Untying the knots: SC will decide sales tax fate on power to AJK

The two-judge bench admitted Iesco petition for regular hearing against the Islamabad High Court’s June 9 judgement

ISLAMABAD: The Supreme Court is set to adjudicate on whether sales tax can be imposed on electricity being supplied to Azad Jammu Kashmir (AJK).

The two-judge bench, headed by Justice Ejaz Afzal Khan, has admitted the Islamabad Electric Supply Company Limited’s (Iesco) petition for regular hearing against the Islamabad High Court’s June 9 judgement.

The judgement has declared that areas under AJK do not come under the ambit of exports; therefore, these areas cannot be exempted from the levy, charge and collection of sales tax. On December 14, 2010, Iesco received a show-cause notice from the Federal Bard of Revenue (FBR) in which it was alleged that electricity is being supplied in AJK without charging sales tax.



The FBR had contended that all taxable supplies made by Iesco were chargeable to sales tax unless otherwise specifically exempted under the sales tax Act-1990. The FBR in the show-cause notice had raised a demand of sale tax to the tune of Rs1.26 billion from the tax period commencing from July 2008 to June 2012.

However, Iesco, while rejecting the FBR’s claim, had filed an appeal in the appellate tribunal. The tribunal passed the order in favour of Iesco. However, the IHC, while setting aside the tribunal order on June 9, declared that AJK areas cannot be exempted from the collection of sale tax.

Now, Iesco contended that under the constitution the state of AJK is not part of Pakistan, adding it is established that if any goods are supplied outside the territory of Pakistan the same would be termed as goods exported and would be zero rated under section 4 of the Sales Tax Act-1990.

“If AJK is not part of Pakistan then any goods that are sent to those areas would amount to goods being taken out of Pakistan and would be an export,” says the petition.

It is further stated that the IHC has erred while holding that since the procedure provided under sections 12 and 13 of the Customs Act-1969; therefore, goods entering the territory of AJK are neither imported nor exported from Pakistan.

“The electricity supplied by the petitioner is transmitted through transmission lines and no procedure as followed in the case of ordinary goods can be followed while supplying the electricity by one country to another country.”

It is further contended that a bilateral treaty has been signed on June 27, 2003 between the AJK government and the government of Pakistan that no sales tax would be charged by either state on the supply of electricity. The petitioner requested the SC to leave to appeal grant against the IHC’s order.

During the hearing, senior standing counsel Nayyab Gardezi appeared on notice to assist the bench. Gardezi supported the stance of the FBR and stated sales tax can be charges on the electricity which is being provided to AJK areas.

However, the bench has granted leave to appeal of Iesco’s petition and adjourned the hearing for an indefinite period.

Published in The Express Tribune, July 6^th, 2016.