Which purchases can a registered manufacturer claim as input tax, including sales tax on industrial electricity and gas bills?

A registered mill can deduct the sales tax it paid on inputs used for its taxable supplies, such as yarn, dyes, packing material and industrial electricity and gas, from the output tax it charges. The claim depends on paperwork in the mill’s own name and registration number, a time window, and a list of purchases that section 8 excludes outright.

What does the law say?

What counts as input tax. Section 2(14) defines input tax to include sales tax levied under the Act on goods supplied to the person and on goods the person imports, federal excise duty charged in sales tax mode, and provincial sales tax on services received (except services the Board excludes by notification).

The right to deduct. Section 7(1) lets a registered person deduct input tax paid or payable during the tax period “for the purpose of taxable supplies made, or to be made, by him” from the output tax due, subject to sections 8, 8B and 73. The proviso adds that input tax not deducted in the relevant period may be claimed “in the return for any of the six succeeding tax periods”.

The paperwork. Section 7(2) says no input tax may be deducted unless the person holds:

Purchase	Document required by section 7(2)
Local purchase of goods	A tax invoice in his name and bearing his registration number
Electricity or gas	A bill bearing his registration number and the address where the connection is installed
Imports	A goods declaration in his name showing his registration number, cleared under section 79, 81 or 104 of the Customs Act
Goods bought at auction	A treasury challan in his name and registration number showing sales tax paid

A proviso adds that, from a date the Board notifies, the claim is also lost if the supplier has not declared the supply in its return or has not paid the tax due.

Which purchases never qualify?

Section 8(1) says a registered person “shall not be entitled to reclaim or deduct input tax” on, among others:

• (a) goods or services used for any purpose other than taxable supplies
• (ca) goods or services where the supplier has not deposited the sales tax
• (caa) purchases where CREST shows a discrepancy or the input tax is not verifiable in the supply chain
• (d) fake invoices
• (f) goods and services not related to the taxable supplies made
• (g) goods and services acquired for personal or non-business consumption
• (h) building and construction materials, paints, electrical and sanitary fittings, pipes, wires and cables used in or attached to immoveable property, excluding pre-fabricated buildings and goods for re-sale or direct use in manufacture
• (i) vehicles of Chapter 87 and their parts, electrical and gas appliances, furniture, furnishings and office equipment (other than electronic cash registers), unless acquired for sale or re-sale
• (l) from a date the Board notifies, supplies the supplier has not declared or paid tax on

Section 8(2) adds that a person making both taxable and non-taxable supplies can reclaim only the proportion of input tax attributable to taxable supplies.

How does it work for electricity and gas?

The industrial electricity or gas bill takes the place of the tax invoice, but only if it bears the mill’s registration number and the address of the connection. Rule 22A of the Sales Tax Rules lets distribution companies correct past bills in a later month instead of issuing debit or credit notes, and says the buyer “shall not claim input tax credit in excess of the sales tax amount actually paid against such bills”.

Section 73(1) normally requires payments above Rs. 50,000 in aggregate to a single supplier in a tax period to go through the banking channel, but it expressly excludes “payment against a utility bill”.

Worked example (illustrative figures)

A registered processing mill in Multan reviews its purchases for October:

Purchase	Sales tax on document	Claimable?	Reason
Grey cloth, invoice in mill’s name and registration number	Rs. 1,800,000	Yes	Section 7(2)(i)
Industrial electricity bill with registration number and mill address	Rs. 540,000	Yes	Section 7(2)(i)
Industrial gas bill with registration number and mill address	Rs. 216,000	Yes	Section 7(2)(i)
Electricity bill for the owner’s house	Rs. 30,000	No	Section 8(1)(g), and no registration number on the bill
New car for the general manager	Rs. 450,000	No	Section 8(1)(i)

Claimable input tax = Rs. 1,800,000 + Rs. 540,000 + Rs. 216,000 = Rs. 2,556,000. The Rs. 480,000 on the house bill and the car is not claimable.

If an August dye invoice was missed, the proviso to section 7(1) lets it be claimed in any of the six succeeding tax periods, September to February.

The Rs. 2,556,000 is then subject to section 8B, which does not let input tax adjusted in a tax period exceed 90 percent of output tax (other than on fixed assets or capital goods). That cap is covered on a separate page.

Common mistakes

• Utility bills in an old name. Section 7(2)(i) requires the registration number on the bill. A connection still in a previous owner’s name does not meet those words.
• Claiming colony or residence bills. Personal or non-business consumption is barred by section 8(1)(g).
• Assuming a valid invoice is enough. Section 8(1)(ca), (caa) and (l) look at whether the supplier deposited and declared the tax.
• Paying suppliers in cash. Section 73(2) denies input tax where a payment that section 73(1) requires through a bank was made otherwise.

What to check in the official text

Read sections 2(14), 7, 8, 8B and 73 of the Sales Tax Act and rule 22A of the Sales Tax Rules. Check whether the Board has notified the dates for the section 7(2)(i) proviso and section 8(1)(l); those notifications are not in this corpus. Wastage limits under section 7(5) are covered on a separate page.