Ikramul Haq

The Rs. 21.8 billion fuel bill is more than waste; it states national priorities. Pakistan does not lack austerity policies

Pakistan’s principal consumption levies are called ‘sales tax’, but constitutional competence is divided: the federation taxes goods, while the provinces tax services. FBR also administers tax on specified services in Islamabad Capital Territory under separate federal legislation. Courts, tax administrators and practitioners routinely describe both the federal and provincial levies as value added taxes (VAT). The description matters. VAT is not merely another name for a tax imposed on a sale or service; it is a system with an internal logic. Once that logic is abandoned, the law may retain expressions such as ‘input tax’, ‘output tax’ and ‘tax invoice’, but the levy ceases, in substance, to operate as VAT. Pakistan began with a conventional sales tax. According to the Federal Board of Revenue’s own historical account, it was provincial at independence, became federal in 1948 and was permanently transferred to the centre in 1952. The shift towards VAT came with the Sales Tax Act, 1990. After the Constitution (Eighteenth Amendment) Act, 2010, Entry 49 expressly excluded sales tax on services. Today the federal Act covers goods; the Islamabad Capital Territory (Tax on Services) Ordinance, 2001 covers specified ICT services; and the provinces levy their taxes under the Sindh Sales Tax on Services Act, 2011, Punjab Sales Tax on Services Act, 2012, Khyber Pakhtunkhwa Sales Tax on Services Act, 2022 and Balochistan Sales Tax on Services Act, 2015. These are legally distinct sales taxes, not one national VAT administered through one return. VAT is a tax on final consumption, collected in instalments as goods and services pass through the production and distribution chain. Each registered person charges output tax on taxable supplies and deducts the input tax paid or payable on business purchases/services. The difference is deposited with the treasury. Where admissible input tax exceeds output tax, the excess must either be refunded or carried forward according to law. The mechanism can be understood through a simple example. Suppose raw material worth Rs.100 is sold with sales tax of Rs.18. A manufacturer adds value of Rs.50 and sells the finished product for Rs.150 plus tax of Rs.27. The manufacturer does not pay Rs.27 again. After deducting input tax of Rs.18, the net liability is Rs.9. If a wholesaler adds Rs.30, the tax on the selling price of Rs.180 becomes Rs.32.40; after credit of Rs.27, only Rs.5.40 is payable. A retailer adding another Rs.20 sells for Rs.200 plus tax of Rs.36 and deposits Rs.3.60 after adjustment. The treasury ultimately receives Rs.36: exactly 18 percent of the final value of Rs.200. The consumer bears the burden, while each intermediary accounts only for the tax attributable to the value added at that stage. Tax does not accumulate upon tax. This is what gives VAT its neutrality. The Sindh High Court explained VAT philosophy with exceptional clarity in Pakistan Beverage Limited v Large Taxpayer Unit (2010 PTD 2673). Its reasoning, reproduced in Waseem Ahmed v Federation of Pakistan (2014 PTD 1733), emphasised that every intermediate transaction has a dual character: tax charged by the seller is output tax, while the same amount becomes input tax for the buyer. These are two sides of one transaction. When Fear Fades, From Reverence to Resistance in Pakistan’s Civil-Military Relationship. Mecca Defense Pact: Will Iran be included? Power Shift in the Middle East The Zenith of Humanity and UOG’s Intellectual Journey The Court held that output-input adjustment is “of the essence of the tax”. Without that adjustment, or an equivalent mechanism, the levy ceases to be VAT. The Supreme Court subsequently approved this description in Commissioner Inland Revenue v Arco Spinning and Weaving Mills Ltd (2021 SCMR 1308). This is not an accounting concession granted to a taxpayer. It is the legal machinery through which tax is restricted to value addition and transferred towards the final consumer. At federal level, section 7 of the Sales Tax Act, 1990 permits deduction of qualifying input tax; section 10 deals with refunds or carry-forward; and section 23 connects the supplier’s output with the recipient’s input through the tax invoice. Provincial statutes likewise recognise output tax, admissible input tax, periodic returns and invoices, although restrictions vary. These provisions are structural, not ornamental. The Supreme Court reinforced this position in Commissioner Inland Revenue v Attock Cement Pakistan Ltd (2023 SCMR 279), examining purchases, output tax, input adjustment, returns and the monthly tax period. More recently, in Commissioner Inland Revenue v Mayfair Spinning Mills Ltd (2025 SCMR 1), it treated section 7 as a beneficial provision central to VAT. Input tax on raw material intended for taxable supplies was not lost merely because the material was later destroyed by fire. There is another commercial feature of sales tax that deserves attention. Tax collected from customers does not ordinarily move into the treasury at the instant of every sale. It enters the common cashflow of the business and remains there until the statutory payment date. Long before the modern invoice-credit VAT emerged, courts in the subcontinent recognised this reality. In George Oakes (Private) Ltd v State of Madras, the Supreme Court of India observed that tax collected by a dealer was kept and turned over in business before being paid to the government; for that period, it became part of the trader’s circulating capital. The reasoning is reproduced in Delhi Cloth and General Mills Co Ltd v Commissioner of Sales Tax ([1969] 23 STC 419 (MP)). This does not mean that collected tax is the trader’s income or that the trader becomes its beneficial owner. It remains a statutory liability. Commercially, however, the receipt passes through the business’s operating funds until the net liability for the tax period becomes payable. VAT legislation recognises this timing through periodic returns and net settlement rather than requiring instantaneous deposit of gross tax on every invoice. An importer pays sales tax upfront, tying up funds in inventory until sale permits input adjustment. Manufacturers finance tax on raw materials; zero-rated exporters depend on prompt refunds; service providers face the same working-capital burden on business inputs. Pakistan’s constitutional division creates

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