The Federal Constitutional Court (FCC) has invalidated the 4 percent additional sales tax imposed on poultry feed manufacturers who supply feed to poultry farms not registered for sales tax. This ruling, delivered by a two-judge bench led by Justice Aamer Farooq and Justice Muhammad Karim Khan Agha, represents a significant setback to government revenue plans just days before the federal budget presentation.
The court’s detailed verdict overturned a prior Lahore High Court decision and dismissed tax demands issued by the Federal Board of Revenue (FBR). The controversy centered on Section 3(1A) of the Sales Tax Act, 1990, which mandates a further 4 percent tax on taxable supplies made to unregistered persons.
Tax officials had maintained that poultry feed producers were liable for this tax because their customers, the poultry farmers, lacked sales tax registration. However, the manufacturers contested this, citing Section 13 of the Sales Tax Act that exempts poultry farmers from sales tax and registration requirements.
The FCC found a flaw in the tax authorities’ interpretation, clarifying that Section 3(1A) is designed to encourage registration among businesses legally obligated to register but who have not done so. It is not meant to penalize those explicitly exempt from registration under the law.
“The intent of the further tax provision targets non-registered taxable persons who are otherwise required to be registered,” the court observed. It noted that poultry farmers benefit from a statutory exemption and thus are not legally required to register for sales tax.
Since these farmers have no registration obligation, the court ruled that neither they nor the feed manufacturers supplying them should face penalties for non-registration. The judgment highlighted that imposing the additional tax on feed producers would effectively shift the financial burden onto poultry farmers through increased feed costs, contradicting the legislative purpose of the exemption.
The bench also pointed out ambiguities within Section 3(1A), emphasizing that tax laws imposing liabilities must be strictly construed, and any doubts should favor taxpayers. This approach aligns with a 2021 Supreme Court ruling in Muhammad Arif Ice Factory v Federation of Pakistan, which barred further tax imposition on sectors enjoying statutory exemptions.
Consequently, the FCC converted the petitions into appeals, allowed them, and set aside the Lahore High Court’s earlier ruling that had supported the tax authorities. This decision is expected to relieve poultry feed manufacturers and farmers, who have been burdened by rising production costs amid escalating feed, energy, and transportation expenses.
Moreover, the ruling may influence how further tax provisions are interpreted in cases involving exempt sectors and unregistered entities not legally required to register under Pakistan’s sales tax framework.
This judgment arrives at a critical juncture as the government finalizes revenue strategies ahead of the federal budget scheduled for June 5. The administration is under pressure to enhance tax collection and broaden the tax base in line with economic reform commitments.
