LAHORE, Dec 19: The Lahore High Court has set aside a circular issued by the Federal Board of Revenue about reducing the rate of input sales tax on local supplies of sugar from 16 per cent to eight per cent.

The Gojra Samundri Sugar Mills and others had challenged a federal government notification issued under section 13(2) of Sales Tax Act 1990 and a subsequent circular issued by the FBR on May 2, 2012. They also assailed the show-cause notices issued by the Deputy Commissioner Inland Revenue under the impugned circular.

On behalf of the petitioners, Advocate Ijaz Ahmad Awan argued that the petitioners were sugar manufacturing companies making taxable supplies of sugar locally in Pakistan. He said the government adhering to demands of the general public and constraints of local sugar producers had on Aug 23, 2009 slashed the levy of sales tax on local taxable supplies of sugar by 50 per cent, that is, from 16pc and to eight per cent.

He said the slashed rate of sales tax remained infield for one year, nine months and eleven days involving more than 21 tax periods of 30 days as well as 21 sales tax returns and none ever objected to any input adjustment rather everyone took benefit.

Advocate Awan stated that in 2012 the petitioners were served with show-cause notices based on an alleged scrutiny of sales tax return from September 2009 to May 2011.

He said it was alleged in the notices that the petitioners had claimed adjustment of the whole of input tax instead of apportionment of input tax, therefore, 50 per cent of input tax was not admissible.

Following the court’s direction, FBR’s Tax Policy chief Dr Muhammad Iqbal appeared in person and told the court that the impugned notification and subsequent circular had been withdrawn. He further said the show-cause notices to the petitioners were also withdrawn.

Justice Syed Mansoor Ali Shah, however, remarked that the exemption granted under section 13 (2) of the Sales Tax Act whereby the rate of sales tax was reduced on the local supply of sugar by petitioners imply that the entire local supply of sugar was taxable at the rate of eight per cent.

“The situation in section 8(2) of the Act is totally different as if a registered person makes taxable and non-taxable supplies, only such proportion of input tax can be claimed that is attributable to taxable supplies in such manner as is specified by the FBR,” said the verdict handed down by the judge.

The judge observed that in the instant case the petitioners were not making any non-taxable supply but the entire supply of sugar was taxable, however, at a reduced rate.

Declaring the circular legally infirm/incorrect, Justice Shah held that the reduction in the rate of sales tax by 50 per cent amounted to splitting the local supply into 50 per cent taxable and 50 per cent non-taxable supply. With these observations, the judge allowed the petitions.

The judge had reserved the judgment on Nov 22 last and released it on Wednesday.