SC gives ruling on delay in tax refunds

Supreme Court says compensation can be claimed after issuance of refund order

Shahbaz Rana April 24, 2020

ISLAMABAD: The Supreme Court of Pakistan has decided that compensation on delayed income tax refund payments can only be claimed from the date the tax authorities accept the refund claim - a judgement that will provide a huge monetary relief to the government.

The apex court dismissed a petition in which the taxpayer pleaded before the court that the Federal Board of Revenue (FBR) should pay him compensation on the delayed refunds from the date he filed the annual income tax returns.

A three-member bench decided that the compensation could not automatically come into effect until taxpayers filed an application to claim the refund and the FBR issued a refund order.

Keeping in view the existing outstanding income tax refunds, the government will save at least Rs40 billion in compensation in just one year. However, the income tax refunds have been outstanding for at least 10 years and the relief will translate into hundreds of billions of rupees. If the refund is delayed and is not paid to the taxpayer within three months of the date on which it becomes due, the taxpayer gets entitled to compensation at the rate of Karachi Interbank Offered Rate (Kibor) plus 0.5% per annum of the amount of refund computed for the period, states the Income Tax Ordinance.

Kibor currently stands at around 9.5% after the central bank reduced its key policy rate to 9% due to the Covid-19-induced economic crisis.

The court judgement not only settles the case filed by the petitioner but it also decides a law question, setting a precedent for other similar cases. “Tax refund becomes due from the date of the refund order and not from the date of deemed assessment under Section 120,” said the Supreme Court in its judgement. “For the above reasons, these petitions fail and are, therefore, dismissed.”

The petitioner had pleaded that the FBR should pay compensation on delayed release of refunds from the date the annual income tax returns were filed. However, the Income Tax Ordinance says, taxpayer, who has paid taxes in excess of the amount which is properly chargeable under the ordinance, may apply to the commissioner for the refund of the excess under Section 170.

The commissioner is to decide the refund application within 60 days of the receipt of the application and decide the same after granting a hearing to the taxpayer. “The taxpayer is free to apply for refund under Section 170, immediately after the filing of tax return or the deemed assessment,” said the court judgement.

It was a 10-year-old case that finally reached its conclusion. Usually, the FBR takes years in giving tax refunds and uses taxpayers’ money to inflate its revenues. Outstanding income tax and sales tax refunds remain one of the contentious issues between the government and the business community.

In this case, the taxpayers had filed refund applications, which were taken up by the assistant commissioner inland revenue in 2010 and were initially rejected.

After remand of the matter, the deputy commissioner income tax passed a refund order in March 2013. The matter remained under litigation between the FBR and the taxpayer. The Supreme Court decided that instead of 2010 the day of compensation on delayed refund would be March 22, 2013 when the FBR issued the refund order.

The petitioner filed tax returns along with refund applications for tax years 2004 to 2008. The deputy commissioner inland revenue decided the matter on March 22, 2013, granting refund to the petitioner as well as additional payment (compensation) for delayed refund with effect from February 15, 2011.

The petitioner filed an appeal before the Appellate Tribunal Inland Revenue, which was allowed, granting additional payment (compensation) to the petitioner for delayed refund from the date of deemed assessment under Section 120 of the ordinance when the petitioner filed annual income tax returns for the relevant tax years. 

Published in The Express Tribune, April 24th, 2020.

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