With the announcement of Finance Act, 2019, it became clear that the Government wants to leave no stone unturned to document the economy. As a result, a number of documentation measures were introduced through the Finance Act, 2019 including the CNIC requirement.
To further enhance the scope of its documentation drive, the Federal Government has amended Section 73 of the Sales Tax Act, 1990 through Tax Laws (Second Amendment) Ordinance, 2019 by inserting a new sub-section 4.
Through this amendment, the registered manufacturers have been barred, in a way, from making taxable supplies to unregistered persons beyond a certain limit. The amendment reads as follows:
A registered manufacturer shall make all taxable supplies to a person who has obtained registration under this Act (i.e. Sales Tax Act, 1990) excluding supplies not exceeding a value of one hundred million Rupees in a financial year and ten million Rupees in a month, failing which the supplier shall not be entitled to claim credit adjustment or deduction of input tax as attributable to such excess supplies to unregistered person.
Clearly, the objective of this amendment is to discourage taxable supplies being made by registered manufacturers to unregistered persons. After this amendment, if a registered manufacturer makes taxable supplies to an unregistered person volume of which exceeds Rs.100 million in a year and Rs.10 million in a month to that unregistered person (i.e. one specific person), such registered manufacturer shall be disallowed input tax adjustment or deduction attributable to such unregistered supplies.
For example, AX Polymers is a registered manufacturer, and it has made following taxable supplies during the month of December 2019:
|Supplies to registered persons
|94.34% of total supplies
|Supplies to UP (an unregistered person)
|5.66% of total supplies
|Input tax available for adjustment
|Input tax disallowed
|5.66% of Rs.35 million
|Input tax adjustment allowed
|94.34% of Rs.35 million
Important thing to note is that input tax is disallowed the same way when supplies are made to un-registered person without obtaining his NIC (CNIC). However, the present amendment is applicable even if the supplier obtains CNIC.
Please note that provisions of Section 74(3) are not applicable to the following ( vide STGO No. 01 of 2020 i.e. C. No. 2/3-STB/2020/6596-R dated 16th January 2020):
- Federal/Provincial/Local Government departments, authorities, etc. not engaged in making of taxable supplies;
- Foreign Missions, diplomats and privileged persons; and
- All other persons not engaged in supply of taxable goods
What are your thoughts on this?