It seems that the Central Board of Revenue (CBR) will never pay heed to the pronouncements of the higher courts that legal interpretation of law is not its prerogative.

It is well established by now that the CBR can issue beneficial instructions1 to reduce the burden and vigour of a tax, but in no way can issue any notification/circular/instructions posing a greater burden of the taxpayers than what is imposed under the law2.

But in utter disregard of this, the CBR keeps on interpreting law against the explicit provisions of law resulting into undue tax obligations for the taxpayers, who have time and again forced to get such instructions declared null and void by invoking extraordinary jurisdiction of High Courts under Article 199 of the Constitution of Pakistan.

The latest example of this blatant violation of law is a sales tax ruling issued by the CBR on 1st April 2002. They wrongly notified the date of effectiveness of the Sales Tax Ordinance 2002, issued on March 21, 2002, through a Presidential Ordinance, by blatantly misinterpreting the relevant provisions of law.

The CBR has ruled that all supplies of medicines made by importers/manufacturers (regardless of where the drugs were lying) were chargeable to 15 per cent general sales tax (GST) with effect from March 21, 2002.

The CBR’s ruling says that it made no difference whether the supplies originated from a factory or any warehouse of a pharmaceutical company or any other place for sales tax purposes. “Resultantly, GST is applicable on such drugs from the time of the promulgation of the Presidential Ordinance”. According to the CBR, “Legally, the taxable event in the sales tax law is the time of supply as defined in section 2(44) of the Sales Tax Act, 1990.

The CBR issued these unlawful clarifications about the imposition of sales tax on stocks of drugs manufactured prior to March 21, 2002, and were lying outside the manufacturing area or with the distributor, who is working on behalf of the manufacturer. The following points need to be examined to analyse the legality of the CBR’s instructions:

1. The government withdrew sales tax exemption from all locally manufactured or imported medicines through a Presidential Ordinance [promulgated in Islamabad on 21 March 2002] with immediate effect. Consequently, 15 per cent general sales tax (GST) on all kinds of medicines/drugs, i.e. allopathic, Unani, Ayurvedic and homoeopathic, became charged with immediate effect. Earlier these medicines and raw material used for their manufacturing, subject to certain conditions, were exempted by virtue of different entries in the Sixth Schedule to the Sales Tax Act, 1990 [hereinafter: “the said Act”].

2. Further sales tax @ per cent 3 is not chargeable if supplies are made to non-registered persons. However, the distributors and retailers will have to get themselves registered after withdrawal of exemptions on medicines.

3. The amendment in the Third Schedule to the said Act through the Sales Tax (Amendment) Ordinance, 2002 means that a manufacturer will have to pay 15 per cent tax on retail price which is printed on every article, container, etc on the following: “Substances registered as drugs under the Drugs act, 1976 and medicaments as are classifiable under any heading of Chapter 30 of the First Schedule to the Customs Act, 1969, —Chapter 30”.

4. As regards the effective date of charging 15 per cent sales tax, section 5(a) read with section 2(44) of the said Act shall be applied. The rate of 15 per cent shall be charged at the time of supply when the new rate of 15 per cent has become effective. Earlier the supplies were zero-rated due to exemptions available under the Sixth Schedule to the Act. The term time of supply as defined in section 2(44) means “ a supply made in Pakistan shall deemed to have taken place at the earlier of the time of the delivery of goods or the time when any payment is received by the supplier in respect of that supply.

Manufacturers who made zero-rated supplies or received payments in respect of the same, prior to the enforcement of the said Ordinance, are fully covered under section 2(44) as far as their nil tax liability is concerned. One wonders under what principles of interpretation of law, the CBR issued the above quoted ruling which is not tenable in law.

How manufacturers should sit in a time-machine to recover sales tax @15 per cent on supplies made to purchasers before knowing the exemption has been withdrawn? Is there a mechanism available to them to retrieve what is beyond their capacity? Is the ruling issued by the CBR, other than from a legal angle, based on common sense? What is the logic behind such an irrational ruling?

The Ordinance, 2002 came to public knowledge through media on 21 March 2002. It is also pertinent to mention that under the Poverty Reduction and Growth Facility (PRGF) Programme with the Structural Performance Criteria (SPC), the IMF required phasing out of the GST exemptions on pharmaceuticals (except life-saving drugs) till March 30th, 2002, but our officials imposed 15 per cent GST on all medicines.

Later on when the matter was brought to the notice of the President he immediately ordered for exclusion of life-saving drugs [notification of which was made on 4th April 2002], as imposing GST on them was not even a part of the agreement with the IMF.

Manufacturers were not in a position to implement this obnoxious notification that took them by surprise [no time was given for any kind of adjustments] unless they read its text in the official gazette or the same was legally served on them on March 21, 2002.

It is a matter of record that none of the newspapers published the original gazette notification, nor the same was served on manufacturers by the Sales Tax Department till even 22 March 2002. In the face of these facts and legal provisions quoted above, how can CBR say that effective date of implementation of the Ordinance is March 21,2002.

An important legal question that arises is, as to when does a Presidential Ordinance levying tax become effective? Does it become effective by mere pronouncement? Is there a condition of its notification in the official gazette? Does publication of gazette notification per se is sufficient, or effective date is when the published notification comes into public knowledge?

Our apex court has upheld the validity of repeated Presidential orders/ordinances issued under Article 89 of the Constitution, when the National Assembly is not in session, in Collector of Customs and Others v New Electronics (Pvt) Ltd and Others [1994] 70 TAX 67 (S.C.Pak.). Thus the Ordinance issued by the President under Article 89(1) of the Constitution is valid and legal. This has a life of four months from its promulgation, unless withdrawn by the President earlier or is validated by the Parliament.

Since the Ordinance under consideration has all the attributes of a Bill presented in the National Assembly, it could not become law of the land unless all the conditions mentioned in Article 75 and 77 were fulfilled. One most important condition was its gazette notification and its public knowledge/communication.

It is a matter of record that both the processes were not completed on March 21, 2002. In view of this incontrovertible position, how could the CBR claim that all the supplies of medicines made on March 21 were subject to 15 per cent GST.

The issue of effective date of a gazette notification was subject matter of a number of judicial pronouncements in Pakistan and elsewhere. Some of the important ones are reproduced below:

* “... The learned Judges of the High Court have rightly pointed out that it was the duty of the Government Press to adduce evidence to show that on what date the publication of the said Gazette was made and, therefore, they were perfectly justified in coming to the conclusion that in the absence of any evidence supporting the assertion that the gazette was published before the 1st July 1955, it was difficult to hold in favour of the appellant”-PLD 1971 Supreme Court 82.

This case, decided by the honourable apex court of Pakistan, holds in categorical terms that unless a notification is properly published and made public, its enforceability cannot be assumed. The CBR is violating the command of the Supreme Court of Pakistan by assuming that the Sales Tax Ordinance 2002, promulgated by the President on 21 March 2001, became operative even prior to its gazette notification, not to talk of coming to public knowledge.

* It is a cardinal principle of law that before any notification can be deemed to be effective, it must be published or broadcast in some recognised manner. -AIR 1951 SC 467.

The word “notification” has special significance, as this is a legal term vis-‘-vis statutory orders, rules and by-laws. The intention of legislation is that public must know through an authentic source what tax liabilities are imposed by the State. This term with reference to the Ordinance under debate will mean the date on which a notification to this effect was published in the official gazette of Pakistan and when it became public. Even in common parlance, “Notification” is defined in Webster Dictionary as under-

“ Act of notifying; act of making known; an intimation or notice; esp., act of giving official notice by word, writing, or any other means.”

In the present case, the requirement was not mere declaration of the Presidential Ordinance but its publication in the official gazette and distribution of the same for the public notice. Can the CBR prove that all these steps were completed by 21 March 2002?

* “ ...in order to prove that an association has been declared unlawful under the Criminal Law Amendment Act of 1908, the Government must not only insert the declaration in the official Gazette, but must publish the Gazette in the manner usually adopted for publishing such Gazette and allow a reasonable opportunity to the people concerned to see the Gazette” “-PLD 1971 Supreme Court 82.

Did the CBR allow the manufacturers, distributors/wholesalers and retailers a reasonable opportunity to see the Gazette on 21 March 2002? Was the Gazette published on the said date? Did the record of the Pakistan Government Printing Press show any sale of the said gazette notification of the said date? If answers to these questions are NO, how can CBR insist its enforcement from 21 March 2002?

* There is unanimity of views in Pakistan, the UK and the Indian courts that “publication of some reasonable sort is essential before a notification or Act comes into force” -PLD 1971 Supreme Court 82, AIR 1931 Bom. 132, PLD 1964 Kar. 478, PLD 1964 Dhaka 795, (1957) 2 Q B 589, (1918) 1 K b 101, 43 C W N 913 and AIR 1951 S C 332.

* In the case of The Queen v Wolferstan and others (1983) 2 Q B 451 it was held that a highway parish having no church, a highway rate is duly published if notice thereof is affixed in some public and conspicuous place or situation in highway parish.

* In the case of Johnson v Sargent & Son, an Order made by the Food Controller under the Defence of the Realm regulations was dated May 16, 1917, but was not known to the parties to the action or to the public generally till May 17. It was held that the Order came into operation only when it became known, namely, on May 17.

The same position exists for the Ordinance which did not come to the public notice and those who were affected by it till they read next morning’s newspapers. One is not sure about the actual date of its publication in the official gazette; hence, the CBR’s claim that it was operative from 21 March 2002 is against the law.

The above discussion and citations from case-law, especially those binding on CBR under Articles 189 and 202 of the Constitution of Pakistan, proves beyond any doubt that a notification can be said to be published only when some means is adopted to communicate it to the public or to the parties concerned in order to make it enforceable.

The mere insertion of such notifications is not enough to make them operative as per ratio of the case The Province of East Pakistan v Major Nawab Khawaja Hasan Askary and others and Maulvi Khurram Khan Panni v the Province of East Pakistan, PLD 1971 Supreme Court 82.