Pharmaceutical giant Bayer Pakistan wins tax refund case

March 21, 2024 (MLN): In a significant development within the pharmaceutical industry, the Commissioner Inland Revenue (Appeals), Karachi recently rendered a decision in favor of Bayer Pakistan (Private) Limited concerning sales tax refunds on inventory, said a document by Maven Minds, the tax law advisor of the case.

The case centered on the refund claim of input tax on the closing inventory of raw materials, packaging materials, and other direct inputs acquired during a zero-rated period for pharmaceutical products.

At the heart of the matter was the pivotal question of whether the company's refund claim for inventory purchased until June 30, 2022 complies with the relevant provisions of the Sales Tax Act, 1990.

This issue sought a resolution in light of the circumstances that, following the sudden change of regime from zero-rated to reduced rate for pharmaceutical supplies vide the Finance Act, 2022, the aforementioned inventory could not be utilized for making zero-rated pharmaceutical supplies despite being procured for that purpose.

“Under the leadership of Adnan Ali Khan, Partner – Maven Minds and through his legal and consultative efforts, we successfully advocated for the rightful refund of sales tax on such inventory,” it said.

This achievement establishes a crucial and precedent-setting milestone for similar cases within the pharmaceutical industry

Case Background

On January 15, 2022, the Federal Government, through Finance (Supplementary) Act, 2022, introduced zero-rated regime for pharma sector which was earlier exempt from sales tax.

This entitled the pharma industry to claim refunds of input tax paid on purchases of raw materials, packing materials and other direct inputs.

The zero-rated regime remained in place until June 30, 2022, after which it was discontinued, and from July 01, 2022, a reduced-rate system was implemented for the pharmaceutical sector under the Finance Act, 2022.

This reduced rate regime bars the claim of input tax.

The appellant (Bayer Pakistan (Private) Limited), engaged in the production and supply of pharmaceutical products and drugs, accumulated a substantial input tax on their taxable purchases until June 30, 2022.

In June 2022, they submitted a refund request for the entire input tax related to the pharma, which was denied by the tax officer.

The officer reasoned that the claim was excessive as it pertained to inventory that had not been utilized in making zero-rated pharmaceutical supplies.

The denial was based on the argument that despite acquiring and paying taxes on these inventories prior to 30 June 2022, they were no longer eligible for a refund as these inventories were actually consumed in making reduced rate pharma supplies and exceeding board’s limit as well.

This was a consequence of the subsequent inclusion of pharmaceuticals and drugs in the reduced-rate taxation framework as per the Finance Act, 2022, which disallows the claim of input tax.

The arguments of the case put before the Commissioner Inland Revenue (Appeals), Karachi were that the appellant’s claim for a refund on inventory in June 2022, related to pharma supplies, which were subsequently subjected to the reduced rate regime, is in accordance with Section 7(1) and 10(1) of the Sales Tax Act, 1990.

The goods for which they paid input tax during the zero-rated period were specifically intended for making zero-rated pharmaceutical supplies.

When they procured these goods and paid the input tax, their sole intention was to use these purchases in making zero-rated taxable supplies.

Therefore, regardless of the later inclusion of pharmaceuticals and drugs under the reduced rate regime through the Finance Act, 2022, the entirety of the input tax associated to the closing stock of tax-paid acquisitions until 30 June 2022 remains eligible for a refund under Section 7(1) & 10(1) of the Sales Tax Act, 1990.

The appellant emphasized that the combined effect of Section 7(1) and Section 10(1) of the Sales Tax Act, 1990 is evident: the adjustment or refund of input tax applies to all taxable goods purchased for production or sale, without any restriction on the goods consumed during the tax period or board's ceiling.

This vested right cannot be negated, cancelled, restricted or denied by any executive authority, except through a change in the law itself.

Following thorough deliberation and hearing from both parties, the Commissioner Inland Revenue (Appeals), Karachi has upheld the arguments and contentions presented by the appellant, ruling in their favor.

The Commissioner Inland Revenue (Appeals), Karachi affirmed the legitimacy of the appellant's inventory claim and acknowledged the unjustified dismissal of the refund claim by the assessing officer.

As a result, the assessment order denying the refund has been adjudged unsustainable.

Additionally, the Commissioner Inland Revenue (Appeals), Karachi has instructed the processing of the aforementioned refund claim in accordance with the Sales Tax Act, 1990.

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