Retention of 10% Input Tax Adjustment by FBR

Retention of 10% Input Tax Adjustment by FBR Case Laws Commercial Corporate Law Industrials Knowledge – Corporate Law Lahore High Court Litigation & Arbitration Sales Tax Solutions - Corporate Law Tax Mrs. Justice Ayesha A. Malik in her judgment has decided the issue regarding retention of 10% input tax adjustment by FBR under section 8B of Sales Tax Act 1990 (“Act”) in Writ Petition No. 3479 of 2013.

1. This common judgment decides upon the issues raised in the Writ Petitions detailed in Schedule “A” and “B”, appended with the judgment, as all Petitions challenge the vires of Section 8B of the Act and raise common questions of law and facts.

2. Petitions mentioned in Schedule “A”, challenge the vires of Section 8B of the Act on the ground that it is in violation of Article 23 of the Constitution of Islamic Republic of Pakistan, 1973 (“Constitution”) being confiscatory in nature as it restricts adjustment of input tax to 90% of the output tax and the remaining 10% of the adjustable amount is illegally retained by the Respondents and carried forward into the next tax period. Petitions detailed in Schedule “B” in addition to the challenge to the vires of Section 8B of the Act, have impugned show cause notices calling for an explanation from the Petitioners with respect to adjustment of input tax in excess of the 90% of the output tax.

3. The Petitioners before the Court are involved in various sectors of business such as the chemical industry, plastic industry, polypropylene industry and the textile industry. Some are involved in the manufacturing business of steel pipes and of foot wear. It is the case of all the Petitioners that Section 8B of the Act, promulgated through the Finance Act, 2007, is illegal and unconstitutional as the Respondents grant input tax adjustment up to 90% of the output tax for every tax period and retain 10% of the adjustable amount, which amount should be refunded to the Petitioners. This 10% of the adjustable amount is carried forward in each tax period that is every month and ultimately at the end of the year, any amount pending is refunded to the Petitioners on an application seeking refund. Learned counsels for the Petitioners argued that the provisions of Section 8B of the Act are confiscatory in nature as the FBR retains the 10% adjustable amount which they are not entitled to. This amount belongs to the Petitioners and is the property of the Petitioners. Since the Petitioners are deprived of their property it causes great financial hardship to the Petitioners as the money can be invested in the business and will prevent financial pressure on the business. Learned counsels explained that on account of the 10% adjustable amount retained by the Respondents a certain portion of input tax adjustment is carried forward each month and consequently large amounts are retained by the Respondents over the year which is then refunded to the Petitioners at the end of the tax year. They argued that this amounts to unjust enrichment and is an unreasonable restriction imposed on the registered person. They also argued that it is confiscatory in nature and violative of Article 23 of the Constitution as they are deprived of their property. Learned counsels explained that under the previous regime, the Petitioners were given 100% tax adjustment for each tax period and certain businesses were excluded from the ambit of Section 8B under SRO No.644(1)/2007 dated 27.6.2007. Learned counsels argued that several efforts have been made to resolve this issue by the Respondents, however, no positive response was given to the Petitioners, hence the instant Petitions have been filed.

4. This Court vide order dated 5.11.2015 issued notice to the learned Attorney General for Pakistan under Order XXVII-A of the Civil Procedure Code, 1908 and also directed to file report and parawise comments on behalf of the Respondent Federation. Whereupon the Respondent Federation has filed report and parawise comments. Parawise comments have also been filed on behalf of the Respondent FBR. Today Raza Ashfaq Sheikh, Secretary (IR) Operations, FBR and Zulqarnain Tirmazi, Commissioner Zone-I, LTU, Lahore have appeared before the Court on behalf of the Respondents to assist the Court.

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