with IR M/S Zalan Logistics Vs Federation of Pakistan and 10 others

PESHAWAR HIGH COURT, PESHAWAR

(JUDICIAL DEPARTMENT)

W.P No.12-P/2026 with I.R

M/S Zalan Logistics

...........................Petitioner.

Versus

Federation of Pakistan and 10 others.

......................Respondents.

For the Petitioner: Mian Naveed Gul Kakakhel, Advocate.

For the Respondents: Barrister Rahat Ali Khan Nahaqi, for respondents No.8 and Barrister S. Ahsan Ali Shah, for respondents No.9 and 10 alfongwith Mr. Umair Jamal, Advocate/Legal Advisor, FBR.

Date of Hearing: 21.05.2026.

JUDGMENT

SYED ARSHAD ALI, J.- M/s Zalan Logistics, a proprietorship concern owned by Akhtar Muhammad, is a registered person under the Sales Tax Act, 1990 ("the Act") as well as the Income Tax Ordinance, 2001 ("the Ordinance").

2.It is averred in the petition that the petitioner is engaged in the import of fresh fruits and vegetables from Afghanistan through Torkham. The import of fresh fruits and vegetables is subject to the levy of normal sales tax at the rate of 18% under the Act. However, such imports are also subjected to the levy of Value Added Tax ("VAT") at the rate of 3%, notwithstanding the fact that the local supply of fresh fruits and vegetables is exempt from sales tax in terms of Entry Nos. 45 and 46 of Table-II of the Sixth Schedule to the Act.

3.It is the petitioner's contention that the object of imposing VAT/Additional Sales Tax ("AST") is to collect a minimum value added tax on the subsequent supplies made by importers, and that such tax is collected in lieu of the sales tax otherwise payable on local supplies. Since the local supply of fresh fruits and vegetables is exempt from the levy of sales tax under Table-II of the Sixth Schedule to the Act, the petitioner contends that it is not liable to pay VAT/AST at the rate of

4.Through the instant petition, the petitioner seeks a declaration that the respondents are not entitled to levy or collect VAT/AST at the import stage in respect of goods whose subsequent local supply is exempt from sales tax.

5.The respondents have filed their para-wise comments, wherein they contend that the minimum value addition tax collected at the import stage from commercial importers constitutes input tax under Clause (iii) of the Twelfth Schedule to the Act, and is, therefore, not adjustable, being minimum tax. They further contend that, in terms of Section 13 of the Act, input tax attributable to exempt supplies is neither adjustable nor available for carry forward.

Opinion of the Court

6.The Act establishes Pakistan's sales tax regime on the VAT model, albeit with certain exceptions. Under the VAT system, sales tax is charged at each stage of the supply chain as goods move from the point of origin to the ultimate destination. At every stage, sales tax is levied on the value added by the supplier concerned. This is achieved by deducting the sales tax paid by the supplier on the goods purchased by him (known as "input tax") from the sales tax charged by him on the goods supplied by him (known as "output tax"). If the difference between the output tax and the

input tax is positive during the relevant tax period, i.e., where the output tax exceeds the input tax, the supplier is liable to pay the differential amount to the State. Conversely, if the difference is negative, i.e., where the input tax exceeds the output tax, the supplier is entitled either to a refund of the excess amount or to carry it forward for adjustment against the tax liability of a subsequent tax period.1

7.Section 3 of the Act is a charging section envisaging the imposition of sales tax at the rate of 18% of the value of:-

(a)Taxable supplies made by a registered person (b) Goods imported into Pakistan irrespective of their final destination in territories of Pakistan.

The charging section, indeed, contemplates two distinct taxable events, namely, the import of goods and the making of taxable supplies. However, any tax paid at the import stage is, subject to the restrictions contained in Section 8 of the Act, adjustable against the tax payable on subsequent taxable supplies in the supply chain under the VAT system discussed above.

8.Section 7A of the Act was inserted through the Finance Act, 2003. Prior to the amendments introduced by the Finance Act, 2019 further amending Section 7-A; it envisaged two distinct modalities of value addition taxation. Sub-section (1) empowered the Federal Government to specify, by notification, that the sales tax chargeable on the supply of goods of a particular description or class shall "be levied and collected on the difference between the value of supply for which the goods are acquired and the value of supply for which the goods, either in the same state or after further manufacture, are supplied." This was a value addition scheme under which the tax was computed on the predetermined Para-7 of Commissioner Inland Revenue Multan Vs. Acro Spinning and Weaving Mills Ltd, Multan and others (2021 SCMR 1308) .

difference between the acquisition value and the subsequent supply value of the goods.

9.The Sindh High Court in New Allied Electronics Industries (Pvt.) Ltd2 addressed this issue in the context of Rule 58B of the Sales Tax Special Procedure Rules, 2007, which levied 3% minimum value addition tax on imports. The court articulated a fundamental distinction between "import" and "supply" as separate taxable events, holding that "as soon as the importer on arrival of his goods at the port is charged with the sales tax, the event to the extent of import gets complete, and then next event relating to the supply of goods starts that under the law is independently taxable and cannot be intertwined or mingled with the imports”. The Court further held that value addition tax, which is inherently tied to the concept of supply, cannot be triggered at the import stage. Section 7A provides for "levy and collection of tax on specified goods on value addition," and "a bare reading of foregoing provisions denotes that levy of value addition tax is interrelated and subjected to the event of supply of goods." Consequently, Rule 58B, which imposed value addition tax at the import stage, was held to be inconsistent with the Act and struck down.

10.The Finance Act, 2019, marked a significant shift in the Section 7A regime. Subsection (2) was substituted with new text referencing the Twelfth Schedule, which now provides the detailed mechanism for minimum value addition tax. The substituted provision reads: "Notwithstanding anything contained in this Act or the rules made thereunder, in respect of the goods or class of goods specified in the Twelfth Schedule, the minimum value addition tax, against the value New Allied Electronics Industries (Pvt.) Ltd. v. Federation of Pakistan (2017 PTD

added by the registered person, shall be payable, at the rate and by the registered persons or class of registered persons, specified therein, subject to the conditions, limitations, restrictions and procedure specified therein”. The Twelfth Schedule, in its current form, specifies that all imported goods subject to certain exclusions shall be subject to value addition tax at 3% ad valorem. This represents a standardized rate applied at the import stage, with specific exclusions including raw materials and intermediary goods imported by manufacturers for in-house consumption, petroleum products imported by licensed Oil Marketing Companies, registered service providers importing goods for in-house business use, cellular mobile phones, and "plant, machinery and equipment falling in Chapters 84 and 85 of the First Schedule to the Customs Act, 1969, as are imported by a manufacturer for in-house installation or use.”

11.The first condition for the levy of value addition tax under the Twelfth Schedule is that such additional tax shall be levied and collected at the import stage from importers on taxable goods that are chargeable to tax under Section 3 of the Act. Clause (iii) of the Twelfth Schedule further provides that the value addition tax paid at the import stage shall form part of the input tax, and the importer shall be entitled to deduct the same from the output tax due for the relevant tax period, subject to the limitations and restrictions prescribed under the Act. The expression "taxable supply" is defined in Section 2(41) of the Act to mean a supply of taxable goods made by an importer, manufacturer, wholesaler, dealer, distributor, or retailer, other than a supply of goods exempt under Section 13, and includes a supply of goods chargeable to tax at the rate of zero per cent under Section 4. The expression "taxable goods" is defined in Section 2(39) of the Act to mean all goods other

than those that have been exempted from sales tax under Section 13 of the Act. Although fresh fruits and vegetables are taxable goods at the import stage, their subsequent local supply is exempt from sales tax. Consequently, when they are sold in the local market, such supplies do not fall within the definition of "taxable supply." The legal implication of this distinction shall be discussed later in this judgment.

12.The additional tax under Section 7A is collected from an importer against the subsequent value addition in the chain of local supplies. The Lahore High Court in Zahid Saleem’ case3 articulated this principle with clarity, holding that "the petitioners and similarly placed case they declared minimum value addition as specified by the Federal Government, they will not be subjected to any further probe and this was a promise given to them by subsection (2) of section 7A and cannot be withdrawn to their detriment through the promulgation of a notification at a later stage”.

13.The Court in Zahid Saleem struck down SRO 592(I)/2012, which had omitted sub-rule (2) of Rule 58E of the Sales Tax Special Procedure Rules, 2007—a provision that had exempted importers paying value addition tax from audit. The court held that the omission contravened the mandate of Section 7A (2), emphasizing that "the legislature had complete faith in those persons who declared minimum value addition prescribed as such and, therefore, waived its power to doubt the veracity of anything declared by those persons by resort to audit or scrutiny of records”.

14.The Sindh High Court, in Maq International’s case4, similarly applied this principle, holding that impugned audit notices issued prior to the Finance Act 2019 were unlawful.

Zahid Saleem v. Federation of Pakistan (2017 SLD 2819) Maq International v. Federation of Pakistan (2021)

The court noted that "the law, as stood at the pertinent time, duly provided for waiver from audit or scrutiny, if a taxpayer qualified per the Provision," and that it was "admitted position before us that the petitioners did in fact satisfy the requirements of the Provision." The respondents' reliance on Rule 58E (2), which had been repealed in 2012, was found unmerited, and the court set aside the impugned notices.

15.From the foregoing legal discussion, it is evident that the levy of additional tax under Section 7A(2), read with the Twelfth Schedule to the Act, constitutes a minimum value addition tax chargeable in lieu of tax on subsequent value addition in the supply chain. Part I of the Sixth Schedule to the Act enumerates the exemptions available at the import stage, whereas Part II sets out the exemptions applicable to local supplies. Fresh fruits and vegetables are specified at Entry Nos. 45 and 46 of Part II of the Sixth Schedule, which means that their local supply is exempt from the levy of sales tax. However, their import remains subject to the levy of sales tax, which, as discussed above, constitutes a separate taxable event. Therefore, the respondents are not entitled to levy additional tax under Section 7A of the Act from the importer at the import stage for two reasons. First, the additional tax is collected in lieu of tax on subsequent value addition in the supply chain. Once it is established that the subsequent local supply of fresh fruits and vegetables is exempt from sales tax, the question of collecting advance value addition tax does not arise. Secondly, the Twelfth Schedule expressly provides that the minimum value addition tax at the rate of 3% ad valorem is chargeable only on taxable goods imported by commercial importers. Although the goods are taxable at the stage of import, the value addition tax collected under the Twelfth Schedule is not imposed on the taxable event of import itself;

rather, it is levied in lieu of tax on subsequent value addition in the supply chain. Consequently, fresh fruits and vegetables, whose subsequent local supply is exempt from sales tax, do not fall within the expression "taxable goods" for the purposes of the Twelfth Schedule, read with Section 2(39) of the Act.

16.We have also considered the judgment of the Sindh High Court in Messrs Al-Zarina Glass Industries v. Federation of Pakistan (2018 PTD 1600) as well as the judgment of the Federal Constitutional Court of Pakistan in Shahzor Feeds (Pvt.) Ltd. v. Federation of Pakistan, dated 04.05.2026 passed in F.C.P.L.A. Nos. 202 to 204, 442 and 587 of 2026. The learned counsel for the petitioner has placed considerable reliance upon Messrs Al-Zarina Glass Industries. However, the learned counsel appearing on behalf of the Revenue has produced a subsequent judgment of the Sindh High Court dated 24.08.2023 passed in Constitutional Petition No. 7493 of 2021, wherein the Court declined to follow the law laid down in Messrs Al-Zarina Glass Industries, which had, in any event, already been set aside by the apex Court.

17.Although the ratio decidendi of the aforesaid judgments is not directly applicable to the controversy involved in the present case, they nevertheless provide valuable guidance regarding the interpretation of the charging provisions governing sales tax within the VAT supply chain. The controversy in Messrs Al-Zarina Glass Industries as well as Shahzor Feeds (Pvt.) Ltd. related to the interpretation of Section 3(1A) of the Act, which provides for the levy of further tax at the rate of 4% where taxable supplies are made to persons who are either unregistered or not active taxpayers.

18.Undoubtedly, the judgment in Messrs Al-Zarina Glass Industries was set aside by the apex Court in Civil Appeal No. 920 of 2018 through judgment dated 15.09.2022, though on

different grounds. The Sindh High Court had held that the levy of further tax under Section 3(1A) would not apply where the underlying supplies were exempt under Section 13 read with Entry No. 29-C of the Sixth Schedule, since such persons were not making taxable supplies within the meaning of Section 2(41) of the Act. Although that judgment was reversed, it was not on this point. We now have the authoritative pronouncement of the Federal Constitutional Court in Shahzor Feeds (Pvt.) Ltd., which, though not expressly referring to the reasoning in Messrs Al-Zarina Glass Industries, substantially reaffirms the same principle. For our guidance, we deem it appropriate to reproduce the relevant observations: “9. As noted above, anomaly exists in section 3(1A) inasmuch as on the plain reading of the provision, no exception has been created except as provided in the proviso to the subsection. It is an admitted position that poultry industry has not been exempted from payment of additional tax by the Federal Government though we were informed that time to time, various notifications have been issued by the Federal Government. Since, the plain reading of the provision is leading to absurdity or anomaly, we, as mentioned hereinabove, in order to reconcile the position, have resorted to look into the mischief that was sought to be cured by the legislature and, as already mentioned, it was to encourage and promote registration with the sales tax authority to become active taxpayers. The law does not require the exempted person from registration of the sales tax. Therefore, the petitioners, who are poultry farmers, are not required to be registered, but to make poultry feed manufacturers liable to payment of further tax (which eventually would be passed on poultry farmers), would not only be unjust but also against the system of payment of sales tax under the Act. Synchronising the provisions including sections 3(1A), 13, 14 and 2(41) of the Act, it would only be fair to come to the conclusion that in the present case, poultry farmers are exempted from payment of sale tax on account of exemption under the law, thus, they are not required to be registered. Since, the requirement of non-registration is mandated by law (section 14 of the Act), no penal consequences would fall upon either of the categories of petitioners before us by way of payment of additional tax. In somewhat similar circumstances, the question arose before Lahore High Court, Lahore which was resolved in favour of the taxpayers in the judgment reported as Muhammad Arif Ice Factory and others v. Federation of Pakistan and others, 2021 PTD 1608. The view expressed therein was

upheld by the Supreme Court of Pakistan and it was observed that further tax under section 3(1A) could not have been imposed on the taxpayers since they were ice manufactures and were exempted. In view of above position of law, the judgment impugned before us, is not sustainable, as it does not reflect the correct interpretation of law and the High Court erred in upholding the order passed by the tax authorities”.

19.In view of what has been discussed above, this petition is admitted and allowed in the following terms: i. We hold and declare that the import of fruits and vegetables is subject to the imposition of sales tax at the import stage.

ii. The said goods are exempt from the levy of Value Added Tax/Additional Sales Tax at the import stage and are not subject to any tax under Section 7-A as well Twelfth Schedule of the Act. iii. However, having regard to the peculiar facts and circumstances of the case, we refrain from directing the refund of the amount so recovered, as such relief would require a factual determination as to whether the incidence of the tax has been passed on to the ultimate consumers or otherwise.

JUDGE

JUDGE

Date of announcement of Judgment......

(D.B) (Hon’ble Mr. Justice Syed Arshad Ali & Hon’ble Mr. Justice Babar Sattar) *A.Ali*