Construction material: LHC directs assessing/adjudicating officers to determine use of input tax

Lahore High Court (LHC) has directed the assessing/adjudicating officers to determine the use of input tax on construction material on case to case basis and interpret the section 8 of the Sales Tax Act 1990 while disallowing the input tax, which does not have direct nexus to the taxable activity.
While explaining the controversy, a tax expert informed that tax department prior to the judgment was disallowing all sort of input tax on construction material including cement, steel, wire and cable and other items in terms of section 8(1) h of the Sales Tax Act, 1990 without realizing its direct nexus with the taxable activity.
According to the petitioners the construction material was essentially requires to build or renew the manufacturing premises for operating a taxable activity hence in their opinion input tax adjustment on such items are admissible under section 7 and 8 being directly relevant to taxable supplies, tax expert added.
According to the judgment of the LHC (Case No ICA No 72329 of 2019), the petitions were to assail vires of Section 8(1)(h) and (i) of the Sales Tax Act, 1990 ("Act of 1990") alongwith interpretation of these provisions as proposed by respondents including Federal Board of Revenue (FBR) to disallow the adjustment of input tax on construction material including cement, steel, wire and cable etc.
The tax department side could not deny that the question of input tax adjustment, being mixed question of law and facts, has to be determined, at first instance, by the Assessing Officer, which may, thereafter, reach this Court in advisory jurisdiction, after going through the test of appeals under the Statute, it said.
LHC order said "we have examined the provisions of Sections 7 & 8 of the sales Tax Act of 1990. Collective and plain reading of both the Sections (ignoring intermediary phrases imposing conditions or qualifying these provisions) show that Section 7 is entitling a registered person to deduct (adjust) input tax, for the purpose of taxable supplies, from the output tax." The entitlement, to deduct/adjust input tax, is subject to the "purpose of taxable supplies". Conversely, Section 8 is disentitling reclaim or deductions of input tax paid on the goods used for a purpose other than taxable supplies. The deduced basic principle is that input tax paid on goods can be deducted or reclaimed, only if such goods are used for the purpose of taxable supplies.
Nevertheless, phrase, any other goods used in Section 8(1)(b), is creating an exception to the general rule, ibid i.e., adjustment or reclaim can be denied, even if the goods were used for the purpose of supplies, if so specified, through notification in official Gazette, LHC order said.
The controversy, reached before us in appeal, is of interpreting Section 8(1)(h) and (i) differently. The appellant claimed that input tax paid on construction of building and its material was deductible, because this investment improves the quality and efficiency of business and is reflected in taxable supplies. Similar arguments were advanced for the vehicles used for the purpose of business. Learned Single Bench decided against the appellant by holding that these goods have no direct nexus to taxable supply and are not part of supply chain.
In the intra court appeal the bench held that "In our opinion, the question whether the goods, input tax of which is claimed, are used for the purpose of taxable supplies, being factual, is required to be determined, at first instance, through assessment proceedings, on the basis of evidence to be produced by the registered person. Though the issue of input tax adjustment was addressed directly, after justify it that Appellate Tribunal was not available in the province, yet the principle to have recourse to the remedies under relevant statute was re-enunciated by referring to earlier judgments. Nothing is pleaded before us to show that the statutory remedies were not adequate under the facts and circumstances of these appeals," LHC said.
LHC has disposed of the appeals with the direction that the assessing/adjudicating officer shall interpret the Section 8(1)(h) and (i) on case to case basis after determining, facts of each case, without prejudice to the findings in this regard, LHC order added.
By virtue of this judgment the contention of the department for disallowance of input tax without determination of its use or nexus with taxable activity is now almost dis-approved and its admissibility is now left on factual verification and confirmation of usage, the tax expert concluded.