Understanding Input Tax Credit Restrictions in Sales Tax – What You Can’t Claim

As a registered business in Pakistan, claiming input tax credits is crucial for efficient tax management. However, certain limitations exist to ensure fairness and prevent tax evasion. This article explores the key restrictions outlined in the Sales Tax Act, 1990, guiding you on what input tax credits you cannot claim.

Restricted Categories:

  • Non-Business Expenses: You cannot claim input tax on goods or services used for personal or non-business purposes (e.g., office furniture, personal vehicles).
  • Undocumented Purchases: Input tax on purchases without valid invoices, discrepancies in CREST data, or unverifiable tax information is ineligible for credit.
  • Fake Invoices: Fabricated invoices are illegal and automatically disqualify any associated input tax claims.
  • Missing Information: Failing to provide required information to the Board regarding purchases can lead to denied input tax credits.
  • Unrelated Purchases: Goods and services not directly related to your taxable supplies are ineligible for credit (e.g., construction materials for personal property).
  • Agricultural Machinery: Input tax on agricultural machinery taxed at 7% under the Eighth Schedule cannot be claimed.
  • Supplies to Unregistered Distributors: Pro-rata input tax on goods supplied to unregistered distributors with missing recipient identification details (CNIC or NTN) is disallowed.
  • Unregistered Persons: Only registered businesses can claim input tax credits.

Proportional Claiming:

If your business deals in both taxable and non-taxable supplies, you can only claim input tax proportional to your taxable supplies, following procedures specified by the Board.

Specific Exclusions:

  • Pre-fabricated buildings
  • Electrical and gas appliances
  • Furniture and office equipment (excluding electronic cash registers)

Additional Points:

  • The Board can further restrict input tax claims on specific goods or services through official notifications.
  • The Board, with federal approval, can restrict certain goods or services to registered businesses only.

Staying Compliant:

Understanding these restrictions is crucial for avoiding penalties and ensuring smooth tax compliance. Consult a tax advisor for specific guidance based on your business activities and keep proper documentation to support your claims.

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