Claiming input tax credits (ITC) is crucial for businesses in Pakistan to manage their tax liabilities effectively. However, understanding the limitations and regulations surrounding ITC eligibility can be challenging. This article aims to simplify the key points from Section 8 of the Sales Tax Act, 1990, guiding registered persons on what input tax they cannot claim.
Key Limitations on ITC:
- Non-business use: Input tax on goods or services used for personal or non-business purposes is not claimable (e.g., building materials for personal construction).
- Discrepancies and irregularities: Tax cannot be claimed on purchases with discrepancies in Sales Ledger data or unverifiable input tax within the supply chain.
- Fake invoices: Claiming ITC based on fake invoices is strictly prohibited.
- Missing information: Failure to furnish required information to the FBR can restrict ITC claims.
- Unrelated purchases: Goods and services unrelated to taxable supplies by the registered person are ineligible for ITC (e.g., office equipment for personal use).
- Certain goods and services: Specific exclusions exist, such as vehicles in Chapter 87 of the Customs Act, electrical appliances, and furniture (except for sale or re-sale).
- Provincial discrepancies: Input tax adjustments barred under respective provincial sales tax laws cannot be claimed.
- Late reporting by suppliers: From a specified date onwards, ITC might be restricted if the supplier hasn’t declared the purchase in their return or paid the due tax.
- Unregistered distributors: Pro-rata ITC on goods sold to unregistered distributors without valid identification details cannot be claimed.
Additional Points:
- For businesses dealing in both taxable and non-taxable supplies, ITC needs to be proportionally apportioned based on FBR regulations.
- Only registered persons can claim ITC on taxable supplies they make or intend to make.
- Fixed tax payers under previous versions of the Act (before December 1998) are not eligible for ITC.
- FBR, with government approval, can restrict the supply of certain goods by registered persons to unregistered individuals.
