The Pakistan Supreme Court has held that input tax adjustments are allowed even on destroyed goods.
The bench of Justices Yahya Afridi, Syed Hasan Azhar Rizvi and Shahid Waheed has observed that input tax deduction can be made under section 7 of the Sales Tax Act, 1990 in respect of goods which got destroyed by the fire and which do not remain available for making taxable supplies.
The issue raised was whether input tax deduction can be made under section 7 of the Sales Tax Act, 1990 in respect of goods which got destroyed by fire and which do not remain available for making taxable supplies?
The department contended that the right to seek adjustment or refund is available only when the goods on which input tax was paid are used in further taxable activities for making taxable supplies, and not when those goods are consumed or destroyed.
For a registered person to avail himself of the beneficial adjustment of input tax against output tax, section 7 of the Sales Tax Act, 1990 [as it was at the relevant time of the present case], mandates the various conditions.
Firstly, the input tax paid on purchases of inputs or raw materials must be intended for the purpose of making taxable supplies.
Secondly, the input tax paid must be for producing taxable supplies, irrespective of whether those taxable supplies have actually been made or are to be made in the future.
Thirdly, the input tax paid in a tax period is to be deducted from the output tax due for the same tax period and not against any future tax period.
Words “taxable supplies made, or to be made” in section 7 do not limit the scope of the correlation between the purchase of the input/raw material and the actual manufacture or production of taxable supplies, that is the making of taxable supplies.
Instead, they expressly expand its legal ambit to include input/raw materials intended for use in future for making taxable supplies.
This explicit legislative intent to encompass future taxable supplies cannot be overlooked.
In such circumstances, a registered person need not wait for the raw material, on which input tax has been paid, to be actually consumed in the manufacturing process before availing the adjustment against output tax.
This interpretation aligns with sound commercial and manufacturing reasoning. There is no express requirement that the raw material, for which input tax is paid, must be actually used during the same tax period to qualify for adjustment.
Denying such adjustment solely because the raw material has not been consumed during the same tax period contradicts the legislative intent.
Section 8(1)(a) of the Sales Tax Act, 1990, which deals with scenarios in which input tax cannot be reclaimed or deducted, does not apply to cases where input/raw materials have been lost through fire.
Case Details
Case Title: The Commissioner Inland Revenue, Legalzoom, Large Taxpayers Office, Lahore And Another Versus Messrs Mayfair Spinning Mills Ltd.
Case No.: 2025 S C M R 1
Date: 12th November, 2024
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