Sales Tax on supplies, services: SC turns down IHC verdict against AIOU

ISLAMABAD: The Supreme Court of Pakistan on Friday ruled that the Commissioner Inland Revenue, Islamabad had wrongly invoked Section 11(4) of the Sales Tax Act, 1990, to hold Allama Iqbal Open University (AIOU) liable for deducting sales tax on supplies and services it received between 2012 and 2013.

A three-judge bench, headed by Justice Munib Akhtar, set aside the Islamabad High Court (IHC) judgment that had upheld the tax authority’s stance, restoring the earlier decision of the Appellate Tribunal Inland Revenue, which had found in favour of AIOU. The apex court held that Section 11(4) – used by the tax department as the legal basis for issuing a show-cause notice to the university – did not apply to the situation described in the notice, as it dealt with tax deficiency, not with withholding obligations.

The case stems from a show-cause notice issued on December 30, 2014, wherein the Commissioner Inland Revenue classified AIOU as a withholding agent and held it responsible for deducting and depositing sales tax on taxable goods and services procured from both registered and unregistered suppliers.

The AIOU, which specialises in distance learning education, prints its own educational material in-house, rather than outsourcing the task to external printers or publishers. This operational model became central to the dispute, as the tax authority treated the university as a withholding agent for transactions involving external supplies – despite the nature of its internal production processes.

The tax authority contended that under Rules 2 and 3 of the Sales Tax Special Procedure (Withholding) Rules, 2007, AIOU was obligated to deduct one-fifth of the applicable tax from registered suppliers and the entire tax amount from unregistered ones, along with filing the requisite returns.

Upon alleged non-compliance, an order-in-original was passed on April 24, 2015, directing the university to make the necessary deposits and submit the relevant returns.

AIOU’s appeals to the Commissioner (Appeals-II) and subsequently to the appellate tribunal followed. While the former upheld the order, the tribunal, in December 2015, ruled that Section 11 (4) was not relevant to the situation at hand.

However, the Commissioner Inland Revenue challenged the tribunal’s order before the Islamabad High Court, which reversed the decision – prompting AIOU to seek relief from the Supreme Court under Article 185 (3) of the Constitution.

In its verdict, the Supreme Court clarified that Section 11 (4) pertains to recovery in cases where there is deficiency in tax payment, and authorises issuance of a show-cause notice only in such scenarios. However, the obligation to withhold tax was not governed by Section 11 (4) at the relevant time.

Copyright Business Recorder, 2025