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The Legislative Amendments do not apply Retroactively unless stated, protecting businesses from Unexpected Liabilities --- Lahore High Court, Lahore

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The Legislative Amendments do not apply Retroactively unless stated, protecting businesses from Unexpected Liabilities --- Lahore High Court, Lahore

Islamabad 12-11-2024: The Lahore High Court’s Multan Bench recently issued a significant decision in [STR No. 43/2023], a case involving M/s Rafhan Maize Products Co. Ltd. and the Inland Revenue Appellate Tribunal. The Court addressed key legal questions on the imposition of further tax under the Sales Tax Act, 1990, particularly focusing on whether further tax applies retroactively and the treatment of supplies made to non-filing registered persons. This judgment has brought clarity on multiple aspects of tax law, particularly for companies operating under the Sales Tax Act.

The Court clarified that simply holding a registration number does not exempt a person from further tax obligations. For such an exemption, the registration must be effective, operative, and free from any legal disability (like suspension or blacklisting) at the time of taxable transactions. The Court rejected the argument that merely obtaining a registration number suffices, emphasizing that only active, valid registrations can qualify for tax exemptions.

The Court dismissed the petitioner’s argument that an amendment to Section 3(1A) of the Sales Tax Act, introduced by the Finance Act 2022, should apply to tax periods dating back to 2013-2014. The Court reaffirmed the principle that legislative amendments generally do not apply retroactively unless expressly provided, thereby safeguarding taxpayers from unexpected liabilities.

A central issue was whether the company’s clients, who had failed to file tax returns, could be considered non-compliant and thus subject to further tax. The Court found that non-filing alone does not immediately disqualify a registration unless it leads to a statutory default. Since the Appellate Tribunal had not investigated whether non-filers had reached this level of non-compliance, the Court remanded the case to the ATIR for further fact-finding on this specific issue.

The Lahore High Court’s order mandates that the Appellate Tribunal Inland Revenue re-evaluate whether recipients who failed to file returns had become legally non-compliant at the time of the transactions in question. If determined to be in statutory default, further tax obligations may indeed apply. This remand decision highlights the Court’s emphasis on precise factual determinations in tax cases, especially where compliance status directly affects tax liability.

To ensure procedural adherence, the Court directed that a copy of the judgment be sent to the Appellate Tribunal under Section 47(5) of the Sales Tax Act. This procedural step underscores the Court’s intent to ensure timely compliance with its order and facilitates the ATIR’s re-evaluation process.

This decision is expected to have a broad impact on companies navigating sales tax obligations, particularly those dealing with registered persons whose tax compliance may be inconsistent. It reinforces the need for taxpayers to maintain not only a registration number but an active, compliant status to benefit from tax exemptions. Additionally, the judgment limits the retroactive application of legislative amendments, providing certainty for businesses regarding their historical tax liabilities.