Law: Sales Tax Act, 1990

Section: 7, 3 , 8

Summary of the Case This case concerns a Sales Tax Reference Application filed by the tax department challenging a tribunal decision regarding input tax adjustment under the Sales Tax Act, 1990. Key Legal Questions Can input tax be claimed on raw materials used to produce exempt goods? Does the right to input tax adjustment remain if goods were purchased for taxable supplies but later used for exempt supplies? Background The respondent (a pharmaceutical company) paid sales tax during a period (21 March 2002 to 22 August 2002) when its products were taxable. It claimed input tax adjustment on raw materials used during that time. After 22 August 2002, the products became exempt from sales tax. The tax department argued that input tax claimed earlier should be disallowed because the goods later became exempt. Court’s Findings The issues had already been decided in a prior case (Collector of Sales Tax v. Johnson & Johnson (Pak) Pvt. Ltd) and that ruling is binding precedent. Under Section 7 of the Sales Tax Act: Input tax is linked to the tax period and the purpose at the time of purchase. If goods were purchased with the intention of making taxable supplies, input tax adjustment is allowed. The respondent’s intention at the time of purchase was to produce taxable goods, so the adjustment was valid. Later exemption of goods does not invalidate earlier input tax claims. A later amendment to the law restricting such adjustments applies prospectively, not to this case. Decision Both legal questions were decided against the tax department and in favor of the respondent. The tribunal’s decision was upheld. The reference application was dismissed. Core Principle Input tax adjustment depends on the intended use at the time of purchase, not on later changes in tax status of the goods. O R D E R    Muhammad Junaid Ghaffar, J: Through this Reference Application, the Applicant Department has impugned order dated 19.05.2006 passed in Sales Tax Appeal No. K-142 of 2004 by the then Customs, Excise and Sales Tax Appellate Tribunal Karachi Bench-I, Karachi. On 23.11.2006, the Applicant’s Counsel had pressed the following questions of law: -…