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).