A division bench of Lahore High Court has ruled that if payment is not made within 180 days through banking channel, the input tax cannot be denied to a registered person and penalty can be levied for not making payment within the prescribed period.
When contacted, Shahid Jami, a Lahore based tax lawyer explained the background facts and the significance of the ruling. The registered person in that case made payment for purchases through banking channel but after the period of 180 days, and the department disallowed the input tax. Whereas as per applicable law of section 73(1) of the Sales Tax Act 1990 where on purchases input tax therein is claimed by the registered person, payment to the supplier should be made from business bank account of the registered person into the business bank account of the supplier. Whereas section 73(2) further provides a time limit as well to make the payment and it reads as under;
"2. the buyer shall not be entitled to claim input tax credit, adjustment, deduction, or refund, repayment or drawback or zero-rating of tax under this Act if payment for the amount is made otherwise than in the manner prescribed in sub section (1), provided that payment in case of a transaction on credit is so transferred within one hundred and eighty days of issuance of tax invoice."
The issue of disallowance went up to high court and the Division Bench gave the following ruling:
"Plain reading of section 73(2 )shows that buyer is not entitled to claim input tax credit, adjustment or refund etc if payment of the amount is made other than manner prescribed in sub section (1) of section 73 of the Act .proviso to subsection (2) further stipulates that in case of a payment against transaction on credit, the same is to be transferred within 180 days of the issuance of tax invoices. In present case admittedly payments were made through banking channel and in the manner prescribed in sub section (1) of section 73 of the Act. Therefore the respondent assessee was not disentitled for input tax adjustment under sub section (2) of section 73 of the Act. So for as proviso to sub section (2) of section 73 is concerned, it is not case of the department that payments were for a transaction on credit. Therefore, the condition of 180 days was not applicable in this matter. In this case, when the payment has been made through banking channel as prescribed in sub section (1) of section 73 of the Act and the only lapse is payment beyond 180 days, in a credit transaction, even then the assessee could at best be liable for penalty under sub clause (16) of section 33 of the Act but cannot be denied input tax adjustment."
Jami explained that as per ruling the condition of payment within 180 days is applicable only if purchases are made on credit and if that condition is not fulfilled then only token penalty under section 33 can be levied instead of disallowing input credit. He observed that it is very important ruling in favour of taxpayer for ease of doing business without being burdened with technicalities of taxing statute.