How does FBR fix allowable wastage for a manufacturer, and how does it limit input tax on wasted material?

A mill that loses more of its raw material than the Board allows for its process cannot claim input tax on that extra loss. The limit is not a figure in the Act. It comes from a notified wastage extent, worked out through a procedure in Chapter IV-A of the Sales Tax Rules, 2006.

What does the law say?

Chapter IV-A, titled the Sales Tax (Imposition of Restrictions) on Wastages of Inputs Rules, 2020, was inserted into the Sales Tax Rules by S.R.O. 938(I)/2020 dated 1 October 2020. It runs from rule 25A to rule 25K.

• Rule 25A (application): the Chapter applies to determining the restriction on wastage of material on which input tax has been claimed, for goods or classes of goods.
• Rule 25B (definitions): “inputs” include electricity, raw materials and processed, semi-finished or finished products used in manufacturing. “Wastage” means the part of an input that is unfit or unable for use in making the corresponding output. “IOCO” is the Input Output Co-Efficient Organization. Section 30DDD of the Sales Tax Act, 1990 establishes the Directorate General of IOCO (Inland Revenue).
• Rule 25C (purpose): wastage is determined to restrict inputs, to resolve disputes where input tax is suspected of being above actual entitlement because consumption was overstated, or to fix the extent of wastage beyond which input tax adjustment is not admissible.
• Rule 25G (the restriction): once the Board has fixed and notified a wastage extent, no registered person may take input tax adjustment on wasted inputs above it.

How does FBR decide the allowable wastage?

Who starts it. Under rule 25D, the Board may start the exercise itself, or on a reference from a Chief Commissioner of Inland Revenue, the Director General of Intelligence and Investigation (Inland Revenue), or on the recommendation of a Government agency or an industrial or business association.

Preliminary study. Rule 25E(1) requires a preliminary study through a field formation. It covers the full range of inputs and outputs, the manufacturing process, the plant and machinery used, general or special wastage standards and known input-output ratios. Where a Chief Commissioner or the Director General makes the reference, rule 25E(2) makes them arrange the study and send its results with the reference.

IOCO analysis. The Board may then refer the case to IOCO to determine the extent of wastage of each input by working out input-output ratios. Rule 25F requires IOCO to plan the work within the Board’s timeframe. The plan covers input and output specifications, process and machinery details, literature, subject specialists, industrial units to visit, office bearers of the relevant association to consult, resources and timelines.

Outside opinion. Rule 25H lets the Board or IOCO seek scientific or technical opinion from an outside expert. No such opinion is conclusive or binding.

Notification. Rule 25E(1) ends with the Board notifying the extent of wastage beyond which input tax adjustment on those inputs is not allowed.

What happens to wastage above the notified limit?

Three rules work together:

Rule	Effect
25G	No input tax adjustment on wasted inputs above the notified extent
25I	The limit applies whether the output is taxable, zero-rated, domestic or exported. No refund on the excess where goods are zero-rated
25J	Wastage above the limit is treated as restricted and not relevant for assessment, declaration and payment of sales tax

For a textile exporter, rule 25I matters most. Zero-rating an export does not lift the restriction. The input tax on excess wastage is neither adjustable nor refundable.

Worked example (illustrative figures)

The figures below are invented, including the wastage limit. No notified textile wastage figure is in this corpus.

A spinning unit in Faisalabad buys 50,000 kg of polyester staple fibre in a month. The input tax on its purchase invoices is Rs. 1,800,000, which works out to Rs. 36 per kg. It produces 42,000 kg of yarn. Assume the Board has notified 10% wastage for this input and process.

Step	Working	Result
Actual wastage	50,000 kg minus 42,000 kg	8,000 kg (16%)
Allowed wastage at the assumed 10%	50,000 kg × 10%	5,000 kg
Excess wastage	8,000 kg minus 5,000 kg	3,000 kg
Input tax on excess	3,000 kg × Rs. 36	Rs. 108,000
Input tax still claimable, subject to other limits	Rs. 1,800,000 minus Rs. 108,000	Rs. 1,692,000

Under rule 25G, the Rs. 108,000 cannot be adjusted. If the yarn were exported, rule 25I would stop it being refunded as well. The Rs. 1,692,000 is not automatically allowed either. Other input tax restrictions in the Act still apply to it. How a notification expresses its ratio (per kilogram, per unit, or as a percentage) depends on that notification.

What if no wastage limit has been notified for my product?

Rule 25G applies only “where the extent of wastages has been fixed and notified by the Board”. The rules do not set a default limit for goods without a notification. Rule 25C does describe the exercise as a way to resolve disputes where consumption of inputs is suspected of being overstated, so an unnotified product can still become the subject of a determination started under rule 25D.

What if the process or machinery has changed since the limit was fixed?

Rule 25K lets the Board review and revise a fixed limit, either on its own or on a representation from an aggrieved person. The rule names technological developments and changes or improvements in industrial processes as grounds. The rules do not set a timeline for deciding a representation.

Common mistakes

• Treating the limit as a cap on actual wastage. A mill may lose more material than the limit. The rules only deny input tax on the excess.
• Assuming exports escape the limit. Rule 25I applies the fixed wastage “regardless of the status of supplies” and bars refunds on the excess for zero-rated goods.
• Assuming an expert report settles the figure. Rule 25H says outside opinion is not conclusive or binding on the fixation.

What to check in the official text

• Rules 25A to 25K of the Sales Tax Rules, 2006, as amended to 30 June 2025.
• The Board notification fixing wastage for your specific input, output and process. Those notifications are not held in this corpus, so no rate is given here.
• Section 30DDD of the Sales Tax Act, 1990 on the IOCO directorate, and any Board notification setting out its functions.