The recent Supreme Court verdict on CNG prices seeks to provide relief to the general public by reducing CNG rates to an apt level. However, there are hidden implications of the order, which if focused upon, can help the country’s financial planners, especially tax authorities, undertake an exercise to generate potential revenue.
This article throws light on two tax periods of CNG operators/owners -- prior to 2008 and post-2008. A tax review can be an eye opener for the Federal Board of Revenue (FBR), as to how CNG operators evaded tax during 2002-2007 and how the evaded tax should be recovered.
For the post-2008 era, the article suggests amendments in the Income Tax Ordinance 2001 to make the tax law resilient to the changing circumstances.
As is apparent from the Supreme Court order, CNG operators have bagged huge profits owing to prices which form a major part of operation costs and in addition to its profits on gas sales. If the court order is perused in detail, it creates a gap between the operating costs charged by CNG operators and the liability to be taxed. Thus, in order to make the picture clear it is first necessary to dilate upon the relevant income tax provisions that can be applied to the income of CNG operators and further link the court order in question to a path leading to ‘definite information’ for future audit of tax payers who may have escaped the tax net.
Tax mechanism prior to 2008: The income of CNG operators prior to 2008 was dealt under Section 18 of the Income Tax Ordinance, 2001.
As per law, the persons liable to be taxed are required to file a return under Section 114 of the Income Tax Ordinance, 2001 at the end of a tax year, declaring all sources of income, deductions claimed and net income in order to calculate net tax payable.
The income tax law provides some general provisions (as per Section 22 of the Income Tax Ordinance, 2001) and special provisions (as per Sections 22-31 of the Income Tax Ordinance, 2001) of deductions which are allowed to a person if expenditures are made solely for the purpose of business.
The psyche behind allowance of tax deductions is basically, to reduce the burden of tax on a tax payer by allowing genuine expenses incurred for acquiring income from business. Similarly, certain expenses are inadmissible under Section 21, and in case a taxpayer has claimed admissible deductions, which are reimbursed subsequently, the law has also dealt with that situation. The ‘silent’ provision of the Income Tax Law relates to recouped expenditures covered in Section 70 of the Income Tax Ordinance 2001 which states :-
“Where a person has been allowed a deduction for any expenditure or loss incurred in a tax year in the computation of persons income chargeable to tax under a head of income and subsequently, the person has received, in cash or in kind, any amount in respect of such expenditure or loss, the amount so received shall be included in the income chargeable under that head for the tax year in which it is received.”
Thus, those who have claimed benefits of Section 20 are liable to be audited afresh. The reason is obvious.
As per routine followed in tax years 2002-2008, CNG operators declared computed chargeable tax income after adjusting expenditures made in the profit and loss accounts. The expenditures usually claimed consisted of salaries, wages, entertainment, depreciation, maintenance and repairing charges. Apparently these, if supported with relevant statutory documents, are allowed as per income tax laws as admissible deductions from gross profit earned by the person, as such expenses have been incurred solely for the purpose of business income.
The components of CNG price i.e., the profits gained by CNG operators, that is now apparent from the Supreme Court verdict and as per declared version of Ogra to the apex court, is operation costs incurred by CNG operators coupled with the return on investment for the operators which, as per the order, is currently fixed at Rs32 per kg (Rs20.80 fixed as operation cost of CNG station and Rs11.19 profit of CNG operators) of sale of CNG. Thus, it is proved that out of the total profit, CNG operators recover up to 22 per cent of operation costs in their overall profit from the prices set by Ogra. Details of operation costs as declared in the apex court order are charges that CNG operators need relief of, as they have to pay salaries, maintenance, depreciation, compression cost, transportation costs, etc.
It is amply clear that CNG operators recover all the expenses made for carrying on business in the garb of operation costs (CNG price per kg sale) which, in the nature, are the same that skipped taxation in the garb of being irrecoverable expenditures. Thus, these operation costs become taxable to the extent they are recovered expenditures which hits the Section 70 of the Income Tax Ordinance 2001 relating to recouped expenditures. The CNG operators as per their declarations have always claimed such expenditures as admissible expenses being borne by CNG operators exclusively and are not being reimbursable, thus bagging in tax relief from paying taxes on such expenditures.
The CNG operators have tried to evade tax in the garb of expenditures being irrecoverable and thus, the Supreme Court order, if perused and ‘treated as a definite information’ may act as a precedent for the FBR as an audit parameter.
Post-2008 tax mechanism: In 2008, the FBR changed the mode of taxation of CNG stations by taxing them at a straight rate of four per cent on gas consumption readings reflected in the gas bills. The idea behind this change in the mode presumably was to make tax collection simple in dealing with CNG stations and to avoid tax evasion. Thus, they were included in the Presumptive Tax Regime (PTR). However, they are still entitled to get deduction for the expenditure they incurred on income from business, under Section 20 (section that allows deductions for any incurred expenditures). This is evident from the fact that Section 234A has not been included in Section 21(that disallows deduction).
It was Section 234A through which CNG business was included in the Presumptive Tax Regime. It reads:
“(1) There shall be collected advance tax at the rate specified in Division VIB of Part III of the First Schedule on the amount of gas bill of a Compressed Natural Gas station.
(2) The person preparing gas consumption bill shall charge advance tax under sub-section (1) in the manner gas consumption charges are charged.
(3) The tax collected under this section shall be a final tax on the income of a CNG station arising from the consumption of the gas referred to in sub-section (1).
(4) The taxpayers shall not be entitled to claim any adjustment of withholding tax collected or deducted under any other head, during the tax year.
This section has not yet been inserted in Section 21 which bars any claim of inadmissible expenses; notwithstanding the provisions of law, and in spite of CNG operators’ inclusion in the PTR, they still have a right to claim deductions under Section 20. They are receiving the expenditures from the consumers in the shape of 20 per cent operational cost and no expenditure is being incurred by them as business men to which deduction is allowed. Therefore, an amendment is required in the ordinance for insertion of Section 234A in Section 21.
Furthermore, there exists some lacunae in the Income Tax Ordinance 2001 itself because the net profit under Section 234A is from consumption of CNG but they are also getting 20 per cent income from the consumer in the shape of operation cost which does not come under the ambit of Section 234A as it is not an income from gas consumption. This 20 per cent operational cost has to be taxed separately treating it as income from business which has not been taxed since 2008 when Section 234A has been introduced in the Ordinance. The rate in the tax schedule should be revisited in the light of the new facts now available on record.
Since 2008, CNG operators have not payed a single tax under Section 234A i.e., at four per cent it has indirectly been paid by the consumers. It requires thorough calculations by the FBR’s audit wing to reopen cases of all CNG stations and compel them to pay under Section 234A. It has now surfaced that CNG operators are simultaneously service providers under Section 153. Under the PTR, they are required to pay tax at four per cent. They are also service providers of CNG. As they are charging the consumer 20 per cent per kg as operational charge, that is in fact a charge on provision of service, they should also be taxed for the same under Section 153 read with Section 234A.
It is the right time for FBR policymakers to seriously consider the issue and order an across the board audit of all CNG operators by focusing on how many CNG operators have claimed deductions of the said operational cost and how many have not; in both the cases, the amount is liable to be taxed.
If claimed as deduction from income from business, it’s taxable as a recouped expenditure because the deduction so allowed to such persons has been recovered by them as profit, aka, operational charges. On the other hand, if they have not declared the same in their returns it would be treated as concealed income, being liable to be taxed and penalisd accordingly.
As CNG owners/operators are under-assessed keeping their profit-making capacity in view, the FBR should make necessary notifications for selection of cases for total audit of such operators coupled with strict monitoring and follow up of such cases. It is also suggested that the FBR should make necessary amendments in the tax policy and tax laws.
The writer is an Inland Revenue Service taxation officer.