In a significant development within the pharmaceutical industry, the Commissioner Inland Revenue (Appeals) in Karachi recently issued a favorable decision for Bayer Pakistan (Private) Limited regarding sales tax refunds on inventory, as detailed in a document by Maven Minds, the tax law advisor for the case.
The case revolved around Bayer Pakistan’s claim for a refund of input tax on closing inventory of raw materials, packaging materials, and other direct inputs acquired during a zero-rated period for pharmaceutical products.
Central to the matter was the question of whether the company’s refund claim for inventory purchased until June 30, 2022, adhered to the relevant provisions of the Sales Tax Act, 1990.
This issue arose due to the abrupt transition from a zero-rated to a reduced-rate regime for pharmaceutical supplies through the Finance Act, 2022, rendering the aforementioned inventory unusable for making zero-rated pharmaceutical supplies despite being procured for that purpose.
The document attributed the successful outcome to the leadership of Adnan Ali Khan, Partner at Maven Minds, and his legal and consultative efforts.
This achievement was hailed as a significant milestone and precedent for similar cases within the pharmaceutical industry.
Background of the Case:
On January 15, 2022, the Federal Government introduced a zero-rated regime for the pharmaceutical sector, previously exempt from sales tax, allowing for refunds of input tax on purchases of raw materials, packaging materials, and other direct inputs.
This zero-rated regime was in effect until June 30, 2022, after which it was replaced by a reduced-rate system under the Finance Act, 2022, which disallowed the claim of input tax.
Bayer Pakistan (Private) Limited, involved in pharmaceutical production and supply, accumulated substantial input tax on taxable purchases until June 30, 2022.
In June 2022, they submitted a refund request for the entire input tax related to pharmaceuticals, which was initially denied by the tax officer.
The denial was based on the argument that the claimed refund was excessive, as the inventory had not been utilized in making zero-rated pharmaceutical supplies, but rather consumed in making reduced-rate pharmaceutical supplies, exceeding the board’s limit.
The appellant argued before the Commissioner Inland Revenue (Appeals) that their refund claim for inventory related to pharmaceutical supplies in June 2022, procured during the zero-rated period, complied with the Sales Tax Act, 1990.
They contended that the goods for which input tax was paid during the zero-rated period were intended for making zero-rated pharmaceutical supplies, irrespective of subsequent changes in taxation through the Finance Act, 2022.
After thorough deliberation, the Commissioner Inland Revenue (Appeals) upheld the appellant’s arguments, ruling in their favor and deeming the dismissal of the refund claim unjustified.
The Commissioner instructed the processing of the refund claim in accordance with the Sales Tax Act, 1990, acknowledging the legitimacy of Bayer Pakistan’s inventory claim.
