The Lahore High Court has set aside a circular issued by Federal Board of Revenue (FBR) about reduction in the rate of input sales tax on local supplies of sugar. The court 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 impugned circular legally infirm/incorrect, the court held that the reduction in the rate of sales tax by 50 percent amounted to splitting the local supply into a 50 percent taxable and a 50 percent non-taxable supply. The court further observed 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 implied that the entire local supply of sugar was taxable at the rate of eight percent and was a taxable supply.

"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 a manner as is specified by the FBR," said the verdict handed down by the court.

Copyright Business Recorder, 2012