LAHORE: The sales tax department cannot deny adjustment against raw materials not actually used during the same tax period after paying the input tax, said sources.
The department had challenged input tax deduction in respect of goods which got destroyed by fire and did not remain available for making taxable supplies.
Contention of the tax authority was that the right to seek adjustment or refund is available only when the goods on which input tax was paid are used further in taxable activities for making taxable supplies, and not when those goods are consumed or destroyed.
It may be noted that three conditions are required to be fulfilled by a registered person to avail himself of the beneficial adjustment of input tax against output tax.
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, and 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.
The tax-payer stressed that words “taxable supplies made or to be made” 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, i.e., 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, he added, to encompass future taxable supplies cannot be overlooked and in such circumstances, a registered person needs 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.
The competent authority agreed with the argument, saying that this interpretation aligns with sound commercial and manufacturing reasoning, as 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. The relevant section 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, it added.
Copyright Business Recorder, 2025
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