2026 PLP 406 (PTD)

MUNIB AKHTAR, J.

This matter is being disposed of as an appeal; see below. It arises out of the Sales Tax Act, 1990 ( 1990 Act ) and raises, in the facts and circumstances of the case, the following question of law: how is Section 66 to apply in relation to the tax paid by a person, otherwise claimable as input tax, if there is an intervening period in which the supplies made by the person are subject to an exemption under Section 13?

2. The respondent taxpayer is in the business of the manufacture and sale (or supply, to use the technical term) of cement. Prior to the Finance Act, 1996, Section 13 of the 1990 Act had simply provided, in its subsection (1), that the Federal Government had the power to exempt such taxable supplies as specified in the relevant notification (subject to, and in terms of, such conditions as might be laid out therein). By the said Finance Act the section was substituted in its entirety. Subsection (1) now provided (as it, essentially, continues to do so) that the supplies of goods as set out in a newly added Sixth Schedule would, subject to such conditions as may be therein specified, be exempt from the payment of tax under Section

3. At the same time subsection (2) of the substituted section continued to empower the Federal Government to, as before, exempt taxable supplies of goods. In exercise of this power the Federal Government, by means of SRO 437(I)/1997 dated 13.06.1997 ( SRO 437 ) inter alia exempted the supply of cement from the payment of sales tax. (SRO 437 has to be read with SRO 471(I)/1997 dated 16.06.1997 ( SRO 471 ) which corrected a typographical error in the former.) By the Finance Act, 1998, the Sixth Schedule was substituted in its entirety, and cement (which earlier was not listed therein) appeared at Sr. No. 19 thereof. Thus, the exemption granted by SRO 437 continued to operate though now in terms of the Sixth Schedule. (We may note in passing that the typographical error made in SRO 437 (corrected, as noted, by SRO 471) was unfortunately replicated in Sr. No.

19. This error was ultimately corrected by means of the Finance Ordinance, 2000. This does not however have any material bearing.) Finally, by means of the Sales Tax (Amendment) Ordinance, 2000, promulgated on 05.09.2000, the entry relating to cement (i.e., the aforesaid Sr. No. 19) was omitted.

3. It was therefore the case that from 13.06.1997 to 05.09.2000 the supply of cement was exempt under Section 13 (herein after referred to as the period of exemption ). Now, at the beginning of the said period, the respondent taxpayer had a certain stock of inputs in respect of which it had paid tax and which would therefore otherwise have been claimable as input tax. Similarly during the said period the respondent continued to acquire (and utilize) inputs on which the tax paid, absent the exemption on the supply of cement, would have been claimable as input tax. Thus, when the period of exemption ended it had a certain stock of inputs in respect of which it had paid tax. Furthermore, at the beginning of the period of exemption it had a certain stock of cement manufactured but not sold. During the period of exemption that cement was sold, and the respondent continued to manufacture and sell its product, so that at the end of the period it had a certain stock of cement which, though manufactured during the period of exemption, had not yet been sold.

4. In or around end-August/beginning-September, 2001 the respondent, with reference to Sections 7, 8 and 66 of the 1990 Act, made a claim for sales tax refund (in the sum of Rs. 93,99,551/-), by way of input tax adjustment, of the tax paid on inputs acquired during the period of exemption, as represented by the stocks as available at the end of the said period (i.e., as on 05.09.2000). This claim was allowed in part (to the tune of Rs. 29,59,943/-) but rejected for the remainder (i.e., Rs. 64,39,608/-) on the ground that the latter portion related to a period more than one year before the relevant date(s) and was thus time barred under Section

66. The respondent appealed the order ultimately made to the Appellate Tribunal, which decided in its favor. The Commissioner (referred to herein after as the Department ) filed a tax reference in the High Court, which was dismissed by means of the impugned judgment. It is against this dismissal that the present leave petition has been presented in this Court.

5. Before us, learned counsel for the Department, and the learned Director General (who sought, and was granted, permission to address the Court) essentially took the position that the portion of the claim denied was rightly withheld because of the one year limitation imposed by Section

66. The learned Director General, on a query from the Court, in particular submitted that the respondent could not rely on Section 7 as the adjustment of input tax against output tax provided for therein was merely a concession granted to the taxpayer and could not override the requirements of Section

66. Learned counsel for the taxpayer submitted that the learned Appellate Tribunal and the learned High Court had correctly appreciated and applied the law, and rightly concluded that the respondent was entitled to the whole of its claim.

6. We have heard learned counsel as above and considered the relevant provisions and examined the reasons that found favor with the learned High Court. The dispute relates only to the portion of the claim denied, on the basis of it being time barred under Section

66. But the correctness or otherwise of the stand taken by the Department cannot be properly understood without keeping in mind the crucial point that since 1990 the sales tax regime applicable in the country is in value added tax, or VAT, mode. Until the contours of the VAT mode, and the principles relating thereto, are not kept in mind it will not be possible to reach the correct conclusion, as a matter of law, of the question now before the Court. Now, one of us while in the High Court has had occasion to set out in detail the principles involved when sales tax is levied and applied in the VAT mode, in Pakistan Beverage Ltd. v. Large Taxpayer Unit 2010 PTD 2673 ( Pakistan Beverage ). Leave petitions against this judgment (CPLA 658-K/2010 etc.) were dismissed in this Court vide order dated 28.12.2010 as being barred by limitation. Review petitions (CRP 4-K/2011 etc) were dismissed by order dated 16.09.2011. The description given of the VAT mode in Pakistan Beverage has been referred to with approval subsequently in this Court in Commissioner Inland Revenue and others v. Arco Spinning and Weaving Mills Ltd. and others 2021 SCMR 1308 (at para 7). In Pakistan Beverage the VAT principles were explained in the following terms (pp. 2680-4; emphasis in original):

10. The first point to keep in mind is that the Sales Tax Act as currently in force is a value added tax, or VAT. When sales tax is levied in VAT mode, it is charged at each stage in the supply chain as the goods move from the point of origin to the ultimate destination. At each stage, the sales tax is paid on the value added by the supplier concerned. This is done by taking the sales tax charged by the supplier for the goods sold by him (known as the output tax) and subtracting from it the sales tax paid by him for the goods purchased by him (known as the input tax). If the difference (i.e., output tax minus input tax) is positive over the relevant tax period, i.e., the output tax is more than the input tax, that means that the supplier has to pay the difference to the State. If the difference is negative (i.e., output tax is less than input tax), then the supplier is entitled to a refund of this amount, or its adjustment in the next tax period(s). It will also be noted that in respect of each transaction, other than the first and the last, the sales tax involved has a dual characteristic. For the person making the supply (i.e., the seller) it is his output tax. For the person acquiring the goods (i.e., the buyer) it is his input tax. These are but two sides of the same transaction.

11. The VAT mechanism was succinctly explained in the House of Lords in Fleming (t/a Bodycraft) v. HM Revenue and Customs [2008] UKHL 2 as follows: one of the essential features of VAT is the passing on of input tax, to be credited against output tax, along a chain of traders (for instance a supplier of components, a manufacturer, a wholesale distributor and a retailer) until the final output tax is borne by the ultimate consumer. Generally a trader s credit for input tax is obtained by deduction from his output tax, but some traders with a large turnover in zero-rated goods (such as most foodstuffs) may be repayment traders that is, they regularly or occasionally pay amounts of input tax which exceed their output tax, so as to entitle them to a repayment of input tax. By contrast payment traders will as a rule simply deduct input tax on making their regular returns . (para 27, per Lord Walker)

12. The Constitutional Court of South Africa described the VAT mechanism in somewhat more detail in Metcash Trading Ltd. v. Commissioner of South African Revenue Service and another 2002 (4) SA 317 in the following terms: VAT is, as its name signifies, a tax on added value. It is imposed at each step along the chain of manufacture and distribution of goods or services that are supplied in the country in the course of business; and it is calculated on the value at the time of each such step . Although the tax is payable on a wide variety of transactions, the present discussion can be confined to the facts of this case, which involves the commercial purchase and sale of goods and can therefore serve as a straight forward example of how the system is supposed to work. The basic idea of VAT is that it is calculated on the value of each successive step as goods move from hand to hand along the commercial production and distribution chain from their original source to their ultimate user. For present purposes it can be accepted that the tax is calculated at the prescribed rate of 14% on the price at which each successive act of handing on takes place. Furthermore, the tax is not only calculated on the value of each successive supply, but is to be paid at that time. As goods move along the distribution chain, everyone making up the sales chain is first a recipient, then a supplier . Being a tax on added value, VAT is not levied on the full price of a commodity at each transactional delivery step it takes along the distribution chain. It is not cumulative but merely a tax on the added value the commodity gains during each interval since the previous supply. To arrive at this outcome a supplying vendor, when calculating the VAT payable on the particular supply, simply deducts the VAT that was paid when the particular goods were supplied to it in the first place. As a commodity is on-sold by a succession of vendors, each payment of VAT by each successive supplier must then represent 14% of the selling price less the 14% of the price which was payable when that commodity was acquired. According to the scheme of the Act the tax that is payable by a supplying vendor is called output tax and the tax that was payable on the supply to that vendor upon acquisition is called input tax. (paras 12-14)

13. It is of fundamental importance to keep in mind that in a VAT, the output-input adjustment, and payment of tax in terms thereof, is of the essence of the tax. Without such (or any equivalent) adjustment, the tax would simply cease to be a value added tax. In the case of the Sales Tax Act, the principle is given statutory effect in section

7. This is one of the basic provisions of the statute.

14. The second point of importance is that value added taxes can be of two kinds, and it is essential to understand the type of VAT that has been given effect to in the statute under consideration. The two types of VAT have been explained in a standard treatise in the following terms (Value Added Tax: A Comparative Approach by Alan Schenk and Oliver Oldman, 2007): For most countries with VATs, international trade is a significant component of their economies. A country with a VAT must define the jurisdictional reach of the tax; that is, the tax may be imposed on production within the country (an origin principle VAT), on domestic consumption (a destination principle VAT), or some combination of the two. Almost every country with a VAT relies on the destination principle to define the jurisdictional limits of the tax. Under a pure destination principle, imports are taxed and exports are completely free of tax (zero rated). (pg. 180; emphasis supplied) The importance of zero rating in respect of exported goods has been explained by the learned authors in the following terms: Countries that rely on the destination principle to tax international transactions typically zero rate exports of goods (regardless of the nature of the goods exported) because those exports will be consumed outside the taxing country. This zero rating is not a preference. The export sales are merely beyond the jurisdictional reach of the tax. The destination principle reflects the near universal understanding that in geographically assigning sales tax or VAT burdens and revenues, the country of consumption gets both . (ibid., pp. 50-51; emphasis supplied)

15. Under the Sales Tax Act, imports are specifically (and separately) brought to tax by section 3(1)(b). Exports are specifically and expressly zero rated by section

4. It is therefore quite clear that the Sales Tax Act embodies a destination principle VAT. Since zero rating of exports is a fundamental principle of VAT levied in this manner, it is an essential element of the Sales Tax Act.

16. It will therefore be seen that since the Sales Tax Act is in the form of a destination principle VAT, there are (insofar as is presently relevant) two principles of basic application which must be kept in mind, since they form part of the fundamental structure of the statute. The first is the concept of output-input adjustment and the second is the zero rating of exports. It must be emphasized that these elements are not a concession or benefit granted to or conferred on the supplier (known as the registered person); they are integral to the whole concept of VAT under the Sales Tax Act. A failure to keep these principles in mind can result in a serious and basic misunderstanding and misinterpretation of the Act. It would also be mistaken to regard these elements simply, or merely, a part of the machinery provisions of the Act. Of course, these elements may be modified but, and this is the important point, this must be done expressly, either in the statute itself or in exercise of an express power specifically conferred by the statute. For example, section 8B was added to the Sales Tax Act in 2007. Subsection (1) expressly provides that a registered person is not to be allowed to adjust input tax in excess of ninety per cent of the output tax for the tax period concerned. Subsection (1) opens with a non obstante clause, and section 7 has been expressly made subject to section 8B. Similarly, section 8(1)(b) expressly confers a power on the Federal Government to specify, by a notification in the official Gazette, the goods in respect of which the registered person may not claim input tax, and the Federal Government has exercised this power from time to time. Of course, since this provision is a species of subordinate legislation, which permits a derogation from the basic principles underlying the Act, any exercise of this power must be narrowly and strictly construed. (As noted above, this power has not been exercised in the present case.)

17. In addition to zero rated supplies, the Sales Tax Act (in line with almost all VATs) also permits exempt supplies, and the difference between the two must also be understood. The position under an exempt supply was explained in the House of Lords in Benyon and Partners v. HM Commissioners of Customs and Excise [2004] UKHL 53 in the following terms: [A person making an exempt supply] is treated as if he was a consumer and bears the burden of the whole of the VAT which has been paid when he receives supplies of goods or services for the purposes of his business or profession. His expenses on VAT, like his other expenses, are matters which he must take into account when deciding what to charge his customers. (para 4, per Lord Hoffman; emphasis supplied) The position obtaining in respect of a zero rated supply (in the context of exports) is stated in Schenk and Oldman, op. cit., as follows: Zero rating is the mechanism under a VAT scheme by which the tax can be completely removed from a particular product or service or from a particular transaction. Under a credit-invoice VAT, a seller of a zero-rated item does not charge VAT on the sale. The sale is classified as a taxable sale subject to a zero rate. As such, the seller is entitled to recover as input credit the tax included in the cost of taxable purchases attributable to that sale. (pg 50; emphasis supplied)

7. The other aspect of sales tax in the VAT mode is the importance of the supply chain. This has in fact become a defined term as set out in clause (33A) of Section 2, which was added by the Finance Act, 2013. But that only encapsulates in statutory form the basic principles involved, which were just as much applicable during the tax periods prior thereto even without any definition. Those principles were set out by one of us in the High Court, in Waseem Ahmed and another v. Federation of Pakistan and others 2014 PTD 1733 ( Waseem Ahmed ). Appeals against this judgment (CA 600/2016 etc) were dismissed (by short order) on 04.12.2024, the detailed reasons for which have been released on 21.06.2025 (PLD 2025 SC 633). The supply chain concept was explained in Waseem Ahmed in the following terms (pp. 1767-9):

42. The concept of the supply chain shows that it comprises of a number of links ( series of transactions ), each link (other than, of course, the first and last) comprising of suppliers standing in a buyer-seller relationship. When this is matched with the second crucially important and fundamental aspect of the VAT mechanism, namely the output-input adjustment, it becomes clear that two successive links in a supply chain constitute the block in respect of which sales tax is payable or refund claimable (as the case may be) over a tax period. This block of two successive links is the paradigm case that is replicated over and over again along a supply chain It can be represented schematically as follows: -> A -> X -> B -> A, X and B are three typical suppliers along a typical supply chain. The arrows that precede and succeed A and B, respectively, indicate that these suppliers stand somewhere along the supply chain, other than the beginning or the end. A X constitute one link , while X B constitute the next successive link . The two links together constitute one block . Now, A s output tax is X s input tax, while X s output tax is B s input tax. Thus, the output-input adjustment for X is the tax payable or refund claimable (as the case may be) over a tax period in respect of this block . This scheme (A X B) was in fact extensively used during the course of the hearings, not merely by learned counsel for the respective parties but also the Court. It represents the paradigm case, is hereafter referred to as such . It is important to note that there is nothing peculiar or special about this block . Indeed, it is its very typicality that makes it the paradigm case. If one were to shift one block before or one block after A X B, the two blocks could be represented schematically as follows: -> A1 -> A -> X -> and -> X -> B -> B1 -> In the schematic on the left, the output-input adjustment for A would determine the tax payable or refund claimable for the block , whereas in the schematic on the right, the output-input adjustment for B would be so determinative. Were the three blocks to be shown together, the schematic would be as follows: -> A1 -> A -> X -> B -> B1 -> It is reiterated that the foregoing patterns would repeat themselves over and over again along the supply chain.

43. Before proceeding further, one point may be made. The supply chain that has been shown above is the simplest possible. In each block there are only three suppliers, being A X B in the paradigm case and so on. There is a simple linearity to the supply chain. In reality of course, things can be much more complicated. Thus, in the paradigm case, over any given tax period, X may well have multiple suppliers (A, C, D, E, etc.), and/or may be supplying goods to multiple buyers (B, S, T, U, etc.). Each of these suppliers and buyers would be part of their own supply chains. Thus, any given supplier may well be on more than one (and perhaps multiple) supply chains simultaneously. In reality therefore, the patterns that may emerge can be much more complex, with a constant crisscrossing of supply chains as, e.g., they converge on a particular supplier and/or radiate out from him. This complexity, which may even resemble a tangled web, can mislead and potentially even confuse. It must be firmly kept in mind that in the end each supply chain can, both in principle and in practice, be separately distinguished, identified, isolated and analyzed. This exercise may be cumbersome but it can be, and should the circumstances so warrant must be, done. More importantly, the same principles and analysis would apply in respect of each supply chain. For purposes of the present discussion and analysis and in order to ensure clarity, we have chosen the simplest model. There is of course a difference between simplifying matters and being simplistic. The supply chain chosen falls emphatically in the former and not the latter category.

8. Section 66, as it stood at the relevant time (i.e., end August/beginning September 2001 when the application was filed by the respondent) was as follows:

66. Refund to be claimed within one year.-- No refund of tax claimed to have been paid or over paid through inadvertence, error or misconstruction or refund on account of input adjustment not claimed within the relevant tax period, shall be allowed, unless the claim is made within one year of the date of payment: Provided further that in a case where the refund has become due on account of any decision or judgement of any officer of Sales Tax or court or the Tribunal, the period of one year shall be reckoned from the date of judgement or decision of such officer, court or Tribunal. It may be noted that the proviso was added by the Finance Ordinance, 2001. Furthermore, this proviso is now the second proviso to the section; by means of the Finance Ordinance, 2002 another proviso has been inserted immediately prior thereto. That proviso (as inserted) was in the following terms: Provided that in a case where a registered person did not deduct input tax within the relevant tax period, the Collector may, after satisfying himself that input tax adjustment is due and admissible, allow the registered person to take such adjustment in the tax period as specified by the Collector:

9. We begin by noting that while the observations made in Pakistan Beverage and Waseem Ahmed with regard to sales tax in VAT mode in terms of the 1990 Act are reaffirmed and confirmed, it should be kept in mind that the fact-situation with which we are here concerned is as set out in paras 2 and 3 above and, in particular, encapsulated in the question of law stated at the beginning of the judgment. The observations made in this judgment are therefore primarily to be regarded within this context.

10. Section 66, and in particular the period of limitation set out therein, applies when there is a claim for refund based on any one of four grounds: inadvertence, error, misconstruction or refund on account of input adjustment not claimed within the relevant tax period. It is only the last ground that requires consideration since this was the only basis on which the respondent s claim was (partially) denied. It therefore needs to be seen as to what would be the relevant tax period for purposes of claiming the input adjustment here involved. It must be remembered that that input tax was what stood at the end of the period of exemption, i.e., the tax paid on such stocks of inputs as were so available. The question therefore becomes, what was the relevant tax period within the meaning of Section 66 for this balance input tax?

11. Tax period is defined in Section 2(43) (as it stood at the relevant time) as simply meaning a period of one month or such other period as the Federal Government may, by notification in the official Gazette, specify . At all times relevant for present purposes the period was one month. (Herein after, for analytical purposes only, a period of thirty days is used as a convenient stand-in for one month .) Now, it is clear from an overall reading of the 1990 Act, and in particular of Section 7(1), that the tax period provides the frame within which the output-input mechanism operates. The mechanism acts discretely, i.e., within, and for purposes of, each such period successively. As the opening words of the subsection make clear, the mechanism operates to determine the tax liability in respect of taxable supplies made during a tax period (emphasis supplied). This is crucial for present purposes. Taxable supplies is itself a defined term. Section 2(41), as presently relevant, defines it as meaning a supply of taxable goods other than a supply of goods which is exempt under section 13 and includes a supply of goods chargeable to tax at the rate of zero per cent under Section 4 (emphasis supplied). And Section 2(39) defines taxable goods as meaning all goods other than those which have been exempted under Section 13 .

12. The position that emerges is clear. The two definitions just referred to reinforce each other. Goods that have been exempted under Section 13 are, for the duration of the exemption, not taxable goods and their supply (i.e., sale) during such period does not constitute a taxable supply . But the output-input mechanism contained in Section 7(1) necessarily requires that there be taxable supplies during the tax period involved. It follows from this that during the period of exemption the mechanism is substantively inoperative. More pertinently for present purposes, this means that any particular (and successive) time durations of one month during the period of exemption are, substantively speaking, not, and cannot be, tax periods . As stated a tax period essentially brackets the (successive) durations of time (of thirty days) during each of which the output-input mechanism operates. Thus, this term is meaningful only in relation to the mechanism. If the mechanism itself is substantively suspended as a matter of law then there is no meaningful sense in which one can speak of a tax period . It follows from this that a taxpayer making a claim for refund under Section 66 cannot be said not to have claimed input adjustment in relation to, or during, a period of exemption since, as a matter of law, there is no tax period therein. Therefore, what is the relevant tax period within the meaning of this section must be some period(s) of thirty days other than the one(s) to be found or located within the period of exemption. (Quite obviously, the foregoing analysis would apply equally to any portion of any thirty day period as may fall within the period of exemption.)

13. In our view, it follows from the above that since tax period has meaning and purpose only when the output-input mechanism is operative, i.e., when taxable supplies are being made, the relevant tax period for purposes of Section 66 can only mean such period (or periods) after the period of exemption is over. It is only then that (e.g.) goods, even if manufactured during the period of exemption but not sold during such period, become taxable goods and their supply becomes a taxable supply . It is only in relation to such a period (or periods) that any adjustment of input tax, including the balance available at the end of the period of exemption, becomes possible and it therefore becomes meaningful to inquire whether the taxpayer has so adjusted it. Finally, it follows from this that since the relevant tax period did not (and could not) exist in the period of exemption no date within that period can serve as the starting point of the limitation envisaged by Section

66. Put differently, the end of the period of exemption does not mark the last day for the start of limitation since up to that point in time there was in law no time period . Rather, if at all any question of limitation can arise under the section, the date for its starting would (and could only) lie in the successive time periods that become operative after the end of the exemption. In other words, for purposes of computing limitation, time does not begin to run from the end of the period of exemption or any other date prior thereto located within the said period.

14. In the present case, the period of exemption ended on 05.09.2000 and the application for refund was made by end August/beginning September 2001. This was well within (or at most towards the end of) a period of one year from the end of the exemption. It follows that since limitation did not begin to run from 05.09.2000 (or any date prior thereto) but rather (if at all) from the successive time periods after that date, the claim was well within time and could not be defeated or denied on the ground of being time barred. Accordingly, the respondent taxpayer was entitled to the remaining Rs.64,39,608/-, as correctly concluded by the learned Appellate Tribunal and the learned High Court.

15. This leave petition is converted into an appeal and the question posed at the beginning of the judgment is answered in terms as set out herein above. Since that answer, in the facts and circumstances of the case, is against the Department it follows that the appeal fails and is hereby dismissed. MH/C-21/SC Appeal dismissed.