ISLAMABAD: The Supreme Court of Pakistan held that the applicability of a taxing statute to a transaction does not depend solely on the residence or place of business of the supplier, but rather on the place where the sale transaction occurs.
“If the transaction takes place where the provisions of the Sales Tax Act, 1990 apply, the supplier cannot claim immunity from liability under the Act,” stated the judgment of a three-judge bench headed by Yahya Afridi, the Chief Justice of Pakistan.
According to the facts, during the audit of M/s Tarbela Steel Re-Rolling Mills (Pvt) Ltd for the tax periods from 2014 to 2016 and 2018, it was observed that the petitioner had made purchases of raw material from suppliers who were not registered under the provisions of the Act 1990, and that withholding tax had not been deducted from payments made to such suppliers.
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The lawyer of the Commissioner Inland Revenue, Peshawar, argued that the petitioner, as a withholding agent, in terms of rule 1 (d) read with rule 2 (6) of the Sales Tax Special Procedure (Withholding) Rules, 2007 (Rules 2007) was under an obligation to deduct withholding tax at the rate of 1 percent of the value of the taxable purchases from payments made to the suppliers of raw material, which he did not.
Therefore, on 10.04.2019, the Deputy Commissioner, Inland Revenue issued a notice to the petitioner requiring it to show cause as to why Rs. 11,474,200/- should not be recovered from it in addition to the default surcharge and penalty. It was alleged that the petitioner had made domestic purchases of taxable goods from unregistered persons without deducting and depositing 1 percent withholding sales tax on the value of taxable purchases.
The petitioner’s counsel contended that since purchases of raw material were made from suppliers in FATA, who were not liable to be registered under the provisions of the 1990 Act, withholding tax was not liable to be deducted from payments made to such suppliers. He explained that at the time, the suppliers in FATA were not liable to be registered under the 1990 Act as the provisions of the said Act had not been extended to FATA in terms of Article 247 (3) of the Constitution.
On 30.09.2019, an assessment order was passed whereby sales tax demand of Rs. 1,115,316/- was made against the petitioner. Additionally, a default surcharge and penalty were also imposed on the petitioner.
The petitioner assailed the order before the Commissioner of Inland Revenue (Appeals), which upheld the assessing officer’s order. The petitioner then challenged the assessment order before the Appellate Tribunal Inland Revenue, Peshawar, which passed in favour of the petitioner. The Department then approached the Peshawar High Court, which held that the petitioner was liable to deduct sales tax at the rate of 1 percent of the value of taxable supplies made to it.
Copyright Business Recorder, 2026
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