Terra Baubedarf- Handel GmbH vs Finanzmat Osterholz Scharmbeck, European
Court Reports {2004} I-5583
37
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-483
Case 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-07995
Case C-439/04 and 440/04 Axel Kittel, Recolta joined cases judgment European Court Reports,
{2006} Page. I-6161
Case 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
38