When is input tax disallowed because of the supplier, such as fake invoices, unpaid tax or a blacklisted or non-active supplier?

A buyer’s input tax depends on the supplier as well as on the buyer’s own records. A valid tax invoice and a genuine purchase are not always enough. The Sales Tax Act, 1990 and the Sales Tax Rules, 2006 disallow input tax in several cases that turn on what the supplier did or failed to do.

What does the law say?

Section 8(1) of the Act lists purchases on which a registered person “shall not be entitled to reclaim or deduct input tax”. The supplier-related clauses are:

Clause	Input tax is barred on
8(1)(ca)	goods or services where the supplier has not deposited the sales tax in the Government treasury
8(1)(caa)	purchases where CREST shows a discrepancy, or where the input tax cannot be verified in the supply chain
8(1)(d)	fake invoices
8(1)(l)	from a date notified by the Board, supplies the supplier did not declare in his return, or on which he did not pay the tax due shown in it

Section 21 adds a separate rule for suspended and blacklisted suppliers. Under section 21(3), while a supplier’s registration is suspended, his invoices “shall not be entertained” for refund or input tax credit. Once he is blacklisted, input tax or refund claimed against his invoices, “whether prior or after such black listing”, is to be rejected. The rejection must come through a self-speaking appealable order, after the buyer has had an opportunity of being heard.

How does a non-active supplier affect my claim?

Section 2(1A) of the Act defines an “active taxpayer”. A registered person falls outside the definition if he:

• is blacklisted or has his registration suspended under section 21;
• fails to file his sales tax return by the due date for two consecutive tax periods;
• fails to file his income tax return or statement under the Income Tax Ordinance, 2001 by the due date; or
• fails to file a quarterly or annual withholding tax statement under that Ordinance.

Under rule 12A of the Sales Tax Rules, such a person automatically becomes non-active and is removed from the active taxpayers list. A non-active taxpayer may not issue sales tax invoices. Rule 12A(3) says no person shall make purchases from a non-active taxpayer. Under rule 12A(4), when a buyer enters a non-active supplier’s invoice in Annexure-A of the return, a message appears saying no input tax credit is admissible against it.

Rule 12A still refers to “clause (1) of section 2”. The Finance Act, 2025 renumbered that definition as clause (1A). The rules in this corpus, amended to 30 June 2025, do not show a matching update.

How does it work in practice?

Rule 12 sets out the suspension and blacklisting procedure, and it reaches buyers directly:

• During suspension: rule 12(a)(v) says no input tax or refund is allowed to other registered persons on the suspended supplier’s invoices, “whether issued prior to or after such suspension”, during the currency of suspension.
• On blacklisting: rule 12(b)(ii) requires the blacklisting order to state the period for which input tax or refund claimed on the supplier’s invoices “from the date of his registration” is inadmissible.
• Buyer’s notice: under rule 12(b)(v) and (vi), a system-generated list of the blacklisted supplier’s invoices goes to the officers with jurisdiction over the buyers. The officer then issues the buyer a show cause notice and decides through a self-speaking appealable order after a hearing, as section 21(3) requires. Rule 12(b)(vi) still names section 11 of the Act as one basis for that notice, although the Act in this corpus shows section 11 as omitted by the Finance Act, 2024.

Separately, section 21(4) lets the Board, the Commissioner or an authorised officer block refunds or input tax adjustments of a person believed to be issuing fake or flying invoices or claiming fraudulent input tax, after recording reasons in writing.

Section 8A can also make the buyer liable for the supplier’s unpaid tax. It applies where a buyer knows, or has reasonable grounds to suspect, that tax on the supply, or on an earlier or later supply of the same goods, would go unpaid. Section 8A places the burden of proving that knowledge on the department.

Worked example (illustrative figures)

A weaving unit in Faisalabad buys yarn from a registered spinner in October, November and December 2026. It claims input tax of Rs. 420,000, Rs. 380,000 and Rs. 500,000 on those invoices, a total of Rs. 1,300,000. In March 2027 the spinner is blacklisted.

1. Section 21(3) covers invoices issued “prior or after” blacklisting, so all three months are exposed, not only purchases after March.
2. The blacklisting order states the period of inadmissibility, which rule 12(b)(ii) allows to run from the spinner’s date of registration.
3. The weaving unit receives a show cause notice, and any rejection of the Rs. 1,300,000 must be through a self-speaking appealable order after a hearing.
4. Had the unit bought from the spinner during an earlier suspension, rule 12(a)(v) would already have barred those claims during the suspension.

What if the supplier is restored?

Rule 12A, through the text headed 12B, lets a non-active taxpayer be restored as active. He must file the missing return or statement with any tax due, the RTO or LTO must recommend restoration after any audit or investigation it needs, and the Board must issue an order. For a suspension, the Commissioner may revoke it after the supplier’s reply and hearing. The rules in this corpus do not say whether a buyer’s claims that were not entertained during a revoked suspension are then re-admitted. They are silent on that point.

Common mistakes

• Assuming an older invoice is safe. Section 21(3) reaches invoices issued before blacklisting.
• Relying on the invoice alone. Section 8(1)(caa) disallows input tax that is not verifiable in the supply chain, even on an invoice that looks valid.
• Buying from a non-active supplier. Rule 12A(3) prohibits the purchase, and the return itself flags the invoice.

What to check in the official text

• Section 8(1)(ca), (caa), (d) and (l), and section 8A of the Sales Tax Act, 1990.
• Section 21(3) and (4) of the Act, and section 2(1A) for the active taxpayer definition.
• Rules 12 and 12A of the Sales Tax Rules, 2006.
• Whether the Board has notified the start date for section 8(1)(l). That notification is not in this corpus.