Syed Muhammad Ijaz
While reading a judgment[1] of the Honorable Sindh High Court concerning the Sales Tax Act, 1990 (“the Act”), legal counsel submitted that the term “exempt” includes anything that is not taxable under the Act. This interpretation, effectively equating exempt with non-taxable, triggered a deeper inquiry into these concepts. The outcome of this analysis highlights three distinct classifications: non-taxable, taxable, and exempt supplies.
It is important to emphasize at the outset that the statutory definition of “exempt” under the Act does not include non-taxable supplies. Therefore, any interpretation that merges these two categories is legally flawed and potentially misleading.
- Non-Taxable Supplies – A Pre-Charge Concept
Non-taxability represents a stage prior to imposition of charge. It applies to supplies or transactions that do not fall within the statutory definition of “goods” as defined under the Constitution, the Sale of Goods Act, 1930, or the Sales Tax Act, 1990. Consider the following legal definitions:
- Article 260 of the Constitution of Pakistan, 1973:
“Goods” includes all materials, commodities, and articles.
- Section 2(7) of the Sale of Goods Act, 1930:
“Goods” means every kind of movable property other than actionable claims and money; and includes electricity, water, gas, stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.
- Section 2(12) of the Sales Tax Act, 1990:
“Goods” include every kind of movable property other than actionable claims, money, stocks, shares and securities.
It is clear from the above that while the Constitution and the Sale of Goods Act, 1930 adopt broad definitions (including stocks and shares), the Sales Tax Act, 1990 specifically excludes actionable claims, stocks, shares, and securities from its definition of goods. Consequently, these items are outside the chargeability framework of the Act and are thus non-taxable. They are not taxable, nor are they exempt—they simply fall outside the scope of the Act.
- Exempt Supplies – Taxable by Nature, but Relieved by Law
Exempt supplies, on the other hand, are those that would otherwise be taxable, but have been specifically exempted by law—primarily under Section 13 of the Act or through a valid notification. Section 13 reads as follows:
- Exemption. – (1) Notwithstanding the provisions of section 3, supply of goods or import of goods specified in the Sixth Schedule shall, subject to such conditions as may be specified by the Federal Government], be exempt from tax under this Act.
(2) Notwithstanding the provisions of sub-section (1)-
(a) the Federal Government may, whenever circumstances exist to take immediate action for the purposes of national security, natural disaster, national food security in emergency situations and implementation of bilateral and multilateral agreements, by notification in the official Gazette, exempt any supplies made or imports, of any goods or class of goods from the whole or any part of the tax chargeable under this Act, subject to the conditions and limitations specified therein;
(b) …
(3) The exemption from tax chargeable under sub-section (2) may be allowed from any previous date specified in the notification issued under clause (a)
(4) …..
(5) …..
(6) The Board shall place before the National Assembly all notifications issued under this section in a financial year.
(7) Any notification issued under sub-section (2), after 1st July, 2015 shall, if not earlier rescinded, stand rescinded on the expiry of the financial year in which it was issued.
Thus, an exempt supply is one that falls within the general taxable base but is relieved from tax through policy-based exemptions.
III. Taxable Supplies – Default Category Subject to Charge
Supplies that are:
- Covered under the definition of “goods” under Section 2(12),
- Not excluded by the Act,
- Not exempt under Section 13 or by notification,
are classified as taxable supplies. These are subject to sales tax under Section 3 and give rise to input tax entitlements, subject to the limitations provided in Section 8.
- Input Tax Adjustment and Pro-Ration Under Section 8(2)
Section 8(2) deals with input tax adjustment in cases involving both taxable and non-taxable supplies. The relevant excerpt is:
(2) If a registered person deals in taxable and non-taxable supplies, he can reclaim only such proportion of input tax as is attributable to taxable supplies in the manner prescribed by the Board.
Notably, the provision does not mention exempt supplies. Yet, Rule 25 of the Sales Tax Rules, 2006 provides for proration of input tax between taxable and exempt supplies using the following formula:
Input Tax on Taxable Supplies = (Value of taxable supplies / (Total value of taxable + exempt supplies)) × Residual input tax
This creates a statutory inconsistency. Since Section 8(2) does not authorize proration involving exempt supplies, the rule exceeds the authority granted under the statute. Accordingly, Rule 25 is ultra vires to the extent it incorporates exempt supplies into the proration mechanism.
- Comparative Analysis – Pakistan vs. India
A comparison with Indian law further underscores the distinction:
- Pakistan – Section 2(11), Sales Tax Act, 1990:
“Exempt supply” means a supply which is exempt from tax under section 13.
- India – Section 2(47), Central Goods and Services Tax Act, 2017:
“Exempt supply” means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt under section 11, or under section 6 of the Integrated GST Act, and includes non-taxable supply.
In India, non-taxable supplies are legally subsumed within exempt supplies, while in Pakistan, the two are expressly distinct. The Pakistani legislature did not include non-taxable supplies in the definition of exempt supply, and no interpretation or delegated rule can override that legislative omission.
- Key Conclusions
From the above analysis, the following conclusions are inevitable:
- Non-taxable supplies are not exempt supplies under the Sales Tax Act, 1990;
- Section 8(2) applies only to taxable and non-taxable supplies, and does not apply to exempt supplies;
- Rule 25 of the Sales Tax Rules, 2006, to the extent that it assumes proration between taxable and exempt supplies, is ultra vires and without statutory backing.
This distinction is not merely academic—it has real implications for taxpayers, auditors, and adjudicating authorities alike. Correct classification impacts tax chargeability, input tax entitlements, and legal compliance. Any conflation of exempt and non-taxable categories may lead to incorrect tax treatment and adverse consequences under audit or litigation.
Syed Muhammad Ijaz, FCA (ICAP), ACA (ICAEW), LL.B., is a Partner at Huzaima & Ikram with over 25 years of expertise in finance, tax, and corporate law. As a Chartered Accountant and Advocate of the High Court, he is dedicated to making significant contributions to Pakistan’s financial and legal sectors.
[1] Spl. Sales Tax Ref. No.279 of 2007– Collector of Sales Tax and Federal Excise vs. M/s. Abbott Laboratories (Pakistan) Ltd. “…. He also readout the provision which relates to the taxable activities as provided under Section 2(41) of the Act i.e. taxable supplies. According to the learned counsel, every supply is taxable unless it is specifically exempted under Section 13 of the Act……”